How Investors Could Win the HP Battle


By Peter Burrows and Andrew Park Even after a bitter five-month proxy fight, it looks like Hewlett-Packard (HWP) managers and dissident board member Walter Hewlett will trade blows all the way to the closing bell. On Mar. 28, nine days after CEO Carly Fiorina declared victory in the still-undecided shareholder vote over HP's purchase of Compaq Computer (CPQ), Hewlett sued the company in a last-ditch attempt to stop the deal.

The board, which days earlier had decided to renominate Hewlett at the company's annual meeting on Apr. 26, fired its own volley. It announced that Hewlett's name won't be on the upcoming board slate -- marking the first time no member of either the Hewlett or Packard families will be represented on the company's board. Says one top shareholder: "I'm disgusted by the whole thing."

Can an optimist find a silver lining in all this? Possibly, if it turns out that Hewlett's lawsuit has enough merit to make it to trial. While HP has asked the Delaware Chancery Court to dismiss the case as baseless, it could shine a light on a long-neglected corporate-governance question concerning the process by which institutional shareholders decide how to vote their shares in proxy fights.

FIDUCIARY DUTIES. Usually, most big shareholders simply sell shares if they don't like a merger proposal or other major corporate initiatives. Otherwise, they tend to rubber-stamp management's proposal -- sometimes, say critics, to curry future favors. That's the key allegation in Hewlett's suit: that HP persuaded a division of Deutsche Bank to vote 17 million of its 25 million shares for the merger in exchange for future banking business.

The suit's timing dovetails with rising interest in the topic among corporate-governance experts, especially in the post-Enron era. Most states already have laws stating that institutional investors have a fiduciary duty to the investors for whom they manage funds. For years, mutual-fund maverick John C. Bogle, founder of Vanguard Group -- along with a chorus of other activist investors -- has been imploring regulators and investors to make this fiduciary duty even stronger. "The mutual-fund industry has been remiss in its responsibility," Bogle says.

Institutional investors may want to heed Bogle. Recently, Securities & Exchange Commission Chairman Harvey Pitt sent a letter to another corporate-governance activist, Ram Trust Services President John P.M. Higgins. While deferring to state laws, Pitt, who declined to comment for this story, said in the letter that federal antifraud and other provisions might be relevant in some proxy votes.

"FAR-REACHING EFFECTS." Advocates of better corporate governance think the main focus should be on fuller disclosure -- and the SEC is already considering amendments to its code that would provide just that. For example, the AFL-CIO, which already publishes surveys of how pension funds vote on issues of importance to its members, has petitioned the SEC to force all mutual funds to publish their proxy votes and voting policies. Says Amy L. Domini, who manages more than $1.8 billion in assets for Domini Social Investments: "Maybe nothing is broken. But we don't have data."

If the Hewlett case proceeds to trial, the spotlight could remind institutional investors that they should pay more attention to how they cast proxy votes. "I think [institutions] would think twice before voting in their self interest," says Higgins. "The case could have far-reaching effects."

The suit claims that as of Mar. 15, Deutsche Asset Management, a Deutsche Bank unit, had voted its shares against the merger. On that same day, HP announced a $4 billion line of credit, with Deutsche Bank named as a co-arranger. Four days later, the suit claims, HP held up the Mar. 19 shareholder meeting while HP "used corporate assets to coerce and entice" Deutsche, ostensibly with promises of a fruitful long-term banking relationship.

HANGING QUESTIONS. The suit further alleges that HP CEO Carly Fiorina closed the polls only after getting word that Deutsche Bank had shifted 17 million of its 25 million shares in HP's favor. That huge chunk of shares -- roughly 0.87% of HP's outstanding shares -- would have been pivotal in swinging the contest, if Hewlett is correct in alleging that management has less than a 1% lead in the tally.

Says one former regulator familiar with the allegations: "There are some very good straightforward questions to ask" in court. Among them: What new information, if any, did Deutsche Bank actually receive on the morning of Mar. 19?

In addition, former HP executives tell BusinessWeek that Deutsche Bank has long sought deeper ties with HP. While it was involved in a number of bond offerings for HP's European operations in the 1990s, it bid aggressively for a significant stake in the spin-off of Agilent Technologies in 1999. Both HP and Deutsche Bank declined to comment for this article.

To be sure, these are only allegations in a lawsuit. Like all major financial institutions, Deutsche Bank has detailed processes and high-powered proxy committees to make sure shares are voted properly.

MISSING PIECES? Deutsche Bank hasn't disclosed any details about the circumstances surrounding the proxy vote. But corporate-governance experts say it will be important for Hewlett to establish which, if any, of 17 million shares were allegedly switched. If it turns out they were in a particular fund -- say, one with a long-term time horizon -- the bank should be able to credibly argue that it was simply swayed by management's last-minute arguments on the merits of the deal. What's more, big HP shareholders and analysts who follow the company say they find it very hard to believe HP's executives would tread anywhere close to unethical territory.

And HP outside counsel Larry Sonsini points out that Hewlett's complaint lacks the basic elements of most successful vote-buying cases: a written, binding agreement between management and an investor, negotiated in a premeditated way to lock up shares -- not in the final moments of a proxy contest when almost all the shares had already been

voted. Says Sonsini: "This is not the kind of environment where you see a valid vote-buying claim." Even governance activist Nell Minow, editor of a Web site called the Corporate Library, agrees. "We were pleased with the lawsuit, but I don't expect [Walter Hewlett] to win," she says.

Anything that proves HP won the proxy fight fair and square will be a good thing for the company's future and for corporate governance. As of now, however, many shareholders and employees still have their doubts. "[The lawsuit] paints Carly in a little bit more of a negative light," says one HP manager.

That's the last thing HP needs right now. Better to clear the air once and for all -- especially if it also gives institutional investors a better roadmap for their responsibilities in proxy battles. Burrows and Park cover technology from BusinessWeek's San Mateo and Dallas bureaus, respectively


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