HP/COMPAQ: Court allows Hewlett's suit to go forward

Walter Hewlett's suit to block the merger of Hewlett Packard Co. and Compaq Computer Corp. merger survived a bid by HP's lawyers to have it thrown out of court.

Delaware Chancery Court Justice William B. Chandler III rejected HP's bid to dismiss the case this afternoon and opened the way for an April 23 trial.

Hewlett, son of co-founder WIlliam Hewlett, filed suit against HP alleging the company had coerced Frankfurt-based Deutsche Bank AG to switch 17 million of its 25 million shares in favor of the $22 billion HP/Compaq merger.

HP filed a motion to dismiss the suit last week and Chandler heard arguments from both sides yesterday.

In his sharply-worded decision, Chandler said he allowed the suit to continue because it is reasonable to believe Hewlett's assertion that HP coerced Deutsche Bank AG into changing its vote.

"Initially, I believe the facts as alleged in the complaint 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," Chandler wrote.

HP's lawyers made the claim that Hewlett did not provide sufficient facts of a contractual agreement between the company and Deutsche Bank. However, Chandler wrote that such a strict interpretation of vote buying is not necessary to move ahead with a case.

"The threshold showing required of a plaintiff is that he plead facts from which it is reasonable to infer that in exchange for 'consideration personal to the stockholder,' a stockholder has agreed to vote, or has in fact voted, his shares as directed by another," Chandler wrote.

There were a number of actions taken by HP management that would lead someone to infer a deal was made, Chandler wrote. He pointed to Deutsche Bank co-arranging a multi-billion line of credit and to HP CEO and Chairwoman Carleton Fiorina delaying the start of a scheduled shareholders meeting until she got news of the bank's decision as two such actions.

"However," he wrote, "a vote-buying agreement is not illegal per se, even when the company management is buying votes."

According to Chandler, what Hewlett needs to prove is that the agreement had a "materially adverse effect" on the company and on shareholders. He also wrote that Hewlett faces an uphill battle to show that Deutsche Bank was indeed coerced and did not act independently.

Still, Chandler said that if Hewlett's charges are true it meant HP's management put its desire for the merger above the wishes of independent shareholders.

"In my opinion, that is an improper use of corporate assets by a board to interfere with the shareholder franchise," Chandler said in the decision.

"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," he wrote.

In its motion to dismiss, HP had asserted that Deutsche Bank simply voted in its best interest, which is what any shareholder, including Hewlett, would have done.

HP also had tried to blunt Hewlett's claims that HP management lied in order to sway voters to back their cause.

Chandler rejected the HP argument, writin that "the allegations can reasonably be read to imply that statements were made which HP management did not genuinely believe to be true."

In a terse three-paragraph statement, HP said it remains confident it will win the case.

"We respect the chancellor's decision to hear the evidence on the issues that have been raised," the company said. "We remain confident, particularly based on the arguments presented, that once the facts are heard, we will prevail.

"We remain optimistic we will be able to complete the merger on our current schedule," the statement said. "HP continues its progress in integration planning and looks forward to the receipt of the certified vote result from the HP shareowner meeting, which is expected within a few weeks."

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