The
Court of Appeal has set parameters for warring parties within dysfunctional Greymouth
Petroleum to negotiate the sale of a 13.8 per cent stake held by former chief
operating officer John Sturgess after the court ruled Sturgess failed to do his
job properly.
Greymouth is a closely
held company with extensive oil and gas interests in New Zealand and Chile. Joint venture investors fell out with Mr Sturgess
after complaints he was incurring expenditure without authority, was failing to
properly report to the board and was proving misleading and evasive when asked
to account for company performance.
Mr Sturgess was
initially willing to sell his stake to the remaining joint venture participants
but later changed his mind, fearing the value placed on his shares would not
price in expectations of future profitability for Greymouth’s Chilean
prospects.
Founded in 2002, Greymouth
Petroleum is owned 13.8% by interests associated with Mr Sturgess; 52.1% by
interests associated with Mark Dunphy (who is executive chairman); and 34% by
Peter Masfen. By 2011, Mr Sturgess was
estranged from his joint venture partners.
The court was told Mr Sturgess was aggrieved that he had not been given
an enhanced shareholding in a Chilean venture.
Messrs Dunphy and Masfen said they fell out because Mr Sturgess began to
act unilaterally and irresponsibly.
Mr Sturgess had taken
to secretly recording meetings with fellow directors. At a tense board meeting in February 2011,
directors attempted without success to have Mr Sturgess take a three month
“holiday” from his position as chief operating officer.
After a seven week
High Court trial, Justice Gilbert ruled Mr Sturgess was primarily to blame for
the dysfunctional relationship: he had failed to report properly to the board
and to Mr Dunphy; he had conducted drilling and exploration operations without
approval and sometimes negligently; and he had committed the company to
unauthorised capital expenditure.
Several instances
stood out. In 2009, Mr Sturgess approved
a fracking operation at a Taranaki drill site without board approval and
contrary to professional advice. The
well was not suited to fracking. The
operation wasted one million dollars. In
respect of a 2010 seismic survey in Taranaki, Mr Sturgess unilaterally committed the company to costs of
a survey which later proved to be wasted and then in turn threw good money
after bad by trying to rework the data. In
relation to operations in Chile, there was evidence of Mr Sturgess failing to
keep the board informed of operational problems which had arisen at various
sites.
In the High Court, Mr
Sturgess said he would step down as director and was willing to sell his 13.8%
stake in the company, provided he got fair market value. Six months later in the Court of Appeal, he
wanted to hold on to his shares as a passive investor. The court was told there were already
differences of opinion over Greymouth’s dividend policy.
The Court of Appeal
ruled that the only way forward was to have Mr Sturgess exit from the company
and sell his shares. It applied the
terms of the shareholder agreement signed by each of the three investors when
the company was formed: the fair value of the shares was to be fixed by an
arbitrator; Messrs Dunphy and Masfen could purchase Mr Sturgess’ shares at this
price; if they did not purchase, Mr Sturgess was free to offer the shares to
anyone else at the same price. If Mr
Sturgess seeks to offer the shares to a third party at a lower price than the
arbitrated fair value, Messrs Dunphy and Masfen have the right to buy at this
more favourable price.
Sturgess
v. Dunphy – Court of Appeal (24.6.14)
14.026