October 4, 2004 5:00 PM PDT

PeopleSoft calls Conway less than honest

WILMINGTON, Del.--A PeopleSoft board member testified Monday that former CEO Craig Conway was fired in large part because of his reckless exaggeration to Wall Street analysts when informing them last year that Oracle's offer to buy the company was no longer a disruptive influence.

Steven Goldby, who chairs PeopleSoft's governance committee, said the board two weeks ago had reviewed Conway's deposition elaborating on his remarks.

"I was...somewhat surprised by the discussion of situational ethics," Goldby told Delaware's Chancery Court in the first day of a trial here that Oracle hopes will permit the acquisition to proceed. Oracle launched its hostile takeover bid for the rival software maker in June 2003.

Oracle's lawyers played a five-minute videotape of the deposition, in which Conway acknowledged being less than honest during the conversation with analysts in September 2003. At the end of the video, after repeated questioning, Conway admitted that his remarks "weren't true."

The testimony from Goldby, chairman and CEO of Symyx Technologies, offers a rare glimpse into a relationship between a board and a CEO that was becoming increasingly estranged over time. Goldby said his initially positive view of Conway soured after watching the CEO fire Tom Jones, head of North American sales, about two years ago, and then hearing a slew of complaints from top PeopleSoft executives early this year who were threatening to quit.

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PeopleSoft's board, in announcing Conway's firing last week, declined to give specifics as to why it terminated his employment, other than to note that it was a progressive loss of confidence in his leadership and that it had nothing to do with Oracle's takeover bid. Some sources have speculated that Conway's firing was allegedly for taking action repeatedly without proper notification to the board.

PeopleSoft had filed an amended transcript of the September 2003 remarks with the U.S. Securities and Exchange Commission shortly after the original document was filed.

Judge Leo Strine appeared surprised that PeopleSoft had made that move, saying it "strikes me as passing strange."

"Gerald Ford, I'm sure, wished he could revise what he said about Poland in 1976," the judge added. (In a 1976 debate with Jimmy Carter, then-President Ford said that there was at the time no Soviet domination of Eastern Europe.)

Boardroom maneuvers
Oracle's strategy appears to be to argue that Goldby and the other directors were not independent and did not give Oracle's acquisition offer adequate consideration. Goldby acknowledged that he had been approached to join the PeopleSoft board by Conway, who also paved the way for Goldby to join two other boards.

Monday's testimony provided a unique window into the internal deliberations of PeopleSoft's board and executives. Goldby had e-mailed Conway in July 2003 complimenting him on an earnings report, saying the CEO is "one of the legendary stories not just in PeopleSoft, but in the Valley."

The situation had reversed itself dramatically just six months later. By early 2004, Goldby said, three of Conway's "direct reports were really terribly, terribly unhappy working for him and were likely to quit" while "our forward product strategy was not as good as it could be." Adding to the problem was a series of executive departures in late 2003.

Goldby said last week was not the first time that the board had considered firing Conway, saying "it really goes back further than that." But the board waited to terminate Conway until it had good news to deliver as well, he said.

The company said Friday that it expected license revenue for the third quarter to exceed $150 million. On Monday, it said third-quarter revenue would exceed Wall Street's expectations.

When PeopleSoft announced Conway's departure last week, the board said it was not firing him "for cause," which allowed him to retain his multimillion-dollar severance package and accelerated the vesting of stock options.

Goldby testified that the board had considered firing him for cause and that board representatives met last Thursday with the senior employment partner at law firm Gibson, Dunn & Crutcher. But, he said, "we were advised" that the statements last fall did not rise to a "material act of dishonesty."

Later in the day, Oracle seemed to be aiming to show that PeopleSoft was so dead set against being acquired that it lobbied government officials to block the deal--a decision that would be nearly impossible to undo if the board later changed its mind.

"We knew at the time it was not something that we could call back once it started," Goldby said.

Goldby described under cross examination how PeopleSoft had written a $25,000 check to a lobbyist to secure a meeting with then-Connecticut Gov. John Rowland and Attorney General Richard Blumenthal. He also said that seven agenda items in a memo given to board members before a January meeting related to rallying political opposition to Oracle.

PeopleSoft representatives met with the U.S. Department of Justice in early February and had prepared presentations for states such as Maryland, Michigan, New York and Ohio--many of them PeopleSoft customers--predicting that the acquisition would lead to higher prices, Goldby said.

Conway appears to have pinned his hopes on the Justice Department winning. One memo he wrote warned "we will keep or lose the company" based on the outcome of the case, and predicted that "it is unthinkable that Delaware will overturn the pill," a reference to the trial that began this week over the poison pill strategy for averting a takeover.

In the deposition that was played in court, Conway seemed bitter about what he described as Oracle's attempt to sabotage PeopleSoft's analyst event. "Oracle found a way to upstage PeopleSoft. When we had something good to talk about, Oracle threw in a dirty trick," he said.

Long court battle
Oracle is seeking to remove PeopleSoft's shareholder rights plan, an antitakeover measure commonly referred to as the poison pill and one of the last remaining obstacles to Oracle's offer if the European Commission does not oppose the deal. In addition, Oracle is also asking the Chancery Court to prohibit PeopleSoft from continuing to offer its customer assurance program, a program that Oracle describes as a de facto poison pill but one that PeopleSoft views as necessary to continue to attract prospective customers.

Throughout its pretrial brief, Oracle alleges various instances in which Conway and the company's management team rejected Oracle's tender offer and launched various anti-takeover measures without proper board approval.

Oracle faces a challenge in removing the poison pill in Chancery Court, where proxy solicitors and attorneys who specialize in business note that they do not recall any companies that have been successful in persuading the court to remove such a provision. A poison pill is designed to make a hostile takeover bid too expensive because it releases a flood of additional shares onto the market, making it impossible for an acquirer to purchase all the shares needed to gain a controlling stake in the company.

A poison pill, however, can be waived at any time a company's board determines that it wants to enter "friendly" merger negotiations with a company. That change of heart in a hostile takeover attempt usually occurs when the buyer throws out an offer price the board "can't refuse," or if a dissident slate of directors, who are more favorable to the proposed merger, are later elected and replace the current board.

Oracle, in its pretrial briefs, also alleges that PeopleSoft's management enacted the customer assurance program without proper board approval or oversight.

PeopleSoft, in response to Oracle's takeover bid and as a means to reassure its current and prospective customers about their multimillion-dollar software investments, would not be lost if Oracle succeeds in its attempt, added a clause to customers' contracts that their money would be refunded several times over if several events occurred. One, Oracle acquires the company, and, two, the money they spent on their PeopleSoft license would be refunded by two to five times the cost, if Oracle discontinues support for the PeopleSoft software two years after the customer signs a contract.

The Chancery Court case will play a significant role in the Oracle deal, as the regulatory obstacles fall by the wayside. On Friday, the Department of Justice announced that it would not appeal a lower court's ruling, which found in Oracle's favor.

Meanwhile, the European Commission has yet to restart the clock on its review of the proposed merger. A number of legal observers say it's likely that the commission will allow Oracle to proceed with its merger efforts, which would remove the last regulatory hurdle. That, in turn, would leave the poison pill as the last obstacle.

CNET News.com's Dawn Kawamoto contributed to this report.

 

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