A shareholder derivative lawsuit was filed in a New Jersey state court on Friday by two pension funds that accuse Royal Dutch/Shell Group, former and current executives and auditors PricewaterhouseCoopers and KPMG of failing to properly monitor company management.
The lawsuit was filed in the Superior Court of New Jersey, Middlesex County on behalf of the UNITE National Retirement Fund and the Plumbers and Pipefitters National Pension Fund, and it claims the company violated the new Sarbanes-Oxley corporate reform rules.
The pension funds are not seeking direct reimbursement for stock market losses, rather it wants executives of the London-based major to return any bonuses and severance payments that reflected inflated performance. It also wants governance changes that would move Shell from a dual board of directors to a single board and would give shareholders the right to nominate at least three directors.
According to the Wall Street Journal, the lawsuit, if it is won, would break new ground by explicitly requiring companies to correct corporate governance problems. Robert Monks, a founder of Institutional Shareholders Services and a consultant in the new lawsuit, told the Journal that “the convoluted corporate structures of the companies known collectively as the Shell Group were a key contributor to the oil reserve revision fiasco earlier this year.”
Monks said “the inability to have coherence in the governing boards is one reason the company suffered these damages and has to be remedied.”
There have been about 20 lawsuits filed against Shell since it began reclassifying its oil and gas reserves in January. However, the lawsuit filed on Friday is the first filed in a New Jersey state court; the others were filed in federal court. The 172-page lawsuit also is one of the first in the United States to target foreign executives under Sarbanes Oxley, and the first to accuse the auditors of malpractice.
Since the beginning of this year, Shell has disclosed in four separate instances that it overstated oil and gas reserves by a total of 4.5 billion boe, or 22% (see Daily GPI, April 13). The Department of Justice launched a criminal probe into the accounting in March (see Daily GPI, March 25).
According to Reuters, plaintiffs’ lawyer William Lerach said, “Our clients view this as a massive oversight failure by the boards of directors. It is not a class action suit on behalf of defrauded investors; it attempts to recover from directors the damage their misduties caused the company.”
In related news, Shell disclosed Friday that it paid former chairman Philip Watts a lump sump severance payment of almost $2 million. Watts resigned in March in the wake of the energy reserves scandal (see Daily GPI, March 4). Shell said no director’s fees were paid to Watts for the period between his resignation and normal retirement date, that he received no performance-related annual bonus for 2003 or 2004, and that he forfeited some stock options and share grants. The exercise term of Watts’ remaining 2.847 million stock options has been shortened, so that they expire five years after his resignation or earlier.
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