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12 Harv. Negot. L. Rev. 103
Harvard Negotiation Law Review
Winter 2007
Article
Oracle v. PeopleSoft
BETWEEN WILMINGTON AND WASHINGTON: LESSONS FROM ORACLE-PEOPLESOFT
David Millstoned1
Copyright (c) 2007 Harvard Negotiation Law Review; David Millstone
Introduction
The Oracle-PeopleSoft takeover contest ended on December 13, 2004 with smiles and handshakes and praise from Vice
Chancellor Strine.1 Such is the redemptive and re-interpretive power of success. Oracle had paid a rich price for its prize. Its
all-cash offer was a 75% premium to the closing price of PeopleSoft common stock on June 5, 2003, the last trading day prior
to the announcement of Oracle’s initial $16 offer. Billions would be wired to shareholder accounts in short order (arriving
just after the first of January, thereby adding a year of tax deferral to the holiday cheer).
PeopleSoft’s months-long scorched-earth defense became subtle and prescient after the deal. “Aren’t you glad we didn’t
accept $16?” PeopleSoft director and Chairman of the Transaction Committee, A. George “Skip” Battle, told one investor in
mid-November in justification of PeopleSoft’s vast and, in certain instances, unprecedented defensive arsenal.dd1
Oracle had even more to celebrate. They were, after all, the victors. The strategic wisdom of the acquisition and the
reasonable- ness of the price were issues to be tested later. For the moment, Oracle had done something once considered
impossible - the com- pany had waged a successful hostile takeover in Silicon Valley.2 *104 “We think hostile takeovers do
work,” Ellison concluded with pride.3
But the process had its costs. Eighteen months of turmoil and hundreds of millions of dollars in transaction costs had
benefited the lawyers and the arbitrageurs, and, even more so, rival SAP. Craig Conway, PeopleSoft’s erstwhile champion,
was humbled. PeopleSoft’s current Chairman and CEO, its founder and largest individual shareholder, David Duffield was
bitter but resigned. He and Vice-Chairman Aneel Bhusri opposed the deal and abstained from the final vote in favor of the
merger. A letter Duffield sent to employees reflected his sentiments: “I offer my sincere apologies for not figuring out a
different conclusion to our 18-month saga. It became clear to us that the vast majority of our stockholders would accept
$26.50 and that Oracle was willing to pay it.”4
The story is a human one, and it would of course be naïve to expect such a messy process to have too clean of a conclusion.
PeopleSoft’s shareholders did well. Oracle’s shareholders did well. Presumably a more efficient company was created.
Shouldn’t we end the inquiry here? A protagonist’s fall from grace, a billionaire’s quasi-socialist grievances, name-calling,
and sand-kicking may make good gossip, but are such events of any consequence? More precisely, are these facts relevant to
the underlying legal questions of how we should structure the rules governing takeover negotiations? In this paper, I argue
that they are, precisely because our corporate law simultaneously empowers managers and directors while crippling
shareholders. The increased power of managers and directors is not the result of any particular reform, but rather the sum
effect of many reforms, and, in particular, the unintended interactions of Delaware case law with federal rules serving to
constrain shareholders. This evolution has created an unstable system that is far too sensitive to the idiosyncrasies, ideologies,
and self-interests of managers and directors. It is not a broken system; far from it. It is sophisticated, highly evolved and in
many respects the envy of the world. But it is needlessly influenced by “jejune, playground, adolescent, macho”5 conduct.
*105 This is, I think, the particular moral of Oracle-PeopleSoft. The redemptive power of a successful, negotiated transaction
only goes so far. A thorough analysis of the 18-month saga reveals a process that was strikingly mismanaged by Oracle.
Often ignoring its advisors and relying on limited hostile-deal experience, Oracle’s team invited needless headaches and
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eroded its credibility with mercurial course changes and rhetoric. This difficult situation was exacerbated by PeopleSoft’s
questionably legal scorched-earth defense and the bad faith its management and certain board members exhibited in handling
Oracle’s overtures. In contrast, investors dealt with the situation in a composed, dispassionate and rational way. And
ultimately it was the investors who brought the two sides together.
Takeover negotiations take place against a background of rules that determine whose views matter and how much. By
undermining shareholders and thereby empowering managers in such negotiations, Delaware’s jurisprudence has added
unnecessary volatility to what is by its nature a difficult, at times explosive situation. What should be a debate about value
devolves, as we saw in Oracle PeopleSoft, into a name-calling, flak-jacket wearing circus replete with personal vendettas and
threats to pets. While all of this is eerily amusing to watch, it imposes real costs on employees and shareholders, not to
mention customers and judges. In this contest, the same deal terms were available to PeopleSoft in February of 2004 as it
received in December of that year. So much of the debate was not about value, but a tour of the very personal aspirations and
hatreds of the companies’ principals. The rules of the game ought to be restructured to minimize such “jejune, playground,
adolescent, macho”6 conduct to the extent possible. One way to do that, to dampen the volatility that results from having
self-interested managers dominate takeover negotiations, is to unburden the restrictions that prevent shareholders from
effectively participating in such negotiations.
The Oracle-PeopleSoft case should make us question the wisdom of Delaware’s endorsement of the suspicious doctrine of
substantive coercion. Additionally, it suggests the benefits of an increased role for investors in takeover situations. Such a
role would be substantially enhanced by easing the outdated restrictions on shareholder communications that chill
interactions among shareholders.
This Paper is organized as follows:
In Part I, I review the history of Delaware’s endorsement of substantive coercion as a justification for maintaining a poison
pill. I *106 then turn to the emergence of the countervailing doctrine of proxy out which has become the safety valve on pill
misuse.
In Part II, I review the history and present incarnation of federal restrictions on shareholder communications.
In Part III, I return to Oracle-PeopleSoft. I consider the lessons of the deal and its implications for Delaware’s takeover
jurisprudence and for federal restrictions on shareholder communication. I argue for the increased involvement of
shareholders in takeover disputes based on that experience. I show that Oracle-PeopleSoft suggests both that directors and
management cannot generally be trusted to conduct hostile takeovers absent the discipline provided by the market through
active shareholders. I document the new realities of shareholding, especially the rise of hedge funds and show how they
contradict traditional assumptions about shareholder ignorance and passivity. I show how Oracle-PeopleSoft belies traditional
assumptions of shareholder passivity and ignorance and illustrates the extent to which shareholders can be a force for reason
in situations animated by personal vitriol and other non-economic considerations.
Finally, I draw these arguments together and suggest a relaxation of restrictions on shareholder communication to provide for
increased shareholder involvement in fundamental transactions. I note that Delaware’s restrictions on shareholders, in
particular the restrictions on the free alienability of shares created by the poison pill, cannot be evaluated independently of the
doctrinally separate restrictions on shareholder communication provided for by the federal regime. If shareholder voice is to
be the ultimate safety valve on misuse of the pill, if it is to replace alienability through a tender as the manner in which
shareholders express their point of view, then shareholder communication needs to become less anathema in the eyes of the
law. I argue that shareholders consistently demonstrate their reasonability in takeover situations. Today, they are
well-informed and active. They are not pushovers in negotiations, nor are they obstreperous. These qualities provide a critical
counterweight to the sometimes volatile and ideological personalities driving takeover contests.
I. Wilmington - Substantive Coercion and Proxy Out
Proxy contests and tender offers are not perfect substitutes. Early on, tenders were an extension of the trading market almost
completely unfettered by regulation. Proxy contests in contrast were burdensome and subject to the extensive disclosure
obligations provided for in the Securities Exchange Act. In 1965 Professor Henry *107 Manne described proxy contests as
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“the most expensive, the most uncertain, and the least used of the various techniques” for acquiring control of a corporation. 7
This changed substantially with the adoption of the Williams Act in 1968, which imposed disclosure requirements on tender
offerors comparable with those required in proxy contests.
Nevertheless, tender offers retained a number of advantages. Foremost among them was that a prospective acquirer could
take his case straight to shareholders. This gave an acquirer the ability to obviate a self-interested management and board. For
shareholders, the possibility of finding real liquidity for a position in an underperforming company gave some substance to
the Wall Street Walk, the idea that if you do not like what management is doing, you should sell rather than complain. And
the opportunity for profit by ousting self-interested or underperforming managers ensured that a robust market of acquirers
would actively seek out such situations. Many academics saw this as a critical part of our corporate law and argued for board
passivity in response to offers. In a famous article, Ronald Gilson presented this view:
The result of management adopting successful defensive tactics is to make impossible a tender offer which management has
not blessed. . . . This result, however, is flatly inconsistent with the structure of the corporation. The market for corporate
control is crucial to the corporate structure because neither other markets nor a fiduciary “fairness” standard effectively
constrains some forms of management self-dealing.8 He added that “absent a pro-management shift in the traditional
standard, pre-offer [defensive] tactics which can have no business purpose should thus be in jeopardy.”9
He was right, but not in the way he intended to be. The wave of takeovers in the 1980s convinced Delaware to take a
decidedly “pro-management shift” in its jurisprudence.10 In Moran v. Household International,11 the Delaware Supreme
Court accepted the idea that free alienability was not a necessary part of a shareholder’s package of rights. A board could use
the newly devised poison pill to block a *108 tender offer it considered threatening. Critically, for our purposes, the Court
signaled that shareholders’ ability to wage a proxy contest was the safety valve on pill abuse when it reasoned that a pill
would not significantly deter proxy activity:
Thus, while the Rights Plan does deter the formation of proxy efforts of a certain magnitude, it does not limit the voting
power of individual shares. On the evidence presented it is highly conjectural to assume that a particular effort to assert
shareholder views in the election of directors or revisions of corporate policy will be frustrated by the proxy feature of the
Plan. Household’s witnesses, Troubh and Higgins described recent corporate takeover battles in which insurgents holding
less than 10% stock ownership were able to secure corporate control through a proxy contest or the threat of one. 12
This view was endorsed more explicitly in Unitrin, Inc. v. American General Corp., 13 when the Delaware Supreme Court
used the possibility of a proxy contest to reason that a poison pill was neither preclusive nor coercive and thereby acceptable
under Unitrin’s interpretation of Unocal:14
After acknowledging that the adoption of the rights plan was within the directors’ statutory authority, this Court determined
that the implementation of the rights plan was a proportionate response to the theoretical threat of a hostile takeover, in part,
because it did not ‘strip’ the stockholders of their right to receive tender offers and did not fundamentally restrict proxy
contests, i.e., was not preclusive.15
Through this evolution in Delaware, proxy contests, the ugly stepchild of the takeover arsenal, became the centerpiece of the
market for corporate control. Separate, but contemporaneous jurisprudence in Delaware reinforced the protections of
shareholders’ rights with regard to proxy contests even as they were being weakened in other contexts. Blasius Industries,
Inc. v. Atlas Corp.16 is the case most frequently cited regarding Delaware’s protection of the shareholder franchise. In that
case, Chancellor Allen struck down a board-packing maneuver taken to thwart a proxy contest famously declaring, “The
shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.”17 Two other
cases, *109 Carmody v. Toll Bros.18 and Mentor Graphics Corp. v Quickturn Design Systems, Inc., 19 which rejected the
validity of dead-hand and no-hand pills, respectively, further protected the shareholder franchise. In Toll Brothers and in the
Chancery court opinion in Quickturn Vice Chancellor Jacobs rejected dead-hand and no-hand pills in part on the grounds that
they disenfranchised shareholders. The Delaware Supreme Court affirmed Quickturn on the much narrower ground that the
no-hand pill violated Delaware General Corporation Law § 141(a), but the effect was the same.
At the same time that Delaware was defending the franchise, its endorsement of substantive coercion, discussed previously,
was undermining restrictions on use of the pill. The doctrine was adopted without heed to the warning of Professors Gilson
and Kraakman that,
[S]ubstantive coercion is a slippery concept. To note abstractly that management might know shareholder interests better than
shareholders themselves do cannot be a basis for rubber-stamping management’s pro forma claims in the face of market
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skepticism and the enormous opportunity losses that threaten target shareholders when hostile offers are defeated. 20 Since a
company could find a bank that would conclude that virtually any offer was inadequate, substantive coercion became, as a
practical matter, an unlimited justification of the pill.
Today, as Vice Chancellor Strine has convincingly argued, substantive coercion and proxy out stand as the twin pillars of the
law governing tenders.21 The doctrine of substantive coercion has expanded the board’s ability to block tenders, while proxy
out has operated to constrain such discretion so it does not become unfettered. Vice Chancellor Strine (who coined the term
“proxy out”) eloquently described this dynamic as follows:
Indeed, the courts have deployed in tandem two doctrinal concepts to escape the ultimate “Just Say No” question. The first
concept - “substantive coercion” - is the notion that directors *110 may legitimately use defensive measures (to some
as-yet-undefined extent) to protect stockholders from making an erroneous decision to sell their shares for too low a price in a
tender offer. The second concept - what I call the “proxy out” - is the idea that the poison pill is not a preclusive or
unreasonable response to the threat of substantive coercion, so long as the stockholders are able to elect a new board that can
dismantle the pill. When used together, the substantive coercion and proxy out concepts reduced poison pill litigation and
funneled takeover fights into the director election process. 22
This evolution has changed corporate law in two basic ways. First, it has altered the balance of power between shareholders
and the board. Second, it has magnified the importance of proxy contests. Whatever the benefits and deficiencies of proxy
contests, those benefits and deficiencies have become significant drivers of Delaware corporate law. It is to those benefits and
deficiencies we now turn.
II. Washington - The Curious Evolution of Shareholder Communication
The “purpose of law,” however, is absolutely the last thing to employ in the history of the origin of law: on the contrary, there
is for historiography of any kind no more important proposition than the one it took such effort to establish but which really
ought to be established now: the cause of the origin of a thing and its eventual utility, its actual employment and place in a
system of purposes, lie worlds apart; whatever exists, having somehow come into being, is again and again reinterpreted to
new ends, taken over, transformed, and redirected by some power superior to it; all events in the organic world are a
subduing, a becoming master, and all subduing and becoming master involves a fresh interpretation, an adaptation through
which any previous “meaning” and “purpose” are necessarily obscured or even obliterated.
- Friedrich Nietzsche, On the Genealogy of Morals
Although central to Delaware’s thinking, proxy contests are a federal fiefdom. This is an artifact of the 1930s when reformers
became convinced that corporate law, historically the prerogative of the states, was a Hobbesian world of cunning barons and
helpless shareholders. Berle and Means issued a call to arms with their famous *111 treatise, The Modern Corporation and
Private Property.23 They documented the rise of the large corporation where small shareholders had ownership without the
basic indicium of ownership - control. Berle and Means feared that this separation of ownership and control would lead to
those in control taking advantage of those who own.
Against this background, the federal government stepped in the fray as a champion of the shareholder with the 1933 and 1934
Acts. The 1934 Act provided continuing disclosure obligations, and, of particular relevance for our purposes, drew the
federal government into the regulation of proxy contests. Congress left the details entirely to the SEC. The authority granted
was broad; it was sea change. Section 14(a) of the 1934 Act provides:
It shall be unlawful for any person . . . in contravention of such rules and regulations as the Commission may prescribe as
necessary or appropriate . . . to solicit or to permit the use of his name to solicit any proxy or consent or authorization in
respect of any security . . . registered pursuant to section 12 of this title.24
There is not a great deal of legislative history regarding § 14(a). But what there is suggests Congress intended to protect the
shareholder franchise and thereby protect shareholders from management abuse. Jill Fisch, in an exhaustive study of the
legislative history, finds substantial support for this interpretation. 25
For example, the Rayburn Report, in a section entitled “Control of Unfair Practices by Corporate Insiders,” states: “Fair
corporate suffrage is an important right that should attach to every equity security bought on a public exchange.”26 The
Report explains that corporate insiders can perpetuate themselves in office by soliciting proxies to secure their re-election
without disclosing to shareholders: (1) their interest in the corporation; (2) the management policies they intend to pursue;
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and (3) the purposes for which the proxies are to be used.
As Fisch explains in her study:
*112 Thomas Corcoran, one of the principal drafters of the Exchange Act, had a broad view of the problems to which the
proxy regulation was addressed. Corcoran believed that corporate insiders, through their control of the proxy process, were
able both to perpetuate themselves in power and to use the voting process to further their private ends. He viewed the abuse
of power by corporate insiders as central to the objectives of federal regulation: “It is one of the big worries about the
corporate form of doing business in this country, that the shareholders, nor really even the boards of directors do not actually
run corporations, but coterie of a very few men on the inside. . . . You are tied up, sir, with a problem so big that this proxy
solicitation touches only one edge of it.27
The era of shareholder protection did not last long. The scope of the rules ballooned over the years as the SEC sought to
extend its oversight, and, ever fearful of creating a loophole, gave its rules expansive and open-ended interpretations. At the
same time, their purpose became confused and reinterpreted and hijacked. In a classic regulatory capture story, the SEC was
co-opted by management, the very constituency it was meant to monitor. John Pound offers a fascinating and invaluable
history of this phenomenon in his article “Proxy Voting and the SEC: Investor Protection Versus Market Efficiency.”28 As
Pound relates, by 1955 the SEC was reviewing its proxy rules to offer management greater protection against “raiders”:
The increasing visibility of proxy contests, and the increasing contentiousness of the campaigns, were sources of concern
among policymakers and the public. Debate focused on the overall economic effects of contests and the possible need for
further regulation. Management groups advocated regulations that would protect shareholders from the financial scheming of
raiders. The American Institute of Management denounced ‘adventurers who do not hesitate to promise the impossible to
stockholders distressed at the turn of events and bewildered as to what to do. They seek out situations of partial failure, not
because they are imbued with a desire to institute reforms which objective analysis shows to be needed, but because only
circumstances of distress can stampede the uninitiated stockholder into surrendering himself into their hands . . . . Their *113
purpose is self-enrichment and the enlargement of personal power.’29
This process continued. The rules, even with some minimal paring back in 1992, have grown to thwart, rather than protect,
shareholder power. Pound again:
The regulations have thus not only failed to solve the collective choice problem in voting, but have constituted an obstacle to
natural market forces that could bring a solution.30 . . . In short, changes in ownership structure and communications
technology have created the potential to solve the collective choice problem that has plagued corporate voting for over a
century, and that originally motivated proxy regulation. But the regulatory structure has prevented these forces from
operating. Deterring active communication about voting issues and coordinated, informal action, the rules have enforced a
regime in which each institutional shareholder has been forced to act as if its peers did not exist. 31
The second major impediment to shareholder communication arose (somewhat accidentally) from federal concern over
tender offers. In 1965, Senator Harrison Williams proposed federal legislation to protect target companies from what he
called the “industrial sabotage” of hostile corporate raids on “proud old companies.”32 By 1968, the Williams Act had been
enacted. The Williams Act introduced Exchange Act Section 13(d) and the related SEC rules requiring any person or “group”
that beneficially owns more than 5% of a public company’s stock to file a Schedule 13D containing disclosure about the
person or group, its stock ownership, its plans with respect to the company, and various other matters. This was intended as
an early warning system for hostile takeovers, but has morphed into (according to the shareholders I spoke with) the primary
restriction on shareholder communication. This evolution was abetted by an SEC with little regard for the chilling effect of
such rules. Bernard Black relates one telling anecdote:
Sometimes, obstructive rules appear almost by accident, with the SEC showing no appreciation for their consequences. For
example, the Commission added the critical word “voting” to the activities that cause shareholders to be considered a
“group” under the 13(d) Rules with the casual explanation that: “Minor *114 word changes have also been made from the
predecessor [rule] . . . . The Commission considered ‘voting’ to be subsumed within the term ‘holding’ but has decided to
make this express to avoid any misunderstanding.”33
The federal rules are now a daunting array of sometime picayune requirements that effectively chill shareholder
communication and coordination. Their effect has been treated at length by a number of scholars. 34 The rules are too
complicated to parse at length in this paper, but I think it is worth reflecting on the obstacles faced by a large shareholder
looking to communicate and coordinate with other large holders.
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The Proxy Rules require anyone who “solicits” “proxies” from shareholders to deliver a written proxy statement containing
various disclosures.35 Solicitation is defined broadly to include any communication to shareholders “under circumstances
reasonably calculated to result in the procurement, withholding or revocation of a proxy.”36 Solicitation of 10 or fewer
holders is excepted,37 but even this is problematic - if you solicit 4 holders who each solicit 4 more, have you tripped it?
(This exception also adds to the arbitrariness of the rules. In some cases 10 shareholders will be a majority, in others well
short of one). The disclosure is onerous and communications are subject to broad antifraud regulation. 38
Such problems are mild compared with the risks presented by § 13(d). The rule requires disclosure by any “person” of
“beneficial ownership” of five percent or more of a company’s equity securities. 39 Persons will be a “group” and have their
holdings aggregated if they have agreed to act together “for the purpose of acquiring, holding, *115 voting or disposing”40 of
the issuer’s equity securities. Such agreements do not have to be in writing and can be proved by circumstantial evidence. 41
Holders who become members of a group are not only subject to disclosure requirement but can be liable under the
short-swing profit rules of § 16(b) of the Securities Exchange Act.42
While the foregoing is quite onerous, the greatest potential liability is actually an unintended consequence of the rules, or,
more precisely, the interaction between the federal rules and state law. Shareholders who are aggregated into a group whose
holdings are in excess of a company’s poison pill threshold will almost certainly be subject to the financial Armageddon
imposed by the pill. This is a result of the broad definitions of “beneficial ownership” contained in most rights plans (a
definition generally modeled on § 13(d)).43
Such restrictions have had their intended (or unintended) effect. The investors that I spoke with are very careful about whom
they speak to, particularly during contests for control. “We are very careful when we talk to other investors,” said one who
cited 13(d) as his biggest worry. Another noted, “First, I only talk to my friends. Second, we don’t strategize. We hash out
scenarios . . . like when you talk to someone about sports. This could happen, if that happened.” One investor described
shareholders as constantly fearful of the rules. He recalled one time he had been invited to a meeting with management
during the course of a proxy contest. When he arrived at the room, he realized the bankers had double-booked the slot and he
was sharing it with another shareholder. This small scheduling error set off warning bells in both investors’ minds - they did
not sit next to each other, they did not talk and when management arrived they opened the conversation with an explanation
that they did not know each other, had no affiliation and certainly were not part of a group. “We are always aware of the rules
and once we’ve filed a 13D we are extraordinarily careful. No conversations basically,” was one rule articulated to me.
“People go to great lengths to avoid 13(d) liability,” concluded an investor. “Everyone has counsel working on these issues.”
The perverse effect of these rules is evident in two recent cases. The recent tussle between Carl Icahn and Kerr-Mcgee is a
fascinating example of how § 13(d) not only chills interactions, but has become a weapon against shareholders who oppose
management. *116 Interestingly, this example was cited to me by two separate investors when I asked about their concerns
regarding § 13(d).
For a long time, investors and analysts had been criticizing Kerr-Mcgee for squandering its cash horde on exploration and
non-core business rather than returning the money to shareholders. Such criticism had grown more pronounced in the recent
bull market for energy. In March 2005, Icahn, who controlled 4.7% and JANA, a hedge fund which owned another 3%,
joined together to launch a proxy contest primarily to force a distribution of the cash. 44 Kerr-Mcgee responded by accusing
the two of having coordinated their purchases of the Company’s stock in violation of § 13(d). “Because they didn’t file as
required, they were able to acquire more shares at lower prices than they would have been able to do otherwise, significantly
disadvantaging other stockholders,” the Company said.45 While in theory this could be true, it is doubtful that the two
coordinated purchases. The undermanagement at Kerr-Mcgee was an open secret in the investing community. Moreover,
Icahn is clearly capable of managing a proxy contest without the assistance of JANA. It would make no sense for Icahn, who
is well-advised, to coordinate a purchase program and incur liability for violations of federal law simply to ensure that he had
a partner with whom to launch a proxy contest. The far more likely scenario is that Icahn and JANA independently reached
similar investment conclusions and bought stock. Months later, when informal pressure on management had yielded no
result, they joined together for a proxy contest. At that point, joining forces would make sense since extensive disclosure
would be required anyway as a result of the proxy contest. Working together would allow the two to defer costs, speak for a
larger block, and not duplicate work.
The question of what actually happened will never be resolved since on April 14th Kerr-McGee caved and announced a
series of measures, including a $4 billion stock buyback and the divestment of more than $2 billion in assets. 46 In exchange,
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Icahn agreed to drop his proxy fight. Confirming Icahn’s thesis, Kerr-McGee’s stock gained nearly 7% on the news.
*117 Two things are clear from the example. First, situations will frequently arise where activist investors independently
acquire stock positions based on similar investment theses. In fact, it is quite rare to find just one activist/value fund in a
particular stock. When sophisticated investors have the same information and do the same homework, they reach similar
conclusions. But these funds will then always be open to accusations of “group” formation if they attempt to influence
management based on their common investment thesis. When two people independently take similar actions, there is always
a possible inference of coordination. That inference is a weapon in the hands of a management that feels threatened. Even in
situations, such as Kerr-Mcgee, where multiple investors actually come together to form an official “group,” they will still be
open to accusations of not properly disclosing the precise moment of group formation. Current disclosure does not cure past
infractions. In fact, such situations are probably more precarious for a shareholder because the formation of the group
manifests an intent to act together. It’s not difficult for a company to allege that such an intent ripened into actual group
formation at some point prior to the disclosure. The other thing worth noting about the example, although it is purely
anecdotal, is how value-enhancing the coordinated action between Icahn and JANA was.
The second example arose out of the AXA-MONY merger. This situation too involved an activist hedge fund running afoul
of the federal rules. Recall the dispute concerned a management sponsored all-cash buyout of MONY by the French
conglomerate AXA. AXA offered approximately $1.5 billion for MONY. Many shareholders thought this substantially
undervalued the company (it was only 75% of MONY’s book value) and they were suspicious of the incentives created by
$82.6 million in severance payments for MONY’s management, most of which went to MONY’s CEO Michael Roth. The
$82.6 million, incidentally, was the final number actually paid to management. A larger sum and one that was less adequately
disclosed was offered to management before activist shareholders blew the whistle. This severance package was actually
larger than the entire deal premium paid to shareholders.47 The deal was opposed by a number of hedge funds and investors
and by both Glass Lewis and ISS. Only after a bump in the deal price, a reduction in the severance package *118 and a
postponement of the vote was the controversial merger finally approved by a narrow 53.4% margin. 48
During the course of the deal, the well regarded hedge fund, Highfields, had emerged as a leading opponent of the deal.
Highfields began exploring a way of communicating its position to shareholders. The fund actually went to the SEC seeking
“advice on any constraints imposed by the Exchange Act, particularly on whether an exempt solicitation under Rule
14a-2(b)(1) could ‘include a copy of MONY’s proxy card in its mailing for the convenience of MONY shareholders to
facilitate . . . voting [against the merger].”’49 Highfields was advised by SEC staff that “although it [had] not been released
formally, the Office of Mergers and Acquisitions at the SEC had considered and adopted a ‘nonpublished position’ in an
informal April 1993 interpretation (circulated internally among SEC staff) that gave qualified approval to shareholders
seeking to mail duplicates of management proxy cards as part of an exempt proxy solicitation under Rule 14a-2(b)(1). On the
basis of these discussions with SEC staff, Highfields planned an exempt proxy solicitation to MONY shareholders that
included duplicates of MONY’s proxy card and conformed to the restrictions described in the April 1993 opinion.”50
Highfields was then sued by MONY, which sought to enjoin the fund from sending the cards with its solicitation. In
contravention of both the SEC’s advice and the spirit of the 1992 reforms, the Second Circuit found that mailing the cards
violated § 14(a) and risked an “irreparable harm” to MONY. The court issued a preliminary injunction declaring:
As we first announced on April 1, 2004, we hold that MONY has demonstrated a likelihood that it will succeed on its claim
that Appellees’ use of duplicate proxy cards was outside the Rule 14a-2(b)(1) exemption and that, absent full compliance
with SEC proxy regulations by Appellees, MONY will likely succeed in its claim against Appellees under Section 14(a). 51
This is an extraordinary result on a number of levels. Even a well-funded, well-advised investor who looked for pre-clearance
from the SEC still ran afoul of the rules. It shows how unreasonably complicated the rules have become. It again shows how
much of a weapon the rules can be in the hands of a management that wants to oppose an activist investor. It shows
(anecdotally) how little benefit the 1992 *119 reforms had. But most importantly, I think, is the longer view. Stepping back
from the actual text and history of Rule 14a-2(b)(1), we must wonder: what is the actual harm being prevented here? It is
such a strange artifact of history, of a world where shareholders were far less sophisticated and information much more
difficult to come by, that the power of Congress and the federal judiciary has been deployed to prevent a hedge fund (one that
has been candid about its position) from mailing to other shareholders the exact same proxy card that management mailed to
them a month earlier. Thus the curious present incarnation of rules designed to protect the shareholder from a “coterie of a
very few men on the inside.”52
III. Between Wilmington and Washington: Lessons from Oracle-PeopleSoft
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Reflecting on the deal recently, one person involved in Oracle-PeopleSoft wondered, “Where were the boards?” He
continued, “It was really a problem for both sides. [Management] did these deals and made these offers and the boards just
came along.”
This was a $10 billion merger. Billion. People’s lives, their careers and fortunes were in the balance. Investors, certainly, had
much at stake. But employees, customers and vendors did too. “Think how many divorces are going to happen because of
this deal,” mused one person involved. The bloodletting had real costs, financial and human. As the inimitable Strine
cautioned, “This is not some game of phony Monopoly or some fun-loving little tricky stuff that people do.” And yet, the
entire deal was marked by “jejune, playground, adolescent, macho”53 conduct.
It is easy to look back and whitewash every action as preceding, and therefore somehow a necessary condition for, the
ultimate negotiated result. But this is simplistic, and wrong. The negotiated solution was the product of two things, neither of
which reflects well on the conduct of the parties - an investor actively looking for a way to bridge the divide between two
sides who would not speak to each other and an activist judge of preeminent reputation and intelligence. As a person
involved in the final negotiations remarked, “the real dealmaker here was VC Strine. In my book, this never would have
happened without Strine.”
I agree that Strine was vital. He acquitted himself admirably and though known for his interminable opinions, like all great
judges *120 he is probably most proud of the cases where his presence obviated the need for an opinion at all. But as most
M&A practitioners would agree, Strine is exceptional. He will not always be there to bail you out.
Investors, on the other hand, will be there. It is their role in this that has been overlooked. This is, I think, the particular moral
of Oracle-PeopleSoft. The saga should make us question the restricted role shareholders have been given in takeover
contests, the strange patchwork of the paternalistic and the preemptive created in the nexus between Wilmington and
Washington.
Oracle-PeopleSoft was an offer to shareholders, a tender offer, blocked for 18 months by PeopleSoft’s board which had
declared the offer “inadequate.” The doctrine of principal relevance in justifying such an action by the board of a Delaware
company is substantive coercion. In addition, I believe substantive coercion is an appropriate starting point for this discussion
because it is, I think, doctrinally prior to proxy out. As Vice Chancellor Strine explained, the increased importance of proxy
contests - proxy out - is a response to the unfettered authority provided by substantive coercion.
A. The Emperor Has No Clothes: Substantive Coercion is Not a Reasonable Explanation of the Interaction Between
Boards and Investors
What conclusions can we draw from Oracle-PeopleSoft regarding substantive coercion? The case study offers a dramatic
repudiation of the doctrine.
Recall that the doctrine is primarily concerned with preventing shareholders from tendering their shares in “ignorance or
mistaken belief” of their true value. Management and the board are believed to have special competence in valuing the
company they run. In Oracle-PeopleSoft, they certainly did not show any. At least they did not show any interest in
addressing the valuation question in good faith (those two inquiries, as Professors Gilson and Kraakman observed when they
introduced the concept, are inseparable).54
When Oracle’s bid was launched, the PeopleSoft board actually had a recent and carefully prepared valuation study - the
fairness opinion from the J.D. Edwards merger. That opinion was three weeks old, the product of careful preparation and
arm’s-length negotiation (insofar as the valuation goes to the merger exchange ratio). The opinion predicted 2004 earnings of
$.69 per share.
*121 In the course of two weeks following Oracle’s bid, that estimate was raised to $1.02 per share. The revised estimate
served as the basis for the board’s determination that Oracle’s offer was inadequate. The banker who presented the revised
estimates recalled no questions from the board. The PeopleSoft employee who prepared the revision could not, under oath,
offer any reason for the change. This simply cannot be the process Delaware envisions when they defer to a board’s special
competence in valuing a company.
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Unlike PeopleSoft’s board of directors, PeopleSoft’s shareholders had no such ignorance or mistaken belief about the
Company’s earning potential. Not one of the investors I spoke with credited the revisions. “We were very skeptical . . . we’re
skeptical of everything in this business, everything these guys say is self-serving and in the best interest of individuals and
the company . . . it was just so self-serving,” was a typical comment. This view was confirmed by Wall Street, which had a
consensus estimate for PeopleSoft’s 2004 earnings in the mid-60 cents per share, consistent with the original, not the revised
estimate.
In point of fact, 2004 earnings turned out to be approximately $.70 per share. This was right in line with Wall Street and
shareholders’ expectations and within a penny of PeopleSoft’s pre-Oracle estimate, but (unsurprisingly) nowhere near
PeopleSoft’s fictitious $1.02 estimate that served as the basis for its response to Oracle.
Not only did the board exhibit no particular skill in valuing PeopleSoft on its own, they did not make any good faith efforts to
get assistance with the question. The Transaction Committee did not hire independent advisors. The board never requested
written valuation studies from its bankers. Even in rejecting the $26 offer, the board accepted only a conclusory oral opinion
from its bankers that the price was inadequate. No one on the board ever inquired what price would be adequate. Making
matters worse, even some of PeopleSoft’s own bankers did not believe their own opinion that the $26 price was inadequate.
PeopleSoft had retained both Citigroup and Goldman. In advance of delivering the opinion on the $26 offer, the chief of the
Citigroup team wrote to the chief of the Goldman team, “I have a fundamental problem with your analysis. Rather than go
into detail I will remain silent in this situation and look forward to having you guys on the buy side across the table from
me.”55 It is perhaps going too far to hold the board responsible for the disloyalty of its *122 bankers, but such problems may
have emerged earlier if the board had, for example, asked its bankers questions.
Although the board rejected the $26 offer as “inadequate” and Conway declared “Oracle’s [$26] offer does not begin to
reflect the Company’s real value,” the board later accepted and declared adequate what was, in real terms, a lower price (why
does anyone ever look at nominal terms anyway?). Such a history does not inspire any confidence that the board has a special
competence in valuation, at least one that can somehow be isolated from self-interest.
One corollary to the substantive coercion doctrine is that a company should use the breathing space provided by the pill to
make its case to shareholders regarding the company’s true value. In addition to putting out the fictitious revisions of the J.D.
Edwards synergy estimates, Conway deliberately misled the market about Oracle’s impact on the Company’s financial
health. He was fired for this, but only a year after he made the comments and only because the threat of perjury drew out the
story. Rather than making its case to the market, PeopleSoft dissembled and in at least one instance lied.
Of course, shareholders believed none of this. When Conway announced that no one was delaying purchases anymore as a
result of the bid, PeopleSoft’s stock price did not suddenly run. This goes to a second corollary of the substantive coercion
doctrine: shareholders are tender-prone, bowled over by any premium offer, unable to act strategically and willing to settle
for a price much lower than can be extracted by management. This is a complicated question. Any incremental obstinacy by
management will result in higher offers simply because all bidders with a lower price will be deterred. That is, you will
produce higher offers but fewer of them, a result that may or may not be efficient. That is a question that cannot be sorted out
with a single case study, but I do think Oracle-PeopleSoft contradicts the root idea that shareholders are especially credulous.
PeopleSoft did not need to announce that $16 was too low; the market traded through the bid immediately. It was
conversations with shareholders (PeopleSoft was not negotiating) that provoked Oracle’s moves to $19.50 and to $26.00, the
number that effectively became the final price. At any point, shareholders who supported the deal at the then-current price
and terms could have tendered their shares in a public display of support for Oracle’s offer. The tender *123 history is
indicative of the discipline and organic organization of the shareholder base: 56
Percentage of PeopleSoft Shares Tendered
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
The picture is a striking display of discipline. More impressive, though, is the final (pre-settlement) tender result - 61%. As
discussed above, that was the result of a coercive situation. But even in the face of such coercion, it was a highly
choreographed affair where shareholders (not perfectly, but reasonably well under the circumstances) gave Oracle the victory
it needed while avoiding a result that might induce confidence or complacency.
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This was, I think, a particularly interesting moment with regard to the doctrine of substantive coercion. The shareholders I
spoke with thought $24 was a fair price and would have accepted it if they had been forced into doing so with a credible
take-it-or-leave-it offer. But shareholders did not, as a result, clamor to accept the $24 offer. Shareholders bargained. While
chastising PeopleSoft for its intransigence, they offered support to the board in its demand for a higher price. And they
correctly called Oracle’s bluff. They saw past the “best and final” bluster, they homed in on Oracle’s desperation as the
critical clue to its mindset, and they demanded a higher number. This message was conveyed in meetings, through the press,
through *124 the tender, and, as always, through the market. Consider PeopleSoft’s stock price for the week ended December
9th. This was the week following the tender but before settlement or trial. (December 9th was the day of Vice Chancellor
Strine’s momentous conference call although, of course, no one knew that at the time.)
PSFT Price--Week of December 9th
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
Since PeopleSoft had already rejected $24, the earliest that a $24 bid could reasonably be received by shareholders would be
following a proxy contest at the end of March 2005. Thus, purchasing stock at $24 in December 2004 would produce a
negative return if you believed $24 was “best and final” (i.e. if you bought the stock on December 10, 2004, and received $24
in cash from Oracle on April 1, 2005, you would have a negative real return). Add to this that the trading level was widely
believed to be $16 on a standalone basis giving the stock a 33% downside if Oracle gave up. The market clearly did not
believe $24 was “best and final.” There are an infinite number of ways to parse the probabilities, but suppose the market
thought there was a 10% chance of the deal falling apart and a 40% chance of receiving $24 on April 1st. Then at $24, the
market was “expecting” a negotiated settlement (with 50% likelihood, the complement of the other two scenarios) at $26.50,
exactly where it happened. Clearly shareholders were demanding more from Oracle. As one shareholder told Oracle, “This is
your moment. But you have to pay up to get a friendly deal done.”
*125 It was just such a shareholder who finally provoked the admission from Oracle that it had more in its pocket and
conveyed this information to PeopleSoft. Thanks to Vice Chancellor Strine, that information became the basis for a deal, but
it should make one wonder - it certainly made Strine wonder - why this had to come through an unnamed investor. Were the
parties who actually carried fiduciary responsibilities (unlike the shareholder) unable to just sit down and have this
conversation? What happened to the model of the board as a loyal bargaining agent for disaggregated and naïve
shareholders?
B. Your Stockholders Are Not Stupid . . . or Disaggregated
The reality is that shareholders are not nearly as simple or as disaggregated as the substantive coercion doctrine presumes.
This fact was noticed by many in the early 1990s with regard to institutional investors. At the time, it became the subject of a
substantial amount of academic work.57 I think an equally important development, and one that has not received nearly the
attention, is the rise of hedge funds. Hedge funds figured prominently in the Oracle-PeopleSoft case and their influence is felt
in almost every takeover contest.
Hedge funds now control over $1 trillion in assets, 58 making them a formidable market force more or less on par with the $8
trillion mutual fund industry.59 Hedge funds may control fewer assets than mutual funds and other institutional investors, but
they are more sophisticated, more willing to hold undiversified positions (if they were not, they would have trouble
outperforming the market) and more willing to be activistic. Having higher tolerances for risk and facing far less regulatory
oversight than their institutional peers, they are in fact drawn to activistic and control situations since those situations offer
outsized returns. Increasingly, hedge funds are themselves the activists (Icahn and JANA with Kerr-Mcgee) or the bidders
(see, for example, the recent bid by Highland for Circuit City).
Hedge funds have been called, derisively, a compensation scheme and not an asset class. This refers to the ubiquitous
1-and-20 fee *126 structure that they charge clients, 1% management fee and 20% of the returns (the carry). Aside from
making a number of people very wealthy, I think this compensation scheme has implications for shareholder activism. Hedge
funds are constantly looking for new ways to produce market out-performance in order to justify their fees. At the same time,
hedge fund managers have far more to gain personally from a successful investment than their peers at institutions. This is
turning them into activists in a way that other institutional investors have never been. It is important to note in this regard that
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the absolute size of hedge fund holdings is not an accurate measure of their importance to takeovers if there is reason to
believe, and I would argue that there is, that they are more likely to be the shareholders in activistic and control situations
than their institutional peers. A good example of this last phenomenon is the recent MCI situation. Hedge funds may not
make up a large percentage of all U.S. telecom holdings, but the MCI shareholder list is a veritable who’s who of the hedge
fund industry. Hedge funds are not everywhere, just the places where it matters most.
One reason that the influence of hedge funds has not, I think, been sufficiently appreciated is that they are largely unregulated
and culturally averse to disclosure. For every Carl Icahn, there are three or four hedge funds whose name no one has heard of
taking large and influential positions. This phenomenon has been abetted by Wall Street, which makes enormous profits
fronting for hedge funds, and by the emergence of a liquid derivatives market. For example, in the recent attempted buyout of
Woolworth Plc by Apax, Deutsche Bank was holding 17% of Woolworth’s stock. This was almost certainly to hedge total
return swaps with hedge funds, i.e., the stock was being held by the hedge funds and Deutsche was fronting for them. 60 As
the recent King-Mylan deal showed, derivatives have complicated the landscape in innumerable ways largely beyond the
scope of this paper. It is worth noting, though, that the influence of hedge funds is systematically underappreciated due to the
lack of disclosure. A number of the investors that I interviewed, large PeopleSoft holders, were hedge funds.
Although hedge funds are hot, institutional investors are still king. In recent years, they have grown more sophisticated as
well and they are increasingly less willing to blindly support management. Investors that I spoke with attributed this
phenomenon in part to Enron and related scandals. They also thought Regulation *127 FD, the SEC rule requiring equal
disclosure, had played a large role in increasing institutional activism. Regulation FD upset the cozy relationships many
institutional investors enjoyed with company managements and thereby lowered the costs of taking positions contrary to
management.
Hedge funds and institutional investors create a formidable and thoughtful shareholder base for modern corporations as was
evident in Oracle-PeopleSoft. The model of an unsophisticated investor, unwilling or unable to actively oppose management
is inconsistent with the realities of the modern market and contradicted by the sophistication exhibited by shareholders in
Oracle-PeopleSoft.
One final point with regard to shareholder sophistication. To the extent the assumptions of substantive coercion accurately
depict some shareholders, to the extent some shareholders actually are too eager to sell at an insufficient price, that subset of
shareholders is quickly relieved of its shares. This final point illustrates what is perhaps the most basic absurdity of the
substantive coercion doctrine. Not even Delaware has closed the stock exchange. During the 18 months that PeopleSoft
resisted Oracle, 2,784,809,000 shares traded. This is 7.4 times the total PeopleSoft shares outstanding. This was an extremely
liquid market. If at anytime a shareholder believed the price, which was at all times a function of Oracle’s bid, to be
sufficient, he could (and did) sell. Of course, the very people most in need of protection are also the first to sell their shares.
Thus substantive coercion does nothing to protect those who actually exhibit “ignorance or mistaken belief” about value.
Rather, through the Darwinian operation of the NYSE, their shares gravitate to holders who know what they are worth.
C. With Friends Like These: The Board as a Loyal Bargaining Agent
Oracle-PeopleSoft also suggests that boards may not be loyal bargaining agents. The poison pill has three primary
justifications: 1) it gives the board the opportunity to communicate its story about true value; 2) it gives the board the
opportunity to search for an alternative; and 3) it allows the board to act as a bargaining agent. PeopleSoft’s board failed
miserably on 1 as the preceding discussion showed. They tried and failed on 2. Thus, after the first few months and certainly
by fall 2004 (as Vice Chancellor Strine implied), 3 was the only justification sustaining their use of the pill.
*128 But PeopleSoft’s board was never looking to bargain. Neither Conway nor Duffield, the CEOs during the contest, ever
had any intention of doing a deal with PeopleSoft. The board implemented a series of defenses at least two of which had an
extreme no-hand character. These defenses were the CAP and the antitrust review. The no-hand character of the CAP derived
from the fact that it was a bargained-for contract with a third party. The no-hand character of the antitrust review derived
from the government’s power to enjoin the transaction. In Quickturn, the Delaware Supreme Court rejected a poison pill with
a far milder no-hand character. The Court (unhelpfully) justified this on the ground that the board did not have the authority
to implement such a pill under § 141(a) of the Delaware General Corporation Law. This does not make a lot of sense given
that the board has the power to precommit the corporation in other ways, such as through a CAP. A better critique of such
devices is that they are inconsistent with directors’ fiduciary duties, the analysis offered by Vice Chancellor Jacobs in Toll
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Brothers. In any case, such devices are highly suspect under Delaware law and they evince an intention on the part of the
board and management to preclude a transaction completely rather than negotiate to an appropriate price. This is why Gibson
Dunn, PeopleSoft’s own counsel, warned against them. PeopleSoft’s motivation was made clear by Conway who urged his
board to invite antitrust review because if the DOJ did not enjoin the transaction, it was “completely and only a matter of
money.” Conway and the board did not seem to understand what their fiduciary duties required and they certainly were not
loyal bargaining agents. What it means to negotiate a sale is that you are arguing over a price. Price is, by definition,
“completely and only a matter of money.”61 If the price is high enough, you have done your job and you accept it.
This unwillingness to bargain was also reflected in the Orwellian argument that became the last refuge of PeopleSoft’s board:
we have a price but we can not tell anyone, because if we negotiate or show any interest, all our customers will leave. As
Vice Chancellor Strine agreed, this argument is clearly disingenuous. How naïve could customers be? They had already
endured an 18-month hostile takeover contest. But it was the one argument that preserved PeopleSoft’s twin desiderata:
satisfy the Delaware burden of willingness to negotiate and do not negotiate. If it were not for an activist shareholder, an
activist judge and the honesty of Skip Battle, the one person on *129 PeopleSoft’s board who deserves some praise for his
conduct, negotiations would probably never have taken place.
D. Shareholder Communication is a Basic Impediment to Shareholder Bargaining Power
In sum, Oracle-PeopleSoft suggests that boards may not be loyal agents. At the same time, the case study offers evidence that
shareholders have both the sophistication and discipline to tussle with a suitor and the appropriate incentives to reach the
right conclusion. But the case for shareholders should not be overstated. They are not the board’s equal in negotiating power,
not even close (though perhaps this is compensated for by the alignment of incentives). The power of shareholders is
constrained in a number of ways (rational apathy, for example). One of the most substantial handicaps, and one that is
completely artificial, is the limitation on communication created by the federal securities regime.
The communication problem is pervasive, and it is difficult to identify particular events in the Oracle-PeopleSoft saga that
might have been otherwise if the federal regime were not so exacting. Such a hypothetical requires us to entertain
counterfactuals with so many variables as to be almost meaningless. How can we know who would have said what, and to
whom, and when, had they not been prevented from doing so by the federal rules? Nonetheless, Oracle-PeopleSoft does offer
some hints at the possibilities of enhanced shareholder communication. First, as I have argued throughout this paper,
shareholders were quite effective at delivering their message even without being able to effectively communicate. This
suggests that if they could more easily coordinate, they would be quite formidable. Second, PeopleSoft showed genuine
responsiveness to CapRe, its largest holder. The loss of CapRe’s support was a critical turning point in PeopleSoft’s thinking
and the moment I would identify when the “just say never” constituency began to lose out to Skip Battle. If CapRe had been
able to deliver this message in coordination with other holders, it might have been able to turn events toward a negotiated
settlement earlier (as it is, it seems CapRe effectively brokered the deal).
But the problem and potential of shareholder communication was most obvious during the highly choreographed November
19th tender contest. Shareholders were in a tough position. PeopleSoft’s unwillingness to create a bid-ask (announce before
the tender deadline an intention to redeem the pill if Oracle raised its offer) made this something of a Soviet election: there
was only one side to vote *130 for. Shareholders faced risk if a majority were not tendered (30% downside) but also risk if
the majority tendered were overwhelming and induced complacency (the last $2.50 extracted represented a 10% increase
worth $1.1 billion to shareholders). PeopleSoft was no help in this matter; their interest was in seeing Oracle lose. They
wanted to take advantage of shareholders’ desire to make this close in order to trick shareholders into tendering too few
shares. Oracle was no help in the matter; their interest was in unqualified victory. So Oracle was spreading disinformation
trying to scare shareholders into tendering. They were telling shareholders in the final hours that they had heard CapRe was
pulling its shares and that a majority would not be achieved. This was, as it turned out, not true. CapRe tendered and even if it
had not an (albeit slim) majority would have been achieved. In the middle of this were shareholders who had to sort this out
on their own. The logical way to overcome this would be to work together. The problem was that if shareholders came
together and coordinated their tender, they would almost certainly be in violation of at least § 13(d) and Rule 14d-9.62 This
dynamic highlights, I think, one of the critical reasons for increased shareholder communication. Often in takeover situations
neither side is adequately representing the interests of shareholders.
As Oracle-PeopleSoft demonstrates, the federal limitations on shareholder communication have handicapped the ability of
investors to act as effective bargaining agents. But this suggests a more basic problem with the evolution of Delaware law
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that has gone largely unnoticed. During the 1980s Delaware ratified the use of the poison pill. Then, through a series of
decisions I have reviewed, Delaware gave directors incredibly broad discretion to deploy the pill with its endorsement of the
always available doctrine of substantive coercion. These changes in the law hamstrung investors in dealing with disloyal
managements by impeding the disciplinary effects of the market for corporate control. Thus, as was evident in
Oracle-PeopleSoft, “just say no” has made investors increasingly subject to the “jejune, playground, adolescent, macho”63
antics of a company’s officers and directors. The one safety valve that has been preserved is the shareholder franchise: proxy
out. In Delaware’s view, the appropriate response to a disloyal management is to oust them in an election. As Vice
Chancellor Strine has argued, “Because the acquirer could simply elect a new board that could redeem the pill, use of the pill
could *131 not be viewed as a fatal obstacle to the bid, and thus as injurious to the interests of target company
stockholders.”64
E. The Tension Between Wilmington and Washington
Unfortunately, Wilmington and Washington were not talking to each other. At the same time that Delaware law was evolving
to place its faith in proxy contests as the primary source of market discipline, Washington’s regulation of that very proxy
system, regulation that was originally designed to protect shareholder voice, was perverted through, among other things,
capture by the managerial class. As was clear from the discussion in Part II, the federal proxy regime is now a formidable
impediment to shareholder voice, not its champion. Professor Lucian Bebchuk has concluded from his extensive work on the
shareholder franchise, “Although shareholder power to replace directors is supposed to be an important element of our
corporate governance system, it is largely a myth. Attempts to replace directors are extremely rare, even in firms that
systematically under-perform over a long period of time.”65 As Professor Bebchuk is fond of pointing out, under the current
regime directors are more likely to be struck by lightning than to be replaced by shareholders in a contested election.
Unfortunately, it is this proxy regime, crippled by regulation, for the most part perfunctory and ineffective, that Delaware
relies on to counter managerial self-interest.
It is this tension that makes Delaware’s compromise so unsatisfactory. Delaware put proxy out at the center of its thinking
even though the regulatory regime governing proxy contests is not its prerogative. Washington developed checks on proxy
contests and tender offers because it believed proxy contests and tender offers were not sufficiently regulated by the states.
Senator Williams, for example, was concerned by the prevalence of tender offers and the threats they posed to “proud, old
companies.” When Delaware later sought to curb tender offers in the 1980s it presumed, I think somewhat naïvely, an
effective shareholder franchise that it could itself protect and defend through decisions such as Blasius. 66 But Blasius and its
progeny are only half the story. The data provided by Professor Bebchuk and others suggest that the regulations Washington
imposes are often outcome-determinative in themselves. As is often the case in law, the greatest effect of the federal
regulations is not on the contests that *132 happen, but on the ones that never occur because the regulation has deterred them.
I believe we can interpret the dearth of meaningful director elections as a reflection, at least in part, of Washington’s
regulation. In making proxy out the linchpin of its thinking regarding poison pills, Delaware imported all the shortcomings of
the federal regime. These shortcomings upset the balance Delaware was seeking by acting as a thumb on the scale in favor of
management.
Part of Delaware’s thinking was, I believe, that anyone with the resources to launch a tender would also have the resources to
wage a proxy contest. Along these lines, a dichotomy is often made by academics between contests by a potential acquirer
and contests generally.67 This distinction is not without merit. As far as it goes, it is true that many people (certainly not all 68)
with the resources to launch a tender offer will have the resources to effectively fight a proxy contest and the inclination to do
so. But this is not the end of the inquiry.
First, it does nothing to address the situation of shareholders who prospectively want the ability to consider tender offers. If a
shareholder believes that use of the poison pill generally is inefficient (as a majority today seem to, given the success of
shareholder bylaw proposals on the matter), or if a shareholder just wants a board of directors who believe in the time-limited
use of the pill but not in just-say-no, then the shareholder has little recourse. He faces all the obstacles to achieving these
results created by the federal regime without the aid of a well-funded acquirer to help him. But such prospective exercise of
proxy out is as important as the retrospective exercise. To be sure, some bidders will endure 18 months of turmoil, an
antitrust trial in federal court, a tortious interference trial in California, a fiduciary duty trial in Delaware, being saddled with
a $2.4 billion contingent liability and $200 million in parachute payments and an extra company it did not intend to buy, in
order to close a deal. But some bidders will be deterred by that. For proxy out to be a viable concept, it cannot simply mean
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that shareholders have the ability to retrospectively undo the scorched-earth policies of a disloyal board. Such a system
imposes all the costs of disloyalty on shareholders - on shareholders, that is, who know they have a disloyal board and want
to oust it - by effectively forcing them to wait to oust their disloyal *133 board until a bidder emerges (the premise being that
it is only the bidder who has the resources to run the proxy contest). This is silly. If proxy out is to be meaningful, it must be
as much prospective as retrospective. Certainly, it means that a potential acquirer can fund a proxy contest to oust a board
that is blocking the acquirer’s tender with a pill. But it has to also mean that prospectively shareholders can ensure that their
board has an opinion regarding fundamental transactions that is reasonably similar their own. Once you admit this last fact,
though, the dichotomy between contests over a bid and contests on a clear day is not consequential.
Even in the context of contests where a tender has already been launched - contests over a bid - it is wrong to assume that the
interests of a bidder and the interests of target shareholders are aligned. This is an important lesson of Oracle-PeopleSoft.
Recall the investor who told Oracle that “while I supported what they were doing, I was a PeopleSoft shareholder, not an
Oracle shareholder, and it wasn’t their interests that I was looking out for.” Just because a bidder has made a premium offer
does not mean that it is suddenly part of a holy alliance with shareholders against an entrenched and disloyal target board. In
Oracle-PeopleSoft, Oracle did a number of things that were quite unhelpful and not in the interests of target shareholders.
Oracle launched an unreasonably low offer and used the offer to disrupt PeopleSoft’s business (see the “twist in the wind”
e-mail).69 Oracle spread disinformation in an attempt to convincingly win the tender. Oracle’s executives used the Delaware
trial to talk down the price. PeopleSoft acted badly, but Oracle was not on the side of the angels. It is really a function of how
poorly PeopleSoft’s board conducted itself that anyone might think so. The apparent alliance between a bidder and target
shareholders that arises from their mutual opposition to a target’s disloyal board is fictitious. A bidder and shareholders may
agree that a target’s disloyal board is not doing its duty, but their interests quickly diverge after that. A bidder wants to
purchase a company at the lowest possible price. A shareholder wants the bidder to overpay.
Thus, even if proxy out is only analyzed in the context of a bid, the existence of a bidder does not solve any issues. If
PeopleSoft’s *134 board had stood for election in March 2005 (that is, if a negotiated deal had not been reached) and
Oracle’s slate had won, the newly elected directors would have voted, with considerable justification, to accept the $24 offer
over which the election was conducted. But PeopleSoft shareholders did not want a board that thought $24 was the right
price. They did not want a board of Oracle shills. They also did not want a board that had adopted the strange, Orwellian
view that although there was a price for the company, it could never ever tell anyone. And perhaps if shareholders had been
forced to choose between a board of Oracle shills and a board that would never negotiate, they would take the shills. But
what they really wanted was a board that would, at the appropriate time and with the appropriate confidentiality, sit down
with Oracle like adults and conduct a hard-nosed but fair negotiation. If shareholders do not have the ability to represent their
own interests effectively in a proxy contest (as opposed to just voting for a bidder’s representatives) then they really face a
Hobson’s choice - as they would have in an Oracle-PeopleSoft proxy contest - between a disloyal board who does not want
any deal and a supine board that wants to sell at too low a price. PeopleSoft shareholders did not want $24 and they did not
want $16, they wanted $26.50.
F. Unburden Shareholder Communication
The shortcomings of proxy out arise because the doctrine exists in the nexus between Wilmington and Washington. This
interaction of federal and state law offers multiple avenues for reform but also raises the legitimate fear that an adjustment in
one city will be frustrated by changes in the other. I believe the most elegant and most promising reform is also the simplest.
Unburden the shareholder. Pare back the anachronistic restrictions on shareholder communication that have chilled dialogue
and coordination.
The benefits of enhanced communication could be achieved with two rather straightforward adjustments to the federal
regime. Both reforms have been suggested at various times by other commentators, 70 but I see little point in sacrificing
elegance for originality. First, expand the rather arbitrary 10-or-fewer exemption into a full-fledged big-boy exemption. Such
a rule would exempt all solicitations between qualified institutional investors. The sophistication of shareholders in the
modern marketplace - the sophistication that was evident in Oracle-PeopleSoft - means that shareholders can *135 evaluate
solicitations from other shareholders without handholding by SEC staff attorneys. The paternalism is simply inappropriate at
this point in the evolution of our securities markets. Furthermore, as hedge funds and institutional investors increasingly
predominate, the reform would make the proxy rules increasingly less important. It has the nice feature of varying regulation
(roughly) with the sophistication of the market.
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A second critical reform would be to scale back Regulation 13D. Although academic discussion often focuses on the proxy
rules, it is immediately clear in speaking with shareholders that 13D is what they fear. One adjustment would be to raise the
disclosure threshold from 5%. Having a tender offer early warning system was substantially more critical in 1968 before the
advent of the pill. Today, shareholders in most companies cannot aggregate more than 15 or 20% without going to the board
anyway. The 5% threshold is anachronistic. A second (more realistic) adjustment to Regulation 13D would be to narrow the
activities that result in group formation. At the very least, voting groups should be excluded. A better rule might be crafted
that also exempted other activities (holding, acquiring, disposing) in situations where control was not at stake.
These two reforms would go a long way towards enhancing shareholder voice and reestablishing the shareholder franchise as
a functional check on management. For example, in the context of Oracle-PeopleSoft, they would have allowed a large voting
block of holders to form and effectively negotiate with Oracle, preempting management’s entrenchment. By enhancing the
shareholder franchise, the reforms would operate to rebalance Delaware’s jurisprudence, which has tipped in favor of
management as a result of Delaware’s misplaced reliance on proxy out.
Oracle-PeopleSoft suggests that shareholders can be trusted. In fact, they were the only constituency in our case study that
deserved the law’s trust and deference. They were not duped by small premia; they were not adverse to an efficient
transaction. They were neither supine nor obstinate. And they remained dispassionate in a contest animated by personal
vitriol. This is not due to their high moral character, their information, or their intelligence. It is, rather, just another example
of self-regarding owners in a market reaching an efficient result. This is perhaps the most basic reason to prefer shareholder
communication as the avenue of reform. It is adaptive. Unrestrained, sophisticated shareholders will devise imaginative
solutions to situations that we cannot now predict. And, as a result, that we don’t have to.
Footnotes
d1
David Millstone, J.D., magna cum laude, Harvard Law School, 2005.
dd1 All quotes from George “Skip” Battle, David Duffield and Craig Conway come from author interviews, unless otherwise noted.
1
David Marcus, Oracle Case Moot, Daily Deal, Dec. 14, 2004.
2
See, e.g., the comments of Karl Will, JP Morgan’s head of technology M&A in Britt Erica Tunick, The Oracle from Oracle, Inv.
Dealers’ Dig., Feb. 7, 2005, at 26-32. (“Technology companies have traditionally shied away from hostile acquisitions, fearing
that if the battle for a company upsets its employees, they may leave immediately after an acquisition. That’s a major issue
because, in tech more than in many other industries, the value of the companies is closely linked to the talented individuals they
employ. And even though that threat diminished after the dot-com bust left a lot of talent looking for work, and few rivals out
there hiring it away, tech companies have remained leery of hostile tactics.”).
3
David Bank, After 18-Month Battle, Oracle Finally Wins Over PeopleSoft, Wall St. J., Dec. 14, 2004, at A1.
4
Olaf de Senerpont Domis, PeopleSoft Bows to Oracle, Daily Deal, Dec. 14, 2004.
5
Transcript of Telephone Conference at 16, Oracle Corp. v. PeopleSoft Inc., No. 20377 (Del. Ch. Nov. 24, 2004).
6
Id.
7
Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110, 114 (1965).
8
Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 22 Stan. L. Rev.
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819, 845 (1981).
9
Id. at 889-90.
10
Id. at 890.
11
Moran v. Household Int’l, 490 A.2d 1059, 1080 (Del. Ch. 1985), aff’d, 500 A.2d 1346 (Del. 1985).
12
Id. at 1080.
13
Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995).
14
Unocal v. Mesa Petroleum, 493 A.2d 946 (Del. 1985).
15
Unitrin, 651 A.2d at 1387.
16
Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).
17
Id. at 659.
18
Carmody v. Toll Bros., Inc., 723 A.2d 1180 (Del. Ch. 1998) (denying a motion to dismiss).
19
Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 729 A.2d 25 (Del. Ch. 1998), aff’d on other grounds, 721 A.2d 1281 (Del.
1998).
20
Ronald J. Gilson & Reinier Kraakman, Delaware’s Intermediate Standard for Defensive Tactics: Is There Substance to
Proportionality Review?, 44 Bus. Law. 247, 274 (1989).
21
Leo E. Strine, Jr., The Professorial Bear Hug: The ESB Proposal as a Conscious Effort to Make the Delaware Courts Confront the
Basic “Just Say No” Question, 55 Stan. L. Rev. 863 (2002).
22
Id. at 864-65.
23
Adolph Berle & Gardner C. Means, The Modern Corporation and Private Property (rev. ed. 1968).
24
Securities Exchange Act of 1934, 17 C.F.R. § 240.14a (2006).
25
Jill E. Fisch, From Legitimacy to Logic: Reconstructing Proxy Regulation, 46 Vand. L. Rev. 1129 (1993).
26
H.R. Rep. No. 73-1383, at 13 (1934). The Rayburn Report was prepared by Congressman Rayburn to accompany a version of the
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bill similar in form to the bill that Congress eventually enacted. For a more involved discussion, see Fisch, supra note 25.
27
Fisch, supra note 25, at 1185.
28
John Pound, Proxy Voting and the SEC: Investor Protection Versus Market Efficiency, 29 J. Fin. Econ. 241 (1991).
29
Id. at 263 (quoting Tris Coffin, Proxy Warfare May Provoke Tighter Government Rules, Nation’s Bus., July 1955, at 92).
30
Id. at 280.
31
Id. at 279.
32
Stephen M. Bainbridge, Mergers and Acquisitions 10 (2003).
33
Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520, 566 (1990).
34
See, e.g., id. See also Thomas W. Briggs, Shareholder Activism and Insurgency Under the New Proxy Rules, 50 Bus. Law. 99
(1994); Bernard S. Black, Next Steps in Proxy Reform, 18 J. Corp. L. 1 (1993); John C. Coffee, Jr., The SEC and the Institutional
Investor: A Half-Time Report, 15 Cardozo L. Rev. 837 (1994); Carol Goforth, Proxy Reform as a Means of Increasing
Shareholder Participation in Corporate Governance: Too Little, But Not Too Late, 43 Am. U. L. Rev. 379 (1994); Mark J.
Loewenstein, The SEC and the Future of Corporate Governance, 45 Ala. L. Rev. 783 (1994); Bernard S. Black, Next Steps in
Corporate Governance Reform: 13(D) Rules and Control Person Liability, J. Applied Corp. Fin., Winter 1993, at 49.
35
Securities Exchange Act of 1934, 17 C.F.R. § 240.14a-3(a) (2006).
36
Id. § 240.14a-1(l).
37
Id. § 240.14a-2(b).
38
Id. § 240.14a-9.
39
Id. § 240.13d-1; 15 U.S.C.S. § 78m(d) (LexisNexis 2006).
40
17 C.F.R. § 240.13d-5(b).
41
Wellman v. Dickinson, 682 F.2d 355, 364 (2d Cir. 1982).
42
17 C.F.R. § 240.16b; 15 U.S.C.S. § 78p(b) (LexisNexis 2006).
43
For an interesting discussion, see Briggs, supra note 34.
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44
Adam Wilmoth, Icahn Unveils Plans for Kerr-McGee; Investor Nominates Himself for Board, Oklahoman, Mar. 4, 2005, at B1.
45
Kerr-McGee Suit Claims Icahn Broke Federal Law, Gas Daily, Mar. 14, 2005, at 1.
46
Richard Siklos, How Icahn Rebranded from Raider to ‘Activist,’ Sunday Telegraph (U.K.), Apr. 24, 2005.
47
Ron Orol, ‘Parachutes’ Gain Popularity, Daily Deal, Dec. 13, 2004.
48
Axa Spreads its US Wings, Ins. Day, July 20, 2004.
49
MONY v. Highfields, 368 F.3d 138, 141 (2d Cir. 2004).
50
Id.
51
Id. at 146.
52
Fisch, supra note 25, at 1185.
53
Transcript of Telephone Conference, supra note 5.
54
Gilson & Kraakman, supra note 20.
55
Pre-Trial Brief of Plaintiff at 29, Oracle v. PeopleSoft, No. 20377 (Del. Ch. Nov. 24, 2004).
56
Slide prepared by Alexia Bertrand, Matt Fucci, Peter Massumi, Walter Scott and Matt Smith.
57
On the rise of institutional investors, see, e.g., Bernard S. Black, Agents Watching Agents: The Promise of Institutional Investor
Voice, 39 UCLA L. Rev. 811 (1992); John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate
Monitor, 91 Colum. L. Rev. 1277 (1991).
58
Hedge Fund Research, Times (London), Apr. 28, 2005, at 48.
59
John Spence, MUTUAL FUNDS: The Boom After The Bust, Dow Jones News Service, May 2, 2005, available at Factiva.
60
Henry Sender, Mystery Shoppers, Wall St. J., Apr. 25, 2005, at C1.
61
Pre-Trial Brief of Plaintiff, supra note 55, at 1.
62
Securities Exchange Act of 1934, 17 C.F.R. § 240.14d-9 (2006).
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63
Transcript of Telephone Conference, supra note 5.
64
Strine, supra note 21, at 877.
65
Lucian Arye Bebchuk, The Case for Shareholder Access to the Ballot, 59 Bus. Law. 43, 45 (2003).
66
See Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).
67
See, e.g., Bebchuk, supra note 65, at 46.
68
One paper that I believe casts doubt on the willingness of a bidder to slog through a proxy contest is Lucian Arye Bebchuk, John
C. Coates IV & Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54
Stan. L. Rev. 887 (2002).
69
This was an email sent by investment banker Joseph Reece from Credit Suisse First Boston LLC, who was advising Oracle, to
Safra Catz in which he described the initial bid as a ‘twist in the wind’ strategy. Reece advised Catz of Oracle to stay with this
low bid ‘to create doubts in the minds of the market.’ In time, he wrote, ‘we should see a decline in the price [of PeopleSoft]’ (as
reported by Susan Beck in Extreme Takeover, Am. Lawyer, May 2, 2005).
70
See, e.g., Briggs, supra note 34.
End of Document
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