Ruling clears way for HP-Compaq merger

Hewlett-Packard Co. Tuesday apparently won the final battle in its lengthy campaign for approval of its intended acquisition of Compaq Computer Corp., as a judge dismissed a lawsuit from former HP board member Walter Hewlett that sought to block the acquisition.

The ruling largely clears to way for HP to complete its announced plan to launch as a merged company on May 7.

After a three-day trial last week in Wilmington, Del., Chancery Court Judge William Chandler III rejected Hewlett’s argument that HP’s shareholder vote on acquiring Compaq should be thrown out.

Hewlett’s suit centered on two allegations: that HP executives publicly backed financial projections they privately knew the merged company would be unable to meet, and that HP improperly coerced a Deutsche Bank AG division to reverse its initial vote and support the acquisition by threatening to withhold future business. Chandler found in favor of HP on both allegations.

“The public statements made by HP management about the progress of the integration process . . . were supported by the facts when they were made and were neither false nor misleading,” Chandler wrote. “The evidence demonstrates that HP’s statements concerning the merger were true, complete, and made in good faith.”

Documents that painted a gloomier picture of the merged company’s prospects, which Hewlett maintained should have been released to shareholders, were preliminary reports that would have been of limited usefulness to investors in understanding the deal, the judge ruled.

“There is no legal requirement that companies disclose all documents generated in a budgeting process,” he wrote.

On the coercion charge, Chandler ruled in advance of the trial that the plaintiffs would need evidence that Deutsche Bank changed its intended vote because of threats from HP and not for independent business reasons. The evidence presented by Hewlett’s team did not meet that threshold, Chandler wrote Tuesday.

HP chairman and chief executive officer Carly Fiorina testified “credibly” that her leaked voicemail suggesting HP “do something extraordinary” to win over Deutsche Bank meant HP would enlist top executives and board members to plead the acquisition’s case, Chandler wrote.

Further, although Deutsche Bank’s commercial banking group became involved in the last-minute effort to connect HP executives via a conference call with decision-makers in the bank’s asset management division, which controlled the contested votes, the evidence does not substantiate the claim that HP enlisted the bankers’ support by threatening to withdraw business, Chandler wrote.

One participant in the HP-Deutsche Bank conference call, a representative of the Bank’s European proxy committee, surreptitiously recorded the call. That recording reveals that all discussions during the call concerned the merits of the proposed acquisition and never touched on the effect of Deutsche Bank’s vote on its future dealings with HP, Chandler wrote.

That HP’s executives and the American Deutsche Bank participants on the call did not know of the recording “reinforces my conclusion about the innocuous nature of the call,” Chandler observed in a footnote. “This lack of knowledge makes it less likely that discussions during the call were merely scripted as a smoke screen for an improper voting agreement.”

Hewlett said in a prepared statement that he was disappointed with the court’s decision but grateful that it processed the case so quickly. He and the trustees of The William R. Hewlett Revocable Trust planned to review the judge’s written decision and then decide on a course of action, according to the statement.

Hewlett, who lost his seat on HP’s board last week after the board chose not to re-nominate him, said his involvement in HP is not over. As a representative of foundations holding significant stakes in the company, he will continue monitoring HP’s performance to ensure that it acts in stockholders’ best interests, he said.

HP is “gratified” by the ruling and looks forward to a chance to move on, the company said in a prepared statement.

The last remaining requirement for HP is official certification of the outcome of the shareholder vote. A preliminary tally, conducted by outside inspector IVS Associates Inc., showed the acquisition passing by a margin of 45 million votes, with 51.4 percent of shares voted in favor of the deal.

Hewlett requested a ballot recount, which is ongoing. An IVS Associates representative referred questions about the recount to HP, which did not return calls Tuesday. Hewlett spokesman Todd Glass said the recount began last week.

“The last I heard, it was going slowly,” Glass said.

Once the recount is finished, Hewlett’s dissident group can challenge the result, a process that could take an extra day or two to resolve, according to HP. Barring a successful challenge, a certified result affirming the acquisition’s passage would be released, clearing the way for HP to finalize the acquisition.

However, legal aftershocks from the contentious acquisition process could continue plaguing HP long after it absorbs Compaq.

A second HP shareholder filed suit against the company Friday, also in Delaware’s Court of Chancery, echoing Hewlett’s allegations and seeking financial compensation for shareholders for damages sustained from the allegedly “tainted” acquisition process. Shareholder Donna Schneider is seeking class-action status for her complaint.

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