by Coll, Steve;
“The directors last Friday did favor a stock buy-back plan, however,” Winokur went on, without pausing long to explain his dismissal of the LBO. “In fact, the company and Goldman, Sachs have been giving further thought to that idea. Geoff is here because he’s an expert not only on mergers but on stock buy-back programs, and I think he could be a help to all of us.”
Winokur and Boisi then began to outline in detail a proposal for a dramatic 16-million-share stock buy-back. If implemented, they said, the company would purchase from public stockholders, in the near future, some 15 percent of Getty Oil’s outstanding stock. Gordon would do nothing, but when the buy-back was completed, the percentage holdings of his trust’s 32 million shares would rise from 40 to more than 50 percent. That meant, obviously, that Gordon would control Getty Oil Company. He could fire executives, replace the board of directors, change the business strategy, do whatever he pleased. Cohler listened closely. On its face, this new proposal was a great victory for his client. But why would Winokur and Boisi support, even initiate, a buy-back plan that put Gordon in control? What was going on here? Certainly, a large stock repurchase such as the one suggested would benefit public stockholders by paying those who sold out a premium over the market price and by indirectly raising the value of those shares the public chose to retain. But Cohler was not naïve. Had Petersen suddenly decided to sacrifice his career for the benefit of the public stockholders? There had to be a catch.
Winokur, finally, explained it. He asked a question. “Speaking philosophically, what do you think Gordon’s reaction would be, Tim, if there were structural changes in the company that would permit Gordon to hold a majority of Getty Oil’s stock—but with certain safeguards for protecting the minority shareholders, the public shareholders, and also safeguards for preserving an independent board of directors?”
“Bart, will you tell me what you mean by that?” Cohler responded. “That’s just a bunch of words. What do you mean, protecting the minority shareholders’ and ‘preserving an independent board of directors’?”
Winokur did not want to get more specific. He was just exploring the question, he said, almost as a matter of business philosophy. He and Cohler began to have the sort of conversation lawyers have when they are speaking for absent clients: long-winded, vague, abstract, filled with caveats. Cohler pressed Winokur for specifics; Winokur avoided him.
Cohler kept saying: “Look, if you make the proper disclosures required by the SEC, and you’ve got a publicly owned company, a majority owner is a majority owner. There isn’t anybody who’s ever bought a share of Getty Oil stock who didn’t know that the trustees owned forty percent, and that there was always the potential for that to become a controlling block. What do you mean, ‘protect the minority shareholders’? The law protects them.”
Winokur responded, “That’s not the issue. The issue is, what are the interests of the public shareholders? State law is inadequate in most cases like this—you’re using the company’s money to put an individual shareholder in control. Look, I don’t want to get into the specifics right now—I don’t want to talk about the mechanics. We just have this concern about protecting the minority shareholders. Getty Oil would use its own money, through the buy-back, to put Gordon in a majority position, and so naturally the company would have concerns about protecting the minority shareholders and the independence of the board. These would only be safeguards.”
Carefully and somewhat vaguely, Winokur was proposing placing what would later be called, in the shorthand of the advisors, “handcuffs” on Gordon Getty. The idea was that the company would repurchase 16 million shares from the public stockholders, raising the numerical percentage of Gordon’s holdings above 50 percent. Before the company began the buy-back, however, Gordon would agree to rules prohibiting him from actually exercising majority control. Gordon would own a majority of Getty Oil’s stock, but he would be allowed to vote only 40 percent, the same percentage he currently held. At one level, the company’s rationale for such handcuffs was defensible: in its own business judgment, Getty Oil management believed that Gordon was not qualified to run the company, and they wanted to be sure that he did nothing to harm the public stockholders who came under his sway after a buy-back. At another level, however, the plan was deceitful. Winokur and Boisi were asking Cohler to consider handcuffing his client while the company secretly arranged a family lawsuit that would permanently undermine Gordon’s power. Cohler, of course, knew nothing about the meetings with Seth Hufstedler and other Los Angeles attorneys or about the contacts with lawyers for the Georgettes and J. Paul Getty, Jr.
Moreover, at that Wednesday meeting Winokur seemed reluctant to admit that it was Getty Oil management’s personal feelings about Gordon, their strong belief that he was erratic and unqualified to run the company, that led them to propose the handcuffs. Instead, Winokur implied that their sole motivation was the “protection of the minority, public shareholders” and that these “safeguards” would be necessary regardless of who was in control of the Sarah Getty Trust. There was a certain moral tone to Winokur’s general statements about protecting the minority shareholders. Cohler kept pressing for specifics because he wanted Winokur to acknowledge that the issue was really Gordon, not the public shareholders. Then Cohler could argue that Winokur had no right to pass judgment on Gordon’s qualifications—Gordon owned Getty Oil, or at least a large part of it, and he had the right to run the company as he saw fit, regardless of management’s opinions about his personality. But Winokur refused to be drawn into a discussion about Gordon’s personal qualifications. He insisted that his and Petersen’s aim was merely to protect the public stockholders—increasingly, he referred to them as “minority stockholders” as if to emphasize that Petersen had a moral obligation to handcuff Gordon.
“I just want to get a sense of what Mr. Getty’s view would be, philosophically, about these kinds of safeguards,” Winokur said.
It was the soft-spoken Tom Woodhouse, of all people, who finally cut through the thick layers of legal posturing. “I think that Mr. Getty would be highly offended by any suggestions that he would not be able to exercise his lawful rights and power, owning whatever stock he held as trustee,” Woodhouse declared emphatically. “He would own exactly the same shares of stock before and after any buy-back—it would be the company that would be buying stock and changing his percentage holding. As a trustee, Mr. Getty has a fiduciary obligation and he couldn’t possibly agree to changing the rights that the law gives him.”
Even Cohler was uncomfortable with the strength of Woodhouse’s declaration. He tried immediately to soften his partner’s assertion that Gordon would never agree to handcuffs, that all this talk about protecting the minority stockholders was just so much bullshit.
“Look, Tom’s expressing more confidence in what Mr. Getty would think than I am,” Cohler said. “I happen to agree with all the things Tom said, as far as his basic instincts, but I’m not going to sit here and tell you what Mr. Getty thinks.” No one could predict the state of Gordon Getty’s mind from day to day.
It was now lunchtime, and the advisors decided to break for sandwiches. In just a few hours, the LBO takeover had been declared dead by Winokur and Boisi. Cohler had implied that he would bring the handcuffs proposal to Gordon’s attention, but it was impossible for him to go further before he talked to his client.
There was an alcove beside the conference room, and the advisors wandered over to a table where a catered lunch had been laid out. They stood casually, eating their sandwiches; the atmosphere was relaxed. Cohler stepped over beside Geoff Boisi. They had never met, and they decided to get acquainted.
“What are Gordon’s goals here?” Boisi asked, voicing the question that had been so often repeated around Getty Oil headquarters in recent months.
Cohler went through his usual speech: Gordon was interested in exploring ways to “maximize value for all shareholders.” He wanted to close the “value gap” between the price of Getty Oil’s st
ock and the worth of its underlying assets. Cohler was not specific, although he did mention that the LBO takeover was the sort of thing that Gordon had been very interested in, but now, apparently, that idea was dead.
Boisi swallowed a bite of his sandwich, looked at Cohler, and asked him what Cohler later described as “the $64,000 question.”
“Is Gordon trying to put the company in play in order to attract a hostile, front-end-loaded, two-tier tender offer so that he’ll be free to sell his stock under the trust instrument?”
Boisi meant, borrowing Winokur’s metaphor from the Bonaventure Hotel meeting: Does Gordon actually want to be squeezed? Does he want to be the juice?
Because of the strange provisions of the 1934 Sarah Getty Trust documents, Gordon could only sell his 32 million Getty Oil shares for cash to prevent a loss. Boisi was describing a particular brand of hostile takeover that would put Gordon in such a position. If Boone Pickens, say, made a tender offer—that is, an official, openly declared offer to purchase stock—for 60 percent of Getty Oil’s shares, then he could squeeze Gordon out. Suppose Getty Oil’s shares were selling for $60 on the stock market. Pickens could offer $80, all cash, for 60 percent of the shares. Each stockholder could then decide: should I sell to Pickens for $80, or hold on to my stock? Because Pickens was offering $20 per share more than the market price, many would sell. Once Pickens gained a majority, he could squeeze Gordon out. He might offer the trust less money than his first $80 tender offer, or he might offer a less attractive $80 “face value” package of cash and debt securities that was actually worth much less than $80. Or Pickens could simply force Gordon to sell his shares for, say, $70. Then Gordon would have to go to court, exercising his “appraisal rights” and ask a judge to determine how much a share of Getty Oil stock was really worth. If the judge decided it was worth more than $70, then Pickens would have to pay the difference. But if the judge decided $70 was fair, Gordon would be stuck. Either way, exercising appraisal rights was a long and expensive process. Gordon and the trust would be facing a loss. They would be free to sell to Pickens at his original price: $80 cash.
The point of Boisi’s “$64,000 question” was this: Perhaps it was Gordon’s secret goal to sell the 32 million Getty Oil shares owned by the trust. Perhaps his wanderings on Wall Street, and his friendly, seemingly naïve meetings with Pickens and the Cullens, were really just a clever ruse, an effort to provoke a hostile tender offer that would put him in a position to sell out for cash. A “front-end-loaded, two-tier” hostile bid was the most onerous form of takeover because it put tremendous pressure on shareholders. They had to decide, very quickly, whether the “front end”—$80 cash, in the Pickens example—was a fair price for their shares. If they felt it was not, if they decided to hold on to the stock because they believed it was worth more than $80, they faced the prospect of a court fight after a forced merger. Takeover critics in Congress and on Wall Street often used the front-end-loaded, two-tier takeover as an example of abusive practices when they pressed for regulatory restrictions on hostile mergers.
Cohler was impressed that Boisi had seen this possibility in Gordon’s actions over the last six months. Clearly, Boisi was a very sophisticated player. But the fact was that Gordon was not nearly as savvy as Boisi’s question implied. If Gordon had put Getty Oil Company in play, it was not by design. It was a result of his intuitive feelings about business strategy, his instinctive push toward “the light at the end of the tunnel.”
“That is absolutely not the strategy,” Cohler told Boisi flatly. “That is absolutely not what Gordon is doing.” Cohler believed that Boisi had taken him at his word. But he knew, too, that his dealings with Getty Oil had been elevated to a new level of sophistication.
As they stood together in the alcove, finishing their sandwiches, Cohler and Boisi began to talk openly about the gamesmanship now overtaking the negotiations between Petersen and Gordon. Specifically, they talked about the role of museum president Harold Williams and the suspicion with which he was regarded by Petersen. During the morning session in the conference room, there had been a lot of speculation about whether Williams was interested in controlling Getty Oil, and whether the museum itself could be “squeezed” if Gordon and the company agreed on a buy-back plan. At the center of these discussions had been the mystery of Williams’ intentions.
“You know, you can over game-play,” Cohler remarked to Boisi as they finished their sandwiches.
“Yes, you can,” Boisi agreed.
Nonetheless, the games persisted. All through Wednesday afternoon and again on Thursday, the advisors discussed “handcuffs” for Gordon Getty, sometimes jokingly referring to them as “golden handcuffs” or “platinum handcuffs” because a buy-back plan might raise the trust’s wealth even as it restricted Gordon’s personal power. By the end of Thursday, though, there was still no agreement. Cohler and Wood-house made it clear that in their view the next step was to proceed with the 16-million-share buy-back—without handcuffs—that would put Gordon in the majority; that was, after all, what Goldman had seemed to recommend at the July 8 board meeting. But Winokur and Boisi insisted on the handcuffs, golden or otherwise.
“This is not going to fly,” Tim Cohler said as the two-day session ended on Thursday afternoon. “We’ve got legal problems with any handcuffs, and Woodhouse has a very strong sense as to what Mr. Getty’s personal reaction will be.”
Cohler continued to insist that Winokur was being disingenuous, that the issue was not the minority shareholders but management’s view of Gordon’s personality and qualifications. “Look, you’re just not willing to admit that the board of directors is flatly refusing to let Mr. Getty into a majority position because they don’t like him,” Cohler said.
“That’s not true,” Winokur answered. “The board is simply concerned with carrying out its fiduciary obligations to maintain its independence and protect the minority shareholders. It doesn’t matter whether it’s Mr. Getty or anybody else—or any combination of people.”
Cohler and Woodhouse said that despite their pessimism about his reaction, they would discuss the handcuffs issue with Gordon. They flew back to San Francisco that evening. Early the next week, they reached Gordon in Europe and explained what had happened at the two-day meeting in Los Angeles. When Cohler heard Gordon’s reaction, he called Winokur and arranged for another two-day summit in Los Angeles, on Thursday and Friday, July 28 and 29.
“Tom was absolutely right,” Cohler announced when the advisors reconvened at Getty headquarters that hot, smoggy Thursday morning. “Gordon was deeply offended by the suggestion that he be handcuffed.”
The tone of the meeting, which had earlier been cool and rational, if also tense, began to change. A freewheeling discussion about the handcuffs ensued, with Winokur insisting again that they were necessary to protect the public shareholders, and with Cohler and Wood-house now adamantly opposed to the concept. They broke for lunch and went at it again. By afternoon, tempers were beginning to fray.
Cohler finally pushed it over the edge. For three full days, they had sat in this conference room discussing the buy-back and the handcuffs. It had gone far enough—there could be no agreement. They were at an impasse.
“Look,” Cohler said with exasperation. “This whole two-day meeting idea has been awkward for me anyway because I’m getting married on Saturday. I told you that I have to be back tonight in San Francisco for the bridal dinner. And frankly, I’m not sure there’s any point in coming back to L.A. tomorrow. This is a week that’s difficult for me for personal reasons. I’d always let professional obligations take precedence over personal needs, but frankly guys, we’re not getting anywhere.”
Cohler actually began to shout at Winokur. He was out of control. “I just don’t think you’re playing straight with me! I do not think that the reasons you’re giving for the handcuffs are the real reasons. You’ve got people in management and on the board who just plain won’t deal with Gordon because they don’t like him. Th
is is a personal thing, and it’s totally contrary to the board’s fiduciary obligations, which you so nicely invoke. The board of directors is supposed to do its job, and it’s not supposed to have a personality contest! You’re not even following your own investment banker’s advice, to go ahead with the buy-back.”
Cohler didn’t stop; he continued to press Winokur in a virtual tirade. “Analytically, this thing just doesn’t stand together, Winokur! If you guys mean what you say about the minority shareholders, then—well, what if there were no public shareholders? What if they were bought out? You’d probably still say the same garbage—anything to keep Gordon from getting control! You’re just trying to blackmail us! You’re just insisting on handcuffs in order to protect Sid Petersen’s job!”
“We’re not trying to protect anybody’s job,” Winokur countered. “Do you know what you’re talking about? You’re contradicting yourself. You are the one who said last week that Gordon would only buy out the public if he could build a fence around ‘his’ assets. We’re perfectly willing to let Mr. Getty take control of this company if he’s willing to pay a fair price. We would require no conditions, no handcuffs, no restrictions. If Gordon will pay a fair price, fine. But he can only pay a fair price if he’s willing to take the risk himself, if he’s willing to take down the fence. If Gordon will use his own assets to borrow the money, he could probably pay a fair price.”
