J. Hugh Liedtke, chairman of Pennzoil Co., is the Thomas E. Dewey of the oil business.
On Jan. 5, 1984, he went to bed believing he had won the crowning prize of his career. It was even announced in the newspapers, just as some papers reported Dewey's victory over Harry S Truman. When Liedtke woke up, he learned that the prize had been snatched away.
The difference for Liedtke, however, is that he has an opportunity to exact revenge from the forces that did him in. He gets his chance Monday in a Houston courtroom, where trial is scheduled to begin in Pennzoil's $14 billion breach-of-contract suit against Texaco Inc.
The deal Liedtke thought he had nailed down 18 months ago was a complex $5.3 billion transaction that would have given Pennzoil 43 percent ownership and managerial control of the much larger Getty Oil Co. Instead, Pennzoil got nothing: Less than 48 hours after Getty Oil Co. issued a press release announcing the Pennzoil deal, Texaco acquired all of Getty Oil for about $10 billion, leaving Liedtke fuming on the sidelines.
How that happened, and whether Texaco should be forced to pay Pennzoil $14 billion in actual and punitive damages as a result, is the subject of the trial. Pennzoil, which, despite its name, has its headquarters in Houston, will be trying to persuade a Texas jury that Texaco, which, despite its name, is based in Westchester County, N.Y., used its money and its power to override a binding contract -- the big bad boys from the East trampling on the code of the oil patch.
Feelings are running high on both sides. Richard Miller, Texaco's lawyer, dismisses Liedtke -- a founder of the old Zapata Petroleum Corp. who talks proudly of his career as a wildcatter -- as "the kind of guy who doesn't want anybody else to make any money." Liedtke says in a deposition filed in the Houston court that Texaco "evidently thinks it is rich enough and strong enough and powerful enough to walk over people with callous disregard."
More than honor is at stake in this David-and-Goliath battle, at least for Pennzoil. The company had assets of $3.2 billion at the end of the 1984; if it should win even a fraction of what it is asking in court, the outcome could have a substantial effect on its balance sheet and stock price.
Texaco, on the other hand, has nothing to win and relatively little to lose besides cash and image. No matter what the Houston jury decides, Texaco is -- and will remain -- the owner of Getty Oil, whose value far exceeds what Texaco could lose in court.
In the view of Joseph D. Jamail, the flashy, controversial lawyer who represents Pennzoil, the value of Getty is so great that it was worth it for Texaco to take the risk of losing a damage suit.
"If you figure Texaco's average cost of finding and producing oil, it was $25 or more a barrel for the past four years or so. That's one of the worst records in the industry," Jamail said. "They got Getty's reserves for $5 a barrel. That's a saving of more than $47 billion to Texaco. So what if Pennzoil hits them for the whole $14 billion we're asking? They can afford it."
Pennzoil's basic claim is that its agreement to form a partnership with Gordon Getty, son of founder J. Paul Getty and head of the family trust, was a binding contract, even though it never was finalized. That agreement would have permitted Pennzoil to acquire control of Getty Oil for an equivalent price of $112.50 a share. Pennzoil says that Texaco, which acquired Getty Oil with its last-minute offer of $125 a share, illegally sabotaged that contract.
Pennzoil originally filed suit in Chancery Court in Delaware, where both companies are incorporated. A judge there refused to block Texaco's acquisition of Getty Oil, but Pennzoil officials like to point out that he found "a likelihood" that Pennzoil could prove that there was a valid contract. The Delaware judge also said, however, that Pennzoil probably can't prove "that Texaco intentionally induced the other parties to breach a contract which Texaco knew they already had with Pennzoil."
Stymied in Delaware in its attempt to force Getty Oil to go through with the deal, Pennzoil sued Texaco in Texas. In the Houston court, Pennzoil can have a jury trial, which it could not get in Delaware Chancery Court, and can ask for punitive damages, which the Delaware court could not have awarded.
"Pennzoil wouldn't have a ghost of a chance in any other court," said Miller, Texaco's lawyer. "They put out all this stuff about how in the oil patch 'my word is my bond,' all that bull about the code of the oil business. It probably never was true. Liedtke talks about a deal based on a handshake, not handcuffs. The problem is, he never saw anybody from the Getty board of directors to talk to, let alone shake hands with."
At the start of this drama, Getty Oil was an independent company whose stock was trading at about $80 a share. The J. Paul Getty Museum in California owned 11.8 percent of the stock through a bequest from the company's founder, J. Paul Getty. Gordon Getty, a son of J. Paul Getty, a trustee of the museum and a director of Getty Oil, controlled 40.2 percent as trustee of the Sarah C. Getty Trust.
On Dec. 28, 1983, Pennzoil opened the bidding for Getty with a tender offer for up to 16 million shares, or just over 20 percent of the stock, at $100 a share. Two days later, representatives of Pennzoil and of Gordon Getty met in New York, beginning a week of high-powered negotiations that resulted in a three-way agreement: Pennzoil and Gordon Getty would form a joint venture to acquire all of Getty Oil, splitting the ownership four-sevenths for Gordon Getty, three-sevenths for Pennzoil. The museum would sell its shares to this partnership for $110 a share and, in the words of the Delaware court, "All remaining Getty shareholders other than Pennzoil and the Trustee Gordon Getty would be eliminated for the price of $110 per share."
"Nobody has ever disputed that Pennzoil made a deal with Gordon Getty," Texaco's Miller said. "But that doesn't mean they made a deal with the company. They worked out a plan in secret and dropped it on the company. It's as if they made a deal to sell your house and didn't tell you about it."
Getty Oil's directors learned about the arrangement at a tumultuous New York meeting that began at 6 p.m. on Jan. 2 and went on, with brief recesses, for 25 hours. The company, Gordon Getty and the museum each were represented by a team of lawyers and investment bankers.
Pennzoil says the minutes of that meeting show that Getty Oil's directors voted 14 to 1 to approve the agreement once the price was increased to an equivalent $112.50 a share. Texaco and several of the Getty directors say they were voting only on the price to be paid to the public shareholders, not on the arrangement itself.
That dispute is at the heart of the legal case. It may be difficult to resolve because the accuracy of the minutes of that frantic directors' meeting is in dispute. Ralph Copley, Getty Oil's general counsel, took notes by hand. He drafted the minutes three times on a word processor and then destroyed his notes.
The interpretation of the minutes is crucial because Pennzoil's case rests on the intention of the participants. Under New York law -- which the lawyers say will apply even in the Texas court, because all the negotiations took place in New York -- a contract is binding if the parties to it considered themselves bound by it, even if all details have not been worked out and a final document has not been signed.
On the morning of Jan. 4, after the directors' meeting, a press release issued at Getty Oil's Los Angeles headquarters said that the company, the Sarah C. Getty Trust and the museum "have agreed in principle with Pennzoil Company to a merger of Getty Oil and a newly formed entity owned by Pennzoil and the Trustee."
To Pennzoil, that announcement is strong evidence that the company and Gordon Getty considered the arrangement final, even though lawyers and investment advisers still were haggling over the language of a final contract. The press release also said that "the transaction is subject to execution of a definitive merger agreement" -- which to Texaco means the deal wasn't final but to Pennzoil was only a pro forma statement of the kind routinely included in such announcements.
What is not in dispute is that on that same day, Jan. 4, Getty Oil's investment banker, Goldman Sachs & Co. -- which, according to the minutes, had felt strongly that Pennzoil's offer was inadequate -- approached Texaco in search of a better price than Pennzoil's $112.50.
Texaco Chairman John J. McKinley moved quickly. He spoke to representatives of Getty Oil, Gordon Getty and the museum -- but not to Pennzoil. The next day, he convened a meeting of Texaco's directors to approve a counteroffer of $125 a share. Gordon Getty, instead of joining with Pennzoil to buy Getty Oil, sold the trust's shares to Texaco.
"I have no doubt that Texaco deliberately set out to use what are said to be its superior financial resources in an effort to wrest the acquisition of an interest in Getty from Pennzoil and to acquire all of the Getty for itself," Delaware Chancery Judge Grover C. Brown wrote in denying Pennzoil's request to block the sale. But he added that it is not so clear that Texaco -- which had been assured by Getty Oil directors that no final deal had been made -- "was deliberately attempting to persuade them to breach that agreement."
As Brown noted, when McKinley called Getty Oil Chairman Sidney Petersen, he was assured that "that fat lady hasn't sung" -- the opera wasn't over.
Pennzoil is suing only Texaco, not Gordon Getty or the museum, because Texaco agreed to indemnify them against any damage suit. According to Pennzoil's lawyers, that fact alone indicates that Texaco knew it was inducing them to violate a valid contract.
The trial is expected to last at least six weeks.