There's a common misconception that a deal ain't a deal
until everyone signs on the dotted line. This thinking is not only
wrong, but also dangerous. A handshake or oral agreement is the
obvious exception. But did you know that an exchange of letters or
even a simple promise can legally bind you? The Pennzoil Co. v.
Texaco Inc. case is the most celebrated example-and one that
every dealmaker should study.
On December 28, 1983, Pennzoil offered to buy Getty Oil. Five
days later, a "memorandum of agreement" was signed by
Pennzoil and Getty, but Getty's board hadn't voted on it
yet. Regardless, on January 4, Getty issued a press release
announcing the merger, subject to the signing of a formal
agreement. However, sometime between the 3rd and the 5th, Getty
apparently also started talking to Texaco, because on January 6,
Texaco announced that it had just bought Getty!
Sometimes called a "deal letter" or an "agreement
in principle" (or a "letter of intent," which is a
less binding variation), a memorandum of agreement is a tidy rest
stop between mere negotiations and the signing of long, formal
documents. It's quick. It nails down agreed-upon points to
avoid rehashing them. It encourages people to work together. But is
it a deal? Is it a deal if it leaves out an important point or
states that the parties will continue negotiating until more formal
papers are signed? Is it a deal if only one party signs?
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Pennzoil sure thought it had a deal. It sued Texaco for
interfering and won ... $10.6 billion (later settled for $3
billion)! Please, appreciate the humor in the sharpest of the sharp
and the cleverest of the clever ending up in court arguing about
the most basic thing of all: Did they or did they not have a
deal?
Here's the problem in a nutshell: In that windstorm of phone
calls, faxes, letters, meetings (and today, e-mail) that
accompanies most deals, you never know when a judge or jury will
say you've crossed the line from courtship to commitment. And
it's not just about who signed on the dotted line. Courts look
at everything: what's said; what's written; whether anyone
acts as if they have a deal; whether the parties are so
sophisticated that one would expect them to wait until formal
papers are signed; whether they issue press releases or throw
parties; and so on.
If you don't want to get roped into a deal prematurely, make
sure you say so loudly, clearly, frequently and in
writing-and don't let anyone involved act as if they've
got a deal.
Of course, when you're trying to make a deal, that advice
can chill negotiations. But you don't want to bind yourself by
mistake. If it happened to Getty Oil, it could happen to you.
A speaker and attorney in Los Angeles, Marc Diener is the
author of Deal Power: 6 Foolproof Steps to Making Deals of
Any Size(Owl Books/Henry Holt). You can reach him at
MarcDiener@aol.com.
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