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Some PeopleSoft shareholders want refund plan axed

They want to put a halt to the software maker's customer refund program to create more favorable conditions for rival Oracle if that company's hostile takeover bid proves successful.

Some PeopleSoft shareholders want to put a halt to the enterprise software maker's customer refund program to create more favorable conditions for rival Oracle if that company's hostile takeover bid proves successful.

On Thursday, an unspecified number of PeopleSoft shareholders filed a motion in the Delaware Court of Chancery to stop PeopleSoft from expanding the so-called customer assurance program. Under the plan, customers would receive refunds of two to five times the cost of their software license fees if PeopleSoft is acquired and the acquiring company stops selling its products.

PeopleSoft introduced the money-back guarantee after Oracle launched its tender offer in June. It recently detailed plans to expand the program in filings with the U.S. Securities and Exchange Commission. Under PeopleSoft's latest plans, the assurance program would go into effect if the company is acquired any time over the next two years, as opposed to its original plan of one year. Any buyer could be forced to pay the refunds if they chose to halt support for PeopleSoft products over the next four years, instead of the originally specified two years.

PeopleSoft's chief financial officer, Kevin Parker, first mentioned the company's intent to expand the refund offer in a conference call regarding the company's earnings last month.

In the Delaware court motion, shareholders said the assurance program serves as a "non-redeemable poison pill...draconian in its effect" that makes it nearly impossible for Oracle to complete an acquisition of PeopleSoft, even if Oracle increased its current $7.25 billion offer. Oracle's bid is currently awaiting antitrust review from the U.S. Department of Justice.

Bruce Jameson, of the Wilmington, Del.-based law firm Prickett, Jones & Elliott, is serving as lead counsel in the shareholder suit, which was first filed when PeopleSoft announced the customer assurance plan in June. He said the changes to the refund program make any potential acquisition of PeopleSoft "impossible."

"It would be very hard for any company making this acquisition not to trigger the program as a result of integrating two companies," said Jameson. "These changes also speak in broad, ambiguous terms that would potentially result in any buyer involving themselves in a large number of customer lawsuits."

In response, PeopleSoft spokesman Steve Swasey called the Delaware lawsuit "without merit" and said the company will defend against the motion aggressively. Swasey denied that PeopleSoft is attempting to cripple Oracle's bid with the assurance program and repeatedly stated that the offer is focused entirely on protecting the investments of existing, new and potential PeopleSoft customers.

Swasey said the program also benefits PeopleSoft shareholders by protecting the company's sales from any turmoil surrounding the hostile takeover bid.

In a written statement e-mailed to CNET, Oracle representatives condemned the additions PeopleSoft made to the refund program and challenged the company's commitment to shareholder interests.

"PeopleSoft?s latest action is management entrenchment at its worst," said Oracle spokesman Jim Finn in the statement. "These modifications to PeopleSoft?s so-called customer assurance program are not about protecting customers. Instead, they reflect PeopleSoft?s blatant disregard for shareholder value and choice, preventing shareholders from exercising their right to determine board membership. This is an obvious attempt to secure management?s record pay packages, such as (PeopleSoft CEO) Craig Conway?s, which, according to Fortune Magazine, is valued at more than $112 million."

At least one industry analyst agreed that PeopleSoft's changes to the refund program appear to be aimed at killing the merger rather than benefiting its customers.

"I don't think revising the terms is a customer-driven thing. I talk to their customers and they say, 'If PeopleSoft wants to throw in this guarantee, that's great,' but they just don't want to have to buy Oracle," said Patrick Mason, an analyst at Pacific Growth Equities. "Revising the terms won't have any effect on PeopleSoft's revenues, but it will, in essence, create a barrier for Oracle beyond the poison pill."

Meanwhile, in PeopleSoft's lawsuit in Alameda County Superior Court, the judge ruled Thursday that the case could move forward to the next stage. PeopleSoft is alleging that Oracle used its hostile takeover bid as a means to disrupt PeopleSoft's business.

Judge Ronald Sabraw overruled Oracle's arguments earlier in the week that there was no legal basis for PeopleSoft's allegations that it engaged in trade libel and false statements concerning its competitor. However, the judge also ordered PeopleSoft to make some changes to the lawsuit--in areas such as its allegations that Oracle interfered with specific customers and contracts--and to refile an amended complaint by Nov. 21.

The companies will hold a case management conference on Dec. 5 to discuss the schedule for gathering documents for the case and to suggest possible trial dates.

CNET's Dawn Kawamoto contributed to this report.