Business & Economy:
Contract dispute on purchase of Getty Oil led to new caution during deal-making
A deal that started with a handshake ended in a $10.5 billion jury verdict.
The deal was done Texasstyle, with a handshake.
But as Pennzoil executives celebrated their pending acquisition of Getty Oil Co. in early 1984, another buyer was circling. Texaco, which traces its roots to the 1901 Spindletop gusher, made a sweeter offer. Getty accepted, and one of the ugliest corporate courtroom brawls in U.S. history was about to get underway.
When it was over, a Texas jury determined that Texaco had intentionally interfered with Pennzoil’s deal and awarded a jaw-dropping $10.53 billion to Pennzoil. It was the largest civil verdict in the nation’s history up to that time and perilously close to Texaco’s market value of $13 billion.
“It was a remarkable case that two large oil companies would go head to head like that,” said Harry Reasoner, long-time lawyer at Vinson & Elkins.
One of the great mysteries was why Texaco didn’t settle the case, said Reasoner, who handled subsequent appeals on behalf of Pennzoil. Companies usually settle disputes before they ever reach a jury — especially when so much is on the line.
Getty was prized for its extensive crude reserves, and in the early 1980s, as Pennzoil looked to expand its reserves, it eyed the company founded by the legendary oil baron J. Paul Getty. Pennzoil agreed to pay $5.2 billion to acquire just under half the company. Company leaders shook on the deal in New York, celebrated with champagne, and quickly issued press releases announcing the purchase.
Texaco, meanwhile, had recently drilled some dry holes and saw an opportunity to scoop up crude reserves estimated at 1 billion barrels. A couple of days after the Pennzoil deal was announced, Texaco swooped in to offer $10.1 billion. The Getty board quickly cast off Pennzoil, and issued another press release announcing the sale to Texaco.
Outraged, Pennzoil sent a telex to Texaco telling the company to lay off and asked a Delaware court to block the sale to Texaco. The judge declined, but suggested that Pennzoil might have reason to claim a contract that was already in place when Texaco came around with its checkbook.
Pennzoil chairman J. Hugh Liedtke prepared to fight. A long-time oil man who started his career as a lawyer doing deals in Midland for energy clients, he became partners in 1953 with another oil prospector, George H.W. Bush, to form Zapata Petroleum. Years later, after a series of mergers and splits, the company became Pennzoil, and Liedtke moved to Houston, according to the Petroleum Museum in Midland.
Pennzoil filed suit against Texaco in state court in Houston. Liedtke asked his friend, Houston personal injury lawyer Joe Jamail, to represent the company. By that time, Jamail had developed a national reputation for his fierce representation of grieving widows and injured workers, as well as his colorful language and aggressive style. Jamail was not a corporate lawyer; he usually sued corporations.
Jamail figured the way to win was to “keep it simple,” according to his autobiography, “Lawyer: My Trials and Jubilations.” At every turn, Jamail tried to transform a complicated and boring contract dispute into a sweeping morality play, by indicting the corporate takeover practices of New York lawyers and investment bankers, according to his book.
“I planned to hammer the point that Texaco stole this oil from Pennzoil and that made the company no better than a thief,” wrote Jamail, who died last year.
It was a clash of ethical values between the old-style GoodOl’-Boys of the oil fields and the new-style Good-Ol’-Boys of Wall Street, according to the book “Oil & Honor: The Texaco-Pennzoil Wars,” by Thomas Petzinger, Jr.
The oil men valued friendships and honor and handshake commitments while modern bankers reveled in taking advantage of loopholes and ambiguities if they could get a better deal, explained Petzinger. To the Wall Street crowd, the deal wasn’t done until the last “hereas and wherefore and thereupon” was recorded.
Representing Texaco was another Houston legend. Richard B. Miller, a Harvard Law School graduate who never finished high school or college, believed that he, not Jamail, was the nation’s best trial lawyer. Texaco’s confidence — some legal observers said arrogance — that it would win kept the company from seeking a settlement.
Neither Miller nor Texaco put up any witnesses to refute Pennzoil’s claim that it was due damages — billions of dollars. Miller’s thinking, according to a case summary from James W. McElhaney at Case Western Reserve University, was that arguing damages would imply Pennzoil had a contract and Texaco had interfered, according to McElhaney. Miller died in 2013.
The trial, which began in 1985, lasted four and one-half months. After two days of deliberations, the jury came back with its verdict, which grew to $11.1 billion with interest.
To appeal, Texaco had to put up an $11.1 billion bond — equivalent to nearly its entire market value. Despite being the nation’s fifth largest corporation, Texaco couldn’t afford it.
Company officials raised the possibility of bankruptcy, a move that led banks to demand immediate repayment of loans, Texaco’s electricity provider to seek weekly payments, and investors to sell, according to “Oil and Honor.” Texaco’s stock fell hard and fast.
The company and its investors hung their hopes on Judge Solomon Casseb Jr. reducing the jury verdict. In a packed courtroom in December 1985, Casseb kept the jury verdict intact. Texaco ended up filing for bankruptcy and several months later, agreed to settle with Pennzoil for $3 billion.
The verdict and the size of the award had repercussions beyond the future of the two companies. The jury’s finding that the handshake agreement in New York essentially amounted to a contract introduced a new caution among executives, undermining the word-is-my-bond style of doing business. After even casual conversations about business over lunch or drinks, executives became reluctant to shake hands immediately following the Texaco-Pennzoil case, according “Oil and Honor.” The phenomenon became known as the “Texaco chill.”
Today, neither company exists, but their brands live on. In 2001, Chevron Corp. bought Texaco. As for Pennzoil, its exploration and production business was sold to Devon Energy in 1999, while Shell now owns Pennzoil-Quaker motor oil.