Southern Petroleum No Liability v Haylock [2003] NZCA 72; [2003] 2 NZLR 175; (2003) 9 NZCLC 263,209 (3 April 2003)

Last Updated: 17 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA203/02

BETWEEN SOUTHERN PETROLEUM NO LIABILITY
Appellant

AND R P F HAYLOCK AND OTHERS
Respondents

CA204/02

AND BETWEEN J W PATEK AND ANOR
Appellants

AND R F P HAYLOCK AND OTHERS
Respondents

Hearing: 3 and 4 March 2003

Coram: Gault P Keith J Tipping J McGrath J Glazebrook J

Appearances: J A Farmer QC for Appellant in CA203/02
S J Katz and L M Riddiford for Appellants in CA204/02
C R Carruthers QC, J W Tizard and P A B Mills for Respondents in both proceedings

Judgment: 3 April 2003

JUDGMENT OF THE COURT DELIVERED BY GAULT P

[1] In a judgment of the High Court delivered by Fisher J on 18 June 2002 the respondents, four former shareholders of Southern Petroleum No Liability (SPNL), were granted leave in accordance with s18 Securities Amendment Act 1988 (now known as the Securities Markets Act 1988) to bring insider trading proceedings by, and at the expense of, SPNL. The intended defendants are Mr Patek, a former director of SPNL, and Energy Exploration Ltd, the successor to Petroleum Industries Ltd (PIL), a subsidiary of Petrocorp Exploration Ltd (Petrocorp), which in turn was a member of the Fletcher Challenge group of companies.
[2] SPNL has appealed, seeking to reverse the order that it meet the costs of the intended proceedings. Mr Patek and Energy Exploration Ltd also have appealed, contesting the Judge’s finding that there are arguable causes of action against them.
[3] We are concerned with an application for leave to have SPNL as a “public issuer” bring proceedings at its expense. We are not concerned to conduct in advance a trial, or mini trial, of those proceedings: Colonial Mutual Life Assurance Society Ltd v Wilson Neill Ltd [1994] 2 NZLR 152, 160. The role of the court on such an application is clear. The material parts of s18 read:

(1) The right of action of a public issuer against an insider may, with the leave of the Court, be exercised by —

(a) A holder of securities of the public issuer; or

(b) A person who was a holder of securities of the public issuer at the time the securities in the public issuer, or any other public issuer, were sold or purchased.

(2) The Court shall give leave to bring an action unless it is satisfied —

(a) The public issuer does not have an arguable case against the insider; or

(b) There is good reason for not bringing the action.

...

(5) The public issuer shall pay the costs of a person to whom leave is given under this section in bringing or continuing a proceeding against an insider irrespective of the result, and, if costs are awarded against that person, shall also pay those costs.

[4] It is common ground that parties opposing the grant of leave carry the burden of establishing that there is no arguable case against the insider or, if there is, there is good reason for not bringing the intended proceeding. We do not accept that the determination of whether there has been shown good reason for not bringing the proceeding constitutes simply the exercise of a discretion. It calls for an assessment of the factors put forward as providing reasons for or against the grant of leave and weighing them to ascertain whether, on balance, there has been established good reason. On appeal from the grant of leave the appellants must show that the Judge’s assessments on those two issues were wrong in law or otherwise not reasonably open to him.
[5] In the proceedings the respondents have been granted leave to bring, it will be alleged that Mr Patek and Petrocorp breached ss9(1)(a) and (b) of the Act. Those provisions read:

(1) An insider of a public issuer who has inside information about the public issuer and who —

(a) Advises or encourages any person to —

(i) Buy or sell securities of the public issuer; or

(ii) Advise or encourage any other person to buy or sell securities of the public issuer; or

(b) Communicates the information, or causes the information to be disclosed, to a person knowing or believing that person or another person will, or is likely to —

(i) Buy or sell securities of the public issuer; or

(ii) Advise or encourage another person to buy or sell securities of the public issuer —

is liable to the persons referred to in subsection (2) of this section.

(2) The persons to whom the insider is liable are —

(a) Any person who sells securities of the public issuer to a person who is advised or encouraged by the insider to buy securities of the public issuer for any loss incurred by that person.

[6] “Inside Information” is defined in s2 as:

“Inside information” in relation to a public issuer, means information which —

(a) Is not publicly available; and

(b) Would, or would be likely to, affect materially the price of the securities of the public issuer if it was publicly available.

[7] It is common ground that at the material time SPNL was a public issuer. It is also common ground that Mr Patek was a director of SPNL and that Petrocorp was a substantial securities holder in SPNL. Accordingly, each of them would be within the definition of “insider” in s3 of the Act in respect of inside information he or it had about SPNL “by reason of” being respectively a director and substantial security holder. In this respect there is the statutory presumption in s3(2).
[8] Section 3(2) reads:

For the purposes of paragraph (b) of subsection (1) of this section, a principal officer, or an employee, or company secretary of, or a substantial security holder in, the public issuer, who has inside information about the public issuer or another public issuer is presumed, in the absence of evidence to the contrary, to have that inside information by reason of being a principal officer, employee, company secretary or substantial security holder.

[9] Adapting the opening paragraphs from the written submissions of counsel for the respondents, the issues for determination on this appeal are as follows:

Can the Appellants show that the Judge erred in rejecting the contentions that:

(1) SPNL has no arguable case that Mr Patek was an insider of SPNL and had inside information about SPNL and advised or encouraged PIL to buy securities of SPNL from the respondents and that the respondents incurred loss.

(2) SPNL has no arguable case that Petrocorp was an insider of SPNL and had inside information about SPNL and advised or encouraged PIL to buy securities of SPNL from the respondents and that the respondents incurred loss.

(3) SPNL has no arguable case that Mr Patek was an insider of SPNL and had inside information about SPNL and communicated or caused the information to be disclosed to PIL knowing or believing that PIL would or was likely to buy securities of SPNL and that the respondents incurred loss.

(4) SPNL has no arguable case that Petrocorp was an insider of SPNL and had inside information about SPNL and communicated or caused the information to be disclosed to PIL knowing or believing that PIL would or was likely to buy securities of SPNL and that the respondents incurred loss.

(5) There is good reason for not bringing the action.

[10] This is not a case in which the respondents followed the procedure available under s17 of seeking the approval of the Securities Commission to require the public issuer to obtain an opinion on whether there is a cause of action against the insider. That procedure, which was said in the Wilson Neill case to be usually desirable and in accordance with the apparent intention of Parliament, requires the public issuer to give all information relating to the matter to the barrister or solicitor providing the opinion. When adopted as a precursor to an application to the court under s18 for leave, this procedure should confine the factual material to be placed before the court as it did in the Wilson Neill case. In this case it was considered unlikely that the s17 procedure would bring out the relevant information because much would be held not by the public issuer SPNL, but by the Fletcher Challenge group. We understand that assessment of the position but, in relation to future cases, point out that under s17(1) the barrister or solicitor giving the opinion is entitled to information “available to” a public issuer, as well as that in its possession. The barrister, in appropriate cases with the assistance of the Commission, may be able to secure additional relevant material through initiatives of the public issuer. We take the matter no further than that. The benefit in following the s17 procedure, as far as practicable, is of course the prospect that any resulting application for leave to bring insider trading proceedings under s18 can largely be based on what is said in the legal opinion rather than on contested evidence that is appropriate for a trial. In consequence, there were filed on the application to the court some 37 affidavits and extensive exhibits. There are disputed matters and the evidence is untested. Although there has been some discovery the respondents say more will be required. In this incomplete factual frame there was extensive argument in the High Court and again in this Court on whether the elements of the statutory causes of action of tipping under s9(1) (a) and (b) could be established.
[11] A central issue, which will govern whether much of the factual material is relevant, is whether, as the appellants contend, the New Zealand insider trading regime is intended to give rise to liability only for using or taking advantage of inside information when dealing or tipping or whether liability arises upon dealing or tipping by an insider merely in possession of inside information though it is not used in the dealing or tipping. This issue has been debated in the United States for many years: see for example Sturc and Cummer, “Securities Litigation, Possession vs Use for Insider Trading Liability”, (1998) 12 Insights No 6, 3, and Horwich, “Possession Versus Use: Is there a Causation Element in the Prohibition on Insider Trading”, (1997) 52 The Business Lawyer, August 1997, 1235.
[12] If, as the appellants contend, proscribed insider trading arises only when inside information is used or taken advantage of, it becomes relevant to determine whether, on the affidavit evidence, it is unarguable that this occurred.
[13] The evidence is directed also to the critical issue of whether Mr Patek, as a director of SPNL, and Petrocorp, as a holder of securities in SPNL, had the alleged information “by reason of” those capacities.

The material facts

[14] Like Fisher J, we are concerned to avoid making findings of fact at this point where the question is simply whether there should be leave to bring proceedings. An appropriate starting point, as with applications to strike out pleadings as not disclosing a cause of action, is the proposed statement of claim and an assumption that the proposed plaintiffs will be able to prove what they allege. However, it must be open to those opposing leave to demonstrate that the case as pleaded is unarguable by showing that one or more of the essential elements of the causes of action cannot be established in fact, or indeed as a matter of law. Anything short of that will not meet the test of showing that the case is unarguable.
[15] In this case a statement of claim was filed after leave was granted in the High Court and this was addressed in the argument in this Court. For the purpose of this judgment, however, the factual background can be considerably abbreviated.
[16] Mr Patek in 1995 was the General Manager of the Energy Division of Fletcher Challenge Ltd. Stemming from that position he held office in the energy exploration and production subsidiaries as the Chief Executive of Fletcher Challenge Petroleum Ltd and a director of Petrocorp. He was also a director of SPNL which was approximately eighty-five percent owned by Fletcher Challenge Ltd.
[17] SPNL held a beneficial interest in Petroleum Prospecting Licence 38705 relating to an area known as Mangahewa in the Taranaki basin. Earlier investigations, including the drilling of an exploration well, had disclosed gas reserves but not whether the gas could be economically extracted.
[18] By mid 1995 Petrocorp had become the Operator under a joint venture operating agreement in respect of the PPL 38705 licence area. There was also an arrangement between SPNL and Petrocorp, recorded in a deed executed in 1993 and described as the alignment agreement, under which the parties, by cross assignments and farm-out arrangements, agreed to share equally in the operation and exploitation of their respective interests in various licences and permits within the Taranaki basin, including PPL 38705.
[19] Petrocorp set up a team to study the deep gas potential within the Taranaki basin. In October 1994, SPNL had agreed to contribute half the cost of this study.
[20] On 24 July 1995, to implement a decision by Fletcher Challenge to acquire the outstanding publicly owned shares of SPNL, PIL was incorporated as a wholly-owned subsidiary of Petrocorp. Mr Patek became a director. That company gave notice of its intended take-over on 31 July.
[21] The respondents and other independent shareholders in SPNL were reluctant sellers, but eventually, between 15 November 1995 and 19 January 1996, they agreed to sell their shares to PIL at a price of seventy-five cents per share. They now contend that, unknown to them, the evaluation of the commercial prospects of the Mangahewa gas resource by the deep gas study team had advanced to the point where the value of their shares in SPNL was considerably higher; that Mr Patek and Petrocorp knew this and advised or encouraged PIL to buy their shares or communicated the information to PIL knowing it would buy their shares; and that as a result they did not receive full value.
[22] The alleged inside information is described in the proposed statement of claim as follows:

The evaluation of the Mangahewa structure within PPL 38705 as being potentially bigger than Maui;

The identification of the Mangahewa structure which lies within the territory of PPL 38705 as suitable for use of the new technologies, including hydraulic fracturing;

The evaluation of the probability of recovering hydrocarbons at an economic return was at the highest level on accepted industry standards;

The recommendations to the Joint Venture for PPL 38705 to drill Mangahewa-2 with a proposed commencement date of 1 March 1996.

[23] It is said that Mr Patek and Petrocorp acquired the information, in particular at a meeting on 2 November 1995 at which the deep gas study team made a presentation of their findings and recommendations. For the purpose of the argument before us it was accepted that Mr Patek was present at this meeting. Copies of power-point slides used for the presentation were exhibited. They reflect considerable enthusiasm.
[24] For present purposes it is unnecessary to traverse the allegations and evidence of how the respondents came to accept the price offered for their shares and the reasons for its increase. It is sufficient to record that there is no suggestion they knew of the findings and proposals of the deep gas study team when they accepted the increased offer.
[25] It was also accepted in the course of argument that Mr Patek was party to, if not the author of, a report dated 3 November 1995 making the case for the acquisition by Fletcher Challenge (through PIL) of the minority shareholdings in SPNL at a higher price than originally offered. That plainly constituted advice and encouragement to buy the shares. We note that the report contains no reference to the status of the work of the deep gas study team.
[26] For the appellants it was argued that there was no breach of s9(1)(a) or (b) because, although Mr Patek, and Petrocorp of which he was a director, had the information, they did not have it “by reason” of being respectively a director and substantial securities holder in SPNL. Further, in advising or encouraging the purchase of the minority shareholdings in SPNL, they did not use or take advantage of the information. It is said that those who made the decision to proceed with the purchase of the shares did not know of the status of the work of the deep gas study team so there was no causative link between the receipt of any communication of the information and the purchase of the shares of the respondents.

Did Mr Patek have the information by reason of his directorship of SPNL?

[27] The starting point is the presumption in s3(2). Mr Patek is presumed, in the absence of evidence to the contrary, to have the information by reason of being a principal officer of the public issuer SPNL. There was evidence to the contrary which the appellants say shows that it is clear beyond argument that it was not by reason of his directorship of SPNL that he acquired the information at the meeting of 2 November 1995. There was affidavit evidence that the deep gas study was a Petrocorp project and that the presentation on 2 November was to Petrocorp management so that it was as an officer of Petrocorp that Mr Patek attended. Mr Farmer accepted in the course of argument that if he was at the meeting “wearing both hats”, Mr Patek could not maintain that he had the information by reason only of his Petrocorp directorship. But he submitted that the evidence establishes that he was present solely because of his position in Petrocorp. It was said that he would not have been there but for that.
[28] A passage in the judgment of Fisher J was criticised as wrongly stating that it was the object of the meeting to gain an approval, which only the joint venture partners could give, to drill a second well in the Mangahewa structure and that the Operator (Petrocorp) could not commit the joint venture partners to that extent. But we do not think that the Judge intended to convey that the object was to secure the approval at that meeting. Rather he saw it as an initial step in a process of securing the approval. That is clear from what he said three paragraphs further on in his judgment.
[29] The Judge concluded that arguably Mr Patek was at the meeting on behalf of SPNL as well. On the present state of the evidence we are not persuaded that was wrong. It is clearly arguable that the deep gas study was part of the joint operations of SPNL and Petrocorp carried out by the Operator, Petrocorp. Even though it related to areas beyond PPL 38705, the study was paid for (at least initially) by the parties equally. That was consistent with the alignment agreement which, in its terms (clauses 9.3 and 12.4) incorporated the obligations under the joint venture agreement. If the study was a joint operation, any information emerging from it would be of interest to the joint venture parties; Petrocorp and SPNL. It is only realistic to recognise that Mr Patek was a director of both SPNL and Petrocorp because of his position as General Manager of the Fletcher Challenge Energy Division. Information he had relating to the business of that division and the subsidiaries within it could not easily be segregated as possessed for particular companies. The question is not so much whether the meeting of 2 November was a joint meeting (as the Judge found arguable; which finding was attacked in this Court), but whether, because of the relationships between the parties, the information acquired by Mr Patek at the meeting was held by him also in his capacity as a director of SPNL.
[30] There is no element of corporate veil lifting in recognising that knowledge in the possession of a director of two companies engaged in joint operations was obtained and was in his possession in both capacities. It may be (if it was an internal Petrocorp management meeting) that he would not have been there but for his directorship of Petrocorp. But that does not mean that, once there, information acquired in discussions relating to a joint operation cannot have been obtained also as a director of SPNL. There was no suggestion of an obligation of confidence having been imposed upon him.

Did Petrocorp have the information by reason of being a substantial holder of securities of SPNL?

[31] Fisher J expressed the view that because the meeting of 2 November 1995 related to a potential joint “investment of some magnitude” Mr Patek’s interest arguably extended to that as a representative of the major shareholder in SPNL. He regarded as artificial the dissection of the activities of a corporate group for this purpose.
[32] For the appellants it was submitted that the evidence shows clearly that the information was held by Petrocorp as Operator of the joint venture and not as a shareholder in SPNL.
[33] Once it is accepted as arguable that Mr Patek acquired the information from the study team it could not be seriously argued that it was not within his authority to receive it for Petrocorp. Petrocorp undoubtedly had the information as Operator under the joint venture arrangements. But arguably those joint venture arrangements, and Petrocorp’s position as Operator (just as Mr Patek’s directorship of SPNL) existed because of Petrocorp’s substantial shareholding in SPNL.
[34] At the present stage, with the evidence incomplete and untested, we are not prepared to find the Judge was wrong to hold that the presumption in s3(2) had not been rebutted.

Does liability under s9 depend upon a causal link?

[35] For the appellants it was submitted that Fisher J erred in rejecting the argument for a causal connection between possession of inside information and acquisition of shares in a public issuer. The Judge said:

The Act does not require any causal connection between Fletcher’s receipt of the Mangahewa information and its decision to raise the offer for the remaining minority shares. It requires only that at the time that he encouraged PIL to purchase, Mr Patek was in possession of unpublicised price-sensitive information.

[36] It was submitted that there must be implied into the wording of s9 requirements for causal links between the possession of inside information and the conduct giving rise to liability. Under s9(1)(a), it is said, there is an implicit link between the possession of the inside information and the advice and encouragement. To be liable the insider must use (take advantage of) the information when advising or encouraging the buying or selling of securities of the public issuer. Under s9(1)(b) it is said, there is implicit a causal link between the tipping and the knowledge or belief that the recipient will buy or sell securities. The tipper must know or believe that the tippee will buy or sell using the information received.
[37] The liability under s9(1) is to the persons specified in subs(2) and in respect of “any loss incurred”. There is implicit in the section that the loss is that flowing from tipping within s9(1)(a) and (b). This too was said to support the implication of the need for the claimed causal links in those provisions.
[38] In support of this argument we were referred to the legislative history and particularly the report of the Securities Commission that preceded the 1988 Securities Amendment Act introducing the insider trading provisions: Insider Trading, Report to the Minister of Justice by The Securities Commission, December 1987. It was submitted that both the report and statements in the House of Representatives during the passage of the Bill make clear that the “mischief” the provisions were directed to was the “misuse” or “taking advantage” of confidential information by company insiders. It was argued that Parliament cannot have intended to impose the severe consequences provided for on a person whose conduct was not causative in any sense of the loss, which could occur if the Act is construed as imposing liability even in the absence of the causative links contended for.
[39] Mr Farmer placed considerable reliance on recent decisions in the United States rejecting the long-advocated view of the Securities and Exchange Commission, that mere possession of inside information is enough and use need not be established. The United States Court of Appeals for the Eleventh Circuit in Securities and Exchange Commission v Adler [1998] USCA11 429; 137 F.3d 1325 (1998) said (p1337):

We view the choice between the SEC’s knowing possession test and the use test advocated by Pegram as a difficult and close question of first impression. It is apparent from the foregoing discussion that there is no definitive guidance on this issue from the Supreme Court. However, we believe that Supreme Court dicta and the lower court precedent suggest that the use test is the appropriate test. The strongest argument that has been articulated in support of the knowing possession test is that a strict use test would pose serious difficulties of proof for the SEC. It is true that it often would be difficult for the SEC to have to prove that an insider used the inside information, i.e., that the inside information has a causal connection to a particular trade. However, we believe that the SEC’s problems in this regard are sufficiently alleviated by the inference of use that arises from the fact that an insider traded while in possession of inside information.

We believe that the use test best comports with precedent and Congressional intent, and that mere knowing possession – i.e., proof that an insider traded while in possession of material nonpublic information – is not a per se violation. However, when an insider trades while in possession of material nonpublic information, a strong inference arises that such information was used by the insider in trading. The insider can attempt to rebut the inference by adducing evidence that there was no causal connection between the information and the trade – i.e., that the information was not used. The factfinder would then weigh all of the evidence and make a finding of fact as to whether the inside information was used.

[40] In United States v Smith [1998] USCA9 1719; 155 F.3d 1051 (1998) the Court of Appeals for the Ninth Circuit reached the same conclusion.
[41] In the Wilson Neill case this Court expressed a provisional view contrary to that urged for the appellants as follows (p162):

The Queen’s Counsel envisaged that, even if a prima facie case could be made against Magnum, a defence of total absence of fault could be available. Absence of moral fault would clearly be important on any question of penalty and also on an application for relief from disqualification under s188A of the Companies Act 1955. Our provisional view is that otherwise it has no bearing on liability under s7 or s9 of the Securities Amendment Act. Sections 8 and 10 provide exceptions from liability in what may be briefly called Chinese wall situations. Section 8 also provides exceptions when commission-approved procedure is followed. In such a legislative scheme there is no room for the principle applied in Civil Aviation Department v MacKenzie [1983] NZLR 78, as to which see further Millar v Ministry of Transport [1986] 1 NZLR 660. Accordingly we have disregarded the references in the opinion to the prospects of establishing such a defence and have given weight only to what is said in the opinion about the uncertain prospects of establishing a prima facie case.

It was submitted that we should decline to follow this obiter view.

[42] The logical approach begins with the statute. In the words and scheme of the provision imposing liability there is no requirement for proof of use of inside information linking its possession to the conduct giving rise to liability. On the contrary the indications are the other way.
[43] After the definition sections the substantive insider trading provisions are contained in ss7 – 19. Section 7 relates to dealing in securities of public issuers by insiders. It is structured similarly to s9 relating to tipping. Liability is imposed on an insider of a public issuer who has inside information about the public issuer and buys or sells securities of the public issuer. There is no express requirement that the inside information must be used or taken advantage of in the dealing.
[44] Section 8 sets out exceptions to s7 specifying circumstances in which no action is to be brought. The first contemplates a procedure, approved by the Securities Commission, for ensuring that inside information is not used by certain insiders in selling or buying securities. The third exception protects those who act in accordance with arrangements under which “Chinese walls” effectively separate persons possessing inside information from those who make or influence the decisions to buy or sell the securities. If it had been intended that liability should not arise unless the inside information is used in the dealing, the prior approval and operation of such procedures and compliance with them would seem unnecessarily cumbersome.
[45] There is a corresponding exception to liability under s9 by the provision in s10 precluding action where effective “Chinese walls” are in place.
[46] This structure in the form of pairs of sections, the first prescribing the circumstances in which liability arises and the second specifying exceptions, is repeated in ss11 and 12, and 13 and 14 dealing respectively with dealing in and tipping about securities of another public issuer.
[47] The remaining sections (15, 16 and 19) are directed to the consequences of insider trading. Section 15 defines losses and gains by reference to the difference in value of securities with or without the inside information being publicly available. Section 16 provides for discretionary monetary penalties and s19 deals with the allocation of sums recovered by the public issuer.
[48] The common element through all of the provisions imposing liability is the requirement that dealing or tipping takes place or is contemplated by a person who “has” inside information. The provisions could have easily been drafted to focus on use or taking advantage of the information but such language is notably absent. Subject to one point mentioned later in respect of s9(1)(b), there is nothing in the wording that indicates any need to read in linking requirements. Importantly, although there has been included in s3(2) a presumption directed to the capacity in which inside information is held, there is no presumption directed to its use. That would have been expected if liability was intended to depend on use of the information.
[49] The scheme of the Act suggests that, in its New Zealand concept, the insider trading law focuses upon restoration of value relinquished or not realised rather than damages and consequential losses. Pecuniary penalties may be imposed in serious cases. The scheme can operate effectively on the basis of absolute liability. Persons in possession of inside information generally can avoid liability by refraining from dealing in or tipping about securities in relevant public issuers. That may not always be the case but the legislature has provided specific means for avoiding liability in the statutory exceptions. There is no need to read in qualifications absent on the plain meaning of the words used. The provisions as drafted are workable and avoid the complexities inherent in proof of motivation or influence.
[50] We have reviewed the report of the Securities Commission on which the legislation is based. While there are passages in the report consistent with an objective of regulating the use or taking advantage of confidential information by insiders, we are satisfied that in its entirety the report recommended liability based on mere possession. When considering the report it is relevant to bear in mind that, at that time, the Securities and Exchange Commission in the United States was advocating liability based on mere possession summarised in the concept “disclose or abstain”. That phrase appears repeatedly in the Securities Commission report and is said to be the basis of the principles recommended for regulating insider trading.
[51] We have not found in the report of the Securities Commission evidence of specific consideration of the position where an insider in possession of inside information deals in or tips about securities but does not use or take advantage of the information when doing so. It could be that the proposition that a person may have but not use material information was perceived as unrealistic or unprovable. Whatever the reason, with some exceptions, the emphasis is on liability of those who have (i.e. possess) inside information and deal or tip. That corresponds with the wording employed in the statute.
[52] We were referred to the speech of the then Minister of Justice on the introduction of the Bill. In the course of outlining the insider trading provisions the Minister said (NZPD vol 490, 5280):

Insider trading refers to insiders, such as company directors, employees, and members, using that information to benefit themselves by making a profit by buying securities that increase in value when the information becomes public knowledge, or by avoiding a loss by selling securities that decrease in value when the information becomes public knowledge.

[53] This passage was invoked as an aid to interpreting the Act. It was said to support the construction of s9 so as to require use of the inside information, not mere possession of it, to justify liability. We are not persuaded that this statement so compellingly states the scope and purpose of the Bill to which it related as to require reading in a requirement which on the clear wording is not there. Further on in the Minister’s speech he said of the specific provision of present concern:

Clause 10 refers to tipping. Tipping is an obvious and easy way to avoid insider trading laws, and clause 10 implements the commission’s recommendation that an insider should be liable for losses incurred by persons who deal with a tippee of an insider.

[54] This general statement is entirely consistent with the wording of the provision enacted as s9. Nowhere in the Minister’s introductory speech did he advert to a distinction between liability resting on mere possession of inside information and liability resting on use of such information.
[55] The United States cases cited by Mr Farmer are interesting and reflect the adoption by the courts of a concept of insider trading consistent with that the appellants say should be read into the New Zealand Act. That approach is understandable in light of the legislation on which those decisions rest. Section 10(b) of the Securities Exchange Act 1934 makes it unlawful “to use or employ ... any manipulative or deceptive device ... in contravention” of prescribed rules. Reg §240.10b – 5 makes unlawful the use of any means or instrumentality of interstate commerce or of any facility of any national securities exchange:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

[56] Referring to those provisions, and also s17(a) of the Securities Act of 1933, the Court of Appeals in Adler said that the language suggests a focus or fraud, deception and manipulation. That represents a quite different and more compelling statutory basis for reading in a requirement for liability of “use” or “taking advantage of” inside information.
[57] Finally in support of this argument it was submitted for the appellant that the potentially ruinous consequences for an individual who happens to have possessed inside information even though that information played no part in a decision to buy or sell securities cannot have been intended. It was said that the purpose of the insider trading prohibitions is to ensure “an equal playing field” for buyers and sellers of securities and, if the inside information, though possessed, is not influential in a transaction, both buyer and seller are in the same position. Therefore, there is no need for prohibitions based on mere possession. However, there are good policy arguments against this. To require proof that inside information was influential in decisions to buy or sell, or continue with buying or selling activities, would involve evidential complexities and burdens the legislature might well have considered undesirable. Imposing the burden of compliance with absolute prohibitions on persons dealing in and possessing price sensitive information about the securities of public issuers was a policy choice that could well have been made. Its effect is to characterise insider trading not as necessarily wilful or fraudulent conduct but rather as a circumstance calling for an adjustment of values between participants in the interests of a credible market.
[58] We are satisfied the provisions should be given their plain meaning and that it is unnecessary for the purpose of determining liability to enquire into the question of the influence (if any) the alleged inside information may have had in the decisions to offer the price for the respondents’ shares in SPNL they eventually accepted.

Section 9(1)(b), communication or disclosure

[59] Liability under s9(1)(b) involves communication or disclosure by an insider with the necessary knowledge or belief. For the appellants it was submitted that there was no evidence and no basis for assertion that the alleged inside information was communicated or disclosed by Mr Patek or Petrocorp to PIL with the requisite knowledge (though knowledge of the intention to buy is clear).
[60] Fisher J noted the unavailability of evidence concerning communications within the Fletcher Group, but held that the fact of communication of the information was arguable. It seems that his reason for this (though it is not expressly stated) is based on his view that it is artificial to dissect the activities of a corporate group in this context. But that must have some limits. In a corporate group context, if there is not actual communication or disclosure, any purchase or sale of securities more appropriately would fall under s7 or s9(1)(a).
[61] If the allegations under s9(1)(b) stood alone, greater scrutiny might have been called for. But leave is directed to proceedings, not separate causes of action, and the case under s9(1)(a) is, on the material presently before the Court, more clearly arguable.
[62] Before leaving s9(1)(b) it is worth mentioning an aspect of its construction. The provision contemplates communication or disclosure of inside information by an insider to a person knowing or believing that another (third) person will, or is likely to, deal or tip. Plainly there must be some link between the information and the third person or the section would be absurdly wide. It would be consistent with the other provisions, all of which relate to persons having (possessing) inside information, to construe s9(1)(b) as limited to third persons whom the insider knows or believes will, or is likely to, deal or tip having the information. That does not mean that the third persons must be expected to use, or take advantage of, the information but merely contemplates that they will have it.

Other reasons why the case was said to be unarguable

[63] The appellants advanced further arguments in an effort to show that the intended claims are unarguable. It was submitted that the inside information as alleged did not exist at the time the respondents’ shares were acquired. It was said further that, if it existed, the information was insufficiently significant or “mature” at the relevant time to be likely to “affect materially” the price of SPNL’s shares should it have been known to the public. These are essentially factual matters. Like the Judge, we do not consider that it can be said to be unarguable that the pleaded information, as it was the subject of the presentation to the meeting on 2 November 1995, could meet the definition of inside information in the Act. It will be difficult to contend that the information would not have been price-sensitive when the receipt of new licences for uninvestigated areas was seen as justifying an increase in the price offered for the shares.
[64] The detailed written submissions analysing the significance of statements said to have been made are more appropriate for a trial. Similarly the criticism of the pleading and the absence of particulars before full discovery cannot be taken too far. Necessarily the basis of an arguable case must be presented. Leave under s18 is not to be granted lightly. But the leave stage is not the time to determine whether the claim is proved. The application calls for a broad assessment of whether there has been shown to be no sufficient foundation for a case that when fully formulated and presented, will have no real prospect of success. The Judge was not satisfied of that and we are not convinced his assessment was wrong.

No good reason to bring proceeding

[65] Having reached this point, it is necessary to turn to the matters advanced by the appellants as providing good reason for refusing leave to bring the proposed proceeding. The first is that the case, as presently particularised, is weak. This is related in part to the general point made by the appellants; that the respondents’ real complaint is not of insider trading but of failure by Petrocorp to disclose the current assessed potential of the Mangahewa area at the time of the acquisition of their shares. We were told that there are separate High Court proceedings making that claim. It is said that the application for leave with which we are concerned is an attempt to convert that complaint into insider trading allegations solely to enable the costs to be imposed on SPNL.
[66] If the respondents’ complaints constitute an arguable case of insider trading it is no good reason to refuse leave that the complaints also may support other causes of action.
[67] We accept that the strength of the proposed claims, as best that can be assessed at the leave stage, and the likely proportionality between costs and benefits are relevant matters to be considered. We accept that it is also appropriate to take into account the evidence (untested at this stage) that the emerging information about the prospects of the Mangahewa area was not specifically identified as influential in the assessment of the price to be offered for the respondents’ shares. Indeed the affidavits show that Mr Patek, at the material time, was unimpressed by the reports of the area’s prospects. We are conscious also of the difficulties faced by those engaged in petroleum and gas exploration and developments with respect to timely disclosure. That may bear heavily on aspects of the claim – for example, any assessment of loss involving notional disclosure would need to take account of the reservations or qualifications that would be necessary to ensure only the appropriate impact on share values. The lure of hindsight, often attractive to claimants, must be resisted.
[68] Taking these matters into account, we are not persuaded there are good reasons in this case for not bringing the proceedings. We are not disposed to interfere with the Judge’s assessment that the case is not so weak that leave could be declined on that ground. Any cost/benefit exercise necessarily would be speculative at this stage. The Judge considered that the burden of showing that leave should be refused on this ground has not been discharged. He considered the risk of unwarranted expenditure is best managed by the imposition of conditions with leave reserved, and we agree.
[69] Accordingly the appeal against the grant of leave is dismissed.

Costs

[70] The appeal was directed also to the interpretation of s18(5) adopted by the Judge as extending to costs incurred before the grant of leave. In his separate judgment delivered on 6 September 2002, Fisher J accepted the argument that ‘the costs ... in bringing ... a proceeding” in the subsection may include the costs of seeking leave which is an “essential part” of bringing a proceeding. He found this to be consistent with the policy of the legislation as confirmed in the Securities Commission Report which the Act implemented. We agree. It would be quite incompatible with the scheme under which public issuers are to bear the costs of insider trading proceedings if complaining shareholders were dissuaded from seeking leave to initiate that scheme by the burden of costs on leave applications. It would simply provide public issuers with an incentive, even where a favourable opinion under s17 has been given, to oppose leave and to attempt to put as much of the burden of formulating the claim as possible upon those seeking leave.
[71] We are satisfied that the wording of the subsection is well capable of the construction adopted by the Judge. While it may be that leave under s18 is not “essential” to insider trading proceedings, it is essential where subs (5) has application. The word “proceeding” must be considered in its context and is not to be qualified by reference to the definition in the High Court Rules.
[72] Section 18(5) is mandatory when it applies - “The Public Issuer shall pay the costs”. However, quantum is a matter properly supervised by the courts. Fisher J has taken steps in that regard.
[73] The appeal on this point also is dismissed.
[74] If any issue arises in respect of costs on the appeal memoranda may be submitted.

Solicitors:
Buddle Findlay, Auckland, for Appellants
Fraser Powrie, Auckland and Oakley Moran, Wellington, for Respondents