NEW YORK, DEC. 19 -- Texaco Inc. and Pennzoil Co. today signed a final settlement plan designed to end their $10.3 billion lawsuit and close the books on the costliest legal debacle in U.S. history.
Texaco will pay Pennzoil a record $3 billion in cash as soon as the deal is closed. Because Texaco is in the midst of a bankruptcy reorganization, the settlement still must be approved by two-thirds of the company's shareholders. But since Texaco, Pennzoil and committees representing Texaco's creditors and shareholders all support the deal, approval is considered highly likely.
Following a week of intensive negotiations involving armies of lawyers and financial experts, Pennzoil Chairman J. Hugh Liedtke signed the 100-page-plus settlement document just after midnight Saturday. Texaco's chief executive, James Kinnear, followed suit shortly before noon at the mid-Manhattan offices of a Texaco law firm.
"In view of all circumstances, including the reduction of Pennzoil's demand to $3 billion, we have determined that the best course of action, and the best business judgment available to us on behalf of our stockholders and employes, is to remove the legal shackles that have constrained our company," Kinnear said in a statement.
Kinnear also indicated that once the settlement becomes final, Texaco will embark on a major restructuring of its assets and businesses, which may involve the sale of some subsidiaries. Pennzoil, too, is likely to pursue a restructuring in order to deploy its massive cash windfall into new investments.
Liedtke said the settlement plan, which will be filed in bankruptcy court Monday, "offers an expeditious and sensible solution and is in the best interests of shareholders, employes and creditors."
Besides its $3 billion payment to Pennzoil, Texaco will disburse about $2.5 billion to its creditors as part of its bankruptcy reorganization. Before its legal battle with Pennzoil forced it to seek bankruptcy protection, Texaco was the country's third-largest oil company. When its restructuring is completed, Texaco is likely to emerge as a considerably smaller corporation.
The agreement signed today apparently marks the end of an extraordinary business and legal conflict that traces back to the death of one of the country's best-known billionaires, oilman J. Paul Getty, who was the chairman of Getty Oil Co. It was a bitterly contested takeover of Getty Oil in 1984 that gave rise to the lawsuit between Pennzoil and Texaco.
For its intrigue, venomous personality conflicts, and charges of duplicity and deceit, the struggle between the giant oil companies often resembled a prime-time soap opera. Even last week, when Pennzoil and Texaco sometimes found themselves allied in complex negotiations involving Texaco's creditors and shareholders, executives and advisers at the two companies found it difficult to refrain from open sniping and bickering.
The personal conflicts in the case are partly a legacy of J. Paul Getty's divided billions. After Getty died in 1976, ownership of his family company was split between his son, Gordon Getty, and the J. Paul Getty Museum. When Gordon Getty -- a semiprofessional composer and opera singer with limited business experience -- began to assert himself at Getty Oil, he triggered the events that led ultimately to Texaco's bankruptcy.
Beginning in 1982, an open, often bitter conflict between Gordon Getty and Getty Oil's professional managers made the company a takeover target. Late in 1983, Liedtke, who was raised in the Oklahoma oil patch and was an early drilling partner of Vice President Bush, made an uninvited bid for partial control of Getty Oil.
In a series of hurried meetings in New York around New Year's Day 1984, Liedtke forged an alliance with Gordon Getty. Together, they quickly bid to take control of Getty Oil. But the company's directors, angry at Gordon Getty and convinced that Liedtke was attempting to buy their company at an unfairly low price, resisted.
Following a marathon, 25-hour Getty Oil board meeting on Jan. 2 and 3, Liedtke and Gordon Getty thought they had made a deal to buy Getty Oil for about $112.50 a share. The next day, the company announced what it called "an agreement in principle" with Liedtke and Getty.
Before the final documents were signed, however, Getty Oil's management contacted White Plains, N.Y.-based Texaco and invited it to enter the bidding against Pennzoil.
A pressured negotiation ensued, and Texaco offered $125 a share on Jan. 6, defeating Pennzoil's bid. At a key moment, Gordon Getty switched his allegiance and agreed to sell out to Texaco.
Liedtke later testified that he was angered and devastated by Getty Oil's decision to spurn his offer and merge with Texaco. Houston based-Pennzoil sued Getty Oil, the Getty museum, Gordon Getty's family trust, and Texaco in Delaware state court, seeking to block the deal on the grounds that Pennzoil's merger contract had been improperly broken. The merger with Texaco was approved by a Delaware judge, however.
Liedtke decided to sue for damages. He did not want to press his lawsuit in Delaware, however, where court rules favor corporate defendants. So Pennzoil's attorneys explored moving their lawsuit to Texas, where trial courts have historically been hospitable to plaintiffs' lawyers seeking huge damage awards.
Pennzoil wanted to sue in Texas all of the parties in the Getty deal -- Getty Oil, the museum, Gordon Getty's trust and Texaco. But in a strange and costly turn of events, only Texaco ended up on trial before a Houston jury. Lawyers for the three other defendants had filed formal responses to Pennzoil's Delaware suit, meaning they couldn't be forced to move to Texas. But the law firm representing Texaco forgot to file its papers, so only Texaco faced a jury trial in Pennzoil's hometown.
Liedtke enlisted flamboyant injury trial lawyer Joe Jamail to handle the case. Texaco claimed from the beginning that the Texas political and legal connections of Pennzoil and Jamail -- who made a $10,000 campaign contribution to the first of two judges to preside over the trial -- doomed its case.
Texaco, however, shunned settlement and pushed an aggressive defense during a five-month trial in 1985. Texaco's lawyers, for example, decided not to rebut Pennzoil's testimony about damages, even though Texaco believed that Pennzoil's damage theory was seriously flawed. Jurors said after the trial that they awarded Pennzoil a record sum partly because they had been presented no other theory by which to calculate damages.
During the trial, Jamail relentlessly attacked Texaco's honesty and persuaded the jury that Pennzoil had been cheated by a conspiracy of corporate titans, Wall Street lawyers, and investment bankers. "You can send a message to corporate America, to the business world," Jamail urged the jury in his closing argument. The jurors responded by returning an unprecedented $10.53 billion verdict in Pennzoil's favor.
The huge award touched off a flurry of accusations and negotiations. When settlement talks broke down, Liedtke traded bitter epithets with Texaco's managers. New bands of lawyers were mobilized to fight the case on appeal.
Texaco's new legal team, led by David Boies, won a ruling in federal court that permitted Texaco to pursue its appeals while posting a $1 billion bond, rather than a bond equivalent to the amount of Pennzoil's full judgment. Thus secured, Texaco was convinced it could pursue its appeals without financial pressures and settlement talks languished.
Earlier this year, however, Texaco received a double blow. In February, the Texas Court of Appeals upheld all but $2 billion of Pennzoil's judgment. Then, in April, the U.S. Supreme Court struck down the ruling that had limited the amount of Texaco's appeal bond. Suddenly, Texaco was required to raise about $10 billion to continue its appeals.
The Supreme Court's ruling provoked the first serious settlement talks since immediately after the jury's verdict. Texaco offered $2 billion in cash to dispose of the lawsuit. But Pennzoil held out for $4 billion. Rather than pursue a compromise, Texaco opted to file for federal bankruptcy protection on April 12, 1987.
The bankruptcy filing brought new players into the fray -- committees of Texaco's creditors and shareholders were organized to participate in a reorganization. Meanwhile, Texaco pressed its appeal to the Texas Supreme Court. Increasingly, Texaco relied on the argument that Pennzoil's alleged merger contract with Getty Oil was invalid because it violated Securities and Exchange Commission rules.
Lawyers on all sides of the case expected that the Texas Supreme Court would hear Texaco's appeal, although few expressed certainty about how the court would ultimately rule. But on Nov. 2, the Texas high court announced a stunning decision to uphold all of Pennzoil's judgment without a hearing.
At that point, Texaco's only remaining appeal was to the U.S. Supreme Court, which hears few of the cases brought before it. Pressure for settlement began to mount among Texaco's creditors and shareholders. Trans World Airlines Inc. Chairman Carl C. Icahn bought a major stake in Texaco and began to shuttle back and forth between Pennzoil and Texaco, pressing for a deal.
The heart of the settlement plan signed today -- the $3 billion payment by Texaco to Pennzoil -- was agreed to by most of the parties a week ago. But it took five days of intense and sometimes angry negotiations to resolve complex issues concerning how the settlement would be structured and financed.
Lawyers who have been embroiled in the legal battles for some or all of the past five years sounded wistful today as they contemplated the end of the dispute. "I can't imagine going back to any corporate work that would be as interesting as this," one lawyer remarked. Another quipped, "I guess I'll have to find some honest work."
David Boies, Texaco's lead attorney, said that when chief executive Kinnear signed the settlement document in a law firm conference room this morning, "there was definitely a sense that this was, if not absolutely the final step, the beginning of the end."