Pennzoil and Texaco Reach Tentative Pact
The largest civil court case in American history was tentatively settled out of court for $3 billion Friday night as Texaco and Pennzoil finally put aside three years of intense wrangling and agreed that awaiting a U.S. Supreme Court ruling on their $10.3-billion feud over Getty Oil is in neither’s best interest.
The tentative agreement is the cornerstone of a settlement plan that dictates how Texaco will emerge from bankruptcy proceedings.
By 1 a.m. EST today, the proposed settlement had not been signed by any of the parties or filed with the U.S. Bankruptcy Court. But sources for Texaco and Pennzoil said that all issues had been resolved and lawyers were putting the finishing touches on the agreement.
An announcement was tentatively scheduled for this morning, officials said.
Interest Payment Issue
The last unresolved issue--when Texaco would start making interest payments to Pennzoil--was settled late Friday in law offices in mid-town Manhattan.
Sources said the interest issue was resolved in Texaco’s favor and the firm would not have to pay interest, as much as $800,000 a day, until late March, rather than from the day the settlement is filed.
Before it was over, the case had forced the nation’s second-largest oil company into bankruptcy court, forced the U.S. Supreme Court to settle a jurisdiction feud that arose after Texaco derailed Pennzoil’s planned merger with Getty Oil Co., and cost both Texaco and Pennzoil hundreds of millions of dollars in legal fees alone. Even though the case was tried in Texas, the alleged wrongdoing had occurred in New York, and all parties had agreed that New York law prevailed.
But it was the enormous verdict that captured the nation’s attention. On Nov. 19, 1985, a Texas state court jury decided that by losing Getty to Texaco, Pennzoil had been wronged to the tune of $10.53 billion--$7.53 billion in actual damages and another $3 billion in punitive damages.
Crying “frontier justice,” critics around the country staged fierce protests and cautioned that juries everywhere would start awarding outlandish judgments if this verdict were allowed to stand. As for Texaco, it warned that a bankruptcy filing might be imminent.
No Longer Fluke Case
Three weeks later, Judge Solomon Casseb affirmed the judgment, and suddenly the case was no longer the fluke it had seemed. A Texas appeals court and the Texas Supreme Court would later uphold the lower-court decision.
Before Texaco could work on an appeal, however, it had a more pressing matter. Under Texas law, Texaco was required to put up a bond in the amount of the judgment before it could appeal. Unwilling to do so--but with the U.S. Supreme Court saying it must--it filed last April for protection from its creditors under Chapter 11 of the U.S. bankruptcy code.
After that, the battleground switched to the bankruptcy courts. And in recent weeks, the fate of the bitter feud has been largely in the hands of committees appointed by U.S. Bankruptcy Judge Howard Schwartzberg to represent the interests of Texaco’s shareholders and creditors.
The battle has been acrimonious from the start. Personal animosity between Pennzoil Chairman J. Hugh Liedtke and his cadre of Texans and Texaco top executives James W. Kinnear and Alfred DeCrane and their team of New Yorkers has kept the focus more on public name-calling since the multimillion verdict two years ago than on efforts to settle the case. For more than 18 months, neither side would budge more than few million dollars despite countless efforts by third parties to bring the two sides to the bargaining table.
Even in the waning hours of negotiations--long after the settlement price was set and only minor issues remained--bad feelings between the two sides frequently threatened to jeopardize the entire pact.
Friday morning, for example, when only one major issue--when the clock on interest payments would start running--separated the parties from a settlement, sources said that Texaco negotiators suddenly decided that the company couldn’t live with a provision that until then hadn’t been in dispute: A demand by Carl C. Icahn, Texaco’s largest shareholder, and the committee representing Texaco’s shareholders that anti-takeover measures voted in by Texaco shareholders in 1985 now be put to another shareholder vote.
Infuriates Key Stockholders
Texaco’s last-minute objection infuriated key shareholders and for a time threatened to deadlock the negotiations--even though they were inches from a pact that both committees, Icahn, Texaco and Pennzoil found to their liking.
Besides the personal animosity, the negotiations were further hampered by the fact that Icahn and the two Texaco committees each had a different agenda.
The shareholders’ committee tapped by the bankruptcy court to help steer Texaco through bankruptcy proceedings was from the start an advocate of Texaco’s belief that the case should be taken to the U.S. Supreme Court and that the companies should never settle. The committee also fought passionately for 12 new seats on Texaco’s 14-member board--a demand that neither Texaco nor Icahn could abide.
Icahn, while objecting to board representation for shareholders, did demand certain other shareholder rights that the shareholders’ committee later embraced but that Texaco fought.
And the creditors’ committee strenuously argued for settlement all along--as well as for assurances that Texaco wouldn’t be allowed to take on huge debts to finance its reorganization and emergence from bankruptcy.
The impasse was finally broken with two breakthroughs in early December.
First, Icahn bought out Texaco’s then-largest shareholder, Australian financier Robert Holmes a Court. And with Texaco’s largest block of stock in hand, the man who also owns Trans World Airlines set off on a mission of shuttle diplomacy to lure Texaco and Pennzoil to the bargaining table--securing for himself a place in history and a fat profit. He also owns a sizable interest in Pennzoil and both stocks have risen sharply since he bought in.
Texaco wouldn’t budge from its $2-billion settlement offer despite Icahn’s overtures. But Pennzoil did listen to the investor’s argument that waiting for the final court ruling--even with a $10.3-billion judgment in hand and three courts deciding in its favor--wasn’t in its interest because the outcome wasn’t certain and by then, Texaco’s financial state could be severly weakened.
An Agreeable Compromise
Liedtke and Icahn agreed that $3 billion was an agreeable compromise. And with that new offer on the table, the two sides got down to their first serious negotiations in three years of combative discussions.
Meanwhile, the creditors’ committee successfully argued to U.S. Bankruptcy Judge Schwartzberg at a Dec. 2 hearing in White Plains, N.Y., that Texaco shouldn’t have a corner on devising its own plan of reorganization if Pennzoil and the two Texaco advisory committees could set aside their differences and design their own plan.
Schwartzberg’s decision to let the three parties try their hand at a separate settlement and reorganization plan gave the equity committee new powers and--with Icahn’s separate efforts--broke the deadlock.
The shareholders’ committee was the first to join Pennzoil’s call for a $3-billion settlement, followed by the creditors’ committee three days later.
Texaco begged off. But by then it still seemed certain that Pennzoil and the two committees could work out a pact that Judge Schwartberg would agree to put to a vote of Texaco shareholders. With approval from at least two-thirds of the shareholders, the settlement could be pushed through without Texaco’s approval.
A day later, however, the pact was suddenly in danger of unraveling despite a firm four-way committment to the $3-billion price tag.
The fly in the ointment was Icahn, the same man who single-handedly got the settlement discussions back on track. His objection: A provision in the proposed reorganization plan that Texaco’s board be expanded from 14 seats to 26 and that all 12 new seats be filled by Texaco shareholders. Such a dilution of management’s authority, he argued, would be ruinous to Texaco, which also objected to the demand.
Icahn Proves Reluctant
Icahn said he couldn’t support the deal until this demand was removed and Texaco began preparing its own reorganization plan that would keep the company in bankruptcy court and out of Pennzoil’s reach.
The shareholders’ committee eventually dropped its demand and told Texaco it would support any agreement by the two companies.
With the pact suddenly in jeopardy, the top executives on both sides entered the discussions themselves--joining weary negotiators who had been bargaining virtually nonstop for a week.
By late Thursday night, settlement was so near at hand that Texaco’s board met for three hours to discuss the key issues. But they ultimately adjourned without taking a position.
Other members of the negotiating teams, however, worked through the night drafting the final details of a plan.
By Friday morning, only one major issue remained: How much interest Texaco would pay Pennzoil on the $3-billion debt.
Pennzoil, which had insisted earlier that interest payments be retroactive to April 12--the date Texaco filed for bankruptcy reorganization, agreed to start the clock running on the date the reorganization plan is filed with the court.
But Texaco and both advisory committees continued to hold out for a later date. They argued that interest should start accruing until the date the plan is confirmed by the court, releasing Texaco from bankruptcy.
