Jury Awards $10.53 Billion To Pennzoil in Texaco Case
By Thomas W. Lippman
November 20, 1985
A Texas jury yesterday awarded Pennzoil Corp. $10.53 billion in damages against Texaco Inc., finding that Texaco beat out Pennzoil in their 1984 battle to buy Getty Oil Co. by unlawfully subverting a binding contract between Pennzoil and Getty.
Pennzoil, anticipating that Texaco would respond to the verdict by undertaking a hostile tender offer to acquire Pennzoil or that some corporate “raider” would move to reap the benefits of the award, said late yesterday that it had prepared its own takeover defense. Its board of directors adopted a preferred-stock distribution plan that a spokesman said would “show Texaco a takeover bid won’t work.”
The jury’s decision, which was reached after only nine hours’ deliberation at the conclusion of four months of testimony that filled 24,000 transcript pages, apparently was by far the largest damage award in the history of corporate litigation. If upheld on appeal, it virtually would destroy Texaco, the nation’s third-largest oil company, which reported a net worth of $13.5 billion at the end of September.
But Texaco said it would challenge the jury’s finding through “all available legal remedies,” and company officials told stock analysts they are determined that Pennzoil won’t collect a cent.
Most analysts agreed yesterday that Pennzoil is unlikely to collect $10.53 billion, which would be more than Texaco paid to acquire all of Getty Oil, but they said the jury’s award increased the likelihood that Pennzoil eventually would receive some damages from the much larger Texaco. Estimates ranged from about $500 million to $2 billion.
Jurors who talked to reporters in Houston made clear that they wanted to teach Texaco a lesson in business ethics, despite Texaco’s insistence that it had not done anything improper and had entered its last-minute bid for Getty only when invited to do so by Getty’s directors and investment bankers.
The jury’s rejection of that argument raised questions yesterday about the implications of the case for “white knights,” companies or individuals invited to bid for corporations threatened with unfriendly takeover.
“We did not crash the party, we were invited” by advisers to Getty Oil who felt Pennzoil’s bid was inadequate, said Richard Miller, Texaco’s trial lawyer. “This is the first time in history where the dragon sued the white knight,” he told reporters.
Jury foreman Richard Lawler, however, indicated that the jurors thought Texaco behaved improperly and said the verdict should send a message that “we won’t tolerate this type of practice in our business community.”
That validated the legal strategy on which Pennzoil built its case. Pennzoil, which is based in Houston, argued before a hometown panel that Texaco, which is based in Westchester County, N.Y., had violated the ethical code of the oil patch by entering a bid for Getty that foiled Pennzoil’s bid to acquire 43 percent — and managerial control — of the company.
Pennzoil Chairman J. Hugh Liedtke turned the legal case into a personal crusade against the oil giant that snatched away the biggest prize of his career when he thought he had it secured. He said the 12 jurors “not only did everybody in this community a favor, but they did everybody in this country a favor by reaffirming the standards by which American businesses and individuals are expected to conduct their business transactions.”
The jury’s verdict does not affect Texaco’s $10.1 billion acquisition of Getty, which was completed last year and was not at issue in the trial. The issue was whether Texaco acquired Getty by sabotaging a binding agreement between Getty and Pennzoil — an agreement already announced to the press — under which Pennzoil would have acquired the 43 percent.
Pennzoil said its agreement to form a partnership with Gordon Getty, son of founder J. Paul Getty and head of the family trust, was a binding contract, ratified by Getty Oil’s directors at a tumultuous 25-hour meeting, even though it never was finalized. In the end, Pennzoil’s bid of $112.50 a share for three-sevenths of Getty was beaten by Texaco’s offer of $125 a share for all of it — the second-largest corporate merger in U.S. history after Standard Oil of California’s $13.2 billion acquisition of Gulf Oil Corp. in October 1984.
Texaco never disputed that Pennzoil had made a deal with Gordon Getty. But Texaco said that agreement was not binding on Getty Oil’s directors and that they never actually approved the arrangement.
Texaco said yesterday that evidence at the trial “demonstrated conclusively that Pennzoil never had a contract to purchase Getty Oil Co. and that Texaco did not induce any party to breach any alleged contract.” The company said it will “immediately seek all available legal remedies to set aside or to reverse the findings, and it is confident that it will prevail on appeal.”
Texaco has not maintained any reserve against a possible damage award in the Pennzoil case because contingent liability reserves are maintained only where there is “deemed to be a genuine liability,” which it did not believe was the situation in the Pennzoil case, a company spokesman said.
However, Miller, Texaco’s trial lawyer, agreed with market analysts who said the verdict enhances Pennzoil’s prospects of collecting some damages. “It certainly does change the odds,” he said. “It is accorded a lot of respect under the law.”
Texaco appears to have a problem in that there is no apparent issue of federal law in the case. Therefore, its only avenue of appeal is through the Texas state court system. The first step is a Dec. 5 hearing before Judge Solomon Casseb, who presided at the trial, at which Texaco is expected to ask that the verdict be set aside or reduced or that a new trial be granted.
The 12-member jury awarded Pennzoil $7.5 billion in actual damages and $3 billion in punitive damages. The largest previous award in litigation between corporations is believed to have been the $1.8 billion judgment obtained by MCI Communications Corp. in a triple-damage antitrust case against American Telephone & Telegraph. That award later was knocked down to $113.4 million in a retrial, and the two sides settled that case and subsequent litigation Monday for an undisclosed sum.
Most analysts apparently anticipate a similar fate for Pennzoil’s bonanza.
“This $10 billion is certainly an excessive number,” said Thomas C. Lewis of Duff & Phelps, an investment research firm. “It’s kind of ridiculous, really.” But he added that the odds are increased that Pennzoil, a company less than a third the size of Texaco, “will walk away with something — maybe $500 million to $1 billion. The market is saying it expects about $600 million to $700 million.”
On the New York Stock Exchange yesterday, Pennzoil stock closed at $57 a share, up 7 1/8 after trading was halted briefly when the verdict was announced. Texaco closed at $36 1/4, down 3.
Pennzoil said its preferred-stock plan was adopted to “ensure that the company’s shareholders, and not an opportunistic ‘raider,’ will retain the benefits” of the damage award. Pennzoil officials said they had heard speculation that Texaco might undertake a raid of its own because, if the damages were upheld, it would be cheaper to acquire Pennzoil than to pay the $10.5 billion.
Liedtke said this was not a “poison pill” takeover defense because “it will not result in burdening the company with debt or have other features characteristic of plans designed to make companies less attractive as takeover candidates.”