Judge: HP May Have Used Assets To Influence Votes, But Hewlett Must Prove It

Hewlett-Packard Compaq Computer

In a 28-page ruling denying HP's motion to dismiss the Hewlett lawsuit, Chandler said that the "facts as alleged" in Hewlett's lawsuit to stop the HP-Compaq deal initially at least "support a reasonable inference that the switch of Deutsche Bank's vote of 17 million shares to favor the merger was the result of the enticement or coercion of Deutsche Bank by HP management."

Hewlett filed suit on March 28, alleging that HP management improperly coerced Deutsche Bank into switching as many as 17 million votes on the morning of the March 19 proxy vote. HP declared victory shortly after the close of voting, but the official results will not be certified until the end of the month.

"Whether the shareholders disagreed with, did not believe or even did not understand the information presented to them by HP management about the proposed merger, it was the right of the shareholders to cast their votes on the proposed merger without impermissible interference from HP management," the judge said in the ruling.

"The allegations of the Hewlett parties, if true, are particularly troubling," Chandler wrote in his ruling. "The extraordinary transaction at issue in this case is one of the limited types of transactions a corporate board cannot unilaterally cause its corporation to consummate."

Chandler further said the contention by HP's attorney in an oral argument that corporate funds were not used to buy "Deutsche Bank's votes because all that is alleged is that Deutsche Bank was promised 'future business' were less than convincing."

The judge said a vote-buying agreement is not "illegal per se, even when company management is buying votes. The more difficult question is whether or not the facts alleged support a reasonable inference that the agreement had a materially adverse effect on the franchise of the other HP shareholders."

Chandler cautioned that at the trial, which is scheduled for April 23-25, Hewlett will have "the significant burden of presenting sufficient evidence for me to find that Deutsche Bank was coerced by HP management during their March 19, 2002, telephone conference into voting 17 million shares in favor of the proposed merger and that the switch of those votes was not made by Deutsche Bank for independent business reasons."

Regarding Hewlett's allegations that HP management allegedly lied as to potential earnings projections, the number of layoffs and the extent of the integration effort, Judge Chandler said if such charges are true "HP management knowingly misrepresented material facts about [the HP-Compaq integration in an effort to persuade ISS (Institutional Shareholder Services) and possibly others to approve of the merger."

Chandler, however, once again cautioned that at trial Hewlett has the "burden of proving, through analysis of reports of the integration team, that this was actually the case."