Texaco Case Will Change Future of Takeover Battles : Companies to Reduce Use of Aggressive Counter Bids in the Future, Experts Contend

The titanic dispute between Pennzoil and Texaco is likely to have enduring effects on the law and the conduct of corporate business, even though the case was settled before the U.S. Supreme Court could pass final judgment.

Usually freewheeling companies will maneuver more cautiously in takeover battles, remembering how Texaco was punished for luring away Getty Oil Co. from a planned alliance with Pennzoil, legal experts predict. The $10-billion damage award that a Texas jury gave Pennzoil may encourage other juries to apportion large awards.

And because many will see the $3.1-billion settlement as favorable to Texaco, the case may persuade other beleaguered corporations to seek refuge in voluntary bankruptcy, as Texaco did last April, scholars say.

The case has polarized legal experts, partly because so many of them have joined one of the two sides to act as litigators or witnesses in the battle. But experts on both sides agree that one legacy of the case will be to reduce the use of aggressive counter bids when companies are competing to take over a target firm.

“Corporations that want to play the takeover game will know that once a contract is concluded they are no longer free to make a better offer,” said Laurence A. Tribe, a Harvard law professor who served on Pennzoil’s team when the dispute was before the federal courts.

Pennzoil brought the suit contending that it had an agreement in principal with Getty, though the two had not signed final papers when Getty broke off to be acquired by Texaco.

Advocates on the other side agreed. “Even the settlement won’t change the wariness the judgment produced in the corporate world,” said Alan R. Bromberg, a law professor at Southern Methodist University who took part in Texaco’s case. “Now that they know how swiftly doom can descend, they’ll be more conscious of how they try to top somebody else’s offer.”

The case is likely to effect the conduct of business even outside the takeover game, some lawyers say, because it advances a legal trend to consider many corporate actions breaches of tacit contracts, rather than legitimate business maneuvers. For example, some courts have awarded damages for commercial landlords who have lured away competitors’ tenants.

The $10.3-billion award, and the $3.1-billion settlement may exacerbate juries’ tendencies to increase the size of their awards, some lawyers say. Of course, under court rules, lawyers arguing similar cases in the future won’t be able to cite the size of Pennzoil’s award.

Yet the case has been surrounded by such notoriety that some jurors may remember it. “There is a sort of one-upmanship that may come into play,” said William V. Dorsaneo III, an expert on Texas state law and a lawyer who helped plead Texaco’s case. “Some jurors like the idea of handing down the biggest settlement--of writing the last word.”

Bigger Beneficiary

The case will reinforce the views of companies that have come to view a voluntary bankruptcy filings as a useful tactic for companies facing huge financial liability.

Manville Corp., once the leading maker of asbestos, and A. H. Robins Co., the maker of the Dalkon shield birth-control device, sought bankruptcy court protection under pressure of liability claims. But some may argue that with the $3-billion settlement Texaco was more clearly a beneficiary of the tactic than the either of those companies.

Also, the bankruptcy court is expected to shield the Texaco directors from personal liability in the case. The directors were reportedly reluctant to offer Pennzoil a large settlement in earlier stages of the dispute, for fear that they would be personally vulnerable to lawsuits from shareholders facing big losses.

Some observers contend that the case will also step up political pressure for changes in the Texas court system, which has drawn criticism from others as well as Texaco in the dispute.

Among other complaints, the critics have charged that Texas justice is partial to local companies--such as Pennzoil--because of the way judges are elected and solicit campaign contributions. Critics have complained that the state court judge who first heard the case tipped the balance in Pennzoil’s favor by the way he worded his charge to the jury.

Challenge Denied

“What happened in Texas with this case was a joke, but not a very funny one,” said Paul J. Curran, a Texaco attorney. “The legacy of this case is that some companies will simply not want to conduct transactions in Texas.”

The Texaco-Pennzoil case reinforced a legal rule that companies cannot appeal cases to the federal courts until they have exhausted state court appeals. U.S. Supreme Court last year denied Texaco’s attempt to challenge the imposition of a huge bond by the Texas courts, saying Texaco had not exhausted state court appeals.

The case has had an effect on securities law by clarifying the Securities and Exchange Commission view on the conduct of tender offers.

The SEC filed a friend-of-the-court brief in the case last spring, contending that Pennzoil had made improperly made a tender offer for Getty Oil stock while it already had separate agreements to purchase stock from some shareholders. The commission has opposed such separate deals on grounds that they can favor big shareholders at the expense of small ones.