Haylock v Patek [2011] NZCA 674; [2012] 1 NZLR 665; (2011) 10 NZCLC 264,984 (21 December 2011)

Last Updated: 25 January 2018

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IN THE COURT OF APPEAL OF NEW ZEALAND

CA247/2008 CA591/2008 [2011] NZCA 674

BETWEEN ROSEMARY PHYLLIS FILLBRIDGE HAYLOCK First Appellant

AND STUART HAMILTON CAIRNS Second Appellant

AND HUGH GREEN PROPERTIES LIMITED Third Appellant

AND JAMES WARREN PATEK First Respondent

AND SHELL EXPLORATION NZ LIMITED Second Respondent

Hearing: 11 to 14 October 2011

Court: Arnold, Randerson and Harrison JJ

Counsel: G J Judd QC and P A B Mills for Appellants S J Katz, C M Laband and A T Edwards for Respondents

Judgment: 21 December 2011 at 11.30 a.m.

JUDGMENT OF THE COURT

A The appeal and cross-appeal in CA591/2008 are dismissed.


B The application for leave to appeal in CA247/2008 is dismissed.

100. Counsel are to confer and provide a memorandum as to costs within one month of the date of this judgment.

___________________________________________________________________

REASONS OF THE COURT

(Given by Randerson J)

Table of Contents

	Para No
Introduction	[1]
The elements the appellants needed to prove	[12]
The Judge’s findings	[13]
Grounds of Appeal and cross appeal (CA591/2008)	[16]
Issues	[20]
Pleadings and statutory framework	[21]
Factual background
The Mangahewa prospect	[28]
PPL 38705 and the Joint Venture and Alignment Agreements	[32]
The work of the DGS team	[37]
The Mangahewa 2 well proposal	[45]
Progress towards the acquisition of the Southern minority interests in the period up to early November 1995 and Mr Papalia’s first report of 12 August	[52]
Buttle Wilson’s report of 14 August	[57]
Events between Buttle Wilson’s report of 14 August and the 2 November meeting	[64]
The 2 November 1995 presentation	[68]
The events of 3 to 6 November	[78]
Events – 7 to 15 November	[89]
The second reports from Mr Papalia and Warburg	[93]
The meeting with Methanex on 13 November	[97]
Events after effective completion of the acquisition on 14 November	[101]
First issue: Was the Mangahewa Information “inside information”?	[111]
The information in this case	[127]
To what extent was the Mangahewa Information already in the public domain?	[133]
Disclosure of the Mangahewa Information	[134]
Was the Mangahewa Information price-sensitive?	[136]
Technical and valuation evidence	[138]
Share price analysis	[147]
Sharebroking evidence	[154]
The significance of the NZX Disclosure Rules	[157]
Conclusion on price-sensitivity	[183]
Second issue: If the Mangahewa Information was “inside information”, did Mr Patek and/or Petrocorp have it at the time of the alleged acts of encouragement?	[185]
Third issue: If Mr Patek had “inside information” at relevant times, did he have it “by reason of” his role as a Southern director?	[201]

Fourth issue: If Petrocorp had “inside information” at relevant times, did it have it “by reason of” its role as a substantial security holder in Southern?	[211]
Fifth issue: If Mr Patek and/or Petrocorp had “inside information” at relevant times and by reason of the pleaded capacities, did either or both encourage PIL to buy the Southern shares?	[213]
Sixth issue: Does there need to be a causative link between the possession of the inside information and the acts of encouragement or advice?	[216]
The application for leave to appeal in CA247/2008	[219]
Summary	[220]
Disposition	[221]

Introduction

[1] In 1995, Southern Petroleum No Liability (Southern) was a publicly listed company engaged in the oil and gas industry, mainly in Taranaki. Approximately 85 per cent of its issued shares were owned by Petrocorp Exploration Ltd (Petrocorp), a wholly owned subsidiary within the Fletcher Challenge group of companies (Fletchers).
[2] This appeal is concerned with a takeover offer made on 31 July 1995 under the Companies Amendment Act 1963 by Fletchers for the remaining shares in Southern not already owned by Fletchers. For the purpose of implementing the takeover, a Fletchers’ subsidiary (Petroleum Industries Ltd (PIL)) was incorporated. The takeover was eventually completed in January 1996 but not without strong challenges by minority shareholders in Southern to the adequacy of the offered share price.
[3] The appellants were amongst the minority shareholders in Southern. In 2002 they and another shareholder (a Mr Oakley) were granted leave by Fisher J^[1] under s 18 of the Securities Markets Act 1988 (the Act) to bring proceedings under the insider trading regime alleging the respondents had acted in breach of the Act.^[2] This Court upheld the grant of leave in 2003.^[3]
[4] The first respondent, Mr Patek, was a director of both Petrocorp and Southern. He was also the Chief Executive Officer of another wholly owned Fletchers’ subsidiary, Fletcher Challenge Petroleum Ltd (FCP) to whom Petrocorp reported. FCP reported in turn to the Fletchers’ parent company, Fletcher Challenge Ltd (FCL).
[5] The second respondent, Shell Exploration (NZ) Limited (Shell) is the successor to the energy interests of Fletchers including Petrocorp and Southern.
[6] The essence of the appellants’ case was that Southern was the holder of interests in a number of licences to explore and prospect for oil and gas, mainly in the Taranaki region. In particular, Southern and Petrocorp each held a 44.5 per cent interest in a prospecting licence, PPL 38705, relating to a prospect at Mangahewa. Wells had been drilled into the Mangahewa structure previously but with disappointing results. In 1994 and 1995, Petrocorp employees known as the Deep Gas Study (DGS) team reviewed existing data in relation to the Mangahewa prospect and undertook further work with a view to presenting a proposal to executives of Fletchers. Their objective was to persuade the executives that another well (Mangahewa 2), was warranted in order to evaluate the potential to recover gas at depth from the Mangahewa structure.
[7] For that purpose, the DGS team made a technical presentation to the Fletchers’ executives on 2 November 1995. The focus of the appellants’ case on appeal was on two aspects of the material presented. First, the size of the Mangahewa structure including the indicative volume of gas initially in place (GIIP). This was said to be 22.6 trillion cubic feet (TCF). Secondly, the proposal to drill Mangahewa 2 by 31 March 1996. We refer to this information as the Mangahewa Information.^[4]
[8] The appellants alleged that Mr Patek and Petrocorp were aware of the Mangahewa Information but did not disclose it to the Southern directors, their advisers or the public directly. Two of those directors were independent and were advising the minority shareholders whether to accept the price offered by Fletchers. The independent directors engaged the services of Nicholas Papalia and Associates and Buttle Wilson and Co Ltd (later SBC Warburg NZ Ltd (Warburg)) to assist them in their task.
[9] The sum initially offered for the shares in July 1995 was 63 cents each but, in consequence of the acquisition by Southern of further licences, FCL announced on 15 November 1995 an increase in the offer to 75 cents per share. Soon afterwards, Warburg assessed the increased offer as being fair and reasonable and the minority shareholders sold their shares to PIL at that price. The takeover of Southern was formally completed on 19 January 1996.
[10] The appellants alleged that Mr Patek recommended to Fletchers on 3, 5, 6 and 14 November 1995 that the takeover offer price be increased. It was said Mr Patek thereby encouraged the purchase of shares by PIL in Southern in breach of the insider trading legislation. It was alleged that Mr Patek’s acts of encouragement should be treated as those of Petrocorp as well.
[11] Finally, the appellants claimed that if they had received the Mangahewa Information, they would have continued to resist the takeover offer and would not have accepted the price offered of 75 cents per share. They alleged they had suffered a loss of $1.24 per share. Between them, the appellants held in excess of two million shares in Southern.

The elements the appellants needed to prove

[12] We will set out the relevant statutory provisions shortly but, for the present, we summarise the key elements the appellants were required to prove in terms of their case as ultimately pleaded and relied upon at trial:

• (a) At relevant times, Mr Patek and Petrocorp had information in relation to Southern which was not publicly available and which would, or would be likely to, affect materially the price of the shares if made publicly available.
• (b) Mr Patek had the information by reason of being a principal officer (director) of Southern.
• (c) Petrocorp had the information by reason of being a substantial security holder in Southern.
• (d) Mr Patek and Petrocorp encouraged Fletchers to purchase the Southern shares.
• (e) In consequence, the appellants suffered loss.^[5]

The Judge’s findings

[13] After a trial occupying some six weeks, Hugh Williams J found against the appellants by a judgment delivered in September 2008.^[6] The Judge heard evidence from 22 witnesses including a number of experts in a variety of disciplines. His comprehensive and highly detailed judgment runs to over 150 pages. An appreciation of the volume of evidence at trial can be gained from the fact that the case on appeal extends to over 7,500 pages.
[14] In essence, the Judge made factual findings that:

• (a) Mr Patek did not have the Mangahewa Information in his possession at the time of the alleged acts of encouragement.
• (b) The Mangahewa Information was not price-sensitive, that is it would not have been likely to materially affect the price of the shares if publicly available.

[15] Those findings were sufficient to dispose of the appellants’ case, but the Judge also found that:

(c) If Mr Patek had received the Mangahewa Information, it was arguable he had received it in his capacity as a director of FCP, Petrocorp and Southern and not by reason alone of his directorship in Southern.

(d) If Mr Patek went on to had been in possession of inside information, he would have been found to have encouraged the purchase of the Southern shares by recommending to FCL on 3, 5, 6 and 14 November 1995 that the offer be increased to 75 cents per share.

(e) Although Petrocorp had the Mangahewa Information during the relevant period, it was not an insider because it did not have it by reason of its role as a substantial security holder in Southern.

(f) No causative link is required between the possession of inside information by an insider and any acts of encouragement to buy or sell shares.

Grounds of appeal and cross appeal (CA591/2008)

[16] The appellants contend on appeal that Hugh Williams J erred in:

• (a) Finding that Mr Patek did not have the Mangahewa Information at relevant times.
• (b) Finding that the Mangahewa Information was not price-sensitive.
• (c) Finding that Petrocorp was not an insider because it was not a substantial shareholder in Southern.
• (d) Failing to find that Petrocorp itself encouraged the purchase of the Southern shares.

[17] The respondents have cross-appealed on the grounds that the Judge erred in finding that:

• (a) If Mr Patek possessed inside information, it was arguable he possessed it (at least in part) by reason of his directorship in Southern.
• (b) No causative link is required between the possession of inside information by an insider and any acts of encouragement to buy or sell shares.

[18] We record that shortly before the hearing of this appeal, the appellants applied for leave to amend the statement of claim by adding a new act of encouragement to buy the Southern shares. However, this application was opposed and was abandoned by the appellants during the hearing.
[19] We also had before us an application for leave to appeal^[7] against a refusal by Hugh Williams J to order particular discovery of documents in respect of a related proceeding brought by Mr Oakley in the Wellington High Court.^[8] Mr Judd QC advised us on behalf of the appellants that the fate of the application for leave depended on the outcome of the substantive appeal against the judgment of Hugh Williams J.

Issues

[20] Against that background, the issues are whether the Judge erred in:

(a) Finding that the Mangahewa Information was not “inside information”.

Sub-issues:

(i) Was it “information” at all?

(ii) To what extent was it already in the public domain?

(iii) Was it price-sensitive?

(b) Finding that if it was “inside information”, Mr Patek and/or Petrocorp had it at the time of the alleged acts of encouragement.

(c) Finding that if Mr Patek had “inside information” at relevant times, he did not have it “by reason of” his role as a Southern director;

(d) Finding that if Petrocorp had “inside information” at relevant times, it did not have it solely “by reason of” its role as a substantial security holder in Southern.

(e) Failing to determine that if Petrocorp had “inside information” at relevant times and by reason of its role as a substantial security holder in Southern, it encouraged PIL to buy the Southern shares.

(f) Finding that there was no need for a causative link between possession of the inside information and the acts of encouragement or advice.

Pleadings and statutory framework

[21] The appellants proceeded in the High Court on the basis of an amended statement of claim dated 31 July 2006 alleging eight separate causes of action. By the conclusion of the trial, two causes of action had been abandoned with six remaining. Three of these were directed against Petrocorp (now Shell) and the other three against Mr Patek. All alleged a breach of s 9(1)(a) of the Act which relevantly provided:

9 Liability of insider for tipping about securities of a public issuer

(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;

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

[22] The appellants contended that the respondents were each “insiders” in relation to a public issuer (Southern) under s 3(1)(b) of the Act as persons who:

By reason of being a principal officer ... of, or a substantial security holder in [Southern] [had] inside information about [Southern] ...

[23] It is not in dispute that Southern was a public issuer and that, as a director of Southern, Mr Patek was a principal officer of that company.^[9] It is common ground that Petrocorp was, by virtue of its substantial shareholding in Southern, a substantial security holder in that company as defined.^[10]
[24] The appellants next asserted that Mr Patek and Petrocorp had inside information about Southern and that they advised or encouraged PIL to buy the appellants’ shares in Southern. It followed, the appellants claimed, that Mr Patek and Petrocorp were liable to them under s 9(2)(a) of the Act.
[25] “Inside information” was defined as follows:^[11]

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.

[26] If the respondents had been held liable, they would have been responsible under s 9(2)(a) for any loss incurred by the appellants. In that respect, s 15 of the Act provided that:

(a) a person who sells a security in a public issuer for less than its value incurs a loss equal to the difference between the value of the security and the consideration receivable ...

[27] Section 15(2) defined “value” for the purpose of calculating the loss under the legislation:

(2) In this section value, in relation to a security in a public issuer, means the value the security would have had at the time of the sale or purchase if the inside information known to the insider about the public issuer was publicly available.

Factual background

The Mangahewa prospect

[28] The Judge received a substantial body of expert evidence concerning the relevant geological structures in the Taranaki region. Much of the geological evidence related to the Mangahewa and McKee formations in the upper part of the Kapuni Group. This Group also included the Turi and Kaimiro formations. The Judge described the Mangahewa formation as:^[12]

... the thickest of the Eocene deposits and is a body of rock comprising interbedded sandstones, siltstones and coals probably deposited as a uniform blanket across the area. The Mangahewa structure is a large, closed, low-relief anticline, 15km long, 8km wide, with a total relief of 240m and an area of 150km².

[29] The Judge explained that the Mangahewa structure was first mapped in the mid-1950s. The drilling of Mangahewa 1 commenced in 1960 and established that the structure was a low porosity/low permeability (known in the industry as “tight”) reservoir gas/condensate trap system. Relatively small quantities of gas were produced from the well but the Judge found that it was obvious the result was of sub-commercial value. Mangahewa 1 was abandoned in 1974.
[30] Six other wells were drilled in the Mangahewa structure, all of which encountered gas but, again, not in economically recoverable commercial quantities. The drilling revealed high water saturation which the Judge said could make extraction economically impossible.
[31] It is common ground that, in order to extract gas in commercial quantities from the Mangahewa structure, it would be necessary to use a hydraulic fracturing technology known in the industry as “fraccing”. The evidence was that although this process was commonplace overseas, experience in New Zealand of using the technique was fairly limited. The purpose of this technology is to fracture (or stimulate) the rock formations to improve permeability so the gas may be more readily recovered.

PPL 38705 and the Joint Venture and Alignment Agreements

[32] Petroleum prospecting licences (PPLs) run for five year periods and require defined work programmes to be effected during their currency. PPL 38705 was originally issued in 1988. PPL 38705 was later renewed but was due to expire on 9 August 1998.
[33] By mid-1993, Petrocorp and Southern each owned 44.5 per cent of PPL 38705. The Minister of Energy retained the remaining 11 per cent. On 2 June 1993, those three parties entered into a Joint Venture Operating Agreement (JVOA). Petrocorp was appointed as the operator of PPL 38705, taking responsibility for the day-to-day management of work undertaken under the licence and providing technical expertise to the joint venture.
[34] Shortly afterwards, on 18 June 1993, Petrocorp and Southern signed an Alignment Agreement covering the various licences each held in relation to the Taranaki Basin. Arrangements such as these are known in the industry as “farm-in” and “farm-out” agreements. The Alignment Agreement gave the parties the right to share equally in the licences each held, including future licences which might be obtained during the currency of the agreement.
[35] Under the terms of the JVOA, an operating committee comprising representatives of both Petrocorp and Southern was established. In addition to its obligations as operator under the licence, Petrocorp was also obliged to prepare programmes, budgets and authorities for expenditure (AFEs) in respect of the joint operations. These required approval by the operating committee.
[36] The JVOA also contained a number of provisions requiring the sharing of information concerning the joint operations.^[13] Under these provisions, Petrocorp was obliged, for example, to promptly provide to each member of the joint venture full reports of all seismic, geological and geophysical data as and when it was produced, daily drilling reports, monthly reports on the joint operations and monthly production reports. Petrocorp was also obliged to provide to the appropriate government authorities all reports and information required by law and under the relevant licences. Similar provisions requiring co-operation and the sharing of information existed under the Alignment Agreement.^[14]

The work of the DGS team

[37] By the early 1990s, it had become apparent that the gas reserves from the Maui field were declining. It was decided a replacement source needed to be found within the next decade to provide long-term security for the gas market and, in particular, to supply Methanex, the largest industrial gas buyer. The Judge found that in 1994 there was concern that, in the absence of secure future supply, Methanex might curtail its production and close one of its two methanol plants. This was confirmed by Methanex in a public statement on 6 October 1995. If this were to occur, it would have had a significant financial impact on Fletchers’ energy interests.
[38] In June 1994, the work programme under PPL 38705 was amended to require, amongst other things, drilling a well and reviewing the potential gas productivity of Kapuni Group sandstones in existing wells. This was to include the likely effectiveness of reservoir stimulation techniques. The amendment to the work programme also required the drilling of a further well by 1 August 1996. Failure to comply with the work programme would result in the surrender of the licence.
[39] These events caused Petrocorp to set up the DGS team in September 1994. The DGS team was to carry out a study to confirm the value of on-shore Taranaki gas potential in respect of some eight deep gas Kapuni Group projects including PPL 38705. The costs of the study were to be shared equally by Petrocorp and Southern.
[40] Mr Warwick Dobbie was a geologist and Southern’s technical manager. He was made aware of these developments and, it is safe to assume, was involved on behalf of Southern in approving the proposed study and the necessary funding for that purpose.
[41] By the end of July 1995, the DGS team had completed data collection and compilation exercises. A meeting of a technical review team (TRT) was held on 27 July 1995 attended by a number of staff or contractors from Petrocorp and Mr Dobbie. The reports obtained by that date included a petrophysical examination reviewing all wells drilled on the Mangahewa structure. This confirmed that onshore Kapuni Group penetrations outside the Kapuni and McKee fields were low-quality reservoirs with poor permeability.
[42] A Petrocorp geophysicist, Mr Philip Wolter, had reviewed seismic interpretations in order to map the Mangahewa structure. Maps delineated the shape and elevation of the Mangahewa and Ohanga structures but only to the top McKee formation level. The Judge said the maps available at that stage were unsuitable for volumetric estimations. Mr Wolter did not give evidence at the hearing but his map was produced along with an affidavit he had filed in opposing the leave application. This noted that the potential of the Mangahewa structure first became apparent through its sheer size, but that the poor quality of the reservoirs precluded economic gas flow. He produced his first version of the top McKee sandstone reservoir depth map on 5 August 1995. It showed the Mangahewa structure but said nothing about gas accessibility.
[43] The Judge also recorded that:^[15]

In addition, Petrocorp commissioned a report from the Centre for Petroleum Engineering at the University of New South Wales on the Kapuni Group. Professor Khurana concluded there was a “high probability of gas reserves in the range of 100300bscf [billion standard cubic feet] being present in the equivalent of the McKee/Mangahewa Formations” but that “overcoming the long term detrimental effect of retrograde condensation on well productivity through hydraulic fracturing would be difficult”. Water saturation, or “mobile water”, was foreseen as a problem since all Deep Gas wells in onshore Taranaki, with the exception of Kapuni, had co-produced water with gas.

[44] A comprehensive report was prepared by the DGS team for the purpose of the meeting on 27 July 1995. This recorded that there had been significant development in the understanding of the structures in PPL 38705 and their reserves potential. The options were either to complete the documentation of PPL 38705 in order to meet the work programme or to continue the study which would “likely result in a well or re-entry proposal and a lengthy testing programme”. The decision was made to continue with the study.

The Mangahewa 2 well proposal

[45] A Mr Ken McCagherty was employed by Petrocorp in 1995 as an engineering manager. The Judge found that Mr McCagherty was an enthusiastic supporter of the DGS who played a significant role in the Mangahewa project. His objective was to drive the project through to fruition which meant either to drill a second well or to abandon the project. His immediate focus was to obtain sufficient funds to drill. He envisaged two wells, one to prove the concept and the second to duplicate the results. His evidence was that the DGS team had not generated any new data or used new techniques. The data on which the team worked was well known and was public knowledge through Ministry of Commerce reports. He considered Mangahewa to be valueless as a Southern “reserve”. Reserves could only be described as such, and attributed value, in the event of a successful well. Commercial value could only be established by that means.
[46] Mr Dobbie of Southern was kept informed of progress by the DGS team and was also involved under the terms of the JVOA in decisions being made about the forward work programme under the various licences and associated budgeting and work priority decisions. For example, he was informed by letter of 6 October 1995 from the chief geologist at Petrocorp:

The Deep Gas review has been largely completed. The mapping has confirmed the Mangahewa structure as a valid structural closure with considerable reserves potential. The critical factors for success appear to be drilling and testing/completion techniques and we will be continuing work on these aspects after the report is lodged. Our assessment of gas market opportunities indicates that we have a 12-18 month window in which to demonstrate a sustainable gas supply beyond 2005, although we are unlikely to access the market until - 2007.

Proving commercial gas volumes in the Mangahewa structure would also enable the JV to place a large proportion of the exploration licence under a PML. [Petroleum Mining Licence]

[47] The same letter set out a proposed work programme for the year ended 31 July 1996. This included a proposal for “a deep well to appraise the Kapuni gas reservoirs in the Mangahewa anticline”. The probability of proceeding (POP) for the Mangahewa 2 well was assessed at 33 per cent at a cost of $5.75 million. The work programme was not confined to Mangahewa 2 but included proposed seismic and drilling work on three other prospects. The letter emphasised that approval of the budget by Southern did not constitute approval of specific projects or expenditure. This would be gained through the normal review and AFE processes.
[48] Mr Dobbie responded by letter of 10 October confirming that Southern supported the philosophy behind the proposed work programme for PPL 38705 and agreeing that “we must accelerate the exploration programme in order to fully evaluate the licence prior to its expiry in 1998”. Petrocorp replied to Mr Dobbie noting that the DGS would be completed before the end of the year “with a likely drilling recommendation”. Mr Dobbie was advised that Petrocorp did not see any reason why the Mangahewa 2 well could not be drilled within the licence year along with a shallow well at another prospect.
[49] Mr Patek confirmed that the Southern directors were aware of the proposal to drill Mangahewa 2. They met monthly and were provided with reports on operations under the JVOA. These reports included documents known as Gantt charts which showed projected dates for planned events. For example, in the period April to July 1995, the Gantt charts included in Southern’s board papers (with one exception) showed February 1996 as the project drilling date for Mangahewa 2. By October 1995, the Gantt chart showed that Mangahewa 2 was “now high priority”. This was done for planning purposes but all were aware that inclusion in the charts did not infer any commitment to proceed with drilling at any particular time, or at all.
[50] While Southern was aware of the proposal to drill Mangahewa 2, it also knew that formal approval was required under the JVOA. On Petrocorp’s side, this would involve obtaining the approval of Petrocorp executives and, ultimately, the FCL Board. It is not disputed that there was real scepticism by the Fletchers executives (including, particularly, Mr Patek) about the prospects of success for commercial exploration of the Mangahewa structure, given the very poor history of previous drilling operations. The DGS team was well aware that there were substantial hurdles to overcome if their aspirations were to be approved.
[51] Mr Patek also confirmed in evidence that the Southern directors were all kept informed during 1995 through Board papers that the DGS was proceeding with seismic interpretation and mapping of the Mangahewa deep gas prospect.

Progress towards the acquisition of the Southern minority interests in the period up to early November 1995 and Mr Papalia’s first report of 12 August

[52] In the meantime, there had been ongoing activity to progress the takeover offer Fletchers had made on 31 July for the minority interests in Southern. Southern’s two independent directors (Mr Norman Geary and Mr John Cameron) had engaged Mr Papalia (of Nicholas Papalia and Associates) and Buttle Wilson to advise them. The managing director of Southern, Mr Trevor Taylor, was said to be pushing strongly for Southern to have Mr Papalia extract every ounce of value for the company and the minority shareholders. Mr Taylor put in place an arrangement to ensure a proper flow of information between Southern and Petrocorp which the Judge said was designed to ensure that the takeover transaction was transparent, uncomplicated and at arm’s length.
[53] The Judge found that Southern gave Mr Papalia all relevant information concerning its exploration and prospecting interests.^[16] Mr Papalia obtained from Petrocorp additional data concerning the prospects Southern was entitled to access. Mr Dobbie also sent other material to Mr Papalia including a copy of the report already mentioned from Professor Khurana and underlying generic economic models.
[54] Messrs Taylor and Dobbie went to Sydney on 5/6 August 1995 to assist Mr Papalia with his valuation. The DGS was discussed, as were issues arising from the meeting Mr Dobbie had attended on 27 July when he met members of the DGS team.
[55] Mr Papalia reported on 12 August 1995 to Southern’s independent directors, valuing all of Southern’s exploration interests at $10.17 million using discounted net present value methods. Working papers prepared at the time show that the highest value attributed to all the prospects within Southern’s portfolio was a figure of $5 million for Mangahewa. Southern’s 44.5 per cent interest in Mangahewa amounted to $2.23 million on that basis. Mr Papalia then assessed the POP at 50 per cent to arrive at $1.1 million as the value of Southern’s interest in the Mangahewa prospect. Mr Papalia’s POP figure was higher than Petrocorp’s own assessment of 33 per cent.
[56] It is important to recognise that the value attributed to Southern’s exploration interests formed only a relatively small part of Southern’s overall value. Mr Papalia assessed Southern’s “proved reserves” to have a pre-tax value of $66.77 million and its “proved plus probable reserves” to have a value of $79.63 million. The expressions “reserves”, “proved reserves”, “unproved reserves” and “possible reserves” are terms defined in guidelines recommended by the Society of Petroleum Engineers in 1988 which depend on the degree of certainty attaching to their existence, scale and recoverability. We discuss these and other such guidelines further below.

Buttle Wilson’s report of 14 August

[57] Mr Papalia’s report was provided to Buttle Wilson who reported on 14 August that the fair valuation range for the Southern shares was 50 to 60 cents each. The report concluded that the offer of 63 cents per share was fair and reasonable to minority shareholders.
[58] Buttle Wilson used a variety of different valuation methods but noted that greater reliability could be placed on three valuation methods namely break-up, going concern and price to net assets. Their report noted that the nature of the oil and gas industry was such that future earnings (and hence future share values) were highly uncertain. Southern’s prospects would depend, amongst other things, on the success of its exploration programme, the productivity of its oil and gas fields, world prices and foreign exchange rates. The share valuation was therefore to be regarded as subjective.
[59] The report also said that discovery of significant oil or gas reserves had the potential to materially increase share prices within a short period but Buttle Wilson was not aware of any greater than normal probability of such a discovery being made. The report further recorded that, in the first five months of 1995, Southern’s shares had traded at prices consistently above the offered price but fell below in the six weeks prior to the takeover offer being made. This was considered to be due to Southern’s disclosure of adverse conditions. Various events had resulted in a significant decline in reserves and reduced expectations for field extensions and exploration with Southern’s Waihapa and Ngaere licences.
[60] The Buttle Wilson report contained the following passage with regard to Southern’s prospecting operations:

Further details of Southern’s prospects are contained in the report of NPA [Nicholas Papalia and Associates]. Oil and gas exploration is highly speculative, and it is not possible to accurately quantify Southern’s chances of success. Some of Southern’s exploration can, at best, only provide incremental increases in reserves. Other projects might possibly be more significant.

The two projects which could, if completely successful, add greatest value to Southern are Cheal 1 and Kaimiro deep gas. Cheal 1 is an exploration well due to be drilled within the next four weeks. Southern has estimated that the structure which Cheal 1 will target could have a net present value to Southern as high as $16.7 million. The cost of the well might also be expended for no return at all.

Kaimiro deep gas is a relatively well explored reservoir within the Kaimiro and Ngatoro fields that is not yet developed. Its nature is explained in the NPA report. There are various uncertainties surrounding the project. It is possible that higher production and better profitability can be achieved than is incorporated in NPA’s assessment of proved and probable reserve value of approximately $9.3 million. The potential value of the project could be significantly higher.

It is not possible to judge the probability of achieving the highly risky maximum potential of these projects. NPA values the Cheal 1 and Kaimiro deep gas upside potential, together with Southern’s other exploration interests, at a total of $10.2 million.

[61] The figure of $10.2 million reflected Mr Papalia’s evaluation of Southern’s exploration prospects. No specific reference was made in the reports prepared by Mr Papalia and Buttle Wilson to the proposal to seek approval for a second well in the Mangahewa structure even though it is clear from the working papers already mentioned that Mr Dobbie and Mr Papalia had discussed the Mangahewa prospect and Mr Dobbie was aware of the proposal for a second well. The Judge appears to have accepted that Mr Papalia was not aware of the Mangahewa 2 proposal.^[17] We discuss below whether that omission was material.
[62] On a break-up basis, Buttle Wilson assessed Southern’s value at $137.5 million of which $10.2 million was attributed to the value of the company’s exploration prospects. The great bulk of the company’s value was seen to lie in its production licences (nearly $80 million) and cash and deposits (approximately $40 million). The assessed value on a break-up basis would result in a value of 60 cents per share.
[63] On a going-concern basis, Buttle Wilson noted that, internationally, oil and gas company shares trade at up to 40 per cent over net asset value which is assumed to partially reflect exploration potential. Southern’s shares had traded in 1993 and 1994 at approximately 30 per cent above net asset value. Buttle Wilson considered that, at 30 per cent of the value of proven and probable reserves, Southern’s exploration potential could be worth $23.9 million. On a going concern basis, the exploration potential was assessed to have a range between $10.2 million and $23.9 million. The resulting value per share would range from 50 to 56 cents on that basis.

Events between Buttle Wilson’s report of 14 August and the 2 November meeting

[64] On 16 August, the independent directors recommended shareholders accept the offer on the basis of the valuations, observing that the offer price of 63 cents per share represented a 21 per cent premium over the market price prior to the announcement of the takeover offer.
[65] By the end of August, Fletchers declared the takeover offer unconditional having received sufficient acceptances to take its shares in Southern beyond 90 per cent by value of Southern’s issued capital. This occurred despite strong shareholder resistance to the offer led by Mr Oakley (a Wellington solicitor) but also including other minority interests. Mr Oakley obtained specialist advice from a Mr Swindon (an oil and gas adviser with many years experience) and a Dr Haskell (a geologist with extensive experience in the oil and gas industry). Mr Oakley sought further detailed information as to the valuations. Further information was provided to him by Southern. Mr Oakley remained dissatisfied and continued to question Southern’s valuations.
[66] The Judge noted Southern’s determination to handle the takeover correctly and its concerns that providing information to Mr Oakley risked treating shareholders differently and could also involve the disclosure of confidential information.^[18] Mr Patek considered that the amount of the offer should be reassessed after it was announced on 16 October that Southern had been successful in its bids for new on-shore and off-shore exploration permits. In consequence, Messrs Taylor and Dobbie met Mr Papalia again in Sydney on 18 October to discuss the value implications of the new permits.
[67] The Judge recorded that by mid to late October, Mr Patek and Mr Humphrey (the general manager for strategic planning of FCP) considered that it was necessary to increase the offer price to enable the takeover to be successfully completed. Discussions about this occurred in early November but we deal first with the next event in chronological order, the critical meeting on 2 November.

The 2 November 1995 presentation

[68] The material presented at the meeting on 2 November 1995 lies at the heart of the appellants’ case. The meeting took place at Petrocorp’s premises in New Plymouth. It was attended by senior Fletchers executives including Mr Wilf Lammerink and Mr Keith Rawlinson. Members of the DGS team were present as was Mr Geoff Logan, the General Manager of Petrocorp. Mr Logan was also a director on the Southern board. Mr Dobbie was not present and, by the time of trial, it was accepted Mr Patek was not present.^[19]
[69] A large number of slides were presented explaining the results of the DGS. The objective of the members of the DGS team was to persuade the Fletchers executives that the Mangahewa 2 exploration well was worth funding. Material contained in the slides was available at trial. The Judge correctly described the material as containing a good deal of spin and hyperbole. Phrases such as “world class size” and “humungous” were used to describe the size and/or potential of the Mangahewa structure.
[70] The appellants’ case, however, focused on the two elements earlier identified:

• (a) The “indicative volumetrics” of the Mangahewa structure GIIP as totalling (for the McKee and Mangahewa formations combined) 22.6 TCF; and
• (b) A “timeline target” to “spud appraisal well by March 1, 1996” (in reference to commencing drilling of the Mangahewa 2 well).

[71] The Judge reviewed the evidence given at trial.^[20] We do not attempt to record here all the Judge’s findings but we summarise his review of the evidence. Neither Mr Lammerink nor Mr Rawlinson shared Mr McCagherty’s enthusiasm for the opportunities presented by the further exploration of the Mangahewa structure. Mr Lammerink described Mr McCagherty’s presentation as “over promoted” and, given the technical and operational challenges involved combined with the inherent reservoir quality issues and fluid distribution uncertainties, the perceived value of the prospect was only “a moderately positive marginal opportunity”.
[72] Mr Rawlinson did not consider there was anything remarkable about the presentation. His evidence was that nothing was presented which was not already known other than perhaps the “hypothesis” that the reservoir was producible and the structure might be bigger than previously thought. Mr Rawlinson’s evidence was that the 22.6 TCF figure lacked credibility and it did not have any particular impact on him. There was a lack of information as to how it was calculated and he considered much more work was required to justify the estimate. He thought the figure was used only to draw attention to the ultimate potential size of Mangahewa, should everything be favourable. The gas-bearing nature of the Mangahewa structure was, he said, a matter of public knowledge and the presentation did not explain why a further well was likely to be any more commercially successful than the previous seven. He did not question the 22.6 TCF figure because the key issue was not the “gas initially in place” figure but whether gas could be economically recovered.
[73] Nevertheless, the changes in the New Zealand gas market, the Maui depletion and the prospect of Methanex closing down part of its plant persuaded Mr Rawlinson that it might be timely to re-examine Petrocorp’s gas prospects. On that basis, he considered it was worth the DGS team continuing to work on Mangahewa.
[74] Importantly, the Judge discusses in some detail the evidence of Mr Robert Crookbain, one of the Petrocorp geologists in the DGS team. He was responsible for calculating the 22.6 TCF figure. The Judge said:^[21]

... He [Mr Crookbain] described it as a “simplistic” calculation of possible GIIP, nothing more than a “back of the envelope” figure generated to demonstrate resource size was not an issue and the gas-bearing portion of the Mangahewa structure was worthy of further consideration if economic uncertainties could be overcome. It was not an estimate of reserves. At best it was a “resource”. It was a rough calculation of indicative GIIP from the volumetrics of the structure though he accepted the petrophysics indicated considerable quantities of gas were there. He said:

... my rough estimate of the GIIP was never intended to be used for generating reserves estimates. This work was performed immediately prior to the 2 November presentation. At the time I expected to be revisiting the GIIP estimates with a fuller characterisation of the scenarios and uncertainties.

[75] The Judge went on to describe how Mr Crookbain had calculated the figure. Amongst other things, it was necessary to compensate for assumed inaccuracies in Mr Wolter’s map below the top McKee depth. As well, a number of uncertainties in the calculation were described, at least one of which was essentially based on “educated guesses”. Mr Crookbain agreed with the view expressed by the author of an article in a petroleum technology journal that the best method to determine reserves in tight gas reservoirs is to analyse production data by use of either decline curves or reservoirs simulation. The Judge noted that the DGS team did not undertake any such work until 1996.
[76] Petrocorp’s exploration manager Mr Steven O’Connor was also present at the 2 November presentation. He was called by the appellants and was more optimistic than the Fletchers’ executives. His view was that there was a relatively high chance of success compared to most exploration and appraisal wells and he did not believe Petrocorp would relinquish the licence without drilling Mangahewa 2 as this would have given a potential major gas opportunity to a competitor. Even so, he considered those sponsoring the project in the DGS team would have had credibility issues if the figures discussed at the 2 November meeting were presented to the senior Fletchers’ executives.
[77] Mr Logan also gave evidence in relation to the 2 November meeting. He was apparently encouraged by Mr McCagherty’s enthusiasm and thought it worth the team continuing to work through the many technical and other issues to see if commerciality could be shown. However, he did not consider the 22.6 TCF figure was credible from a senior management perspective, being about five times the size of Maui reserves. It would have been obvious, he thought, that the DGS team could have been under no illusion that it would be a major challenge to persuade Fletchers that the second well was worth funding.

The events of 3 to 6 November

[78] In attempting to fix Mr Patek with knowledge of the events of 2 November, the appellants placed considerable store on memoranda within Fletchers over the period 3 to 6 November. In particular, reliance was placed on a memorandum of 6 November from Mr Patek to Mr Garry Mace who had responsibility within FCL for Fletchers’ energy interests. This memorandum referred to Southern having enhanced prospects for gas production at various locations including the Mangahewa structure. It was argued on the appellants’ behalf that this showed Mr Patek was aware of the content of the material presented at the 2 November meeting.
[79] The Judge dealt with this issue in considerable detail.^[22] He noted that Mr Patek had conducted a review of onshore activities in New Plymouth at a meeting on 3 November. None of the DGS team attended the meeting. Although Mangahewa was on the agenda, the Judge said all present at the meeting agreed that there was no discussion of specific projects and the discussions focussed on high level strategic issues.
[80] The same day, Mr Humphrey as general manager of FCP prepared a draft report on the acquisition of the minority shareholding in Southern along with a covering memorandum. The draft report noted that, by that stage, about two-thirds of the minority shareholders had accepted the offer of 63 cents per share. Fletchers held 95 per cent of the Southern shares as at 1 November.
[81] Mr Humphrey’s report also discussed developments since an internal valuation in July which might justify an increased offer. These included improved expectations for the recovery of deep gas from the Kaimiro field, the imminent conclusion of a contract to purchase Kupe gas and the acquisition of the new permits for exploration. As the Judge noted, Mr Humphrey must have had some prior notice of Mr Papalia’s likely updated valuation because the draft report referred to an additional 12 cents per share above the earlier valuation of 50 to 56 cents. The 12 cents per share was made up of 4 cents per share for the new on-shore licences and 8 cents per share for the new off-shore licences.
[82] Various options were discussed in the report but it was concluded that the price of 63 cents per share would be unlikely to survive a court challenge by Mr Oakley. An increase of up to 80 cents per share was recommended.
[83] In the meantime, Mr Patek (as CEO of FCP) prepared his own personal memorandum to Mr Mace (as the head of FCL’s energy interests). This was sent on Sunday 5 November and commented on Mr Humphrey’s draft report. The memorandum recorded that Mr Patek had discussed the acquisition of the minority shareholding in Southern with FCL’s chief executive, Mr Hugh Fletcher, on the previous Friday, 3 November.
[84] It is evident from Mr Patek’s memorandum that he believed Mr Fletcher was opposed to any increase in the offer. Mr Fletcher was said to have objected to the methods of valuation and, according to Mr Patek’s memorandum, believed that Fletchers would be subject to criticism on the basis that it had hidden value if the offer were to be increased. He also reportedly objected to being “greenmailed” by Mr Oakley. Nevertheless, he was said to be willing to receive and consider Mr Humphrey’s report.
[85] Mr Patek’s memorandum of 5 November discussed the objections raised by Mr Fletcher. He considered that an increased offer was justified and that value would be created by concluding the acquisition expeditiously. If matters lingered, he considered value would be destroyed. He also believed his personal integrity would be compromised if Fletchers disagreed with the valuation of the new permits by the independent valuer and were not prepared to meet that value. He thought it likely that Southern’s independent directors would resign if that were to happen, given previous discussions and undertakings he had given to them. He noted that an increased offer would amount to an additional $4 million and said he had no difficulty justifying the additional expenditure in value terms. Another copy of this memorandum has handwritten notes upon it (which the Judge found were almost certainly those of Mr Mace) which, amongst other things, stated “proceed now at 75c” and “for discussion Tuesday 7/11”.
[86] Mr Patek’s subsequent memorandum to Mr Mace of 6 November attaching the draft report on the acquisition (now in final form) was also drafted by Mr Humphrey. Like the other memoranda on this topic, it was on FCP letterhead. The memorandum effectively summarised the main points from the report and recommended that the acquisition be concluded at a price of 75 cents per share, and up to 80 cents if needed. The relevant part of the memorandum for present purposes read:

Since July, the issues of control have become clearer and tangible as we secured the Stratford gas supply contract and will soon conclude the Kupe gas purchase deal. Additional value has been created in Southern Petroleum through gas transmission to Stratford using the TAWN gas pipeline to Stratford, enhancing the Tariki/Ahuroa gas production profile, securing Kupe liquids transmission through TAWN facilities and enhanced prospects for Kapuni gas production from Kaimiro, Waihapa and the Mangahewa structure in PPL 38705 (50% Southern Petroleum) which have proven undeveloped gas reserves. Value attached to the onshore and offshore licence interests has been upgraded from the strategic plan values to those developed for the onshore and offshore bidding round.

(Emphasis added)

[87] The Judge noted that both Mr Humphrey and Mr Patek were closely cross-examined about the reference to enhanced gas production and inclusion of the Mangahewa structure in that reference. The Judge recorded that both Mr Humphrey and Mr Patek denied having any knowledge of the material presented at the 2 November meeting which might have justified a reference to enhanced prospects at Mangahewa. Mr Humphrey said he was absolutely confident there had been no suggestion to him at this time that there was a very large field which had suddenly emerged and which had great value.
[88] Mr Patek said he thought the reference to enhanced prospects was to fraccing the deep gas reservoirs and the improved prospects for Kaimiro, factors used in the report to help justify an increase in the value of unproven oil and gas. He added that the work done by the DGS team which was reflected in the 2 November presentation (of which he later became aware) did not amount to an enhanced prospect for Mangahewa. Mr Patek said that, in retrospect, the reference to “proven undeveloped gas reserves” was not appropriate given the level of exploration of the Mangahewa structure at that stage.

Events – 7 to 15 November

[89] Mr Patek met Mr Oakley on 8 November to discuss Mr Oakley’s concerns about the valuations and the share offer. There was some discussion of Dr Haskell’s views about the prospects for deep gas in the Kaimiro field. Mr Patek accepted there was no discussion of the existence of the Mangahewa Information about which he said he remained unaware. It was arranged that Dr Haskell would meet Mr McCagherty the next day. Again, according to the Judge, the principal focus of the meeting was on the prospects at Kaimiro which seemed to be the main point of difference with regard to valuation.
[90] Mr McCagherty’s evidence was that Dr Haskell had not sought any further information about any of the other existing licences including Mangahewa. Dr Haskell’s recollection was different. He said he had asked Mr McCagherty for a review of “leads and structures” but received only generalities. The material in the 2 November presentation was the type of material he would have expected to have been revealed in answer to his question. Mr Taylor agreed that Mr McCagherty had been instructed to respond in generalities because there was concern that the net present value figures for the new licence blocks had not then been released to the market. The differential treatment of shareholders in respect of the giving of information was therefore an issue.
[91] The Judge recorded that Mr McCagherty’s evidence was that if Mr Taylor had asked him to discuss Mangahewa with Dr Haskell, he would have been happy to do so. But he would never have said that the Mangahewa 2 well would be drilled (despite his enthusiasm) because the Mangahewa Information had not then been economically analysed, expert input had not been obtained with regard to hydraulic stimulation (fraccing) and approval from Fletchers had not been obtained.
[92] After the meeting of 9 November, Dr Haskell reported to Mr Oakley suggesting he seek an additional 15 cents per share to compensate for Dr Haskell’s view of the gas reserves available in Kaimiro. The Judge then summarised Dr Haskell’s evidence to the effect that if he had received the material presented to the 2 November meeting:^[23]

... he would have suggested Southern’s minority shareholders should benefit from the deep gas reserves position, that Mangahewa 2 would test the Mangahewa prospect and, irrespective of the deep gas reserves, would encounter the reservoir systems found by Mangahewa 1 and “with stimulation, provide economic production from the culmination of the structure” in which those shareholders would have been entitled to share.

The second reports from Mr Papalia and Warburg (formerly Buttle Wilson)

[93] Mr Papalia’s second report to the independent directors is dated 16 November although it must have been conveyed by some means prior to that time. Similarly with Warburg’s second report dated 17 November. We say that because reference was made to revised reports of share value in announcements to the Stock Exchange by Southern’s independent directors on 14 November. The effect of the revised Papalia valuation was to add post-tax value to Southern’s value of $21.33 million. The report also noted that recent development activity in the Kaimiro field had enhanced the value of Southern’s interest by $220,000. However, the report also said that exploration and appraisal work on the Cheal prospect had proved inconclusive and that evaluation of the same reservoir in the Ngaere-3 well had proved to be negative and had been abandoned. No reference was made to Mangahewa.
[94] The Warburg second report concluded that the share value as at 17 November was 59 to 69 cents per share and that the revised price of 75 cents per share was fair and reasonable to minority shareholders.
[95] On 14 November, Southern’s independent directors advised the Stock Exchange that they had completed their evaluation of the recently awarded permits and that Warburg had advised that the fair value for the shares had increased to a range of 59 to 69 cents per share. Shareholders were advised to await the outcome of discussions the independent directors proposed with PIL.
[96] On the same day (14 November), the FCL board met to discuss the acquisition. The following day FCL informed the Stock Exchange that the offer had been increased to 75 cents per share and that Mr Oakley and all other significant outstanding minority shareholders had also advised they would accept the increased offer. That effectively brought the takeover to an end but it was not formally completed until January 1996.

The meeting with Methanex on 13 November

[97] The appellants placed considerable reliance on material which Petrocorp presented to Methanex representatives on 13 November 1995 immediately before effective completion of the acquisition (14 November). The meeting was arranged on 2 November, the same day as the presentation by the DGS team already discussed. The essential purpose of the meeting was to discuss actual and potential gas resources capable of supplying the Methanex plant. Although a number of topics were discussed, the deep gas potential of the Mangahewa structure was a central part of the discussions. One of the objectives was to persuade Methanex to contribute towards the cost of drilling Mangahewa 2. For that purpose, Mr Logan instructed Mr O’Connor that the brief would be “to create the best realistic picture we can of likely increases in gas reserves over the next several years to assist Methanex with making their decision”.
[98] Copies of the slides presented at the meeting with Methanex described the Mangahewa structure as “a very large Kapuni structure with over 150 km² areal closure.” The material added that seven wells had been drilled into the structure over a 30 year period; gas tested at rates over 1.0 MMCFD but with inconclusive results. It was said that “reserves potential could exceed 1 TCF”.
[99] Two of the Methanex people attending the meeting reported to executives within Methanex to the effect that one of the “distinct opportunities for new gas reserves in NZ” was “deep on-shore gas (new information first presentation)” and that the “on-shore prospect is by far and away the most significant (timing, size and cost) with good probability dependant mainly on the success of fracturing activities.” The memorandum continued “[r]ecovery in the 1 to 2 TCF range provides the potential for long-term gas.”
[100] Mr Judd emphasised, and we accept, that Mr Logan as general manager of Petrocorp considered the outcome of the DGS to be sufficiently promising and to have sufficient credibility to warrant an approach to Methanex with a view to persuading them to contribute to the cost of drilling Mangahewa 2. The figure of 1 TCF for potential reserves was substantially less than the figure of 22.6 TCF for the GIIP. The 1 TCF figure represented the DGS team’s estimate of potential recoverable gas as distinct from gas in place. Plainly, the approach made to Methanex had the endorsement of Mr Logan and he personally attended the presentation. Nevertheless it was clear to all that a good deal of further work was required to be done before it could be established whether gas in commercial quantities could actually be recovered.

Events after effective completion of the acquisition on 14 November

[101] We set out only a brief summary of events during this period since they are relevant only in limited respects. First, they may cast light on the significance of the Mangahewa Information at the material times. Secondly, the later events show what further processes were necessary over a substantial period before the drilling of Mangahewa 2 was finally approved.
[102] On 15 November 1995 Mr Patek was present at a quarterly performance review meeting with Petrocorp staff including members of the DGS team. Amongst other things discussed was a “brief review” of the deep gas work that had been done. Mr Webster of Petrocorp informed Mr Dobbie of Southern about the year 8 work programme and budget for PPL 38705. He confirmed earlier advice that work on Kaimata would be suspended and advised that:

The work programme therefore now comprises only a likely deep appraisal well on the Mangahewa structure and subsequent geotechnical evaluation. There are many issues yet to be addressed before we can make a recommendation re a deep well, but the proposed work programme allows for an accelerated programme if justified.

[103] Mr Webster went on to confirm to Mr Dobbie that the second Mangahewa well was not definite and approval would be subject to further approval processes within Fletchers. Mr Webster added that he would prefer to progress the deep well to approval stage before the end of year 8 (that is, by July 1996). The estimated cost of the well would be $5.75 million.
[104] A second meeting took place on 11 December 1995 with representatives of Methanex. Representatives of Petrocorp were present including Mr Logan and Mr McCagherty. Further slides were presented with a view to persuading Methanex to contribute to the cost of the proposed Mangahewa 2 well. The material presented differed from that which had been presented at the 2 November meeting. The GIIP figure was reduced to 14.6 TCF while a total of 7.65 TCF was forecast for “potential gas reserves”. The Judge described this last figure as new. Another slide referred to reserves potential as exceeding 1 TCF.
[105] The Judge cited Mr McCagherty’s evidence that the figures were his own “guesstimates”.^[24] The Judge also referred to Mr McCagherty’s evidence that his calculation of potential reserves for the purposes of this meeting resulted from his “wild guess” that the porosities might be somewhere between 9 and 75 per cent. Other “guesses” were involved in the multipliers which resulted in the 7.65 TCF figure. Mr Logan agreed that this last figure was very much a “blue sky” figure designed to persuade Methanex to contribute to the cost of any further well.
[106] We observe that the marked differences between the figures presented on 2 November and the figures presented to Methanex the following month tend to confirm a distinct lack of reliability in the data and the conclusions which might be drawn as to its significance in relation to price-sensitivity.
[107] Ms Katz for the respondents emphasised that much had to be done before the Mangahewa 2 well was finally approved. The February 1996 date projected for Mangahewa 2 proved to be very optimistic. It was not until 31 January 1996 that a formal presentation was made to Mr Patek by the DGS team. The material presented at the 2 November meeting and at the two meetings with Methanex was shown to Mr Patek but he remained deeply sceptical about the prospects for commercial exploitation of the Mangahewa structure.
[108] Economic analysis (not previously undertaken) continued during the period January to September 1996. Throughout the first half of 1996, FCP management continued to raise queries and issues about the merits of a second well. In addition, work continued throughout 1996 on productivity and recovery issues including the commissioning of external fraccing studies which were seen as critical to commercial success.
[109] In March 1996, a Petrocorp decision review team meeting took place for the purpose of gaining support for the drilling of a well, as a first step before obtaining approval from FCP and FCL. A draft well proposal was prepared in June 1996; necessary petrophysics work was completed the following month; and formal approval from FCP and FCL was sought on 10 September 1996. Final approval was given for the Mangahewa 2 well on 23 September 1996.
[110] The Mangahewa 2 well was spudded (commenced) on 15 December 1996. After a number of technical challenges, Mangahewa proved to be a small gas condensate field on the crest of the Mangahewa structure. As at 1 January 1996, the Ministry of Economic Development estimated the ultimate recoverable reserves for the field at 72.50 BCF. Mr Logan’s evidence was that this was very close to Petrocorp and Southern’s own internal reserve estimate during 1995 for valuing the Mangahewa prospect.^[25]

First issue: Was the Mangahewa Information “inside information”?

[111] For convenience, we repeat the definition of inside information pertaining at the relevant time:^[26]

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.

[112] In simple terms, the Act deals with information which is not publicly available but which would be price-sensitive if it were released. There is no definition of the term “information”. This led us to discuss with counsel during the hearing whether the material relied on as inside information must have some threshold level of credibility or reliability before it could be treated as information for the purposes of the definition. For example, would mere speculation or rumour suffice or must there be some reasonably reliable foundation for the relevant material before it could be regarded as information? And, we asked, would matters of opinion as distinct from matters of fact qualify as information in this context? Would it make a difference if optimistic views by some within a company were not shared by their superiors?
[113] We commence this part of our judgment with a brief description of the purpose of the insider trading legislation and the policy rationale underlying it since these may have a bearing upon the type of information the legislature had in mind in the present context. The Securities Commission described the purpose of the proposed insider trading regime in a report which preceded the enactment of the Securities Amendment Act 1988 in these terms:^[27]

The basis of the principles is adopted from the concept known as “disclose or abstain”. An insider who has price-sensitive information that comes to him, or is generated by him, by reason of his position as an insider, should be prohibited from dealing or tipping until the information is published or is otherwise reflected in market prices. While he is inhibited from disclosing, he should also be inhibited from dealing unless and until the market price has adjusted to reflect the information.

[114] The policy considerations supporting the insider trading legislation were also discussed in some detail in the Securities Commission’s report. Those most commonly relied upon are fairness, market efficiency and fiduciary duty. As Lord Bingham put it in R v Staines and Morrisey:^[28]

The integrity of the market depends on equality of knowledge since fair operation of the market is jeopardised if those who are “in the know” (often called “market insiders”) can exploit information for their personal advantage which they have obtained in the course of their professional activities when such information is unavailable to others.

[115] These succinct comments by Lord Bingham encapsulate issues of fairness through equality of knowledge amongst market players and the need to avoid exploitation of the market by insiders who do not share relevant information with the market.
[116] As we understand it, the market efficiency theory holds that market price provides the best estimate of value so long as the market operates efficiently. To do that, it is considered that all market participants should have the ability to have access to the same information. Market efficiency is therefore said to be promoted by insider trading legislation.
[117] The Commission gave examples of the type of information in contemplation. This could include material relating to a company’s profitability, possible or pending takeovers, capital reconstructions or major new contracts or undertakings.^[29] It was noted that insiders will often have broad indications of financial trends before they can be verified to the extent and in a manner appropriate for publication. Similarly, negotiations for major contracts might extend over a period of time with agreements in principle but without final conclusions. The Commission clearly contemplated that information about the existence of negotiations might be regarded as inside information but noted that premature disclosure of information of this kind could reduce the chances of a successful conclusion.
[118] Further guidance as to the meaning of “information” may be gained from the Securities Commission report into Regal Salmon Ltd^[30] in which the Commission indicated that, in contrast to the legislation in force at that time in Australia and Ontario, the New Zealand legislation did not require that the information be specific. The Commission considered the courts would be guided by the comments of McInerney J in Commissioner for Corporate Affairs v Green.^[31] The Judge was there considering the meaning of the word “information” in s 124(2) of the Companies Act 1961 (Vic) which, unlike later legislation in Australia, did not require “specific” information. McInerney J said:^[32]

I am reluctant to import into s 124(2) a word which is not there. Our section does not require that information be “specific”. In many cases a hint may suggest information or may enable an inference to be drawn as to information. Information about impending stock movements or share movements may often be veiled. Discussion concerning such a movement may often take the form of “mooting” but not deciding a matter. ...

[119] The report into Regal Salmon Ltd then cited with approval an observation made by a legal commentator:^[33]

And so although information which has motivated trading must be something more than a hunch or shrewd or educated guess, any opinions, predictions, deductions, and suchlike perceptions capable of being made only by an insider will be sufficient to satisfy the operation of s 128(1) [of the Securities Industries Code].

[120] The Commission’s report into Regal Salmon Ltd went on to state that “[i]n many cases a hint may suggest information or may enable an inference to be drawn or a deduction made which could only be made by an insider.”^[34]
[121] Some helpful observations were also made by Young J in Hooker Investments Pty Ltd v Baring Bros Halkerston & Partners Securities Ltd.^[35] The Judge was considering s 128(1) of the Securities Industry Act 1980 (NSW) which did not, at the time, define “information”. After referring to the observations of McInerney J in Green, Young J said:^[36]

... I wonder a bit, however, whether it is safe to equate information and knowledge. Information is often defined as knowledge acquired, derived or inculcated by observation, reading or study or by what one is told; but in some cases information implies lack of knowledge such as, for instance, where one says he is informed of a thing but he does not know whether or not his information is true: see State v Simpson 118 SW 1187 at 1188.

To my mind information in sub-s (1) goes further than knowledge and includes the situation where someone has been informed of something which he does not know to be true nor does he care whether it is true or not. In other words, information may include a rumour that something has happened with respect to a company which a person neither believes nor disbelieves.

[122] Our research has not revealed any other authorities in overseas jurisdictions which materially assist in the interpretation of the insider trading legislation at issue here. The Court of Appeal of Western Australia has recently discussed insider trading issues in R v Mansfield,^[37] but the legislation in issue differs materially from our Act. Legislation in other jurisdictions also differs from our own and does not assist.
[123] However, we are satisfied that a broad approach to the interpretation of the term “information” is justified having regard to the purposes of the legislation as identified by the Securities Commission in its 1987 report. In particular, information in this context may include matters of opinion as well as matters of fact. Relevantly to the present case, information may include the views or predictions of experts which may not have reached the point where they have been fully substantiated, documented or proven. And, as the Securities Commission suggested, inside knowledge that negotiations are in progress in respect of a takeover or major new contract or that a profit announcement (whether favourable or adverse) is in the wind, may also qualify as information in this context. That may be so even if the matters at issue have not yet been finally documented or completed to the point where a public announcement is appropriate.
[124] Having made these observations, we do not consider that every piece of “tittle tattle” would qualify as information in this context. There must, we think, be some threshold below which material could not properly be regarded as information. If, for example, completely unsubstantiated rumour were to qualify as information, share transactions could be seriously inhibited for no good reason. On the other hand, the bar should not be set so high that the purpose of the legislation is defeated.
[125] The answer to the question of where the bar should be set is found in the definition of “inside information”. In order to qualify as information, the relevant material must not be publicly available and must be of such a nature that it would (or would be likely to) affect the price of the shares to a material extent if it were made publicly available. If, objectively considered, it would be unlikely to materially affect the share price if released to the public, then it is not inside information for the purposes of the legislation.
[126] Material which is in the category of wholly unsubstantiated rumour would generally be unlikely to affect the share price. Even if it might affect the share price, its effect would very likely be short-lived since one would expect the company to move quickly to correct any false rumours circulating in the market place. Similarly, if the material in question was merely an unsupported opinion of a low-level employee of the company which was not accepted by responsible officers or executives within the company. On the other hand, the more substantial the material and the more reliable its source, the greater the prospect that it could be price-sensitive.

The information in this case

[127] The Judge’s conclusions about the material presented at the 2 November meeting and its significance are best set out in full:

[298] Mr McCagherty was new to New Zealand. He regarded himself as someone who was “known for getting things done” whereas others described him in a slightly less flattering light. It was reasonably clear he wanted to succeed in this, his first major project for Petrocorp, by getting approval to drill Mangahewa 2, though soon learning that explorationist and engineering enthusiasm would not automatically lead to drilling approval given Petrocorp’s and Mr Patek’s unhappy Taranaki drilling experience and Petrocorp’s processes which Mr Swindon described as “bureaucratic”. Given Mr McCagherty’s approach, a certain amount of over-statement in the 2 November presentation might have been expected even if the results were no more than identifying management’s “key concerns so we can try and address them”, as Mr McCagherty put it.

[299] It also seems reasonably plain that the circumstances of the meeting were not such as to give the impression this was anything more than its title, a “technical presentation”. It was far from a meeting at which firm proposals for proceeding with all parameters known was presented to management for adoption and approval. Comparison with the radically different form of the well development proposal of 10 September 1996 shows the 2 November presentation to contain, as witnesses said, a fair amount of “spin”. This was material which summed up the old data on which the DGS team had worked to date, but where all present knew there were significant uncertainties in the possibility of a new well converting the known existence of gas in the Mangahewa structure into a reserve which was economic to drill and which would be commercially profitable in future gas flows. In that regard it is particularly important to keep in mind that the DGS team had undertaken no tests, conducted no new inquiries and obtained no new information. All it had done was to take data derived years in the past publicly available through the Ministry of Commerce – and intensively re-examine, re-work and re-interpret that data to produce new results, ones which were much more promising than any earlier calculations. Even their recognition that the known gas in the Mangahewa structure was likely only to be recoverable at commercial rates through fraccing was not based on novel technology, even though seldom used in New Zealand.

[300] Those present were also alive to the major uncertainties facing the wishes of the DGS team and Mr McCagherty to drill Mangahewa 2. First, there were the technical uncertainties. Water saturation had been a problem in Mangahewa 1 and nearby wells. Mr Crookbain’s 22.6 TCF GIIP figure was not only said to be no more than “indicative” but was a “back of the envelope” calculation on which he did not expect others to rely and which was based on what he knew to be no more than assumptions as to the permeability and porosity of the Mangahewa structure. Mr McCagherty over-stated the position by saying Mangahewa was “not tight” when the technical people present knew that not to be wholly true. The flavour of the presentation – ‘humungous’, ‘world class size’, ‘multi-TCF Potential’– and the way in which it was said to have been presented by persons who were invariably positive about such things, smacks more of hyperbole than dry, persuasive, scientific argument.

[301] All those present also knew the 2 November presentation would never, of itself, have resulted in Fletcher Challenge executive office approval to spend the significant sum even drilling one Mangahewa 2 well would cost. The chronology of the work undertaken over the following months by the DGS team and others, and a comparison between the 2 November presentation and the 10 September 1996 appraisal well proposal demonstrates that.

[302] From all of that, it is concluded the 2 November presentation was, far from the formal presentation of a discovery of massive amounts of gas which a well drilling proposal, if funded, was highly likely to produce in an economically commercial fashion, no more than a review arising from scientists’ re-consideration to that point of old data, with a recognition by all present of the need for considerable further work – especially in economic modelling and obtaining advice on and designing a fraccing programme likely to work – before submitting the proposal to a sceptical management to try to persuade it to spend the significant sums required.

[303] There was thus no particular impetus on any of those present on 2 November to convey the detail to others outside those attending, specifically Mr Patek, at that stage.

[128] Summarising the Judge’s key factual findings to this point:

• The material presented to the 2 November technical meeting was a re-working of previously derived data which was publicly available.
• The DGS team had not conducted any tests, conducted new inquiries or obtained any new information.
• All present knew there were considerable uncertainties in establishing whether the Mangahewa structure would yield gas recoverable in commercial quantities.
• There were substantial technical difficulties involved and considerable further work would be needed, especially in investigating the feasibility of the fraccing technology (which would be essential for the successful exploitation of the resource) and economic modelling (which had not been undertaken).
• The 22.6 TCF GIIP figure was no more than an indicative (“back of the envelope”) figure which even Mr Crookbain did not expect others to rely upon.
• All present at the meeting were aware that persuading the sceptical Fletchers’ executives to spend the substantial costs involved for a second well would be a considerable hurdle.

[129] Nevertheless, the Judge found that the intensive work of the DGS team in re-examining and interpreting the previous data had produced results which were “much more promising” than earlier data.
[130] In her written submissions, Ms Katz did not dispute that the Mangahewa Information was information in terms of the statutory definition but, perhaps encouraged by views expressed by some members of the Court during argument, she submitted that the material was so lacking in credibility that it could not properly be treated as “information”. We conclude, however, that the DGS evaluation of the prospects for the recovery of deep gas from the Mangahewa structure was capable of amounting to information for insider trading purposes. In particular, the indicative volumetrics of the Mangahewa structure was information for the purposes of the Act even if a substantial body of further work was required to evaluate the prospect more definitively and despite the difficulties which lay ahead in persuading the Fletcher executives that Mangahewa 2 should proceed.
[131] We are particularly influenced in reaching this conclusion by the Judge’s finding that the volumetric information, although indicative and involving a re-working of existing data, produced a result which was much more promising than earlier data. We also consider that Mr Logan’s endorsement of the use of the Mangahewa Information for the purpose of persuading Methanex to contribute to the cost of Mangahewa 2, tends to add a degree of credibility to it.
[132] While we find that the Mangahewa Information was “information” for the purposes of the Act, it does not follow that it was “inside information” for the Act. That assessment requires consideration of two issues: whether the Mangahewa Information was publicly available and whether it was likely to have a material effect on the price of the Southern shares.

To what extent was the Mangahewa Information already in the public domain?

[133] The fact that the Mangahewa structure was a large potential source of gas at depth had been publicly documented since the early 1960s when it was first mapped as a large structure by the Shell-BP-Todd Consortium. But despite the Judge’s finding that the material presented to the 2 November meeting was a re-working of previously derived data which was publicly available and that no new tests, new inquiries or new information had been obtained by the DGS team, Ms Katz did not seriously contend that the volumetric information, although only indicative, was already in the public domain. She also accepted that Mr Wolter’s map was new information.

Disclosure of the Mangahewa Information

[134] It is accepted that the Mangahewa Information was not disclosed to Mr Papalia for the purposes of his valuation. However, Mr Judd informed us that it is not now suggested relevant information was deliberately withheld. Mr Dobbie did not have the Mangahewa Information when he briefed Mr Papalia on 5/6 August and Mr Papalia’s second report focused only on the effect of the new licences on Southern’s value. Mr Dobbie said he was aware of the work of the DGS team at the time he briefed Mr Papalia. The week before he had attended the TRT meeting at which the DGS was discussed. To the best of Mr Dobbie’s knowledge, all relevant material was passed to Mr Papalia either in written form or in verbal discussion. Mr Papalia deposed that he was made aware of the DGS team’s work but was advised it was incomplete.
[135] There is no evidence to suggest that the Southern directors had the volumetric information presented on 2 November. But the position was different in respect of the proposal to drill Mangahewa 2 as we discuss at [45] to [51] above. The Southern directors (including the independent directors advising the minority shareholders) were aware of this proposal and that, by October 1995, the new well was considered by Petrocorp to be a high priority. Even so, it still required funding approval from both Southern and Fletchers and no commitment to drill had been made.

Was the Mangahewa Information price-sensitive?

[136] The Judge noted that the technical and expert evidence extended to several hundred pages, all of which was highly detailed, complex and technical in nature.^[38] He traversed the evidence of the expert witnesses at considerable length. It is unnecessary for us to discuss this evidence in detail because Mr Judd did not seek to challenge the Judge’s conclusion based on the expert evidence nor the preference the Judge expressed for the views of the respondents’ witnesses rather than those called for the appellants. However, we propose to refer briefly to the conclusions reached by the experts as an overview.
[137] The expert evidence covered three broad topics: technical and valuation evidence, share price analysis and sharebroking evidence.

Technical and valuation evidence

[138] Under this heading, the appellants’ experts were Dr Haskell, Mr O’Connor and Mr Swindon. Mr Papalia had retired and was unable to give evidence. In broad terms, Dr Haskell’s evidence was that the implications of the DGS as at 2 November 1995 were that there was an accessible on-shore economic gas field in place in the Mangahewa structure that was seven times the size of the Maui Field. Had the Mangahewa Information been made available to him, he would have recommended to Mr Oakley that he should not sell his Southern shares so that he and the other minority shareholders could benefit from the “Deep Gas reserves position” shown by his calculations. His view was that even if only 10 per cent of the potential resource of Mangahewa had been ultimately recoverable, it would still have been a major find representing approximately 10 to 15 years supply of natural gas for New Zealand. He discounted the risks involved with fraccing.
[139] Mr O’Connor who, it will be recalled, was a geologist and the exploration manager for Petrocorp from November 1994, gave evidence to the effect that the net present value of the Mangahewa prospect was up to 15 times greater than the value used by Mr Papalia. The Judge found that the variation between Mr O’Connor’s figures and the Papalia figures was principally explained by the very large difference in the starting point for gas volumes.^[39] There were also differences in the probability figures. For example, Mr O’Connor utilised a POP of at least 90 per cent rather than Mr Papalia’s 25 per cent. His conclusion was that Mr Papalia’s valuation of the Mangahewa prospect could not be relied upon because he was not aware of the “potential reserves” identified by the DGS team; he was unaware of the material presented to Methanex on 13 November; and he was unaware of the 22.6 TCF GIIP figure.
[140] Mr Swindon’s evidence was that the material presented on 2 November 1995 was of the “highest strategic significance”. He considered that the volumetric information and the fact that a test well was proposed for March 1996 were striking elements of the Mangahewa Information and could have led to media comments such as “SPNL targets $35 million bonanza”. In cross-examination, however, he accepted that he would not have disclosed this information to the market if he had been a director of Southern at the time. He would have ensured that someone independent of Southern or Petrocorp did a technical study as to the background of the calculations involved in the Mangahewa Information. He accepted he was unaware of the NZX Hydrocarbon Report Rules including the requirement for expert reports we discuss below. He concluded on the basis of calculations he described in the evidence that the value of the Mangahewa Information was between 74c and $3.56 per share.
[141] Mr Tearpock (an experienced petroleum exploration and production consultant) was briefed by the respondents to provide an expert opinion as to whether Mr Papalia’s first valuation of Southern’s interests in PPL 38705 would have been increased in his second valuation if he had been given the information presented on 2 November. Since the Judge preferred Mr Tearpock’s evidence, we summarise some of the key points made by Mr Tearpock:

• The fact that there was a substantial volume of gas in place in the Mangahewa structure was publicly known so the issue was whether there was a sufficient volume of recoverable gas which drilling and completion techniques could produce at commercial rates from the tight reservoirs with potentially low gas and possibly high water saturation.
• Reviewing Mr Wolter’s map down to the top of the McKee Formation, Mr Tearpock noted that the lack of mapping of deeper horizons introduced uncertainty into the GIIP calculation.

• The 22.6 TCF GIIP figure was a very rough calculation subject to a number of uncertainties and never intended to be used for generating reserves estimates.
• A significant proportion of the 2 November information was already in the public domain but there were a number of pieces of information which Mr Papalia might have regarded as new. One of these was the 22.6 TCF figure which would have been regarded positively.
• Nevertheless, the GIIP figure was “replete with concerns, issues and risks relating to whether or not a volume of gas can be found that can be produced in commercial quantities and at commercial rates”.
• Despite that, had Mr Tearpock seen the 22.6 TCF figure in November 1995 he would “certainly have taken the view that the Mangahewa prospect was worth another look”.
• Mr Tearpock’s reassessment of the GIIP information as at 15 November 1995 concluded that it was at best “extremely optimistic” or more likely “unrealistically optimistic”.
• His calculation was that the GIIP estimate was approximately 0.755 TCF or 755 BCF.
• In his opinion, an expert in Mr Papalia’s position would have regarded the 22.6 TCF figure as a rough estimate of what might be an estimated GIIP value and as a “screening number” for an exploration project. He did not believe an expert would have used this figure to re-evaluate the value placed on the Mangahewa prospect in terms of discoverable commercial gas. By reviewing the technical data available at the time, an expert such as Mr Papalia should have quickly realised that the GIIP estimate in the 2 November presentation was unrealistic.
• The uncertainty voiced at the 27 July TRT meeting as to whether gas could be recovered commercially by fraccing the Mangahewa structure had not been resolved by November (with overseas experts not being invited to submit stimulation designs until February 1996).

[142] The Judge then recorded:^[40]

Based on all those re-calculations – but not the adverse drilling history during the period – Mr Tearpock reached the view that the maximum value of the Southern interest in the Mangahewa prospect at the time of Papalia 2 would be $4.96m based on the adjusted comparative analysis, the most likely would be $1.46m based on the average of the most likely range in adjusted comparative values, and the minimum would be zero because no re-evaluated ENPV was positive.

[143] The Judge then summarised serious criticisms made by Mr Tearpock of the evidence of the appellants’ witnesses including, in particular, Mr Swindon and Dr Haskell.
[144] The Judge went on to explain why he preferred the evidence of Mr Tearpock rather than that of Mr Swindon and Dr Haskell.^[41] He described Mr Tearpock’s evidence as “extremely thorough, very detailed, highly expert, both measured and reasoned in its views and conclusions, and highly persuasive”.^[42] The Judge considered there was weight in Mr Tearpock’s criticism of Mr Swindon’s evidence. In particular, the latter had taken a view of the evidence which was most favourable to the appellants while largely overlooking the negatives. He had been loose in the use of the term “reserves” and had given little acknowledgement to the “numerous and ... significant uncertainties impinging on Mangahewa on and after 2 November”.^[43]
[145] Mr Swindon had adhered to conclusions which were contrary to the evidence and this, in the Judge’s view, weakened his credibility. The Judge considered that Mr Tearpock’s criticism of the likely media comments mentioned by Mr Swindon (the “$35 million bonanza” comment) was justified.
[146] As to Dr Haskell, although the Judge described him as a highly experienced geologist with lengthy experience, he concluded that he seemed to have coloured his approach to the interpretation of the 2 November material.^[44] He too, the Judge considered, had adopted unquestioningly the use by the DGS team of the word “reserves” without factoring in the necessary weighty qualifications.^[45]

Share price analysis

[147] The Judge went on to consider the evidence of the witnesses in relation to share price.^[46] The Judge described the appellants’ expert, Mr Wallace, as having experience in providing strategic and financial advice to public and private sector organisations including evaluating securities. Mr Wallace’s opinion was that an increase in the offer price of at least $1.24 per share would have been necessary to support the offer, given the Mangahewa Information.
[148] The respondents’ witness on share price was a Mr Stone who the Judge described as having the dual advantage of being a trained geologist as well as an investment banker and sharebroker. He had been involved earlier in mapping work for the Mangahewa field as part of a geophysical assessment of PPL 38705. Mr Stone was critical of Mr Swindon’s view that the Mangahewa Information should have been disclosed to the market. His evidence was that companies such as Southern involved in exploration and prospecting would not normally disclose such a premature GIIP figure to the market in the light of the drilling history and the way in which the 22.6 TCF GIIP figure had been calculated.
[149] Based on an analysis of similar companies involved in the energy market, Mr Stone concluded that the market does not assign any material value to exploration potential of an undrilled prospect. The market sometimes factors in some value to committed or imminent wells, particularly if drilling has commenced. The market assigns significant value to the announcement of a discovery (which would follow in the exploration cycle after the drilling of a well) but does not assign full value to a field until it has been developed and production initiated.
[150] Mr Stone added that the share price of companies such as Southern was heavily weighted towards tangible assets (proven and probable reserves, cash, and infrastructural assets). He also gave evidence that when the market became aware in mid-1996 of the proposal to drill Mangahewa 2, there was no discernible impact on share price.
[151] Importantly, Mr Stone’s evidence was that, had Petrocorp taken the decision to disclose the figure, it could only have been done by minimising the possibility of creating a false market. The Judge summarised Mr Stone’s evidence on this point:^[47]

... Factors which would have required to be included to avoid that possibility [of creating a false market] included the “very rough” manner of the calculation, it being a “best case” scenario, the fact it was unsupported by detailed technical data, the drilling history, the fact the figure was not intended to generate reserves estimates, it did not speak to commerciality, no decision had been made to drill and management was sceptical of the commercial prospectivity of the structure. The only information Petrocorp might therefore have disclosed without those additional conditions could have been that the Mangahewa structure was large and contained potentially significant gas – but that had been publicly known since the early 1960s.

In addition Petrocorp could not, under the NZX Hydrocarbon Report Rules, simply disclose a “reserve estimate of 7.65 TCF” without a supporting expert report. Mr Stone’s view was it would have been exceedingly unlikely an independent expert would have supported the figure, at least without a much more comprehensive analysis establishing the required commerciality.

[152] The Judge then reviewed Mr Stone’s conclusions:^[48]

Because Mangahewa 2 was far from being a discovery at 16 November, Mr Stone’s view was that disclosure of the information mentioned would have been unlikely to have had a material or even discernible impact on the share price because of the uncertainties, the lack of commitment earlier summarized and the evidence reviewed elsewhere. Even if Petrocorp believed there was 22.6 TCF GIIP in place, the market would have regarded that as of no commercial value until proof it could be extracted economically. While announcement of a proposal to drill a prospect with a 22.6 TCF GIIP may have stimulated the market in the short term, it would have been misleading for such an announcement to be made without qualifying it by reference to the significant uncertainties earlier summarized. Mr Stone therefore concluded:

I do not however believe the market, if it had been provided with the key information available to Petrocorp, presented objectively, would have assigned any material value to Mangahewa as at 15 November 1995.

[153] In assessing the views given by Mr Wallace and Mr Stone, the Judge again preferred the respondents’ witness Mr Stone having regard to his dual training and experience which he regarded as more specifically relevant than Mr Wallace’s rather broader approach.^[49]

Sharebroking evidence

[154] The final expert evidence in relation to price-sensitivity was given by two sharebrokers, Mr Cimino for the respondents and Mr M Benjamin for the appellants. Mr Cimino had led the team which prepared the two Warburg reports already discussed. He described oil and gas shares as being highly volatile and expressed the view that Southern’s prospects were dependant on productivity of its fields and the success of its exploration programme. He re-worked his figures based on Mr Tearpock’s evidence and concluded that if Mr Tearpock’s valuations for the Mangahewa prospect as at November 1995 had been used, then the fair value range for the shares would have varied only very slightly from Mr Papalia’s assessment. The top of the range at 71 cents would have been below the 75 cent offer price which therefore remained fair and reasonable. Mr Benjamin’s evidence, based on Mr Wallace’s brief, was that the value of Southern’s shares at November 1995 was up to $1.24 per share.
[155] The Judge preferred Mr Cimino’s evidence rather than that of Mr Benjamin.^[50] He noted that Mr Benjamin and interests associated with him had profited significantly from their holdings in Southern and he significantly reduced the weight which could be given to his evidence despite Mr Benjamin’s accomplishments and acceptance as an expert elsewhere. On the other hand, Mr Cimino had been largely responsible for both the Warburg reports and “his objective re-consideration of the issues in light of events since was persuasive”.
[156] Accepting that the views of Messrs Tearpock, Stone and Cimino deserved greater weight and had greater acceptability, the Judge concluded:^[51]

Their conclusions, both singly and together, are that even if the parts of the Inside Information and the Mangahewa Information which were not public in November 1995 had been made public at that juncture, it would have made little, if any, difference to Southern’s share price.

At bottom, much of the plaintiffs’ expert evidence was based on their witnesses’ almost unquestioning acceptance of the various TCF figures used by the DGS team – especially their lax use of the word “reserves” – as solid and reliable when, as the evidence showed, the DGS team themselves did not regard it as such. There was little recognition that the 2 November Methanex 1 and Methanex 2 material was, as Mr Logan put it and largely for the reasons that led him to that view, simply not credible from a management perspective and much of the plantiffs’ expert evidence paid insufficient regard to the dampening effect on Southern’s share price which would have occurred if disclosure had properly enumerated the numerous and significant uncertainties attending the project.

The significance of the NZX Disclosure Rules

[157] In the High Court, there was argument about the significance of the disclosure rules of the New Zealand Stock Exchange (NZX). The Judge accepted that, in order to avoid misleading the market, it would have been necessary to accompany any public announcement of the Mangahewa Information with material such as that described by Mr Stone and recorded at [151] above. On this issue, the[52]udge said:⁵²

... To avoid misleading the market, any public announcement of the Mangahewa or Inside Information would therefore have had to be couched in rather more sober terms than some of the language used on 2 November.

It also needs to be borne in mind that, when public announcements –including those related to Mangahewa 2 – were made, they were made by Mr Logan as general manager of Petrocorp. It is thus clear that, however keen they may have been, it would not have been open to Mr McCagherty or the Petrocorp scientists to make any public announcements of the Mangahewa Information.

Only by a suitably conditioned and phrased announcement could the market have been properly informed of the correct position concerning the DGS team’s work and the position taken by Petrocorp or, in due course, FC Petroleum and Fletcher Challenge. It can be safely concluded that dealing with the Mangahewa and Inside Information in that way would have been likely to dampen market response.

[158] The Judge added that despite the exuberance of those supporting further exploration, it was never going to progress without funding. Even if the project passed that hurdle, no progress could be made without the support of Petrocorp and that did not occur until after Mr Patek was persuaded on 3 May 1996 to proceed with Mangahewa 2. To ensure a well-informed market, any publicity concerning Mangahewa 2 before 16 November would have had to reflect both the significant technical uncertainties then surrounding the project, but also the managerial processes which needed to be satisfactorily navigated.^[53]
[159] The Judge supported his conclusions in this respect by reference to the NZX Listing Rules. Publicly listed companies (issuers) were required to comply with the Rules which the NZX had power to enforce. The 1989 Rules contained provisions relating to the disclosure of “relevant information”. In addition to general disclosure requirements relating to all public issuers, the 1989 Rules contained specific and more detailed disclosure obligations relating to companies engaged in the exploration for or extraction of minerals, oil or natural gas.^[54]
[160] The Companies Act 1993 came into force on 1 July 1994.^[55] The NZX responded by promulgating new listing rules which came into effect on 1 September 1994. The 1994 Rules required issuers to amend their constitutions to comply with the new Rules. In general, issuers were required to amend their constitutions to comply with the new Rules when their company re-registered under the new Companies Act. Amendments by issuers to their constitutions to adopt the provisions of s 4 of the Rules (which deal with takeovers) had to be made no later than 31 December 1995. The existing listing requirements relating to takeovers under the 1989 Rules were to continue to apply until the issuer amended its constitution.^[56]
[161] The 1994 Rules also contained general disclosure obligations upon public issuers, as well as detailed specific disclosure rules relating to companies involved in exploration or mining activities. We discuss the details of these rules below.
[162] On appeal, Mr Judd submitted on behalf of the appellants that the NZX Rules were irrelevant to the obligations upon Mr Patek and Petrocorp under the Act. First, he submitted that the Rules did not apply to them because they were not public issuers. The disclosure obligations under the Rules would apply only to Southern and FCL. Secondly, Mr Judd submitted that the Judge had erred in his approach to his assessment of the price-sensitivity issue.
[163] The essence of his submission was that the Judge had taken into account what the market might have done had the Mangahewa Information been released to the market along with all of the accompanying information identified by Mr Stone in his evidence. It was submitted that the Judge ought to have focussed on what did happen: that nothing was disclosed. The correct test, Mr Judd submitted, was whether the share price would have been affected by disclosure of the Mangahewa Information, unadorned by any of the surrounding information Mr Stone identified.
[164] Mr Judd summarised his submission in this way:

The test is not whether additional information should have been or would have had to be disclosed. Insiders with inside information don’t have an obligation to disclose. Their obligation is not to deal and not to advise or encourage anyone else to do so. Practically they can give themselves the right to advise or encourage by causing the information to cease to be inside information by getting it made publicly available. In this case, as the information remained not publicly available, the only option they had to avoid liability was to close off the takeover offer (desist from advising or encouraging).

[165] In a supplementary submission, Mr Judd submitted that Petrocorp could have shared the Mangahewa Information with Southern. If that had occurred, the independent directors could have evaluated it in the same way as Southern’s new licences were valued and recommended to the NZX that no-one should sell their shares until they had completed the evaluation.
[166] We do not accept Mr Judd’s submission. Put simply, the statutory definition of inside information requires the Court to consider a counter-factual, namely whether Southern’s share price was likely to be materially affected if the inside information at issue were released. In other words, the Court must consider whether the hypothetical public release of the information would be likely to materially affect the market’s perceptions of the value of Southern’s shares. It is an integral part of that exercise to consider how, by whom, and in what form the information would have been released in the specific circumstances relevant to the companies involved.
[167] We agree with the Judge that the provisions of the Act relating to insider information cannot be viewed in isolation. Regard must be had to the nature of the business in which the public issuer is engaged, the type of information in question and the regulatory environment in which the company is operating. While we accept counsel’s point that an insider is obliged to disclose inside information or to desist from dealing in the securities and from advising or encouraging others to do so, it does not follow that the Court is obliged to disregard the manner in which relevant information must be released to the market should disclosure be made. Indeed, for the reasons given, the opposite is the case.
[168] In our view, the High Court was entitled to take into account the relevant NZX disclosure rules which, amongst other things, are designed to ensure that fair and balanced information likely to materially affect share price is promptly provided to the market. Importantly, the rules are also designed to ensure that a false market is not created through the release of inaccurate, misleading or premature information. These rules operate in the interests of protecting members of the public who may wish to buy or sell shares in public issuers by ensuring, as far as practicable, that all such persons are provided with timely and balanced information which may affect share price.
[169] The general disclosure requirements of the 1994 Rules are contained in Section 10 of the Rules and are in similar, but not identical, form to the corresponding provisions of the 1989 Rules. The explanatory notes in relation to Section 10 of the Rules are instructive. They confirm that the NZX will exercise its discretion with regard to disclosure requirements to ensure they are “construed to require fair information to the market generally and not to confer upon particular persons, simply by qualifying as holders of Equity Securities of an Issuer or participants in the market, rights to information which would benefit those persons in particular in their dealings with the Issuer”.
[170] The notes further record that the duty to correct false information in the market is limited so that “antagonists cannot force information out of a company simply by generating a false rumour”. The notes also state that the interests of the market in requiring correction of false rumours is intended to be limited to those which are of “a nature or of a source which lends substantial credence to them”.
[171] The notes go on to state that, in deciding whether or not to release information, issuers should have regard, amongst other things, to the insider trading provisions of the Act and the Fair Trading Act 1986 (including, in particular, the sections dealing with the supply of information that is, or is likely to be, misleading or deceptive).
[172] As already noted, Section 10 of the 1994 Rules imposes additional disclosure requirements upon companies described as “mining issuers” (defined as “an Issuer which is principally engaged in the exploration for or extraction of any mineral, oil or natural gas”).^[57] A mining issuer is obliged to provide to the NZX a report after the end of each quarter providing, amongst other things, full details of production, development and exploration activities.^[58] The Rules also require a mining issuer to ensure that any contract with an unlisted company as operator in a joint venture contains provisions requiring the operator to disclose to the issuer immediately any significant discovery of mineralisation or hydrocarbon.^[59]
[173] The Rules also require joint venture contracts to contain a provision to the effect that the operator will provide to the issuer if required a full report on any such discovery and information necessary to avoid the establishment of a false market in the issuer’s securities. The contract must also authorise the issuer to make any such report available to the NZX.^[60] It will be recalled that both the JVOA and the Alignment Agreement in the present case contained disclosure provisions of this nature.^[61]
[174] Significantly, the 1994 Rules also contain extensive provisions relating to hydrocarbon reports.^[62] It is unnecessary to refer in detail to these provisions since they are comprehensively described by the Judge in Annexure 1 to his decision. It is sufficient to note that the Rules provide for the disclosure of hydrocarbon reports of varying types with careful definitions of the distinctions between possible, probable and proved hydrocarbon reserves.
[175] The Judge noted that these expressions were terms of art in the oil and gas industry^[63] and he adopted Mr Tearpock’s view that Mr Papalia correctly regarded the Mangahewa gas at the relevant times as “contingent or prospective resources” rather than “reserves”.^[64]
[176] The 1994 Rules prohibit the use of the word “reserves” in this industry unless one or more of the hydrocarbon reserve categories applies. This is demonstrated by the following Rules:

10.11.4 Potential Hydrocarbon Reserves Report: Where a report relates to the potential hydrocarbon reserve state (ie from the earliest exploratory investigations to the stage preceding that at which proved hydrocarbon reserves can be estimated), the word “reserves” shall not be used.

10.11.6 Reports of Hydrocarbon Reserves: Where a report relates to results of exploratory investigations which have reached the stage where a hydrocarbon reserve can be estimated, reports which refer to hydrocarbon reserves shall use the expressions for categories of hydrocarbon reserves, as defined in the Rules.

[177] These Rules demonstrate the need for real caution in the oil and gas industry in releasing information which is incomplete, inaccurate or misleading. The premature release of partial information in the present case was likely to have the opposite effect from that which the NZX Rules intended. The Judge’s conclusion that disclosure of the Mangahewa Information would have been highly misleading in its unvarnished state was well-founded.
[178] If the Mangahewa Information had been released publicly, it is reasonable to infer that this would have been done by FCL as the ultimate owner of the majority stake in Southern. In that case, FCL (as a public issuer) would have been obliged to comply with the NZX Rules. Even if Petrocorp had released the information, it would undoubtedly have considered it essential to put the full picture before the public in order to ensure that fair and balanced information was in the marketplace. The same conclusion may also be safely inferred if, as Mr Judd suggested, Petrocorp had provided the Mangahewa Information to the independent directors of Southern and their advisers. Release of the information to them is effectively a release to the public since the anticipated recommendation of the independent directors to the minority shareholders would become public information.
[179] On any of these scenarios, it would have been necessary, in order to provide a full and balanced picture for the independent directors and Mr Papalia, to have been informed of the tempering factors identified by the Judge. These included the fact that the volumetric information said nothing about the economic or practical feasibility of the actual recovery of gas (neither of which had been investigated), the dismal results from all prior wells in the structure, the fact that fraccing was necessary to extract the gas and that this was an untried technique in New Zealand, the recognition by the members of the DGS team that the volumetric figures were mere guesstimates which could not be treated as reliable, the absence of mapping of the structure below the top of the McKee level, and the need to obtain the approval of Mr Patek (and ultimately, the FCL Board) to the funding of the Mangahewa 2 well in the face of the highly sceptical view held by Mr Patek, senior Fletcher executives and members of the FCL Board.
[180] These were the very factors which Mr Tearpock took into account in undertaking his assessment: would Mr Papalia’s advice about Southern’s valuation have been different if the Mangahewa Information had been disclosed? Mr Tearpock’s clear answer to that question, which the Judge accepted, was no.
[181] We are satisfied that the Judge was correct to take these factors into account. To decide otherwise would have risked defeating the objective of both the 1994 Rules and the Act as well as exposing those disclosing the Mangahewa Information on an unqualified basis to a claim for damages for breach of the Fair Trading Act. Our view in this respect is supported by the observations made by this Court in the appeal which followed Fisher J’s leave decision:^[65]

... 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.

[182] Although this Court referred to the assessment of loss by way of example, we are satisfied that the identified qualifications to the bare Mangahewa Information are also relevant to the assessment of the price-sensitivity issue for the reasons already discussed.

Conclusion on price-sensitivity

[183] At the end of the day, the Judge’s acceptance of Mr Tearpock’s evidence to the effect that Mr Papalia’s valuation would not have been affected by the Mangahewa Information if it had been given to him and the evidence adduced by the respondents that the share price would not have been materially affected, was sufficient to dispose of this aspect of the case and, indeed, of the appellants’ claim overall. We conclude that no ground has been established to challenge the Judge’s conclusion that the Mangahewa Information was not inside information since its disclosure would not have had any material effect on the price offered for the remaining Southern shares which Petrocorp did not own.
[184] We add that the significance of the Mangahewa Information to Southern’s share price at November 1995 must be kept in perspective. PPL 38705 was only one of many licences held by Southern. The value Mr Papalia attributed to the Mangahewa prospect was only a very small fraction of the total value attributed to Southern’s overall interests. The great bulk of the value of Southern did not lie in its prospects but in its production licences, cash and deposits. It might be tempting to view the issues in hindsight in the light of the subsequent modest success of Mangahewa but the task of the Court was to assess the materiality of the Mangahewa Information in the light of what was known at November 1995 and the likely outcome if the information had been known publicly at that time.

Second issue: If the Mangahewa Information was “inside information”, did Mr Patek and/or Petrocorp have it at the time of the alleged acts of encouragement?

[185] Although our conclusion that there is no basis to upset the Judge’s finding that the Mangahewa Information would not have materially affected the price of the Southern shares is sufficient to dispose of this appeal, we nevertheless go on, as the Judge did, to consider whether Mr Patek and/or Petrocorp had the relevant information at the time of the alleged acts of encouragement. It is common ground that Petrocorp had the Mangahewa Information at the relevant time, although it is disputed that it did so “by reason of” its role as a substantial security holder in Southern. The issue on appeal is whether the Judge was wrong to find that Mr Patek did not have the Mangahewa Information at the time of the alleged acts of encouragement.
[186] Mr Judd properly recognised that the Judge’s finding on this issue was a question of fact and that he faced a heavy burden in seeking to overturn a finding of this character. Mr Judd submitted first that the Judge had wrongly approached this issue by considering whether Mr Patek had received the information and, if so, from whom. The correct test, Mr Judd submitted, was whether Mr Patek had the information not whether he had received it.^[66]
[187] We can determine this submission in short order. First, we are not persuaded that the Judge did approach the matter in the way Mr Judd submitted. Although the Judge referred on a number of occasions to whether Mr Patek had received information, there is nothing to suggest that the Judge misconceived the question he had to decide. Secondly, we see nothing improper in the Judge considering whether Mr Patek had received the information from others. As he did not generate the information himself, he could only have the information if he had received it from others. There is no substance in this point.
[188] Mr Judd’s second basis for challenging the Judge’s factual finding was a submission that the Judge had overlooked aspects of the evidence. This submission was coupled with an argument that, by working back from the point where Mr Patek undoubtedly did have the Mangahewa Information in December 1995, it could be inferred that he must have had it at the time of the alleged acts of encouragement between 3 and 14 November. We discuss this argument below but note at this stage that it is a difficult argument to mount given Mr Patek’s emphatic denial that he had the Mangahewa Information at relevant times and the Judge’s acceptance of that evidence.
[189] To set the background on this issue, we now summarise the Judge’s reasons for his conclusion that Mr Patek did not have the Mangahewa Information at relevant times. The Judge discussed this issue at considerable length.^[67] He carefully considered all the documentary and viva voce evidence presented to him. He began by making the point that Mr Patek was not personally present at the meeting on 2 November and could only have had the Mangahewa Information if it had been conveyed to him by others. There was no direct evidence that he received the material presented to the 2 November meeting or to Methanex until after the second meeting with Methanex on 11 December. Secondly, there were both geographical and functional separations between the DGS team and Mr Patek. Thirdly, the Judge took into account the findings already noted about the technical nature of the material discussed at the 2 November meeting and the fact that much of the material was not new information.
[190] In that respect, it is common ground that Mr Patek (in common with the other directors of Southern) was aware the DGS team was studying the Mangahewa structure and that there was a proposal to drill a second well. However, he said he was not aware of the material presented on 2 November until mid-December at the earliest. No formal presentation was made to him until 31 January 1996. His evidence in that respect was supported by key witnesses such as Messrs Lammerink, Rawlinson and Humphrey. No witness gave any direct contrary evidence on this point. Rather, the appellants relied on inferences to be drawn from documentary evidence and other circumstances.
[191] The most compelling reason given by the Judge for concluding that Mr Patek was not aware of the Mangahewa Information at material times is the conclusion that both Mr Patek and Mr Humphrey were strongly motivated to achieve a successful outcome for Fletchers. They were aware that any increase in the share price offered would have to be clearly demonstrated to the FCL Board as being “value based”. The Judge reasoned that if Messrs Patek or Humphrey had been aware that, on one interpretation of the 2 November material, there might have been prospects at Mangahewa for recoverable gas greater than that in the Maui field, it would have been “virtually certain” that they would have included much more than the passing reference to Mangahewa in the papers presented to FCL’s head office to justify the recommended offer price.
[192] The Judge’s conclusions in this respect are best set out in full:

[309] Next it is to be recalled that Messrs Patek and Humphrey had, for a number of days, perhaps even a week or two, been in significant difficulties as far as the Southern takeover was concerned. They were its instigators and the officers principally responsible in Fletcher Challenge for trying to ensure its success. Their personal corporate reputations were no doubt engaged and in Mr Humphrey’s case, no matter how he properly quarantined his Southern holdings during the takeover period, he must have known any increase in the offer price would financially benefit him.

[310] On the one hand the offer had been current for over two months but, despite the time for acceptances being extended, resistance to acceptance was still stout, especially from the group represented by Mr Oakley. Opposition was steadfast. Requests for information were numerous: a number still remained outstanding by late Octoberearly November. Litigation was threatened. Looming NZX and company law regulatory changes added their own pressure. On the other hand, the Fletcher Challenge executive office would not countenance any increase in the offer price unless it was “value based”. The chairman of Fletcher Challenge, Mr Fletcher, had made clear he would not be, as he put it, “green-mailed” into sanctioning an increase in the offer price just because of the adamant opposition of Mr Oakley and others. He saw the purchases by GPG, DF Mainland and others as speculative.

[311] It was therefore the case that Messrs Patek and Humphrey were strongly motivated to achieve a successful outcome for Fletcher Challenge yet they knew, from as recently as the “heated session” Mr Patek had with Mr Fletcher on 3 November, that opposition from Fletcher Challenge management to increasing the offer price was adamantine unless any increase could clearly be shown to be “value based” to Fletchers.

[312] As it happened, all Messrs Humphrey and Patek came up with to justify the “value based” increase was to add the value arising out of the new licences issued to Southern and Petrocorp the new business development and $7m for “unproven oil and gas” to the “Project Knight” July estimates. While the former was tangible value, justifiably included, the last must have been less persuasive. Thus, had either Messrs Patek or Humphrey the slightest inkling that Petrocorp’s scientists had, only a few days previously, presented figures, which, if capable of being achieved commercially at the volume suggested, would have added significantly to Southern’s value, it would have been virtually certain they would have included much more than the oblique reference to Mangahewa that appears in the papers in their justification to Fletcher Challenge head office to increase the offer price and bring the takeover, in which they had those vested interests, to a successful conclusion. After all, evidence suggested that, on one interpretation of the 2 November material, the scientists might have hit upon a prospect orders of magnitude of gas greater than Maui, New Zealand’s largest gas field. And the suggested discovery, if realisable technologically and economically, would have multiplied Southern’s value by several times the Papalia and Warburg figures. Given the pressure Messrs Patek and Humphrey were under, had they known of that material, it is highly likely they would have relied heavily on it as proof a price increase would be thoroughly “value based”. The fact there is no direct reference of that sort appears in the 36 November material is strong evidence neither Messrs Patek nor Humphrey knew anything of the material contained in the 2 November presentation, that is, the Mangahewa and Inside Information, when they sent the material to Mr Mace and the board sub-committee on 6 November.

[193] The Judge also dealt at length with the reference to enhanced prospects for the Mangahewa structure in the memorandum of 6 November from Mr Patek to Mr Mace which we have discussed earlier in this judgment.^[68] The Judge concluded that the explanations given by Mr Patek and Mr Humphrey for this single reference to Mangahewa “while not completely compelling [were] credible”.^[69] The Judge noted that this was a single word in voluminous technical documents of which Mr Patek was not the author. If he knew nothing of the 2 November material or the work of the DGS team on Mangahewa, the reference to Mangahewa would not have alerted him to the work of the DGS team or spurred him to make inquiries concerning that reference before sending Mr Humphrey’s papers to Mr Mace. The Judge considered that oversight could be explicable.
[194] The reference in the 6 November memorandum to enhanced prospects for Mangahewa (amongst other prospects in the same area) represents the high water mark in support of the appellants’ claim that the Judge was wrong to conclude that Mr Patek was not aware of the Mangahewa Information until after the takeover had been completed. We agree with the Judge. However, the appellants’ contention cannot stand in light of Mr Patek’s emphatic denials and the far more compelling reasoning of the Judge which we have described above.^[70]
[195] Mr Patek’s evidence is also supported by a memorandum he sent to Mr Logan on 1 December 1995 in relation to the Petrocorp exploration budget which included a request for funding required for Mangahewa 2. Mr Patek expressed his strong concern about the absence of an economic evaluation to support the probability of creating value by continuing exploration in Taranaki and sought a further paper providing a “disciplined framework” justifying further expenditure. Mr Judd submitted that Mr Logan’s request would have made no sense to Mr Patek if he was unaware of the Mangahewa Information, but this overlooks the evidence that Mr Patek was aware of the Mangahewa 2 proposal. His strongly worded response is consistent with his evidence that he was not aware of the material presented on 2 November or of any properly evaluated proposal that a second well was justified on the basis it would be likely to show that deep gas was commercially recoverable at Mangahewa.
[196] Mr Judd submitted that Mr Patek undoubtedly had the Mangahewa Information on 15 December 1995 when he was sent notes prepared by Mr Logan of the second Methanex meeting on 11 December 1995. It was this material which led Mr Patek to call for further information which was provided to him on 31 January 1996. It was submitted that the material received by Mr Patek on 15 December 1995 showed that Mr Patek must have had the relevant information prior to that time. We have reviewed these notes but we are not persuaded that the inference Mr Judd invited us to draw is reasonably open. While Mr Patek accepted in cross-examination that he should have been concerned about references in the notes to “confirmed potential reserves in the range 5 to 10 TCF”, it does not follow that he was aware of the Mangahewa Information in the period 3 to 14 November.
[197] Counsel also relied on a memorandum from Mr Logan to Mr Patek dated 14 November prior to a quarterly performance review meeting Mr Patek was to attend the next day at Petrocorp. The memorandum refers to the fact that there was to be a brief review of the deep gas work. Apart from the fact that this meeting was after the pleaded acts of encouragement, the reference to the deep gas work could not be sufficient to show Mr Patek knew of the Mangahewa Information at that time. Not only did Mr Patek deny any such knowledge, but he was not cross-examined upon this memorandum. Nor were Mr Logan or any of the other recipients of the memorandum.
[198] It was also submitted that Mr Patek was aware of Mr Wolter’s mapping work in respect of the Mangahewa structure in 1995. However, Mr Judd accepted that the map was not mentioned to Mr Patek in cross-examination. Instead, it was shown to him in re-examination. He denied having seen it before.
[199] Finally, Mr Judd referred to evidence that Mr Patek approved Mr Logan’s proposal to meet with Methanex personnel on 13 November. It was, he said, inconceivable that Mr Patek did not know the gist of the material to be presented. This submission is difficult to sustain in the light of the Judge’s finding that Mr Patek was not given any of the information presented to Methanex on 13 November, received no report of the meeting and saw no need to call for any of that data.^[71]
[200] We have carefully considered the points Mr Judd has made and the responses to each of them provided by Ms Katz. We are not persuaded that any of them, either individually or collectively, would justify our interfering with the Judge’s findings. It needs to be kept in mind that Hugh Williams J heard the evidence and the lengthy cross-examination of the key witnesses. That is an advantage a trial judge has which cannot possibly be replicated in an appeal. In the absence of any compelling documentary evidence (and we have found none) the careful factual findings made by the Judge are not capable of realistic challenge.

Third issue: If Mr Patek had “inside information” at relevant times, did he have it “by reason of” his role as a Southern director?

[201] Ms Katz submitted in support of the cross-appeal by the respondents that, if Mr Patek had the Mangahewa Information at relevant times, he did not have it “by reason of” his role as a director of Southern. Rather, if he had the information, then it was by virtue of his role as a director of Petrocorp or as the CEO of FCP.
[202] The issue arises from the language of s 3(1)(b) of the Act which, related to the present appeal, provides that the relevant inside information must have been held or acquired “by reason of” Mr Patek being a principal officer (director) of Southern. By virtue of s 3(2) of the Act, it is presumed, in the absence of evidence to the contrary, that a principal officer of a public issuer has the relevant information by reason of being a principal officer of the public issuer.
[203] The Judge found that, if (contrary to his finding) Mr Patek had received the Mangahewa Information, it could only have been conveyed to him by those who attended the 2 November presentation.^[72] Those attending were all Petrocorp employees. The Judge went on to find that if Mr Patek had received the Mangahewa Information, it seemed “virtually certain” it would have been conveyed to him as CEO of Petrocorp (in fact, this was an error since Mr Patek was the CEO of FCP, not Petrocorp; Mr Patek was however a director of Petrocorp).
[204] The Judge said that the relevant information, if received, had not been given to Mr Patek “because of”, “due to” or “by virtue of” his directorship of Southern.^[73] The Judge considered that some form of causal nexus was required between receipt of the information and Mr Patek’s role as a Southern director. In the Judge’s view that test was not met. He concluded that, if Mr Patek had received the Mangahewa Information, he would not have done so solely by reason of his directorship in Southern. Somewhat confusingly, the Judge went on to reach the “tenuous” conclusion that Mr Patek might be an “insider”.^[74]
[205] We do not think it necessary to engage in any detailed analysis of the term “by reason of” in the context of the present case. We are content to adopt the straightforward approach that the phrase may be equated with “because of” or “by virtue of”. We are also satisfied that it does not matter whether the inside information is received by a principal officer of the public issuer in more than one capacity. While there may be cases where it may be possible in the particular factual circumstances to clearly differentiate between the possession or receipt of information by a principal officer in one capacity or another, this was clearly not such a case.
[206] If Mr Patek had received inside information during the relevant period, we consider the inevitable finding would have been that he received that information in his capacity as a director of Southern and as a director of Petrocorp. The likely finding would have been that he also received the information in his capacity as the CEO of FCP.
[207] The terms of the JVOA and the Alignment Agreement are critical to our reasoning on this point. We do not need to repeat the terms of those arrangements.^[75] It is sufficient to note that Petrocorp and Southern were parties to this arrangement under which they undertook a joint operation in the oil and gas industry for their mutual benefit. An operating company comprising representatives of both companies was established and obligations requiring Petrocorp to provide Southern with full reports on all activities Petrocorp was undertaking in its role as operator under PL 38705 and other licences each company held.
[208] In short, the two companies agreed to co-operate and share all information relevant to their joint activities in the exploration and production of oil and gas. It follows that, if Mr Patek had received relevant information in his capacity as a director of Petrocorp, there was an obligation to provide that information to Southern and Mr Patek would have received it as a director of Southern.
[209] In these circumstances, it is difficult to conceive of a clearer case where, if Mr Patek had received the relevant information, he would have done so in his capacity as a director of both companies. We conclude that the Act does not require a plaintiff to demonstrate the relevant information received by a director or other principal officer of the public issuer solely in that capacity. If the information is received partly in that capacity and partly by reason of some other capacity, it does not matter.
[210] As this Court recognised in its earlier decision on the leave application, the critical question is the relationship between the parties and that:^[76]

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. ...

Fourth issue: If Petrocorp had “inside information” at relevant times, did it have it “by reason of” its role as a substantial security holder in Southern?

[211] This Court considered this issue in its earlier leave judgment stating:^[77]

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 [Southern]) existed because of Petrocorp’s substantial shareholding in [Southern].

[212] Given our conclusions on the third issue, we can deal with this issue shortly. We see Petrocorp’s role as a substantial security holder in Southern as inextricably linked to the JVOA and Alignment Agreement. The terms of these agreements and Petrocorp’s shareholding in Southern demonstrate the extremely close relationship between the two companies. In the circumstances, if Petrocorp had inside information at relevant times, it is unrealistic to differentiate Petrocorp’s possession of that information from possession of it by reason of Petrocorp’s role as a substantial security holder in Southern.

Fifth issue: If Mr Patek and/or Petrocorp had “inside information” at relevant times and by reason of the pleaded capacities, did either or both encourage PIL to buy the Southern shares?

[213] The Judge found that, had it been necessary to do so, he would have found that Mr Patek was advising or encouraging PIL to buy the shares of the outstanding Southern minorities by recommending to FCL on 3, 5, 6 and 14 November that the offer price be increased.^[78] Ms Katz did not challenge that finding except in one respect.^[79]
[214] The Judge did not make any specific finding as to whether he would also have concluded that Petrocorp had advised or encouraged PIL to buy the shares in the same way. It was not strictly necessary to do so given his other findings which were sufficient to dispose of the appellants’ case. It is not necessary for us to decide this issue either but, on the evidence, we would have concluded that the pleaded acts of advice or encouragement by Mr Patek were acts done or advice given in his capacity as the CEO of FCP.
[215] It is possible on this issue to clearly differentiate Mr Patek’s role as CEO of FCP from his role as a director of Petrocorp. Mr Logan’s evidence was that Petrocorp had little involvement in the takeover other than as a shareholder of PIL. The takeover was driven at corporate level at Fletchers’ head office in Auckland. That evidence is supported by the evidence of Mr Patek and Mr Humphrey and by the documentary evidence. It is quite clear that the memoranda of 3 to 6 November were recommendations by Mr Patek as CEO of FCP to FCL (or a sub-committee of FCL) in relation to the increase in the offer price for the Southern shares. These memoranda were on FCP letterhead which was entirely consistent with the Fletchers’ corporate structure. FCP was the company with oversight of Fletchers’ energy interests and the FCL board took ultimate responsibility for any decisions on the offer price.

Sixth issue: Does there need to be a causative link between the possession of the inside information and the acts of encouragement or advice?

[216] The Judge quoted at length from Fisher J’s leave judgment and the earlier decision of this Court on the issue of whether it was necessary for a plaintiff to establish under the Act that there was a causative link between the possession of the relevant inside information and its use (for example, in advising or encouraging the sale and purchase of shares). Fisher J had concluded that the Act did not require any causal connection between receipt of the Mangahewa Information and the decision to raise the offer for the remaining minority shares.^[80] He found that the Act required only that, at the time he encouraged PIL to purchase, Mr Patek was in possession of unpublicised price-sensitive information. That finding was considered and upheld by this Court.^[81]
[217] Although the Judge did not explicitly adopt this Court’s finding on the issue, it is implicit that he did so and, in any event, he was bound to follow this Court’s decision. On the cross-appeal, Ms Katz submitted that the Judge had erred in this respect while acknowledging it was unlikely this Court would depart from its earlier decision.
[218] We see no reason to question this Court’s earlier decision on this point. Indeed, we consider that the reasoning of the Court is compelling. We agree that the scheme of the Act imposes absolute liability and that there is no requirement to show a link between the possession of inside information and its use.

The application for leave to appeal in CA247/2008

[219] In view of our finding on the substantive appeal, there is no point in the appellants pursuing their application for leave to appeal in CA247/2008 relating to discovery issues in a related proceeding in the Wellington High Court. That application is dismissed accordingly.

Summary

[220] We summarise our conclusions on the appeal and cross-appeal as follows:

• (a) The Judge correctly concluded that the Mangahewa Information was not “inside information” within the meaning of the Act because it was, at least in part, already in the public domain and because, to the extent it was not publicly available, the information would not have materially affected the price of the Southern shares if the information had been made publicly available.
• (b) There is no basis to disturb the Judge’s factual finding that Mr Patek did not have the Mangahewa Information at relevant times.
• (c) If the Mangahewa Information was “inside information” which Mr Patek had in his possession, he had it by reason of his role as a Southern director for the purposes of the Act. Contrary to the Judge’s finding, it is not necessary to show that Mr Patek had it in his possession solely by reason of his role as a director of Southern.
• (d) Petrocorp had the Mangahewa Information in its possession at relevant times and (contrary to the Judge’s finding) it did so by reason of its role as a substantial security holder in Southern.
• (e) The Judge correctly found that if Mr Patek had inside information at relevant times, he encouraged PIL to buy the Southern shares at least on 3, 5 and 6 November 1995 by recommending to FCL that the offer price for the shares be increased.
• (f) If Petrocorp had inside information at relevant times, it did not encourage or advise PIL to buy the Southern shares by recommending to FCL that the offer price for the shares be increased. Rather, any such recommendations were made by Mr Patek in his capacity as the Chief Executive Officer of FCP.
• (g) We agree with the Judge that there does not need to be a causative link between the possession of the inside information and the relevant acts of encouragement or advice.
• (h) The application for leave to appeal in CA247/2008 should be dismissed in consequence of the findings on the substantive appeal.

Disposition

[221] The appeal and cross-appeal in CA591/2008 are dismissed.
[222] The application for leave to appeal in CA247/2008 is dismissed.
[223] Counsel are to confer and provide a memorandum as to costs in the light of s 18(5) of the Act within one month of the date of this judgment. Counsel may wish to consider whether s 18(5) envisages that the public issuer is obliged to pay the appeal costs of a party who has been unsuccessful at trial and on appeal.

Solicitors:
Fraser Powrie, Auckland for Appellants
Russell McVeagh, Auckland for Respondents

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^[1] Haylock v Southern Petroleum NL [2002] 3 NZLR 518 (HC); Haylock v Southern Petroleum NL (No 2) [2002] 3 NZLR 819 (HC).

^[2] The insider trading regime was introduced by the Securities Amendment Act 1988 (later renamed the Securities Markets Act 1988). The regime was later repealed and replaced by the Securities Markets Amendment Act 2006 but the new regime so introduced is not relevant to this appeal.
^[3] Haylock v Southern Petroleum NL [2003] NZCA 72; [2003] 2 NZLR 175.

^[4] The information relied on in the High Court was wider than that relied upon on appeal but covered much the same ground.

^[5] The Judge referred to the receipt of inside information “in confidence” as a further ingredient. This is relevant for the purposes of s 3(1)(c) of the Act but not to s 3(1)(b) which was the provision ultimately relied upon by the appellants.
^[6] Haylock v Patek [2008] NZHC 1352; [2009] 1 NZLR 351 (HC).
^[7] CA247/2008.

^[8] These proceedings were later settled and Mr Oakley did not continue as a plaintiff in the proceeding before Hugh Williams J which is the subject of the substantive appeal.
^[9] A principal officer is defined as including a director by the Securities Markets Act 1988, s 2.
^[10] Substantial security holder is defined by the Securities Markets Act 1988, s 2.
^[11] Securities Markets Act 1988, s 2.
^[12] At [49].
^[13] Clauses 4.02(a), 4.07 and 13.01(a).
^[14] Clauses 5.1, 9.3 and 9.4.
^[15] At [67].

^[16] We note that the Judge’s use of the word “relevant” is a matter of contention since there is no dispute that Mr Papalia was not given the Mangahewa Information.
^[17] See the discussion at [286]– [287] of the judgment.
^[18] At [186]–[187].

^[19] At the time leave was given to the appellants to proceed and at the time of the appeal against that decision, it was understood that Mr Patek was present at the 2 November 1995 meeting.
^[20] At [84]–[108].
^[21] At [100].
^[22] At [194]–[205].
^[23] At [217].
^[24] At [129].

^[25] We note that the Ministry of Economic Development’s 2010 New Zealand Energy Data File estimated the ultimate recoverable gas reserves (P50) for Mangahewa at 209.6 BCF with two other wells in the Mangahewa structure bringing the total to 529 BCF (or .5 TCF).
^[26] Securities Markets Act 1988, s 2.

^[27] Insider Trading: Report to the Minister of Justice by the Securities Commission (December 1987) vol 1 at [3.1].
^[28] R v Staines and Morrisey [1997] 2 Cr App R 426 (CA) at 430.

^[29] Insider Trading: Report to the Minister of Justice by the Securities Commission (December 1987) vol 1 at [3.2].

^[30] Securities Commission Report of an Inquiry into Aspects of the Affairs of Regal Salmon Ltd Including Trading In Its Listed Securities (1994) at [19.83]–[19.84].
^[31] Commissioner for Corporate Affairs v Green [1978] VicRp 48; [1978] VR 505 (VSC).
^[32] At 515.

^[33] K J Bennetts “Regulation of Insider Trading: The Australian Experience” (1987) 3 Canta LR 254 at 265, cited in Securities Commission Report of an Inquiry into Aspects of the Affairs of Regal Salmon Ltd Including Trading In Its Listed Securities (1994) at [19.84].

^[34] Securities Commission Report of an Inquiry into Aspects of the Affairs of Regal Salmon Ltd Including Trading In Its Listed Securities (1994) at [22.38(a)].

^[35] Hooker Investments Pty Ltd v Baring Bros Halkerston & Partners Securities Ltd (1986) 10 ACLR 462 (NSWSC)
^[36] At 468.

^[37] R v Mansfield [2011] WASCA 132 in relation to s 1042A of the Corporations Act 2001 (Cth) which defines information to include “matters of supposition and other matters that are insufficiently definite to warrant being made known to the public and matters relating to the intentions ... of a person”.
^[38] At [330].
^[39] At [349].
^[40] At [402].
^[41] At [440]–[442].
^[42] At [442].
^[43] At [440].
^[44] At [441].
^[45] At [441].
^[46] At [413]–[433].
^[47] At [425]–[426].
^[48] At [431].
^[49] At [433].
^[50] At [444].
^[51] At [446]–[447].
^[52] At [457]–[459].
^[53] At [460].
^[54] Sections 8 and 10 of the New Zealand Stock Exchange Listing Requirements, July 1989.
^[55] Companies Act 1993, s 1(2).
^[56] Rules 1.10 and 1.11 of the New Zealand Stock Exchange Listing Rules 1994.
^[57] Rule 10.10.1.
^[58] Rule 10.10.4.
^[59] Rule 10.10.2.
^[60] Rule 10.10.2.
^[61] See [32]–[36] above.
^[62] Rule 10.11.
^[63] At [1] of Annexure 1 to the judgment.
^[64] At [13] of Annexure 1 to the judgment.
^[65] Haylock v Southern Petroleum NL [2003] NZCA 72; [2003] 2 NZLR 175 at [67].
^[66] Securities Markets Act 1988, s 3(1)(b).
^[67] At [294]–[327], and also at [194]–[211].
^[68] See [78]–[88] above.
^[69] At [308].
^[70] See [192]–[193] above.
^[71] At [305] and [316].
^[72] At [273]–[274].
^[73] At [273].
^[74] At [283].
^[75] See [32]–[36] above.
^[76] Haylock v Southern Petroleum NL [2003] NZCA 72; [2003] 2 NZLR 175 at [30].
^[77] Haylock v Southern Petroleum NL [2003] NZCA 72; [2003] 2 NZLR 175 at [33].
^[78] At [327].

^[79] Ms Katz submitted there was no evidence that any encouragement or advice took place on 14 November. We do not find it necessary to decide that point since we are satisfied Mr Patek did not have the Mangahewa Information until mid-December 1995 at the earliest.
^[80] Haylock v Southern Petroleum NL [2002] 3 NZLR 518 (HC) at [75].
^[81] Haylock v Southern Petroleum NL [2003] NZCA 72; [2003] 2 NZLR 175 at [42], [48], [49], [57] and [58].