In its hallowed "hang 'em high" tradition, a Texas jury on Tuesday assessed an unprecedented $10.5 billion judgment against Texaco Inc. for what the jury concluded was an improper and high-handed move by Texaco to take Getty Oil Co. away from its original suitor, Pennzoil Co.
If the full award stands -- and that is considered unlikely by many onlookers in the legal and investment communities -- it would be by far the biggest penalty tagged on a company in a corporate lawsuit, large enough to push Texaco into or close to bankruptcy.
By chance, on the same day, the Supreme Court of Delaware issued a ruling upholding a powerful defensive tactic that is increasingly being adopted by companies to protect themselves against hostile takeovers.
Of the two, the decision by the Houston jury was clearly the most spectacular. Judging by the comments by some of the jurors, the size of the award reflected their anger at their impression of Texaco's conduct in the quest for Getty last year. Pennzoil had a handshake agreement to take control of Getty, celebrated with champagne and trumpeted with a press release -- but not formalized with a final contract signed by Getty's directors.
Texaco seized that opportunity and topped Pennzoil's offer with its own, and took over Getty for $10 billion, a perfectly legal, upright piece of opportunism, in Texaco's view.
But the jurors didn't think so. Richard Lawler, the jury foreman, told reporters: "We won't tolerate this sort of thing in corporate America." And juror Jim Shannon called it "a $10 billion verdict to corporate America telling them that the idea that in business anything goes is dead and corporations will be held accountable." Texaco's prospects may not have been helped by its image as a big, East Coast suitor with the fat bankroll, taking the home-town girl away from the homelier, less-well-off Pennzoil.
"Their milestone verdict says the public demands integrity and morality from the entire business community," said Pennzoil Chairman J. Hugh Liedtke.
It may also say that some of the public has a problem with the high-rolling pace of corporate mergers and hostile takeovers, of which the Texaco-Pennzoil battle is just one example.
The Texaco verdict doesn't change the legal framework affecting mergers and takeovers, because the fight there was over the sanctity of a handshake contract, not the rules of mergers.
But the much less spectacular ruling by the Delaware Supreme Court on Tuesday does cast a large shadow over the regulators and members of Congress who are struggling to come to terms with the merger-takeover boom.
The issue in the Delaware Court was the legality of the "poison-pill" defense against hostile takeovers. To fend off such an attack, the directors of Household International Inc. last year changed the corporation's rules to create such a pill, intended to make a hostile takeover too costly to consider. The pill provision would allow Household shareholders to buy $200 of a raiding corporation's stock for only $100 in the event of a hostile merger.
A former director of Household sued, charging that the pill provision prevented takeovers that might bid Household's stock up, benefitting shareholders, but the Delaware court concluded Household's action was a "reasonable defensive mechanism" by directors to protect the company, consistent with the leeway given directors' to see to the shareholders' long-run interests.
Because so many corporations have their legal headquarters in Delaware, the rulings of its courts have a long reach in the business community.
If Household's legal opponents are right, the vindication of the pill defense by the influential Delaware court will lead to its widespread adoption by companies, greatly raising the odds against successful takeovers -- at the shareholders' expense. Coincidently, Pennzoil coupled its initial victory over Texaco by adopting its own poison-pill provision -- intended to prevent a corporate raider from capturing Pennzoil and running off with the $10 billion it hopes to collect from Texaco.
Household's lawyers argue, on the other hand, that recent Delaware court rulings don't give blanket protection against hostile takeovers. The poison pill is a powerful defense, but not all-powerful, they say: Corporate directors who ignore shareholders' interests by responding selfishly or imprudently to takeover offers can still be held accountable in the courts.
The issue is a good example of the unresolved questions raised by the surge of hostile takeovers and mergers. Are they good for the economy overall? Should the Securities and Exchange Commission impose new regulations to define how the game is to be played? If so, what rules are needed to protect shareholders and assure that the gains exceed the costs?
In March of 1984, the SEC did propose new regulations to reform the merger business, but has backed away from them since then while it continues to study the issue. The SEC's inaction is causing increasing irritation among some members of Congress and the business community, who want a more decisive response from the regulatory agency.
SEC Chairman John S. R. Shad has promised Congress to complete a review of the takeover issue by the end of the year, none too soon for Rep. Timothy E. Wirth (D-Colo.), chairman of the House subcommittee on telecommunications, consumer protection and finance. "There remains a great deal of public and congressional concern about current takeover activity," said Wirth in an Oct. 3 letter to Shad.
The Houston verdict may be another echo of that concern.