SEC Gives Texaco Big Boost in Its Appeal of Award to Pennzoil
Breathing new life into Texaco’s uphill appeal of the $10.3-billion court award that forced the oil titan into bankruptcy, the Securities and Exchange Commission on Monday took the highly unusual step of intervening in the Texaco-Pennzoil dispute over the rights to Getty Oil.
In a letter sent to both sides late Friday, the SEC said it will file a “friend-of-the-court” brief around July 20, asking the Texas Supreme Court to hear Texaco’s appeal. The brief will focus not on the heart of the case--whether Pennzoil and Getty already had a contract when Texaco won Getty away with a sweeter offer--but rather on whether Pennzoil violated a securities rule during the negotiations and thus invalidated the premise of its lawsuit.
Although the SEC refused Monday to disclose either the brief’s contents or its rationale for the uncharacteristic step, securities lawyers said it may not matter whether the SEC takes an outright stand on the issue in contention or simply seeks a clarification.
The mere fact that it is intervening, securities experts said, vastly strengthens Texaco’s case by calling attention to an issue that Texaco regards as one of its strongest cases for winning on appeal.
“It’s not normal for the SEC to intervene, especially in a state court case,” said John Pritchard, a New York securities lawyer who successfully defended Indiana’s securities laws governing takeovers in a landmark U.S. Supreme Court ruling earlier this year. “This has to be seen as altering the mix in Texaco’s favor in the appeal.”
The federal agency filed 32 such briefs last fiscal year. But the vast majority sought clarifications of federal disputes. What makes this case “so unusual,” former SEC New York chief Ira L. Sorkin said, is the agency’s decision to intervene in a state court case between private litigants.
“The only thing I can figure is they consider this case to have such significant ramifications just in terms of size, and the Texas Supreme Court may be the last show,” Sorkin said.
Texaco already has lost two rounds in the Texas courts and has petitioned that state’s highest court--the Texas Supreme Court--to hear its appeal. Regardless of what happens there--and it hasn’t any obligation to hear the case--the U.S. Supreme Court is the next, and last, rung on Texaco’s appeals ladder. But many securities lawyers consider it a long shot that the U.S. Supreme Court will find a federal issue in this case that would permit it to hear the dispute.
The rule in contention is called 10(b)13. It prohibits anyone who has made a tender offer for a company from making any private agreements to buy the target company while the tender offer is pending. In this way, the SEC discourages corporate suitors from making “sweetheart deals” with big shareholders at the expense of smaller ones.
At the time it agreed to buy Getty Oil stock, Pennzoil also had outstanding a tender offer for Getty shares owned by the public. Texaco contends that Pennzoil thus was in violation of rule 10(b)13 and so had an invalid contract with Getty--if it ever in fact did have a contract, which Texaco also disputes.
Pennzoil has argued in court that it could have received a routine exemption from this securities rule but didn’t think it necessary and that, in any event, Texaco waived its right to make this an issue when it failed to adequately raise the matter during the 1985 trial.
The SEC’s decision to intervene caught virtually everyone by surprise.
Securities lawyers were stunned. Texaco executives were both relieved and delighted. And Pennzoil, while expressing confidence “that the issue has been properly considered in the trial court and the court of appeals,” was clearly confounded.
“They dropped a hand grenade on us,” one member of the Pennzoil team said.
Texaco acknowledged that it had solicited a friend-of-the-court brief from the SEC--as it had from several labor unions and state and federal officials after it lost the first round in Texas. Several states, including New York and Delaware, did intervene at the appeals court level, but the SEC decided against it.
Texaco apparently had given up on the SEC having a change of heart.
“It’s extraordinary,” said one Texaco executive. “It’s a rocky road when you can’t even get anybody to listen to you.”
Texaco’s long battle with Pennzoil has grown increasingly arduous. Many who have followed the case since the November, 1985, jury award had begun predicting that Texaco’s only hope was to get a U.S. Supreme Court hearing on the facts of the case. (Earlier this year, the Supreme Court ordered Texaco to take a related dispute--over the size of a bond it had to post to appeal its case in Texas--back to Pennzoil’s home turf, a ruling that prompted Texaco to seek refuge in the bankruptcy courts.)
While not admitting defeat, the White Plains, N.Y., firm had grown increasingly frustrated over its failure to persuade the Texas courts to consider evidence that Texaco believes is crucial to its case.
For example, the Texaco-Pennzoil trial judge refused to admit any evidence that the Pennzoil deal may have violated the 10(b)13 securities law on grounds that jurors shouldn’t hear legal opinion.
And the Texas appeals court accepted Pennzoil’s argument that the securities issue is “elaborate and strained” and that Pennzoil could have received an SEC exemption simply for the asking.
“I guess all the shouting we did about this finally paid off,” one Texaco executive said. “It didn’t surprise any of us that the SEC would stand back until the point where they thought it might be too late. I guess that’s the point we’re at.”
