ISS gives thumbs-up to PeopleSoft directors

Institutional Shareholder Services, which advises hundreds of portfolio and pension fund managers on how to vote on proxy-related issues, said the board's response to Oracle's bid "met the standard of fiduciary responsibility." But ISS questioned the company's need for prolonging the use of a controversial customer guarantee program.

The ISS announcement comes as investors prepare to cast their ballots at PeopleSoft's annual shareholders meeting March 25. PeopleSoft directors Craig Conway, George "Skip" Battle, Frank Fanzill Jr. and Cyril Yansouni are up for re-election. Proxy solicitors said that if ISS had advised its clients to withhold their votes for PeopleSoft's board, it may have led to a symbolic vote of no confidence in the way PeopleSoft's directors had handled Oracle's bid.

"In meeting with ISS, the board members conveyed the key factors considered in making the decision to recommend against the Oracle tender offer. A leading factor was the board's assessment of regulatory risk, which has proven correct and supports the board's decision to reject the Oracle tender offer without clarity on a DOJ decision," ISS said in its report.

ISS also looked favorably on PeopleSoft's creation of an independent transaction committee, comprised of outside directors, to review the offer. That committee has met 14 times since the initial offer.

"We are pleased with ISS's recommendation in favor of the PeopleSoft board nominees," CEO Conway said in a statement. "ISS's recommendation supports our board's actions over the past nine months to protect and enhance value for stockholders in the face of Oracle's hostile actions. PeopleSoft stockholders can be assured that the board has acted and will continue to act in their best interests."

Oracle declined to comment, pending review of the ISS decision.

ISS also noted that it understood the board's decision to launch PeopleSoft's customer assurance program, in light of a "real threat of lost business" due to the uncertainty surrounding the merger and erosion of shareholder value.

"We believe that Oracle's initial threats of dropping support to PeopleSoft customers in a successful takeover scenario are legitimate concerns for PeopleSoft customers. Given the facts and circumstances at the time and in advance of the DOJ ruling, the directors of this board appear to have acted in a manner consistent with fulfilling their obligations to shareholders."

Under the program, customers are guaranteed a sizable refund if PeopleSoft is acquired after two years from their signing a contract, and the acquirer discontinues support of the products.

ISS, however, would like to see the program dropped as soon as possible, given that it could discourage future offers to buy the company.

"In light of the Department of Justice decision that the Oracle bid is anticompetitive, we believe that the basis for continuing the customer assurance program stands on weaker ground...We would like to see the board discontinue this practice," ISS said. "A continuation of this practice would shift the original purpose of protecting customers to preserve shareholder value to an environment that can be construed as management (and) board entrenchment."

In its report, ISS noted that PeopleSoft's board plans to drop the program after it believes that product sale negotiations will no longer be affected by concerns over future support. And the board informed ISS that the contingent liability from the program will decline over time, as its terms expire in customer contracts.