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Trouble Ahead, Trouble Behind
By the time Hewlett-Packard Company's $8.8 billion write-down of Autonomy was announced in November, a number of the in-house lawyers who had worked on the ill-fated dealdenounced by pundits as HP's worst everwere already gone. Even before then, plenty of the company's lawyers had reason to head for the exits.
In the past six years, HP employees have weathered debacles including the fallout from the pretexting scandal, former CEO Mark Hurd's departure after allegations of sexual harassment, and former CEO Leo Apotheker's brief and rocky tenure. Those highly public pratfalls have left the legal department that new general counsel John Schultz inherited last April tired and frustrated, according to interviews with a dozen former HP lawyers.
Battered by scandal, some lawyers who remain are afraid to hope for better. The work is taxing, and the rewards appear to be dwindling. HP's stock options, a key component of compensation packages in Silicon Valley, are shrinking in value. And bonuses in the legal department are notably smaller this year, a source at HP says.
"When you have various crises occurring in succession," says Daniel Cooperman, who has served as general counsel at Apple Inc. and Oracle Corporation and is currently of counsel at Bingham McCutchen, "any general counsel would be concerned about the morale in the department."
GC Schultz, who joined HP in 2008, faces a tall order. After overseeing the internal investigation of the Autonomy mess, Schultz must now deal with the wave of litigation that the allegations have triggered. Schultz, who declined to be interviewed, may also face scrutiny about the legal department's handling of the deal.
Accountants shoulder the primary responsibility for detecting cooked books during due diligence, M&A experts say. But legal and accounting work can overlap. A source at HP says that the lawyers are discussing the examination they conducted during the acquisition to determine whether they could have detected any improprieties at Autonomy before the whistle-blower came forward. And Eric Talley, a corporate law professor at UC Berkeley School of Law, adds that concerns raised about Autonomy's books before the negotiations should have influenced the lawyers' approach.
Although dozens of internal and external lawyers work on deals of this magnitude, the general counsel is ultimately responsible for due diligence, says Robert Stefanski, a Reed Smith partner who served as general counsel of TIBCO Software Inc. Charles Charnas, a longtime HP lawyer who was acting GC before leaving in 2008, is confident that Michael Holston, who was general counsel at the time of the deal, would have brought any concerns to the board. "That was his job, and he was determined to do it correctly," says Charnas. (Holston declined to be interviewed for this article.)
If there is anyone who understands what Schultz is up against, it may be Charnas, who served as acting general counsel after Ann Baskins resigned over the legal department's use of pretexting to spy on journalists and members of its board in an attempt to track down leaks. The furor created an avalanche of work for the legal department, Charnas notes.
Six years later, the department is no longer a stranger to such challenges. Charnas left HP after being passed over for the permanent general counsel position offered to Holston, a former prosecutor and Morgan, Lewis & Bockius partner who represented the company in the pretexting scandal. Charnas read the selection of a litigator for the top spot as a harbinger of legal battles to come.
Charged with helping the company move forward, Holston shook up the department. A champion of Hurd's push to cut costs, he instituted rigorous performance reviews and implemented layoffstrading long-term lawyers for junior attorneys. But others note that Holston leveraged his close relationship with Hurd to elevate the legal department. Whereas some of his predecessors had answered to the chief financial officer, Holston reported directly to Hurd.
Their bond grew more complicated when Holston was tasked with investigating Hurd's behavior after an HP contractor alleged that Hurd had sexually harassed her. When Hurd resigned, Holston denounced his behavior as reflecting a "profound lack of judgment," though the company did not find evidence of sexual harassment. "I think the writing was pretty much on the wall for him after that," a former HP lawyer says. "He was standing there like a federal prosecutor who had gotten his man."
Holston left shortly after Meg Whitman was named CEO in September 2011. But Whitman reassured in-house lawyers that she was pleased with their performance and wanted the department to stay the course, a source at HP says. She may have found the right man in Schultz, who worked with Holston at Drinker Biddle & Reath; Morgan Lewis; and, finally, HP.
To rally the legal department, he needs to remind his charges of the company's proud history, Cooperman advises. "The quality of the department, and its role in shaping HP, are things that need to be emphasized," he says, "so lawyers really feel that pride."