Haylock v Patek HC Auckland CIV 1999-404-000899

[2008] NZHC 2335

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 1999-404-000899

BETWEEN  R P HAYLOCK First Plaintiff

ANDS H CAIRNS Second Plaintiff

ANDHUGH GREEN PROPERTIES LTD Third Plaintiff

ANDJ W PATEK First Defendant

ANDSHELL EXPLORATION NZ LTD Second Defendant

Hearing:         7 April 2008

Counsel:Gary J Judd QC and Patricia A B Mills for the Plaintiffs James Farmer QC with Sarah Katz and Anna Harris for the Defendants

Judgment:      19 May 2008

[ORAL] JUDGMENT OF WILLIAMS J [As to admissibility of expert evidence]

Solicitors:

Fraser Powrie, PO Box 108 132 Symonds Street, Newton, Auckland

Oakley Moran (J W Tizard), PO Box 241, Wellington

Russell McVeagh (Sarah Katz/Anna Harris), PO Box 8, Auckland

Copy for:

Gary J Judd QC, P O Box 137 273 Parnell, Auckland
J A Farmer, P O Box 1800 Auckland
Patricia A B Mills, P O Box 47 864 Ponsonby, Auckland

Tim Frampton, Civil Registry, Auckland High Court

R P HAYLOCK AND ORS V J W PATEK AND ANOR HC AK CIV 1999-404-000899  19 May 2008

[1]      This judgment deals with a further objection on behalf of the defendants to the admissibility of expert evidence which the plaintiffs propose should be led from a Mr Swindon.

[2]      The procedure which has been adopted, sensibly, is for the objection to be notified before Mr Swindon began reading his brief, with the argument on its admissibility immediately following.

[3]      In a sense this judgment is very much a sequel to the judgment delivered in this case on 14 May 2008 though informed by extra evidence which has been called since that date and, of course, different evidence to be given by Mr Swindon by comparison with that proposed to be called from Mr Grimmond.

[4]      To aid in the comprehensibility of this judgment to such casual reader as there may be, by way of background paragraphs [1]-[10] of the 14 May judgment are repeated:

Claim

[1] This is a claim brought pursuant to the insider trading provisions of the Securities Markets Act 1988.  In brief, it asserts that, if certain information concerning the Deep Gas prospects of a subterranean formation known as the Mangahewa Structure were known to the minority shareholders of Southern Petroleum NL during the course of a contested takeover bid by Petroleum Industries Ltd (“PIL”) for the 15% of the 229,285,155 shares in Southern Petroleum not then owned by Fletcher Challenge Ltd or its subsidiaries, the dissenting shareholders would either not have sold their shares to PIL or would have been paid significantly more than the 75 cents per share they accepted.

[2] More specifically, PIL’s takeover notice under s 4 of the Companies Amendment Act 1963 was given on 31 July 1995 at 63 cps.  An independent valuation from Nicholas Papalia & Associates was commissioned by the independent directors of Southern Petroleum to value the company’s oil and gas assets.

[3] On 16 August 1995 the independent directors recommended shareholders accept the takeover offer on the basis of Papalia’s valuation of Southern Petroleum’s exploration interests, including PPL 38705, at $10.2m together with a valuation from Buttle Wilson & Co Ltd placing the valuation range on the exploration potential of the company between that figure and $23.9m.

[4] PIL extended the date for shareholder acceptance on 15 September 1995 and on

29 September 1995 advised shareholders that the takeover offer was unconditional and it was proceeding to compulsory acquisition of the remainder of the shares.

[5] A number of shareholders – including the plaintiffs – maintained their view that the share price offer was too low and commenced a publicity campaign to that effect.  In particular, a former plaintiff in this case, a Mr Oakley, commissioned a former Petrocorp executive and experienced geologist, Dr Haskell, to investigate the matter on his behalf.   Dr Haskell spoke to Petrocorp executives in New Plymouth on 9 November.  He was given a deal of information but says he was told little about the Mangahewa Structure.

[6] Between that date and Southern Petroleum’s Extraordinary General Meeting on 16 November, a number of the dissenting shareholders agreed to sell, but at 75 cps.

[7] On 16 November 1995 Fletcher Challenge advised it would offer 75 cps to all shareholders - both those who had previously accepted the offer and those still outstanding – and the takeover was approved at a Southern Petroleum General Meeting later that day.

[8] Roughly in parallel with all of that – and any links between the two streams are one of the critical issues in the case – in early 1995 Petrocorp set up a Deep Gas Team to investigate further the presence of gas and oil in deep structures, including the Mangahewa Structure, in the Taranaki Basin. The team’s first meeting occurred on 20 July 1995 and the evidence shows intensive investigations in the ensuing months, progressively focusing to greater degree on the Mangahewa Structure.   Regular performance review meetings with Petrocorp/Fletcher Challenge executives took place.  Details of those investigations and meetings will require consideration in the substantive proceeding.

[9] Importantly, on 2 November 1995 the Deep Gas Team made a significant technical presentation to certain management officials.  The presentation was couched in enthusiastic terms concerning the prospects for the Mangahewa Structure and proposed the drilling of an appraisal well to tap into what the Deep Gas Team saw as substantial oil and gas prospects in the Structure.

[10] The plaintiffs plead that none of the information leading up to, and included  in,  the  Deep  Gas  Team’s  2  November  presentation  was  made public until long after the takeover was complete;  that it was material which should have been made public;  that it would have affected their decisions to sell  or  the  price  at  which  they  sold  had  it  been  public;    and  that  the defendants knew of the information and, by deliberately withholding it, exposed themselves to liability under s 9 of the Securities Markets Act 1988.

[5]      Mr Swindon is highly experienced in the oil and gas exploration industry, having been involved in that area for much of his life.  He is also an experienced company director, particularly as far as oil and gas exploration companies are concerned – again having been involved in that area for a lengthy period.  He was

retained by Mr Oakley, the former dissident shareholder of Southern Petroleum and a former plaintiff in this case, during the takeover offer in 1995 and spent a number of days perusing documents then available and advising Mr Oakley.

[6]      He was also a deponent in the leave application, for which purpose he was able to view some additional documents, and the brief of his evidence given in this substantive  hearing also  takes  advantage  of  the  significant  discovery which  has occurred in this case.   It would appear that he can clearly give “expert evidence” within the definition of that term in s 4 of the Evidence Act 2006.

[7]      As with the Grimmond matter, it is helpful to set out the relevant provisions of s 25 of the Act.

25       Admissibility of expert opinion evidence

(1)An opinion by an expert that is part of expert evidence offered in a proceeding is admissible if the fact-finder is likely to obtain substantial help from the opinion in understanding other evidence in the proceeding or in ascertaining any fact that is of consequence to the determination of the proceeding.

(2)An opinion by an expert is not inadmissible simply because it is about—

a)        an ultimate issue to be determined in a proceeding; or

(b)      a matter of common knowledge.

(3)If an opinion by an expert is based on a fact that is outside the general body of knowledge that makes up the expertise of the expert, the opinion may be relied on by the fact-finder only if that fact is or will be proved or judicially noticed in the proceeding.

[8]      The  criteria,  accordingly,  for   admissibility  decisions  are  whether  the proposed evidence will give the fact-finder substantial help on a  fact that is of consequence to the determination of the proceeding and, in terms of subs (3), is a fact that “is or will be proved”.

[9]      There are four bases on which objection is taken to a number of passages in Mr Swindon’s brief and it is also helpful in that regard to repeat paras [36]-[40] of the former judgment, setting the scene of the matter:

[36] Assuming  liability  is  established,  the  facts  that  will  obviously  be  of consequence in the determination of this proceeding include the impact on Southern Petroleum’s share price that public knowledge of the results of the Deep Gas Team’s study and any management decisions in relation to it, (what can loosely but compendiously be termed the “Mangahewa Information”) might have had during the period that Southern Petroleum continued to be listed on NZX, namely until 22 December 1995.   That analysis is also likely to include reference to Southern Petroleum’s share price for the period up to 2 November 1995.

[37] But such evidence requires to be securely grounded in fact with logical inferences able to be drawn in relation to possible effects on the share price during the period 2 November –22 December 1995 of public availability of the Mangahewa Information.  Econometric analysis might conceivably be of assistance in assessing the possible impact of that public knowledge during this period.

[38] But Fletcher Challenge Energy was not listed until three months later, apparently on 14 March 1996 and, once it was listed, it was involved in a wide range of energy business interests, well beyond its acquisition of all Southern Petroleum’s capital.   And, although the technical nature of Mr Grimmond’s brief makes the observation elusive, it does not seem he was able with any certainty to disaggregate the effect on Fletcher Challenge Energy’s share price of its ownership of the Southern Petroleum capital, still less the effect on Fletcher Challenge Energy’s share price of its Southern Petroleum business had the Mangahewa Information been public by and after Fletcher Challenge Energy’s listing.  Still less would it seem relevant to any issue requiring determination in  this  case  to  extend  the  analysis  of Fletcher Challenge Energy’s share price and the effect on that price of the Southern Petroleum holding for five years beyond listing.

[39] The test under s 25 is whether the fact-finder is likely to obtain “substantial help” from the opinion expressed in deciding a fact of consequence in the determination of the case.

[40] On the assumption earlier made, that quantum may become an issue for determination, the question is what would be the likely effect on Southern Petroleum’s share price had the Mangahewa information been publicly available.  That can be calculated by reference to comparative statistics up to

2 November 1995, and the price achieved against what might have been achieved during the period from that date up to Southern Petroleum’s de- listing, though de-listing, it must be acknowledged, introduces a further variable.   The three month gap to Fletcher Challenge Energy’s listing, the wide range of its business interests and the five year span adopted by Mr Grimmond does not currently seem relevant to determining any issue in the case.

[10]     Two of the objections are of lesser moment and can be readily dealt with.

[11]     Sentences from paragraphs 24, 30 and 33  and the whole of para 31 are objected to on the basis that they are legal conclusions affecting the outcome of the

case.  Perusal of those passages, however, shows they are not expressions of legal matters, or at least not as far as New Zealand is concerned.

[12]     The contested passage from para 24, true, does make some observations about Australian regulatory action, but that is of little consequence so far as this case is concerned.

[13]     In para 31 Mr Swindon expresses a view about what should have happened under an alignment agreement between Southern Petroleum and Petrocorp.  That is not a legal observation but a factual one.

[14]     The two sentences from para 30 and 33 are similarly observations made by Mr Swindon based on his experience as to what course of action should have been undertaken.  They are not legal views.  Indeed Mr Swindon is not a lawyer.

[15]     The  second  shorter  objection  is  on  the  basis  that  opinions  have  been expressed by Mr Swindon in paras 172(b) and the last sentence of 174 but, said Mr Farmer QC, senior counsel for the plaintiff, no factual foundation has been laid for those observations.

[16]     Paragraph 172(b) speaks of “more recent results” at a number of oil and gas fields or explorations other than Mangahewa-2, the focus of the present case.  But, as Mr Judd QC, senior counsel for the plaintiffs pointed out in his response, there has been evidence about more recent results at those fields.   At the end of the case it seems unlikely those results will bulk largely in matters for decision but there is at least an evidential foundation, currently, for the observation Mr Swindon makes.

[17]     The final sentence of para 174 comments on the effect of public availability of the information on the value shareholders might have ascribed to license interests granted to Southern Petroleum in October 1955.   As Mr Judd was disposed to acknowledge, a careful reading of that sentence suggests it has little relevance to the matters in issue in this case.

[18]     Of the two remaining objections, the more substantial in terms of numbers of objections relates to one that Mr Swindon is expressing a view in 2008 based on facts which were not known to him in 1995, and indeed some not known to him when he swore his affidavit in the leave proceedings.  Ex post facto, the retrospective view of that fact finding, in Mr Farmer’s submission, means that Mr Swindon’s evidence will not give substantial help to the fact finder and offends against the decision of the Court of Appeal also mentioned in the Grimmond matter, Attorney- General v Equiticorp Industries Group Ltd (In Statutory Management) [1995] 2

NZLR 135.

[19]     However, although helpfulness was the criterion adopted by the Court of

Appeal in that case, the Court did observe (at 139) that:

It would be a churlish appellate Court that denied a trial Judge the advantage of evidence which he regarded as helpful to him”

and  when speaking of that case (at 140):

The facts are complex even if the ultimate issue may be less so.  And any conflict of expert analysis and opinion is likely to help to bring the issues into sharper focus.

[20]     There are a number of foci of the paragraphs to which objection is taken in this aspect of the matter but careful reading suggests that nearly all are observations by Mr Swindon derived from his extensive experience in the area.   For instance, paras 30-40 are commentary on industry practice;  para 42 is a careful and extended treatment of documents available to the parties up to 2 November 1995;  paras 97 and 98 similarly review documents after the critical date;  para 100 speaks of staff competence at Petrocorp at the time;   and paras 163-165 make observations concerning Mr Swindon’s view of the completeness of the Deep Gas Study at the critical date.

[21]     The remaining paragraphs do express some views on who of management, and whether Mr Patek, was at the critical meeting on 2 November 1995 and at para 174 Mr Swindon expresses a view that Petrocorp and Mr Patek were, at an unspecified  date  in  November  1995,  in  possession  of  a  large  body  of  market- sensitive information which they did not pass on.

[22]     All those are facts which may at some stage need to be decided in the context of this case.   In particular, the information passed on to those who were present at the critical meetings will be a significant matter which will need to be proved in terms of s 25(3).

[23]     The Court’s view therefore is that, whilst of course the weight to be given to those observations is very much a matter still undecided, there is no basis under s 25 or under Equiticorp to decide that the passages under contest are inadmissible.

[24]     Accordingly, that aspect of the objection is overruled.

[25]     The final objection is as to paras 143-162.   In those paragraphs Mr Swindon attempts to assess the value which the Mangahewa Information would have had, had it been publicly disclosed prior to the general meeting on 16 November 1995, by reference to the changes in Fletcher Challenge Energy’s share price over the ensuing period.

[26]     As Mr Swindon notes, the first official public release of the Mangahewa Information was a Press release on 23 January 1997.  That was followed by other disclosures to the public of information concerning Mangahewa-2 in the ensuing period.   He says that from a market point of view the striking elements of the Mangahewa Information were the estimated amount of GIIP and that a test well was, in November 1995, proposed for March the following year.

[27]     However, as noted, a significant complicating factor in this case was the de- listing of Southern Petroleum in December 1995 and the fact that Fletcher Challenge Energy was not listed until March the following year.

[28]     Mr Swindon accepts that over the period that Mangahewa-2 was drilled and tested, the Fletcher Challenge Energy share price was  affected  by a  number  of aspects quite outside the Mangahewa Information.   He mentions international oil prices, general stockmarket trends and, in para 152, a number of major influences from Fletcher Challenge Energy’s businesses other than Southern Petroleum.

[29]     It is not difficult to assume that additional influences may well have been CPI  movements  over  the  period,  measures  of  investor  confidence,  oil  prices generally  and  differences  in  dates.    That  can  be  demonstrated  by  posing  the rhetorical question:  who, a year or two years ago, would have forecast that oil prices would be as they are in May 2008?   Movements in international oil prices, Mr Swindon said, are a key factor affecting the value of oil and gas companies, as one might expect.  He said that, while not all the rise in the Fletcher Challenge Energy’s share price over the period of November 19950- August 1997 could be attributed to Mangahewa-2, it was a significant element.

[30]     The issue in terms of s 25 is substantial helpfulness and, as earlier mentioned, what needs to be assessed is the helpfulness of facts of consequence to the determination of the proceeding and facts that will be proved.

[31]     Assuming the plaintiffs are successful to the point where quantum issues come to be assessed, there are, for the reasons earlier outlined, some significant difficulties and complexities in this case in trying to assess the loss to the minority shareholders of Southern Petroleum at the relevant date, 16 November 1995.   The difficulty is in assessing the effect of something that did not happen and what would have happened had it occurred.

[32]     But, however difficult that calculation may turn out to be, and whatever weaknesses there may be said to be in the approach and the assessment of the various expert witnesses, the Court, assuming it reaches that position, must have some evidence which will help it in a decision on the crucial facts on the quantum issue of this claim.   There will be significant differences in the approach of the experts.  There is the problem of time.  There is the problem that different companies are involved.  There is the problem that different businesses are involved, at least in the sense that Southern Petroleum was only a part of Fletcher Challenge Energy. There are the problems involving differences in national and international circumstances and, as Mr Farmer said, there is the problem that a comparison is being made between the pre-drilling potential of Mangahewa and the post-drilling discovery of what was found.

[33]     At the end of the day an assessment must be made based on the evidence.  A speculative approach is impermissible and accordingly, although there may be problems involved in the evidence to be given by Mr Swindon and other experts, including, presumably, experts for the defence, the conclusion must be that that evidence may give substantial help in the proof of a critical fact in the proceeding, namely the assessment of quantum.

[34]     In those circumstances, the objection to Mr Swindon’s evidence of valuing Southern Petroleum by reference to Fletcher Challenge Energy’s share prices must also be dismissed.

…………………………..

WILLIAMS J.