Hewlett Sues HP, Alleging Improper Vote
Dissident Hewlett-Packard Co. director Walter Hewlett on Thursday sued to stop the company’s acquisition of Compaq Computer Corp., accusing HP management of improperly steering business to a major shareholder to win the investor’s votes in the closely fought proxy battle.
Hewlett’s lawsuit escalates what already had been one of the most intense and expensive shareholder fights in years. It asks a Delaware business court to throw out the votes of Deutsche Asset Management, which could be enough to kill the $20-billion deal.
HP Chief Executive Carly Fiorina said last week that the company narrowly won the proxy fight. Hewlett has refused to concede, saying the results are too close to call.
“They have uncovered a very sexy, interesting issue. You can’t use the shareholders’ money in order to buy swing votes,” said Columbia University corporate law expert John Coffee.
But proving that act will be difficult, legal scholars said, and HP issued a statement calling the suit “completely 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.
The suit was filed in the Delaware Court of Chancery, which has resolved many of the country’s biggest takeover fights. Most of the largest U.S. companies, including HP and Compaq, are incorporated in Delaware.
The most serious allegation concerns HP’s contacts with Deutsche Bank. The asset management group’s proxy committee had recommended a vote against the merger, and the unit cast at least 25 million shares to block it, according to Hewlett’s suit.
On March 15, four days before the voting deadline, HP announced a $4-billion line of credit that would be managed by two other Wall Street firms but co-arranged by Deutsche Bank and a fourth company. The upfront fee for that role could be less than $1 million, one lending expert said.
HP then requested a telephone conference with Deutsche Bank the morning of the March 19 special shareholders’ meeting that concluded the voting.
The suit says that after that call, Deutsche Bank switched 17 million votes to favor the merger. If Hewlett’s side is correct that HP won the still-uncertified vote by less than 1%, that switch made the difference.
“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 alleges.
A bank spokeswoman didn’t return phone calls seeking comment.
HP declined to respond in detail. The computer and printer company has said the managers who picked the leaders of the credit facility were insulated from those in the proxy fight.
HP used Deutsche Bank as one of two lead managers in selling $652 million worth of debt last year. And the brokerage was a co-arranger in 1997, records show.
“Deutsche Bank consistently participates in HP deals at a co-arranger level,” said Meredith Coffey, an analyst at debt data specialist Loan Pricing Corp. in New York.
The challenge for Hewlett will be to produce evidence showing something other than business as usual between HP and the brokerage.
“If he can prove an actual exchange of remuneration for votes, I think he has a very strong case. But I think that’s pretty unlikely,” said Harvard Law School professor and corporate law specialist Reinier Kraakman.
Hewlett also accused HP managers of misleading shareholders and an influential proxy advisory firm, Institutional Shareholder Services, about how well its merger plans were going.
The suit says HP’s planning team had been told before the shareholder vote that the combined company might need to lay off 24,000 workers, not the 15,000 disclosed publicly, and that profit would fall $1 billion short of estimates. HP declined to address those accusations Thursday.
Coffee, the Columbia expert, said those claims were less likely to sway a judge.
The Chancery Court tends to move quickly, and it probably will permit Hewlett to seek documents and other information that could back up his claims before the shareholder vote is certified in the next few weeks and HP can close the acquisition.
Although Hewlett has asked the court to quickly declare the merger defeated, other outcomes are more probable, Coffee said. “I don’t think many courts want to determine the winner.”
Instead, the court might decide to delay the merger while it hears evidence or even orders a new election, raising the prospect of an additional $100 million or more in proxy fight costs and additional lost business for HP during the distraction.
