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Hewlett-Packard Co. may have unwittingly given Walter Hewlett an edge in their fight over the company’s $19 billion deal for Compaq Computer Corp. That is because in rejecting HP’s motion to dismiss the dissident director’s challenge to the March 19 proxy vote, Chancellor William B. Chandler III from the Delaware Court of Chancery outlines in his opinion the steps Hewlett’s legal team must take to prevail at trial, scheduled for April 23 to April 26. “The plaintiffs are now going to trial with a road map drawn by the judge,” said John Reed, a partner in the Wilmington, Del., office of Duane Morris. “They know exactly what the judge thinks and what needs to be proven.” Legal experts said this advantage does not mean Hewlett will win. Most give him less than a 10 percent chance of success. Yet they said the ruling gives Hewlett at least a fighting chance. “It was a strategic mistake for HP to demand the hearing,” said one lawyer who was at the April 7 argument. “You have a very limited amount of time to present your case. The advantage is that Hewlett could have wasted a day on something the judge did not care about.” An HP spokeswoman declined to comment, citing the pending litigation. Hewlett lawyer Stephen Neal of Cooley Godward in Palo Alto, Calif., did not return a call for comment. A supporter of the companies said HP may benefit as much as Hewlett from Chandler’s exposition because it now knows which arguments the judge wants to hear. “This works both ways,” the source said. HP agreed Sept. 4 to buy Compaq for $25 billion; the price has since fallen to $19.4 billion. Hewlett came out against the merger Nov. 6. David Woodley Packard, son of HP’s other founder, joined him. Other foundations connected with the founders and their families also announced their opposition. In the following months the companies and Hewlett waged a very public battle for shareholder support. The campaign culminated in March’s stockholder vote, which is still being tallied though HP has claimed a slim victory. Hewlett responded nine days later by filing suit in Delaware, where HP is incorporated. He charged that HP illegally coerced Deutsche Bank into supporting the deal and that it misled investors about expected gains associated with the merger. HP chairwoman Carly Fiorina clearly was concerned about Deutsche Bank. In a voice mail left March 17 for Chief Financial Officer Bob Wayman, she said they needed to do something “extraordinary” to win the bank’s votes. She did not specify what step that meant. A recording of the voice mail was given anonymously to the San Jose Mercury News, which published it Tuesday. But legal experts said Chandler set a high hurdle for Hewlett to win this claim. He must prove that HP illegally forced Deutsche Bank to change its vote by threatening to bar it from participating in a multibillion-dollar credit facility HP had secured only days before the merger vote. “The plaintiffs 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 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,” Chandler wrote in his decision. One lawyer said that means it is insufficient for Hewlett to show only that HP made threats. Rather, he needs to show that Deutsche Bank understood the threat and acted on it. Though he set a tough standard, the judge also lightened Hewlett’s load by rejecting some HP arguments that he would otherwise have had to refute at trial. The judge said HP is wrong in arguing that vote-buying is illegal only if the agreement obligates at least half of the company’s shares to vote a certain way. Chandler also said vote buying may occur absent a contractually binding obligation between the parties to vote shares a specific way. Instead, Hewlett must “plead facts from which it is reasonable to infer” that HP bought votes, he ruled. The judge also specified that vote buying by management is legal only if it does not have a “deleterious effect on the corporate franchise,” which Chandler explains in a footnote as meaning that the decision was ratified by an independent vote of disinterested shareholders. On the false disclosure count, Chandler said the issue is not whether HP officials misled investors or Institutional Shareholder Services — a proxy advisory firm that in March issued an influential report backing the deal — about the status of the post-merger integration planning. Rather, the judge said the question is whether HP officials knew they were lying when they made their comments. To prove this, Hewlett would need to show that the company’s post-merger integration team had informed Fiorina and others that their revenue, employee layoff and other projections were off. “At trial, the plaintiffs have the burden of proving, through analysis of reports of the integration team, that this was actually the case,” Chandler ruled. Reed, the Wilmington lawyer, said this will be tougher than it might first appear. HP is likely to prevail if even a small percentage of the total number of reports from the integration team supported management’s assessment, he said. “You don’t get to litigate the business decision,” Reed said. “You only get to litigate that there was no basis for the business decision.” A second Wilmington lawyer noted that Chandler said Hewlett must show HP officials “knowingly misrepresented” material information. “That means lying, which is a very tough standard,” the lawyer said. That is because Hewlett must prove Fiorina knew that what she was saying was a lie, the lawyer said. The judge also narrowed the dispute by saying it does not matter what Hewlett said in response to comments from HP management regarding integration. In past disclosure cases, the Delaware court has rejected claims if the opposition raised enough objections that investors were aware of problems. But Chandler said this case is different because Hewlett argues there was information from HP’s integration team that was never publicly disclosed. “If the integration team explicitly informed HP management that what HP was disclosing was factually incorrect, and that was not disclosed to HP shareholders, then the total mix of information available to shareholders was inadequate,” Chandler wrote. The judge also rejected HP’s argument that the disclosures were protected as forward-looking statements because Hewlett alleges that HP lied, and lies are not protected by law. He also did not accept HP’s argument that Hewlett should have raised this claim before the shareholder vote. Chandler is expected to issue a ruling in the three-day trial by early May. Copyright (c)2002 TDD, LLC. All rights reserved.

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