Mesa Partners v. Phillips Petroleum Co.

• Decision Date: 20 December 1984
• Citation: 488 A.2d 107
• Parties: MESA PARTNERS, a Texas partnership, Plaintiff, v. PHILLIPS PETROLEUM COMPANY, a Delaware corporation, Defendant.
• Court: Court of Chancery of Delaware

Page 107

488 A.2d 107

MESA PARTNERS, a Texas partnership, Plaintiff, v. PHILLIPS PETROLEUM COMPANY, a Delaware corporation, Defendant.

Court of Chancery of Delaware New Castle County.

Submitted Dec. 17, 1984.

Decided Dec. 20, 1984.

On Motion of Plaintiff for a Preliminary Injunction. Motion Granted.

Charles F. Richards, Jr., Edmund N. Carpenter, II, Samuel A. Nolen, Thomas A. Beck, and Daniel J. Kaufman of Richards, Layton & Finger, Wilmington; Baker & Botts, Houston, Tex., for plaintiff Mesa Partners.

Martin P. Tully, Thomas Reed Hunt, Jr., Lawrence A. Hamermesh, and David A. Jenkins of Morris, Nichols, Arsht & Tunnell, Wilmington; Herbert M. Wachtell of Wachtell, Lipton, Rosen & Katz, New York City, for Phillips Petroleum Co.

WALSH, Vice Chancellor.

This action began as an effort by the plaintiff, Mesa Partners, a Texas partnership, ¹ to secure a declaratory judgment that it was not obligated to refrain from attempting to acquire shares of stock, and ultimately control, of Phillips Petroleum Company ("Phillips") by reason of the execution by Mesa Petroleum Company ("Mesa") of an agreement dated January 6, 1983. This agreement ("the Standstill Agreement") between Mesa and General American Oil Company of Texas ("GAO") resolved the competition between Mesa and Phillips for the acquisition of GAO. By virtue of that agreement, Mesa retired from the battle, was compensated for its abortive efforts and Phillips acquired GAO. Phillips claims the agreement had the further effect of restricting Mesa from launching any effort to acquire an interest in Phillips within five years of its execution. In effect, Mesa now seeks a preemptive ruling that the agreement does not limit its proposed plan of acquisition.

I

Mesa commenced this action on December 5, 1984, the day following its announcement of a tender offer for 23 million shares of Phillips' stock at $60 per share. Since that time Mesa and Phillips have filed a succession of suits in various jurisdictions to counter or anticipate the other's move. In order of filing these actions include: (a) an action by Mesa in the United States District Court for Delaware on December 4, 1984, to enjoin the enforcement of the Delaware Tender Offer Act (8 Del.C. § 203), (a rite of passage in tender offer litigation in this jurisdiction) and to decide the Standstill Agreement under the claim of pendant jurisdiction; (b) the present action, commenced the following day; (c) the ex parte securing of a temporary restraining order by Phillips in Washington County, Oklahoma to prevent Mesa from moving against Phillips contrary to Phillips' view of the Standstill Agreement; (d) further resort to this Court to restrain Phillips from pursuing its Oklahoma action and the seeking of supplemental relief in the United States District Court to prevent Phillips from initiating any proceeding in any other federal court and (e) an action in a Louisiana State Court, at the apparent behest of Phillips, to prevent Mesa from attempting to acquire an interest in certain of Phillips' assets in that State, through control of Phillips, without prior approval of State regulatory agencies.

After two weeks of moves and countermoves, during which Mesa moved and later withdrew a motion to consolidate the hearing for preliminary injunction with a final hearing and Phillips sought unsuccessfully in this proceeding to restrain Mesa from acquiring any interest in Phillips pending the preliminary injunction hearing, the matter has come to rest at the preliminary injunction stage. Both the United States District Court and the Oklahoma Court, the latter reluctantly, have deferred to this Court's determination of Mesa's claim for preliminary injunctive relief.

II

The extensive discovery record which has been developed on an accelerated basis provides an insight into the events which transpired on January 5 and 6, 1983, when Mesa and Phillips negotiated the fate of GAO. The scenario began on December 20, 1982, when Mesa launched a hostile tender offer for a 51% controlling interest in GAO. Mesa's tender offer was two-tiered but its only price commitment was to purchase shares in the first step at $40 per share. GAO responded three days later with a self-tender offer for 31% of its shares at $50 per share. The usual flurry of litigation followed in several jurisdictions as Mesa sought to enjoin GAO's self-tender. By December 30, 1982, Mesa claimed to have achieved a tender of more than 77% of GAO stock but was unable to take down those shares because the depositing shareholders were free to withdraw their shares in favor of GAO's self-tender by January 7, 1983. That date was also the time fixed for a hearing on a preliminary injunction in Mesa's suit against GAO pending in the United States District Court for Delaware.

In the meanwhile, GAO's investment banker, First Boston Corporation, was seeking a "white knight" to rescue GAO from the unwanted attention of Mesa. Phillips expressed interest in such a role and began negotiations with GAO looking toward a possible acquisition. Eventually, Phillips and GAO were able to agree on the basic terms of merger which included, inter alia, the payment by Phillips of $45 per share through direct acquisitions from certain large shareholders and by securing the shares to be realized from the GAO self-tender which would continue. Key to the consummation of the deal, however, was a settlement with Mesa. Acting through their investment bankers, GAO and Mesa began negotiating for Mesa's exit from the scene. At first, GAO would not identify its white knight but eventually Phillips was disclosed and direct negotiations ensued with Joseph G. Fogg, of Morgan Stanley acting on behalf of Mesa and Geoffrey Boisi of Goldman, Sachs acting for Phillips. Phillips' basic approach was to persuade Mesa to abandon its tender offer in favor of the GAO self-tender. In the process Mesa would be able to sell its previously acquired block of GAO shares and be compensated for its expenses.

By January 5, the negotiations had reached the point where it was desirable for the Chief Executive Officers of both companies to talk directly. On the evening of January 5, T. Boone Pickens, Mesa's CEO, who was in New York, spoke by telephone to William C. Douce, Phillips' CEO, who was at a hunting lodge in Georgia. Douce described the conversation as a candid and friendly one in which the terms of Mesa's withdrawal were discussed. Pickens appeared interested in broadening the negotiations to include the sale of oil rigs and "other deals" but Douce indicated he was interested only in securing GAO and its assets for Phillips. Eventually, it was agreed that Mesa would be paid $15 million for its "expenses" in the GAO affair. Douce claims that he also told Pickens that it would be necessary for Mesa to execute a standstill agreement as to "GAO and its assets" but he did not talk "specifically" about Phillips Petroleum. Pickens does not recall any discussion concerning a standstill agreement.

After the respective CEOs had reached agreement on the terms of Mesa's withdrawal, Douce contacted Phillips' headquarters in Bartlesville, Oklahoma, advised them of the terms and requested that an implementing agreement be prepared and sent to Pickens in New York. At this point events become disputed with each side offering a different version of the circumstances under which the agreement was prepared and executed. It is clear, however, that basic responsibility for the drafting of the Standstill Agreement fell to GAO's counsel, Wachtell, Lipton, Rosen & Katz ("Wachtell Lipton") while Phillips' counsel, Fried, Frank, Shriver, Harris and Jacobsen ("Fried Frank") were assigned responsibility for preparing the volumnious documents needed to effectuate the GAO-Phillips agreement. The two firms did confer concerning the language of the Standstill Agreement and reached an understanding to use a "subtle" approach to secure Phillips inclusion in the Standstill Agreement without specific use of its name. It was agreed to use language in the agreement which by implication could be construed to apply to Phillips. This approach was consistent with the views later expressed by Phillips' executives that it did not want to appear apprehensive over the need to protect itself from a "raid" by Pickens through insisting on a specific identification in the Standstill Agreement. In other words, if Phillips were perceived to be "running scared" it might whet Pickens' appetite.

Phillips contends that the Standstill Agreement drafted by Fried Frank and Wachtell Lipton was also reviewed by Mesa's law firm--Skadden, Arps, Slate, Meagher & Flom ("Skadden Arps") but it is unable to identify any individual at that firm who had a hand in the drafting of the agreement and in view of events which transpired later, it is highly unlikely that Mesa's attorneys had any direct input. ² It is also clear that the Standstill Agreement was not an original work of legal draftsmanship. In both form and language it tracks a similar agreement dated June 18, 1982, also prepared by the Wachtell Lipton firm, under which Mesa withdrew from the contest for control of Cities Service Company at the behest of Gulf Oil Company. Indeed, paragraphs 2 and 3 of the respective agreements, which form the heart of this dispute, are almost identical.

The agreement between Mesa and GAO appears on the letterhead of Mesa and is addressed to GAO. In paragraph 1, it recites the receipt of $15 million dollars "in lieu of payment of our expenses incurred in connection with our outstanding cash tender offer * * * for shares of * * * GAO." Paragraphs 2 and 3 provide:

2. We hereby agree that for a period of five years from the date hereof, neither we nor any Affiliate (as that term is defined in Rule 405 under the Securities Act of 1933) of ours (regardless of whether such person or entity is an Affiliate on the date hereof) will (a) acquire, offer to acquire, or agree to acquire,...