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HAYLOCK AND ORS V J W PATEK AND ANOR HC AK CIV 1999 404 000899 [2008] NZHC 687 (14 May 2008)

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
                                                              CIV 1999 404 000899

              UNDER                       Securities Markets Act 1988


              BETWEEN                     ROSEMARY PHYLIS
FILLBRIDGE
                                          HAYLOCK
                                          First Plaintiff

        
     AND                         S H CAIRNS
                                          Second Plaintiff

              AND       
                 HUGH GREEN PROPERTIES LIMITED
                                          Third Plaintiff

              AND     
                   J W PATEK
                                          First Defendant

              AND                       
 SHELL EXPLORATION NEW
                                          ZEALAND LIMITED
                                          Second
Defendant


Hearing:      13 May 2008

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

Judgment:     14 May 2008


                    [ORAL] JUDGMENT OF WILLIAMS J



Objections under Evidence Act 2006 s 25 to admissibility of evidence of
geologist and econometrician of possible effect in share
price of listed company
of public availability of information on oil and gas prospect largely granted in
terms of paras [23] [24]
[41] and [43].




HAYLOCK AND ORS V J W PATEK AND ANOR HC AK CIV 1999 404 000899 14 May 2008

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.


Issue


[11]     This judgment deals with objections by the defendants to the whole or
part of
the proposed evidence of two of the plaintiffs' witnesses, Messrs O'Connor and
Grimmond.


O'Connor Objection


[12]    
Mr O'Connor is a chartered geologist who is in the process of his evidence-
in-chief at the time this judgment is being written.
He has given the major extent of
his judgment, which dealt largely with issues of fact, but is now proposing to give
evidence as
to his view of the value of the Mangahewa Structure to Petrocorp. It is
that part of the evidence to which objection is taken on
the ground Mr O'Connor is
not qualified to give the expert evidence his brief contains.


[13]     As an aside, it should be noted
that the brief was only served on the
defendants on 12 May 2008 (once confidentiality issues had been cleared away).
Mr O'Connor
filed an affidavit in 2001 on the plaintiffs' application for leave to
commence the proceeding. His brief, so Mr Farmer QC, senior
counsel for the
defendants, asserted, largely reflected his affidavit's content but also included a
section, paras [80]-[126], which
were new material not flagged in the affidavit or
since.


[14]     Mr O'Connor's experience set out in his brief is that he is a
chartered
geologist, a Fellow of the Geological Society and a Certified Petroleum Geologist of
the American Association of Petroleum
Geologists. He is recognised by the NZX
and ASX as a Competent Person for "reporting of Mineral Resources and Oil
Reserves" to comment
on exploration and estimation of mineral resources. He has
lengthy experience in petroleum geoscience with various oil companies
in many
locations and has published technical papers on geoscientific topics. He said his oil
company experience "provided comprehensive
training on all aspects of petroleum

geoscience" focusing on risk analysis, with his skills and experience principally in
the "geoscientific
and reservoir engineering aspects of the upstream petroleum
industry". He continued:

       I have a good understanding of the risk-based
evaluation of net present value
       (which is a primary ranking tool for investment decisions in exploration and
       production
activities). I also understand the general process of market
       valuation methods.

[15]   In the section of Mr O'Connor's evidence under challenge, Mr O'Connor
begins by saying that "value means different things to different people and the
various different methods of valuation each have
their place in the commercial
world", a comment he amplifies in the balance of his brief.


[16]   Initially, Mr Farmer objected
to passages in Mr O'Connor's brief in which he
proposed to give evidence on the valuation of petroleum exploration fields. That
objection
was, however, withdrawn late in the afternoon of 13 May when this
judgment was in preparation.


[17]   The withdrawal was appropriate
because, as Mr Farmer conceded,
Mr O'Connor's proposed evidence of the valuation of petroleum exploration fields
seemed well within
the field of his experience with the monetary figures contained in
that portion of the evidence being largely multiplicands of publicly
ascertainable cost
of aspects of such exploration which would come within Mr O'Connor's
geoscientific and geological experience.
Examples include net gas prices, net oil or
condensate prices, well costs and probability ratios of proceeding with drilling and
of
success.


[18]   The objection was, however, maintained in relation to portions of
Mr O'Connor's evidence in which, using the
earlier figures, Mr O'Connor purported
to calculate the "risked net present value" to Southern Petroleum of the expected
yield from
the Mangahewa Structure extended into its effect on the company's share
price (paras 114.2 and 114.3 of the brief).


[19]   Section
4 of the Evidence Act 2006 defines "expert evidence" as evidence
including opinions "based on the specialised knowledge or skill
of that expert".

[20]     Whilst there is ample basis for concluding that Mr O'Connor's geoscientific
and oil exploration experience
entitles him to express an opinion on those matters,
there is currently no material before the Court to suggest Mr O'Connor has the
necessary "specialised knowledge or skill" in the valuation of the matters described
in para [18], still less that he has experience
in valuing the impact on share prices of
oil exploration and prospecting companies of assets such as the oil and gas in the
Mangahewa
Structure. There is currently no evidence before the Court of any
expertise on Mr O'Connor's part of share valuation.


[21]    
A comparison was sought to be drawn between Mr O'Connor's experience
and that of Mr Papalia but, as Mr Papalia's CV makes clear (4/1465-1466),
he has
tertiary qualifications including a Master of Commerce, claims expertise in asset
valuations, corporate analyses and related
topics, and is a member of Accounting and
Taxation Societies.


[22]     There is currently no evidence that Mr O'Connor has comparable
experience
in any of those fields. Indeed, he claims no more than a "good understanding" of the
valuation of net present value ­
and that only as an exploration and production tool
not in share valuation ­ and an understanding of the "general process of market
valuation methods". That does not seem to be an assertion by Mr O'Connor of
expertise in the valuing of shares, still less of expertise
in the impact on the price of
shares of a listed oil and gas exploration company of absence of public knowledge of
a prospect thought
to be of value.


[23]     In those circumstances, the conclusion must be that Mr O'Connor, on the
material currently before the
Court, lacks the specialised knowledge or skill to give
expert evidence and opinion on the matters discussed in paras 114.2 and 114.3
of his
brief.


[24]     For completeness, it should be observed that Mr O'Connor's comments on
Mr Papalia's valuation did appear
more to be focused on what might be termed
exploration and prospecting matters than on their fiscal consequences, but, lest that
conclusion be thought unsound, leave is reserved for the defendants to further their
objection, within the bounds of this ruling,
to other passages in Mr O'Connor's brief.

Mr Grimmond's evidence


[25]   Mr Grimmond is an experienced economist, more particularly an
econometrician, whom
the plaintiffs wish to call to give evidence by way of a
regression analysis:

       to examine the extent that "full public knowledge"
about future prospects for
       the Mangahewa field might have had on share prices at the time of Fletcher
       Challenge Energy's
purchase of southern Petroleum NL shares in 1995/96
       by examining the impact on FCE's share price of the later release of

      information and derivatively on SPNL's share price had it continued as a
       listed company.

[26]   Mr Grimmond says share
prices are influenced by many factors and
econometricians use statistics to measure the extent that share price levels are
correlated
with movements in relevant information by measuring the impact of
economy-wide and industry factors on share prices and then testing
for
"unexplained" structural shifts.


[27]   He said his model identified a "number of sustained shocks" to the Fletcher
Challenge
share price from 1996 to 2001 which could imply a share premium and an
increase in company valuation with the impact of the Mangahewa
field on that
valuation impliedly greater to the extent that it might have bolstered share prices.
Assuming all positive shocks were
due to Mangahewa and all negative shocks to
other factors, Mr Grimmond then calculated the "maximum impact" on each Fletcher
Challenge
Energy share and translates those factors into implications for Southern
Petroleum share prices, again up to 2001. That produced
for him a "net impact
scenario" translating into a premium for Southern Petroleum shares at that date.


[28]   He detailed his data
sources including Southern Petroleum's daily price and
volume trades from 1992 to 22 December 1995, the date the company was
apparently
de-listed, with similar information for Fletcher Challenge Energy from its
listing on 14 March 1996 to de-listing five years later.
He said he was:

       ... asked to establish an estimate of what the price of Southern Petroleum
       NL's shares would have
been in March 2001 based on market knowledge
       and Fletcher Challenge Energy's specific activities"

adopting a four step approach
before and after the December 1995-March 1996
period.         He detailed proxies used, exchange rate influence and deployed a
complicated
mathematical model to sum up that process. He detailed the variables
he used including overseas spot rates, futures prices and share
prices for oil and gas
companies operating both in this country and overseas.


[29]      Mr Grimmond's three estimation methods
included :


          ·     Ordinary least squares


          ·     Autoregressive conditional-heteroscedastic model estimation


          ·     State space estimation of structural kind series models


the reasons for the choice of which he elaborated including
a further complicated
algebraic model. Estimation results using those methods produced a series of results
for Southern Petroleum
and Fletcher Challenge Energy share prices over the period
before and after the takeover.


[30]      Mr Farmer's submission made
the point that among the critical issues which
may arise if quantum comes to be decided in this case are the definitions in s 15
of
the Securities Markets Act 1988, particularly "value" as meaning the "value the
security would have had at the time of sale or
purchase if the inside information
known to the insider of the public issue was publicly available" (emphasis added).


[31]    
 Mr Farmer submitted that, having regard to the time at which any question of
"value" may need to be calculated, Mr Grimmond's evidence
was inadmissible as
being unhelpful in that regard. Mr Farmer cited s 25 which relevantly reads:

          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 ...

[32]   Mr Farmer made the point that the helpfulness criterion
is largely derived
from the decision of the Court of Appeal in Attorney-General v Equiticorp Industries
Group Ltd (In Statutory Management)
 [1995] 2 NZLR 135, 139 itself adopting the
test propounded by the High Court of Australia in Murphy v R [1989] HCA 28;  (1989) 167 CLR 94,
110.


[33]   Mr Farmer submitted the nature of Mr Grimmond's evidence was such that
the Court was unlikely to obtain "substantial
help" from evidence which tracked the
brief, a submission he supported with detailed reference to it.


[34]   Mr Farmer also advised
the defendants have briefed an econometrician, but
that witness will not be called if Mr Grimmond's evidence is ruled inadmissible.


[35]   Mr Judd QC, senior counsel for the plaintiffs, submitted that the focus on
"gain" overlooks the plaintiffs' claim that Petrocorp
obtained a "benefit" from the
matters in issue in the case. More broadly, however, he submitted the objection is
premature and that,
if Mr Grimmond's methodology were sound, his evidence would
be found substantially helpful. It should accordingly be heard and weighed
with the
evidence of other experts, irrespective of whether, in the end, all the econometric
evidence was found unhelpful in determining
issues in the case.


[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.

[41]    Thus, beyond that limited range, the matters discussed in Mr Grimmond's
brief do not currently seem
likely to provide "substantial help" on that question.


[42]    Accordingly, other than in that limited sphere, the objection to the
admissibility
of Mr Grimmond's brief is upheld.




                                              ................................
           
                                           WILLIAMS J.




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, Case Officer, Auckland High Court




14 May 2008