April 30, 2002 2:40 PM PDT

Judge dismisses HP merger lawsuit

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A Delaware judge ruled Tuesday that Hewlett-Packard's shareholder vote was legal, paving the way for the company to complete its merger with Compaq Computer.

See special coverage: A Fight to the Finish Delaware Chancery Court Judge William Chandler III ruled in favor of HP on all claims and dismissed Hewlett's suit, which had sought to overturn the results of HP's March 19 shareholder vote.

The decision is a huge setback for former director Walter Hewlett, who has led the charge against the $19 billion Compaq acquisition during a six-month proxy fight and recent court battle.

HP CEO Carly Fiorina has said that the company hopes to launch the combined company May 7. However, she must wait for a recount and challenge of the preliminary shareholder tally, which showed HP winning by a 45 million vote margin out of some 1.6 billion cast--a difference of only about 3 percent of the votes cast.

In his lawsuit, Walter Hewlett had alleged the vote was tainted. Hewlett had two main charges: The company failed to disclose that its integration planning was going more poorly than it had hoped and that it essentially bought the vote of Deutsche Bank, a large shareholder.

A three-day trial revealed there were doubts among some HP workers that the company's financial goals were achievable. It also showed that Deutsche Bank's proxy committee was under pressure from its corporate staff. But many trial watchers said Hewlett lacked the smoking gun that would prove his allegations.

In the 44-page ruling, Chandler systematically ruled against Hewlett's arguments.

The "plaintiffs have failed to prove that HP disseminated materially false information about its integration efforts or about the financial data provided to its shareholders," Chandler wrote. The judge also said that the "plaintiffs have failed to prove that HP management improperly enticed or coerced Deutsche Bank into voting in favor of the merger."

On the vote-buying claim, Chandler added, "The plaintiffs can point to nothing in those exchanges (between Deutsche Bank and HP) that indicates a threat from management that future business would be withheld by HP."

As for Hewlett's contention that HP failed to disclose discrepancies between management's stated financial goals and lower numbers produced by members of the integration-planning effort, Chandler said "HP's explanation of the gaps between the bottom-up and top-down numbers is compelling."

And in regard to Hewlett's contention that the company should have disclosed the concerns being voiced by HP's "value-capture" units, Chandler said, "While this information clearly would be material if presented in final reports or projections, that is simply not the case here."

HP spokeswoman Rebeca Robboy said "the ruling speaks for itself. Clearly we are gratified, and we look forward to moving on."

In a statement, Walter Hewlett said he was "disappointed" with the court's decision, but grateful that it acted quickly.

"We will now review the court's written opinion and decide on a course of action," Hewlett said.

Hewlett has the option of appealing to the Delaware Supreme Court, although a representative said Hewlett has not yet decided whether to do so.

Hewlett also vowed to remain involved in the company his father founded even though he is no longer on the board--management decided not to renominate him in the wake of the lawsuit.

"My involvement with HP will not end today," Hewlett said. "As chairman of the William and Flora Hewlett Foundation and as a trustee of the William R. Hewlett Revocable Trust, I represent two major stockholders and I will continue to monitor the company's performance to ensure that it acts in the best interests of all stockholders."

The Securities and Exchange Commission and the U.S. Attorney's Office for the Southern District of New York have also requested information regarding HP's relationship with Deutsche Bank and Northern Trust, and HP's solicitation of their merger proxies.

Both agencies declined to comment on what effect, if any, the Delaware Court's ruling would have on their respective cases.

Despite the victory, HP did not come off looking good during the trial, said Charles Elson, professor of corporate governance at the University of Delaware.

"It painted the picture of a process that certainly raises questions," Elson said.

Elson said the judge's ruling is not a vindication of HP, but rather a declaration that Hewlett's evidence did not merit the court's intervention.

"His role as a judge isn't to issue a rebuke," Elson said.

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

 

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