Walter Hewlett wasn't in the courtroom on Apr. 7 during a rare Sunday hearing at the Delaware Chancery Court. If, perchance, Hewlett was in church, it may have been time better spent. The judge heard arguments on whether Hewlett-Packard must face trial in a lawsuit brought by the dissident director. And even though Hewlett won the first round of this battle, he still may need a prayer or two to achieve his ultimate goal: derailing the $18.7 billion merger between HP and Compaq Computer.
In his lawsuit, Hewlett, heir to one of the founding families of HP, alleges that HP used corporate assets "to coerce and entice" Deutsche Bank to vote in favor of the merger. The lawsuit also alleges that HP's managers painted too rosy a picture of the merged company's profitability and ability to maintain revenues, and that shareholders would not have approved the deal if they had sufficient, additional information. HP managers say they eked out a narrow margin of victory in the proxy fight, but final results of the shareholder vote aren't expected for another week or two.
After hearing HP's motion on Sunday to dismiss the lawsuit, Delaware Chancellor William Chandler III ruled on Monday, Apr. 8, that Hewlett's side had presented enough evidence to convince him that a trial was in order. Winning the trial, which is slated to start on Apr. 23, will be much harder because both of his allegations may be very difficult to prove in court.
MARGIN OF VICTORY? To prevail on the Deutsche Bank issue, Hewlett needs to convince Chandler that HP's management made a deal that effectively bought votes. The suit claims that as of Mar. 15, Deutsche Bank had voted its 25 million shares against the deal. On that day, HP announced a $4 billion line of credit, with Deutsche Bank named as a co-arranger.
Four days later, the suit claims, HP CEO Carly Fiorina held up a shareholder meeting on the deal until hearing that Deutsche Bank had shifted 17 million shares -- about 0.87% of HP's outstanding stock -- in management's favor. If Hewlett is correct in his contention that management has less than a 1% lead in the tally, those shares may have clinched the contest.
In arguments on Apr. 7, HP counsel Donald Wolfe likened provisions against vote-buying to an out of date "zoot suit" and maintained that under recent Delaware case law, vote buying isn't forbidden if it hinges on an unwritten agreement where there's no contractual obligation to vote shares one way or another.
ANY SMOKING GUN? HP was unable to convince the judge on that count. "A contractually binding obligation between parties to an agreement to vote shares in a particular manner is not a prerequisite to a vote-buying claim," Chandler wrote in his Apr. 8 ruling. Corporate-governance experts welcomed the potential test case. "If a prohibition against vote buying is a zoot suit, then I'd rather be unstylish," says Charles Elson, director of Center for Corporate Governance at the University of Delaware (see BW Online, 3/4/02, "How Investors Could Win the HP Battle").
Hewlett must now come up with evidence that HP actually used its corporate clout to convince Deutsche to shift its vote in exchange for future business. In the absence of a smoking gun, that will be difficult. "The problem of proof here is you don't know what's the wink, the nod, the sly smile," says Andrew G. T. Moore, a former Delaware Supreme Court justice who now works as a senior managing director at investment bank Dresdner Kleinwort Wasserstein. "Those are things that are very difficult to prove in a courtroom."
The second part of the lawsuit may be equally tough to prove. Hewlett says management assured stockholders that the company was on track to achieve at least $2.5 billion in cost savings in the two years following the merger while losing no more than 5% of revenues and laying off only 15,000 employees. The complaint alleges that HP knew that integration planning wasn't on track before the proxy vote, that the cost savings and revenue hit wouldn't match HP's estimates, and some 24,000 employees could lose their jobs.
"NOTHING NEW"? HP's attorneys argued that such projections were by nature uncertain. Furthermore, they said, since Hewlett had publicly presented an alternative viewpoint, shareholders had sufficient information to make an informed decision.
HP attorney Steven Schatz likened management's view to that of General George C. Marshall in World War II. The top brass can see the whole battlefield, while Hewlett may have been talking to foot soldiers who thought that the campaign was going poorly. "Mr. Hewlett has nothing new," Schatz told the court. "He just rehashes the argument he made throughout the proxy fight, which was rejected by the shareholders."
Hewlett's attorneys are seeking documents showing exactly what Fiorina and HP's management team knew about the integration of the two companies (see BW Online 3/18/02, "Doubts about HP-Compaq's Financial Goal"). If that information shows that things weren't going as smoothly as Fiorina had maintained -- and that management knew how bad the picture really was -- then shareholders may have been ill-served. "If General Marshall went to his field soldiers and they all said the campaign can't be won, and he turns around and tells the public that everything's great, then that's a problem," Hewlett attorney Lawrence C. Ashby said.
NO DISCONNECTS? Again, it'll be tough for Hewlett to prevail here. Even though the foot soldiers may have had a differing view of the situation, Fiorina likely had some basis for making her claims, some legal experts believe. If her statements were simply based on optimism about HP's prospects, with some grounding in fact, then Hewlett will have a rough time convincing Chandler that Fiorina intentionally misled investors.
"You can make a judgment on what a person acting in good faith may have thought the case was," says Charles R.T. O'Kelley, a University of Georgia professor specializing in Delaware corporate law. "It may very well be that the studies will not show the dire disconnect between what was being said and what internal parties thought was going to happen."
Clearly, Hewlett faces long odds in putting an end to the merger. So if he wasn't in church last Sunday, he might be in coming weeks. By David Rocks in Wilmington, Del.