Takeover Leaves Legal Limbo
By opting for a wedding instead of a continued courtroom fight, Oracle Corp. and PeopleSoft Inc. have deprived dealmakers of a ruling on the validity of a controversial program spawned at the start of their 18-month takeover battle.
Just days after Oracle’s initial offer in June 2003, PeopleSoft began fashioning special customer clauses in its multimillion-dollar license agreements with buyers of its enterprise software systems.
Those clauses gave PeopleSoft customers the right to ask Oracle to return anywhere from two to five times the amount the customers spent on PeopleSoft products, if a victorious Oracle failed to support the acquired product lines.
Redwood City, Calif.-based Oracle said the customer assurance program was an unnecessary scare tactic that harmed shareholders by adding about $2 billion in uncertainty to the takeover cost -- money that Oracle might have to pay disgruntled PeopleSoft customers.
During a trial in Delaware’s Court of Chancery, Pleasanton, Calif.-based PeopleSoft denied that the program was merely an anti-takeover measure, or poison pill, in disguise. Without the money-back guarantee, PeopleSoft said, it would not be able to secure new business and shareholder value would erode.
PeopleSoft’s customer assurance program became the centerpiece of litigation between the two companies. Everyone from arbitrageurs to academics to software analysts was waiting for Delaware Vice Chancellor Leo E. Strine’s final word on the measure.
When Strine met with lawyers Monday to discuss putting the legal action on hold, there was only scant mention of the customer program.
“Does a settlement deprive the world of the benefit of his thinking? Absolutely,” said Lawrence A. Hamermesh, a professor at Widener Law School in Delaware.
Strine has made comments that many observers took as signs that he was willing to rule the customer assurance program valid. Rewritten for the fifth time during the trial, the sixth and final version of the program appeared to be tailored to address concerns raised by Oracle, the judge noted.
Earlier in the case, however, Strine had remarked that the sheer size of the potential liability created by the customer assurance program required a strong showing from PeopleSoft that it was vital to keeping the business alive in the face of the takeover threat.
John Torrey, a software industry analyst with Adams Harkness, predicted that the PeopleSoft program would have been held to be an appropriate safeguard for shareholder value.
“I think the customer assurance program served the exact purpose that PeopleSoft management designed it to serve,” Torrey said. “Number one, it gave customers assurance over this period that the products they were buying would be supported. And number two, it acted for some time as a meaningful anti-takeover corporate protection.”
Some experts who question the wisdom of such ironclad takeover defenses hope the legal limbo might discourage the use of such plans in the future.
Harvard University Law School professor Lucian Bebchuk has conducted research concluding that companies with anti-takeover measures created less value for shareholders over time. PeopleSoft’s plan “is an especially worrisome takeover defense, because a poison pill is reversible in a way that this plan was not designed to be,” he said.
If such customer plans are seen as valid and used in the future, “that would increase takeover defenses and obstacles to potentially efficient acquisitions,” Bebchuk said. “Right now, the validity of this defense is left in doubt.... I hope the uncertainty would chill and discourage its actual use in the future.”
