Shell Petroleum, Inc. v. Smith

The Royal Dutch Petroleum Company (Royal Dutch) controlled a majority of the stock of Shell Oil Company, Inc. Shell Petroleum, Inc. was the successor to SPNV Holdings, Inc. (collectively, Holdings) (defendant), which Royal Dutch created to acquire Shell Oil’s remaining shares. After completing a $58-per-share tender offer, Royal Dutch controlled 94.6 percent of Shell Oil’s stock. Royal Dutch next pursued a short-form merger in which Shell Oil’s remaining shareholders would receive $58 per share, plus $2 per share if they waived their appraisal rights. In connection with the merger, Holdings distributed discounted-cash-flow (DCF) analyses for Shell Oil’s reserves. However, the 1995 DCF analysis erroneously failed to account for approximately 295 million barrels of reserves in the United States. Due to this error, the DCF analysis understated Shell Oil’s projected cash by approximately $1.1 billion (which translated to $3–$3.45 per share) and incorrectly indicated that the reserves had declined between 1984 and 1985. Raymond Smith and other Shell Oil minority shareholders (plaintiffs) sued Holdings, alleging breach of the fiduciary duty of candor. After a trial, the chancery court concluded that the 1995 DCF analysis was materially false and that Holdings was liable for misleading the minority shareholders because Holdings controlled the preparation and dissemination of the 1995 DCF analysis. Holdings appealed, arguing that the error was immaterial because it understated Shell Oil’s reserves by only 5.5 percent, which would not cause a reasonable shareholder to change his mind about seeking an appraisal. However, Shell Oil had previously touted its discovery of 220 million barrels of oil in the Gulf of Mexico as a major find, and the Wall Street Journal reported this discovery on its front page. Additionally, Holdings argued that the error was immaterial because a reasonable shareholder expected some margin of error in a DCF analysis. Finally, Holdings argued that it was not liable for Shell Oil’s error just because it was Shell Oil’s majority shareholder.