Smith Agrees to $2.5-Million Settlement of Suit Over Abortive Gearhart Takeover

Smith International Inc. has moved a step closer to emerging from bankruptcy by agreeing to a $2.5-million settlement of a lawsuit stemming from the oil services company’s unsuccessful efforts to take over Gearhart Industries Inc. in 1984.

The tentative settlement, which is subject to approval by the bankruptcy court overseeing Smith’s reorganization, essentially removes the Newport Beach company from a $300-million lawsuit filed by Fossett Corp., a Texas company that held Gearhart stock at the time of the attempted takeover.

The Fossett suit alleges that when Gearhart and Smith settled their takeover battle, Gearhart paid $29 million too much to secure its independence. In the agreement ending the takeover fight, Gearhart paid $80 million to buy back the 5.3 million Gearhart shares that Smith had accumulated.

Although the settlement price was about half the amount that Smith had originally paid for the Gearhart shares, the suit alleges that the payment was still $29 million higher than the fair market value of the stock at the time of the settlement.

Fossett sued Smith, Gearhart, and Smith Chairman Jerry Neely for allegedly conspiring to violate the rights of Gearhart shareholders with their takeover maneuvers. The suit against Gearhart and Neely remains intact and is not affected by the settlement with Smith.

The settlement is scheduled to be considered Tuesday by U.S. Bankruptcy Judge James Dooley. If approved, a potential roadblock to Smith’s efforts to emerge from Chapter 11 bankruptcy reorganization will be removed.

The company filed for reorganization early last year after losing a $205-million patent infringement lawsuit. Smith has agreed to settle the patent case for $95 million, but the terms of its proposal require that Smith emerge from bankruptcy by Dec. 31.