December 15, 2004

OracleSoft -- Dodging the Poison Pill

Shortly before hearings were to recommence in the Delaware Court of Chancery on Monday, Oracle and PeopleSoft announced that the two companies had agreed to a merger in which Oracle would pay PeopleSoft shareholders the high, high price of $26.50/share. In case you have been on a manned, orbiting spacecraft for the past year and a half, this agreement is the culmination of a hostile takeover launched by Oracle (at $16/share) that has been met with fierce opposition by the PeopleSoft board. The price was first upped to $19.50, then $21, then "final answer" $24. The most interesting wrinkle in this tender offer was the position of the customers of PeopleSoft. In most mergers, any retail customers of either party are usually scattered and, as a result, silent. In this case, the customers that would be affected were users of PeopleSoft's payroll software, which are by definition the largest customers you can imagine: entire state governments, entire state university systems and private university systems. PeopleSoft used the spectre of hurting these influential customers to spark antitrust litigation and to fashion an ingenious poison pill.

Unfortunately, now we will not find out if the Court of Chancery would have upheld the board of directors' use of that pill.

PeopleSoft already had a traditional poison pill in place, which would give existing shareholders the right to purchase additional stock at discount prices (50%) should an offeror acquire 20% of the outstanding stock. These defense mechanisms dilute the tender offeror's holding and greatly increases the expense of a tender offer. (The most "successful" poison pill was Pennzoil's poison pill that eventually scared off Union Pacific, a lost opportunity that many blame for the ultimate downfall of Pennzoil.) In addition, PeopleSoft adopted a Customer Assurance Plan, which gave contractual rights to its customers in the event of a change of control and decrease in customer service. The estimated cost to Oracle of the CAP was estimated to be between $1.5 and $2 billion. Would adopting this innovative plan be defensible under the modified Business Judgment Rule?

Ironically, on Monday, the WSJ was reading the tea leaves of the Oracle/Peoplesoft litigation to predict a Delaware retreat on poison pills. Apparently in the past month Vice Chancellor Leo Strine, Jr. had made several off-the-cuff remarks that he is no fan of the PeopleSoft poison pill. Added to the fact that he has made similar remarks over the years regarding poison pills generally, one might wonder whether he would have viewed this case as an example of a board of directors misusing a poison pill. However, this case will be dismissed as part of the merger agreement, so we will never know.

Gordon may have crossed paths with Chancellor Strine at Skadden's Delaware office, so he may have an inside view. Of course, our Skadden demigod Joe Flom definitely has his ideas about poison pills. The Hamilton & Booth Corporate Finance textbook (pages 820-21) recounts a humorous story of Mr. Flom and Marty Lipton fighting over whether a Harvard Law School student's note on poison pills should have been published during the pendency of the Moran v. Household International, Inc. case (500 A.2d 1346 (Del. 1985)). Mr. Flom and Mr. Lipton were on opposites of that poison pill case, and Mr. Flom believed that the student's pro-poison pill note had been unduly influenced by his summer clerkship with Mr. Lipton's firm, Wachtell, Lipton. The piece was ultimately published under the title "Protecting Shareholders Against Partial and Two-Tiered Takeovers: The "Poison Pill Preferred.'"

Posted by Christine at December 15, 2004 09:53 AM | TrackBack