Secret Talks Over Hammer Art Collection : Art: Court hearing in Occidental shareholder dispute reveals recent negotiations with county museum. Corporate lawyers argue that the artworks may be sold if the Westwood project is blocked.

WILMINGTON, Del. —  Lawyers siding with Occidental Petroleum Corp. and shareholders opposed to a museum for the art collection of company chairman Armand Hammer squared off Wednesday with Occidental arguing the $400 million collection might go to Japanese investors if the project is halted.

And the hearing here brought disclosures that, as recently as last September--nearly two years after Hammer angrily backed out of a deal to donate his collection to the Los Angeles County Museum of Art--negotiations were held about conveying the Hammer collection to the county museum, after all.

The talks, which took the form of secret settlement negotiations in the lawsuit being heard here, apparently broke down. Still, the hearing here Wednesday was dominated by references to the county museum and disagreement over whether construction of the Hammer facility in Westwood, which is to open in November, is a “national treasure” or a monument to corporate waste.

The county museum emerged as an apparent wild-card player in the dispute, with the California attorney general’s office and a lawyer for other shareholders noting that the county facility may have been irreparably harmed by Hammer’s decision. The lawyers argued that the county museum could still emerge as a practical compromise manager for the Hammer museum facility.

In Los Angeles, the county museum said it had no comment on the situation. It was learned that some top county museum board members had learned of the ill-fated compromise proposal--but only after Hammer had soundly rejected the idea last September. Existence of the plan had been rumored for several weeks, but could not be confirmed before Wednesday.

In the end, Occidental attorney Grover Brown declared that doubt over whether the Hammer museum will be completed is ill-founded, “because it’s gonna be” finished.

Brown ruled out any possibility for a compromise in which the county museum would end up controling or displaying the art, declaring, “there’s no way we can get that done.”

The arguments came at a hearing in a case here in which a judge will decide whether to accept a proposed settlement in the shareholder litigation that would limit construction and endowment costs for the museum, as well as control the amount of money Occidental can give to charities Hammer controls.

The judge, Vice Chancellor Maurice Hartnett, took the case under advisement. The lawsuit is being heard here because Occidental is incorporated in Delaware. Hartnett gave no indication of when he would rule.

But in nearly three hours of arguments by a total of seven lawyers, it was clear that an obscure doctrine of Delaware law called the “business judgment rule” will eventually determine the fate of what is to be called the Armand Hammer Museum of Art and Cultural Center.

The rule holds that decisions by corporate boards of directors are not normally subject to second-guessing by the courts as long as the decisions were made in good faith and after a reasonable attempt by corporate boards to obtain information required to make them.

In large degree, a corporate decision needs only to meet minimal standards under what the doctrine calls a “reasonableness test.” The business judgment rule’s existence is one of many factors that make Delaware attractive to corporations that wish to conduct their affairs with the maximum degree of freedom and minimum of court interference.

The possibility that the rule might apply to an art museum has never arisen before in this state. The doctrine, which is unique to Delaware in terms of the degree of responsibility and latitude it accords board members, has been brought into play on only one previous occasion in regard to a corporate charitable donation. That case is so ambiguous in its application to the Hammer museum dispute that it has been widely cited as supportive by both sides in the litigation.

Hartnett gave no hint of how he was leaning in the case, conducting the entire hearing without asking a single question on the substance of any of the lawyers’ arguments. Shareholders opposed to the settlement proposal include the California Public Employees Retirement System, three other public employee pension programs in Pennsylvania and New York and New York City private investor Alan R. Kahn, who owns 700 shares of Occidental.

If the settlement proposal is accepted, all shareholder litigation in the case would be terminated. If the judge rejects it, three remaining shareholder suits would continue--placing the Hammer museum in the potential position of reaching its opening date with the court challenges unresolved.

The case is further complicated by emergence last week of a claim by the estate of Hammer’s late wife, Frances, alleging her sole heir may be entitled to a 50% ownership interest in the Hammer art collection. The court action here has already established that the so-called Hammer collection was purchased in large degree with Occidental Petroleum Corp. funds and that Occidental is the owner of record of at least $1.4 million worth of art the company said has “historically” been exhibited as part of the collection.

Attorney Brown urged Hartnett to disregard the possible ownership claim by Joan Weiss, Frances Hammer’s niece, since courts in California, where the title case is expected to be filed, would take years to render a verdict. The Delaware judge, Brown contended, should let the Hammer museum be completed since, even if Weiss wins “some right to that art, they (Weiss and her husband, Robert, executor of the Frances Hammer estate) will know where to find it.”

Attorney William Prickett, representing two shareholders who reached the proposed settlement with Occidental, cast the situation as a crucial decision by Hartnett in which the judge will not so much decide a shareholder dispute but render a judgment with broad implications for the arts in the United States.

“Future generations of Americans have a large stake in whether or not this settlement is approved,” Prickett told Hartnett. He compared the Hammer art collection to a “national treasure” comparable in value to the Alaska and Louisiana purchases in the 19th Century.

Prickett contended that any failure of the Hammer museum project could result in the Occidental-Hammer art collection, which includes Old Master and Impressionist works, as well as a collection of drawings by Leonardo da Vinci, being donated to the National Gallery of Art in Washington or broken up and sold off--perhaps ending up in either the Soviet Union or Japan.

In an interview after the court hearing, Prickett claimed he had been approached indirectly by unnamed Japanese investors interested in acquiring the Occidental-Hammer art if the museum project falls apart.

Susan Henrichsen, a deputy California attorney general representing the California state employee pension fund, argued that the museum is a project “devoid of legitimate corporate purpose” that has “raised more controversy and ill will than it has good will.”

Henrichsen and Sidney Silverman, the other lead shareholder lawyer, contended that the Hammer museum is nothing more than a nearly $100 million “gift” by Occidental to its chairman. Henrichsen ridiculed the argument that Hammer might disperse his art holdings, contending “in fact, there is no evidence . . . that such a thing would occur. All the evidence is to the contrary.

“To suggest that the holdings would dissipate borders on the absurd.”

Silverman, reading from a 1987 press release issued by Hammer, noted that the Occidental chairman announced, “I have decided to create my own museum “ at the time, but that the reality was “only he (Hammer) is having Occidental pay for it.”

Silverman sought to contrast the decision to build the museum with Occidental’s layoff of 900 employees last year. “You have on the one hand Occidental constructing this grandiose museum building honoring Dr. Hammer,” Silverman said, “and on the other hand, eliminating 900 jobs to save money.”