Last June, about 750 disgruntled Southern Petroleum shareholders won High Court approval to pursue an insider trading case over the Fletcher Challenge Energy takeover of the former listed company in 1995.

Shell New Zealand is appealing that decision on the basis that the shareholders' case is not arguable; while the shareholders, represented by Colin Carruthers QC, are also seeking proceedings against former FCE director James Patek.

The move by the disgruntled shareholders followed an April 2001 out-of-court settlement by Shell New Zealand (which had just bought FCE) with listed retirement care provider ElderCare over its disputed preference shares in the former FCE subsidiary. Eldercare said at that time that FCE would pay it $NZ1.3 million relating to over 4000 disputed preference shares in Southern Petroleum Services, in addition to $NZ275,000 FCE had paid after ElderCare dropped its claim alleging insider trading.

At the time of the FCE takeover of Southern Petroleum, the minority shareholders were paid NZ75 cents a share but are seeking $23 million in compensation, including penalties and interest. They believe they would have received $NZ1.25 more a share had FCE not withheld vital information about the size of Southern Petroleum's Taranaki oil and gas prospects, including a stake in the licence which later yielded the 500-600 bcf Pohokura gas discovery.

They also claim Mr Patek advised and encouraged FCE to buy out Southern Petroleum minority shareholders and actively advised the minorities to sell, despite allegedly having information that would have increased the price if disclosed. Mr Patek allegedly received the information in his capacity as a Petrocorp director from a presentation about Taranaki energy prospects in November 1995.

Shell counsel Jim Farmer, QC, is reported as yesterday saying that the crucial matter was whether there was evidence of a causative link between FCE and Patek knowing inside information and acting on it to tip the buying of Southern Petroleum stock. If there was no evidence of that link then there could be no proceedings.

The small shareholders' case was that Mr Patek was an insider of Southern Petroleum and that he advised or encouraged FCE to buy Southern Petroleum shares, Dr Farmer said.

As part of their argument, the small shareholders said the governing principle of the Securities Amendments Act, under which insider trading cases were taken, was "disclose or abstain". This meant an insider, who had price-sensitive information, should be prohibited from dealing or "tipping" until that information was published or otherwise reflected in market prices.

However, Dr Farmer argued that Patek acquired inside information by reason of his position as a director of then Fletcher subsidiary Petrocorp and not by reason of his position as a director of Southern Petroleum.

In his June 2002 judgment, Justice Fisher said the minority shareholders' statement of claim against Petrocorp and Mr Patek was not without difficulty.

The current appeal court case is being heard by Justices Gault (presiding), Keith, Glazebrook, McGrath, and Tipping and is expected to last at least a week.