NEW YORK, JULY 22 -- In a significant boost to Texaco Inc.'s fortunes, the Securities and Exchange Commission said today that it will support a key legal argument being pressed by Texaco in its bitter dispute with Pennzoil Co.
As expected, the SEC said it will file a brief with the Texas Supreme Court endorsing Texaco's contention that Pennzoil violated SEC rules when it agreed to a 1984 merger contract with Getty Oil Co.
A Texas jury found in 1985 that Texaco interfered with that contract, awarding Pennzoil a record $10.53 billion in damages. Earlier this year, the Texas Court of Appeals upheld all but $2 billion of the award. In April, Texaco filed for protection under Chapter 11 of the federal bankruptcy code, and the Texas lawsuit is now on appeal to the state Supreme Court.
The friend-of-the-court brief made public by the SEC today fulfilled many, but not all, of the hopes expressed in recent weeks by Texaco's lawyers. Texaco said it was "extremely pleased" by the brief.
Pennzoil officials issued a statement in Houston saying they would have no comment until they had seen the brief.
The SEC supported Texaco's view that Pennzoil violated an SEC rule called 10b-13, which prohibits anyone making a tender offer for a company's shares from purchasing stock outside the offer.
But the commission stopped short of saying, as Texaco does, that Pennzoil's violation relieves Texaco of any legal liability for its alleged interference with the Getty contract. The SEC said it would take no position on that crucial issue or any other affecting "the outcome of this case."
The 10b-13 issue, while highly technical and complex, has become centrally important to Texaco's appeal of the Pennzoil verdict. Because it involves a federal law, the issue may help Texaco press its case to the U.S. Supreme Court if the Texas high court upholds Pennzoil's judgment.
At the time Pennzoil negotiated its alleged contract to acquire Getty Oil in partnership with Gordon Getty, a major stockholder, it had outstanding a tender offer for 20 percent of Getty Oil's shares. Without withdrawing that tender offer, Pennzoil negotiated privately to purchase about 9 million shares owned by the J. Paul Getty Museum.
Texaco subsequently bought all the shares at the invitation of Getty Oil's management, and Pennzoil sued, winning its huge jury award. On appeal, Texaco has argued -- so far unsuccessfully -- that it could not have interfered with Pennzoil's contract because the agreement to buy the museum's shares made the contract void under the SEC's 10b-13 rule.
Pennzoil has responded with several arguments of its own. Pennzoil contends that Texaco has no standing to raise the 10b-13 issue because it was not a party to the contract. (In its brief, the SEC did not comment on that argument.)
Pennzoil has also argued that it could have obtained a special exemption to the 10b-13 requirements if it had asked the SEC. The commission specifically rejected that notion in its brief, saying that it was "highly unlikely" an exemption would have been granted.
Lastly, Pennzoil has said that it did not violate 10b-13 because it did not intend to defraud anyone when it purchased the museum's shares. In its brief, the SEC rebutted that argument as well, saying the force of its rule is "not limited to transactions made with fraudulent intent."