NEW YORK, DEC. 18 -- Texaco Inc. and Pennzoil Co. tonight reached an "agreement in principle" to settle their $10.3 billion legal dispute, according to Texaco attorney David Boies.
The deal calls for Texaco to pay Pennzoil about $3 billion as part of a reorganization plan that, if endorsed by a bankruptcy judge and two-thirds of Texaco's shareholders, would end Texaco's bankruptcy and its four-year-old legal battle with Pennzoil.
Approval of the reorganization is considered likely since committees representing Texaco's creditors and shareholders have expressed support for the settlement.
A formal announcement about the settlement has tentatively been scheduled for Saturday, according to the lawyers involved in the settlement talks.
The oil giants first locked horns over a contested 1984 takeover of Getty Oil Co. Pennzoil sued Texaco for interfering with a merger contract and won a record $10.53 billion verdict from a Houston jury in 1985.
Texaco accused Pennzoil of using campaign contributions and political influence in Texas to shepherd its mammoth award through the state's appellate courts.
Last month, the Texas Supreme Court upheld Pennzoil's judgment, which now stands at $10.3 billion, without granting Texaco a hearing.
For its part, Pennzoil said that Texaco's management handled the lawsuit recklessly, without regard for the best interests of the company's shareholders and employes.
After the Texas high court's decision in November, Texaco's only remaining appeal was to the U.S. Supreme Court, which hears only a small fraction of the cases brought before it.
Texaco's dimming hopes for a reversal of the Pennzoil verdict increased the pressures for settlement.
At the heart of the deal of the agreement in principle announced tonight is the payment of about $3 billion by Texaco to Pennzoil.
On numerous occasions in the past, Pennzoil and Texaco have come close to settlement only to have the deals fall apart over disagreement about how much Texaco should pay. This time, however, the amount of the settlement was agreed upon well before other details were worked out, according to sources familiar with the negotiations.
Attorneys and executives at the two companies spent much of today locked in talks at the Manhattan offices of a law firm representing Texaco and at the Waldorf Astoria Hotel, where Houston-based Pennzoil maintains a suite.
The principal snag in the negotiations today was a disagreement between Pennzoil and Texaco over how to handle Texaco's pending legal appeal to the Supreme Court, according to sources.
Pennzoil Chairman J. Hugh Liedtke was said by sources to have called the dispute over the Supreme Court appeal a "deal-breaker" earlier this morning.
But sources familiar with the talks said progress on the issue was made later in the day, and a compromise was apparently reached tonight.
(Boise's use of the phrase "agreement in principle" to describe the preliminary settlement between Texaco and Pennzoil was ironic since the meaning of that phrase -- for example, whether it meant an enforceable contract exists -- was at the center of the original jury trial in Houston.)
The settlement reached tonight will take the form of a bankruptcy reorganization plan filed by Texaco and supported by Pennzoil and Texaco's creditors and shareholders. The creditors and shareholders committees were poised tonight to endorse an accord, according to people familiar with the committees' position.
The creditors, who are mainly holders of Texaco bonds, had earlier held out for guarantees by Texaco that it would not take on substantial debt once it emerged from bankruptcy. Such debt might lower the value of Texaco bonds.
The dispute has been resolved by Texaco's agreeing to make a statement that it will make its best effort to reduce debt levels, sources said.
Similarly, shareholder demands for seats on Texaco's board of directors have been dropped, sources said, and major Texaco shareholder Carl C. Icahn has ended his quest for removal of Texaco's so-called poison pill antitakeover provisions. Icahn was still seeking other changes in Texaco's corporate charter today, however, according to sources.
It was unclear tonight whether any such changes would be included in the rorganization plan to be filed by Texaco.
The dispute between Texaco and Pennzoil over a Supreme Court appeal of their lawsuit centered on whether Texaco would agree to attempt to dissuade the U.S. solicitor general, the Securities and Exchange Commission and other federal agencies from intervening in the appeal once a settlement was final, sources said.
Pennzoil feared that if such intervention was announced before a shareholder vote on the settlement, the deal might be scuttled, the sources said.
The firms apparently agreed to address that problem by petitioning the Supreme Court for an extension of their appeal filing deadlines. An extension would allow time for a shareholder vote before the court decision.
Sources said the extension would fall to a single Supreme Court justice, Byron White, who handles such matters when they arise from the Texas courts.