In a stunning development, two former high-level Dow Chemical (DOW) executives, J. Pedro Reinhard and Romeo Kreinberg, settled their litigation against the company Monday, admitting that Dow acted properly in firing them in April 2007, and that they had, indeed, been engaging in secret discussions about a leverage buy-out of the company without the board’s knowledge or approval. The contemplated $50-60 billion buyout would have been the largest LBO ever.

The joint press release states that “Mr. Reinhard and Mr. Kreinberg acknowledge participating in discussions which were not authorized by nor disclosed to Dow’s Board concerning a potential LBO of Dow [and that] the actions taken by Dow’s Board were appropriate under the circumstances.”

At the same time, it says, Dow’s board “acknowledges Mr. Reinhard and Mr. Kreinberg’s substantial contributions to Dow over their lengthy and illustrious careers at Dow.”

There are also undisclosed portions of the settlement. Under the circumstances, that fact might mean that company has agreed to impose financial penalties on the executives that are less onerous than the company had originally sought.

At the time of the firings on April 12, 2007, Reinhard was a Dow director and advisor and a former chief financial officer, while Kreinberg was the executive vice president for the performance plastics and chemicals portfolio. On May 8, each executive sued Dow for defamation, claiming that the press release Dow had issued explaining their terminations had been false. The terms of today’s settlement amount to a near total retraction and renunciation by the executives of these claims.

Also on May 8, 2007, Dow sued each executive for having violated the duties of loyalty they owed Dow, seeking contractual damages. In Reinhard’s case, Dow cut off $10 to $15 million worth of deferred equity awards he had already earned but had not yet been paid, and the company was also seeking to force him to disgorge (under so-called “claw-back” provisions of his contract) a nearly equal sum that he had already been paid over the previous three years.

Kreinberg was facing a loss of roughly $10 million in equity compensation not yet paid, and another $5 million in disgorgement.

Since the financial terms of the settlement are confidential, it is unclear how this portion of the dispute was resolved, but it seems unlikely that the executives would have “settled” had they not received anything in return.

Based on court filings and other discovery materials that have come to light thus far, the executives’ LBO discussions primarily involved a plan by an Omani sovereign wealth fund which was being advised by JP Morgan Cazenove (a UK joint venture of JP Morgan Chase). The discovery materials suggest that the Omanis hoped to form a consortium with two marquee US private equity firms (KKR and TPG were approached) to do a break-up takeover in which the remaining entity’s CEO would have been Kreinberg and its new chairman Reinhard.

As a result of information gained during the discovery process, Dow Chemical’s board later leveled an additional charge against Reinhard – that he had, without its board’s knowledge or permission, served as an observer at board meetings of another chemical company, Basell, which recently merged to become LyondellBasell. (Basell and, now, LyondellBasell are businesses privately owned by the holding company Access Industries, an investment vehicle privately owned by billionaire Len Blavatnik.)

Reinhard is currently a director on the boards of Royal Bank of Canada (RY), Sigma-Aldrich (SIAL), and Colgate-Palmolive (CL). He left the board of Coca-Cola (KO) in April 2006.

The planned LBO came to light after three London newspapers reported rumors about the bid. Dow CEO Andrew Liveris then made inquiries of JP Morgan Chase CEO Jamie Dimon, who ultimately confirmed that, in fact, the bank’s London office had pursued such a plan, and that Kreinberg and Reinhard had been involved. Dow’s board terminated the two executives two days later.

A call and e-mail to Kreinberg’s lead attorney, Stanley Arkin, were not immediately returned.

Reinhard’s attorney, Gary Naftalis, referred inquiries to a spokesperson, who issued this statement: “Pedro Reinhard is pleased with the settlement. . . . He has served as a loyal and committed employee and Board member of Dow Chemical and has served its shareholders for many years. The dispute with his former company and colleagues was distressing to him personally and he greatly appreciates the company’s public recognition and kind words about his illustrious career at the company.”

Dow’s lead attorney, David Bernick, said, “This was a very important piece of litigation for the company and for the board. The company is very pleased with the fact it has been resolved in this way.”

Dow spokesperson Chris Huntley said: “It’s fair to say we’re pleased that what had been a disappointing chapter in Dow’s history has been closed, and that the board’s swift and decisive action in April [2007] has been vindicated.”

Here is an earlier blog item I did on the case.