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As PeopleSoft Inc. was firing CEO Craig Conway last week, the software company was preparing for a legal battle that not only could affect its acquisition fight with Oracle Corp., but also how the courts treat corporate anti-takeover defenses. The case, due to go before Delaware Vice Chancellor Leo Strine Jr. today, will be the first in 15 years in which a Delaware court has addressed the legality of the poison pill, the takeover defense made famous in the 1980s. A pill limits a hostile bidder from acquiring more than a modest percentage of a target’s stock by threatening substantial dilution of the bidder’s stake if it exceeds the threshold. The case also features an issue never before raised in Delaware. To protect its customer relationships, PeopleSoft adopted a “customer assurance plan.” After Oracle made its bid, PeopleSoft began to include in its contracts with clients clauses that would entitle them to substantial damages should another company acquire PeopleSoft and stop servicing them, as Oracle threatened to do. Strine must address the legality of those clauses. The novelty of the CAP clauses, the importance of the poison-pill issue, the size of Oracle’s bid and Strine’s willingness to examine bedrock legal doctrines mean the PeopleSoft trial will be the most scrutinized takeover case in Wilmington in years. The trial is the latest installment of Redwood Shores, Calif.-based Oracle’s bid for business software rival PeopleSoft. On June 6, 2003, Oracle said it planned to offer $16 a share for the Pleasanton, Calif.-based target, which four days earlier had announced a deal to buy J.D. Edwards & Co. for $1.7 billion in stock. Oracle raised its offer to as much as $26 a share before dropping it to $21 a share May 14. From the start, the takeover battle has been acrimonious. Oracle CEO Larry Ellison was blunt about his plans for PeopleSoft. “We don’t plan to integrate these two companies,” he said. “There’s almost no business integration risk at all. Our intention is we’re not going to actively sell the PeopleSoft products anymore.” That attitude posed a big threat to PeopleSoft and now-ex-CEO Conway. In its brief, PeopleSoft cited a Wall Street Journal article that wondered, “Who in their right mind would buy PeopleSoft [products] with that cloud in their future?” PeopleSoft has said the CAP clauses were the only way the company could protect its business in the face of an Oracle campaign calculated to destroy it. “Prospective customers increasingly were demanding, as a condition to signing deals, stronger and more definitive CAP terms and definitions,” the company claims in its brief. Oracle argues Strine should invalidate the clauses because they are an illegal takeover defense. The outcome of the issue will depend on the reasonableness of the CAP clauses, said William T. Allen, himself a former judge on the Court of Chancery and now a professor at New York University’s schools of law and business. Because the clauses were a response to a takeover threat, Allen said, Strine will likely ask if they were reasonable in relation to the threat Oracle posed to PeopleSoft. A discussion of the issue at an M&A conference in New Orleans in March suggested that Strine, the judge in the case, could be sympathetic to PeopleSoft’s position. Victor Lewkow, a partner at Cleary, Gottlieb, Steen & Hamilton in New York and PeopleSoft’s lead corporate lawyer, argued that including the CAP clauses in customer contracts was the only way his client could preserve its business. Dennis Hersch, the Davis Polk & Wardwell partner who is Oracle’s lead corporate lawyer, sniffed that the clauses were merely takeover defenses by another name and the court should invalidate them. Strine then waded into the debate and acknowledged the difficulty of PeopleSoft’s position, arguing, “How do you play out the hostile bid process and keep your customer base?” Oracle’s bid for PeopleSoft has also involved extended antitrust review. The European Commission is still investigating the potential anticompetitive effects of a merger, and the U.S. Department of Justice initially sued to stop the bid on antitrust grounds. The DOJ lost in a California federal district court, and announced Friday that it will not appeal that decision. That case has given PeopleSoft’s board a rationale for resisting Oracle. Citing the antitrust issues and claiming that Oracle’s goal is merely to destroy PeopleSoft, the target has steadfastly kept in place its poison pill. Strine discussed poison pills at length in his ruling in a 2000 case involving takeover defenses that Shorewood Packaging Corp. had put in place to fend off a bid from Chesapeake Corp. Though the case specifically dealt with Shorewood’s amendments to its bylaws, Strine mused more broadly about the rationale for takeover defenses. But no Delaware court has ever required a company to remove its pill. Instead, the courts have consistently noted that if a board is ignoring the wishes of shareholders to sell the company, the bidder can run a proxy fight to replace the intransigents with board members who will pull the poison pill and sell the company. PeopleSoft is unusually vulnerable to a proxy fight, since half of the company’s eight directors are up for election every year and shareholders may vote to amend its bylaws. Thus the shareholders could vote to increase the size of the board to nine members and elect five insurgents to the board who would remove the pill and sell. This winter, Oracle said it would launch a proxy fight to gain control of PeopleSoft using exactly that plan. The bidder killed the idea when the Department of Justice announced Feb. 26 it would sue to stop the deal — tacit admission that PeopleSoft shareholders would not have voted for the Oracle slate in the face of the DOJ’s suit. If it gains the required antitrust approvals, Oracle could launch such a proxy fight again next year. Strine could seize on that to write an opinion that upholds the target board’s actions while offering guidance on when a company might not be able to keep its pill in place. Copyright �2004 TDD, LLC. All rights reserved.

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