April 8, 2002 1:55 PM PDT

Judge allows Hewlett suit to proceed

update A Delaware judge ruled Monday that Walter Hewlett may pursue a lawsuit against Hewlett-Packard, a decision that could pose problems for the company's proposed $19 billion merger with Compaq Computer.

See special coverage: A Fight to the Finish Hewlett, the HP director who opposes the company's acquisition of competitor Compaq, alleges in his lawsuit that HP's management effectively bought shareholder votes by striking a business deal with a major shareholder and misled investors about integration plans.

HP, which believes it narrowly won a March 19 shareholder vote on the deal, asked a Delaware court to dismiss the suit, a request that was denied Monday.

A report by Dow Jones quoted the decision by judge William B. Chandler III as stating: "Because the complaint raises a reasonable inference, accepting its allegations as true, that HP management knowingly misrepresented material facts about integration in an effort to persuade (shareholders) to approve of the merger, HP's motion to dismiss the disclosure claim must be denied."

The William R. Hewlett Revocable Trust issued a statement saying it was "pleased" with the ruling and "grateful that the court took up this issue on such short notice. The discovery process is currently ongoing and we look forward to the trial later this month."

In a statement, HP responded that "we remain confident, particularly based on the arguments presented, that once the facts are heard, we will prevail. We remain optimistic we will be able to complete the merger on our current schedule."

The issue is crucial because HP claims, based on preliminary estimates, to have won the merger vote by a slim majority. If any votes are thrown out as a result of the lawsuit, the company may not be able to establish a majority.

The lawsuit is now due to go to trial on April 23. Chandler has reserved three days for the trial, although it could go longer.

While the lawsuit proceeds, the companies are waiting for the official tally of the shareholder votes, which should be ready in the next few weeks.

If HP and Compaq do merge, it would be the largest technology deal ever, creating a company that HP Chief Executive Carly Fiorina says would be better able to compete with leading computer company IBM.

Although he initially voted in favor of the deal as a director, Hewlett in November said he would fight to block it. He assembled a coalition that includes other members of the Hewlett and Packard families, who also believe Compaq's low-profit PC business would dilute HP's lucrative printing franchise. In total, the family own about 18 percent of outstanding HP shares through various trusts, foundations and personal holdings.

Specifically, Hewlett's suit alleges that HP directed "enticements and coercions" to get bank subsidiary Deutsche Asset Management--which according to the suit holds at least 25 million shares of HP--to switch from voting against the merger to voting in favor of it. Hewlett says the proxy committee of Deutsche Asset Management had made its decision to vote against the deal on or before March 15.

But on March 15, the suit says, HP closed a multibillion-dollar credit facility for which Deutsche Bank acted as a co-arranger. Hewlett claims that by March 18--the day before the shareholder vote--the bank feared that a vote against the deal would hurt its business dealings with the computer maker and that HP persuaded Deutsche Bank to change a significant number of votes.

"On information and belief, in addition to the inducement provided by the HP credit facility, Deutsche Bank was led to understand that if it did not switch its votes to favor the proposed merger, its future business dealings with HP would be jeopardized," the suit states.

One legal analyst said in March that the claims could be grounds for overturning the vote, provided Hewlett can prove them in court.

"There is a doctrine in corporate law that you can't buy votes. I guess that is the way (Hewlett's lawyers) are going to try and characterize this," said Jesse Choper, professor of corporate law at Boalt Hall, the law school at the University of California at Berkeley. Overturning the vote would not be unprecedented, he added.

On the other hand, finding proof that HP coerced the bank could be difficult, said Mary Ann Jorgenson, coordinator of the business practice for corporate law firm Squire, Sanders & Dempsey.

"Many vendors decide for their own commercial interest to vote for or against a deal," Jorgenson said. "Not every vote is going to be pure, nor is that part of the game."

The vote-buying question falls under state corporate governance law, while the proxy issues are covered by federal law, with regulatory authority given to the Securities and Exchange Commission, according to Fred Taylor Isquith, a securities expert at law firm Wolf Haldenstein Adler Freeman & Herz.

 

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