March 28, 2002 3:45 PM PST

Hewlett files suit over HP merger vote

Dissident Hewlett-Packard director Walter Hewlett filed a lawsuit Thursday claiming that HP improperly garnered votes for its proposed merger with Compaq Computer from one of HP's largest shareholders, Deutsche Asset Management.

See special coverage: A Fight to the Finish Hewlett is asking the Delaware Chancery Court to invalidate votes cast by HP shareholders in favor of the proposed $20 billion merger. After the March 19 shareholders meeting, HP said preliminary figures indicated it had won the necessary majority of shares cast.

However, HP acknowledged that the vote was extremely close, and Hewlett refused to concede. In the suit, Hewlett claims the margin between the yes and no votes is less than 1 percent of HP's total shares. A Delaware firm is now preparing the official tally, with the results perhaps a few weeks away.

In the lawsuit, Hewlett charges that "HP management used corporate assets to entice and coerce certain financial institutions to vote in favor of the proposed merger."

Specifically, Hewlett charges that HP directed "enticements and coercions" to Deutsche Bank, the parent to Deutsche Asset Management, which according to the suit holds at least 25 million shares and had initially voted against the proposed merger. Hewlett's suit says that HP persuaded Deutsche Bank to change a significant number of votes in the final moments of voting before the polls closed.

HP said in a statement that the suit was without merit.

"We find it regrettable that Mr. Hewlett has chosen to resort to baseless claims without regard to the impact of his false accusations on HP's business reputation and employees," the company said. "We continue our progress in planning for a successful integration of our merger with Compaq."

A Deutsche Asset Management representative declined to comment.

The lawsuit marks the latest turn in a hard-fought, highly publicized squabble over the future of one of Silicon Valley's most venerable icons and the largest technology merger ever. It's a battle that has pitted Hewlett, a 15-year HP director and son of company co-founder William Hewlett, against other directors on the nine-member board and CEO Carly Fiorina.

Hewlett's suit lays out the chronology of an arrangement between HP and Deutsche that it says "had the purpose and effect of defrauding and disenfranchising HP stockholders."

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 bank feared its vote against the deal would hurt the company's business dealings with HP.

"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.

Along with Hewlett, the William R. Hewlett Revocable Trust is also participating in the lawsuit.

"Mr. Hewlett and the Trust have asked the court for expedited proceedings so that these very important issues can be resolved as soon as possible," said a statement issued by Hewlett. "Mr. Hewlett and the Trust want to ensure that the ultimate outcome of the HP stockholder vote...was determined in a full, fair and lawful manner. If the merger is ultimately closed, Mr. Hewlett reiterated that he will do everything he can to support the successful implementation of the merger."

Hewlett also claims in his suit that "HP management also made numerous materially false and misleading public statements." Specifically, the suit claims that HP said its integration efforts were going smoothly, when in fact "HP knew the integration planning was not on track, that the projected cost savings and revenue losses were not what investors expected," and the company faced having to generate more revenue or increase to 24,000 the number of workers it was planning to lay off.

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

"There are some things that are hard to prove, (for example) whether a particular product caused a particular injury," said Jesse Choper, professor of corporate law at Boalt Hall, the law school at the University of California at Berkeley. "This is something that is not hard to prove if you've got the goods."

As for the Deutsche Bank claim, Choper said: "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."

Others say HP is likely to have the upper hand in a legal fight.

Mary Ann Jorgenson, coordinator of the business practice for corporate law firm Squire, Sanders & Dempsey, said there are legal arguments to be made on both claims, but Hewlett will have a tough time making his case.

Jorgenson said that although there are laws against buying votes, it will be tough to prove that's what occurred in the Deutsche Bank case.

"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 the law firm Wolf Haldenstein Adler Freeman & Herz.

An SEC representative declined to comment on the case, saying that as a policy, the agency will not say whether it is looking into a particular matter.

Overturning a vote would not be unprecedented, Choper said.

"There are a multitude of cases in which courts have vindicated claims of those challenging the proper disclosure of statements made in a proxy," Choper said.

However, Jorgenson said, Hewlett would have had an easier time challenging those statements before a vote than after it. In addition, even if Hewlett can find members of the integration team who believed the financial goals were unreasonable, HP is likely to have outside advisers to back up its claim that its goals were attainable.

"When you reasonably believe something, you have not misrepresented or lied," Jorgenson said. "I can imagine there are always doubters on large company integration teams."

In related news, Deutsche Bank's global head of asset management and wealth management services, Michael Philipp, 48, resigned this week and plans to "pursue business interests outside the financial services industry," according to the bank.

Philipp, who had been planning the resignation as early as January, will remain with the bank as a senior adviser to the asset management division, however. Thomas Hughes, president and chief operating officer of Deutsche Asset Management, will become global head of asset management. Pierre de Weck will join the bank April 1 as global head of private wealth management.

News.com's Sandeep Junnarkar contributed to this report.

 

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