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Dissident shareholder Walter Hewlett can press ahead with his legal challenge to the $18 billion merger of Hewlett-Packard Co. and Compaq Computer Corp., a Delaware judge ruled Monday. Hewlett, an HP board member who waged a proxy battle to defeat the deal, has raised reasonable questions about whether HP’s managers misled shareholders regarding the companies’ integration plans and post-merger earnings prospects, ruled Judge William B. Chandler III of the Delaware Chancery Court. Hewlett’s allegation that HP coerced a large shareholder into changing its vote also deserves further investigation, the judge ruled. “It is certainly possible for management to enter into vote-buying arrangements with salutary purposes,” the judge wrote. “However, I conclude that the plaintiffs have stated a cognizable vote-buying claim.” Hewlett said in a statement that he was pleased with the ruling and was continuing to gather evidence to support his claims. HP said in a statement that it was disappointed but expected to prevail in the trial. The company expects to complete its merger on schedule, HP added. Still, the ruling is a blow for HP, which had hoped to have the complaint thrown out, thus averting a three-day trial scheduled to begin April 23. But a corporate lawyer following the case said the decision does not indicate that Hewlett’s claim will get a sympathetic hearing. “The plaintiffs are going to have a high burden of proof to show coercion,” he said. “I think this is very much a procedural decision.” But Charles Elson, a professor at the University of Delaware’s Center for Corporate Governance, said the decision is an important first hurdle for Hewlett. “The Hewlett side made a strong case,” he said. A hearing on HP’s motion to dismiss the case was held Sunday. HP claims that shareholders narrowly approved the merger at a meeting last month, but Hewlett has said that the vote was too close to call. IVS Associates Inc., the Newark, Del., firm contracted to count the votes, has not yet released a preliminary tally. In his complaint filed March 28, Hewlett alleged that HP managers deceived investors by claiming at February meetings with analysts and investors that they could cut costs by $2.5 billion in the two years after the merger, while laying off only 15,000 employees. At that time, however, the company knew already that they would fail to meet those estimates and would have to lay off far more employees, the HP board director charged. Hewlett also claimed that HP used an investment banking mandate to pressure Deutsche Asset Management, a unit of Deutsche Bank AG, to switch as many as 17 million proxy votes to favor the merger. Those votes provided HP with its margin of victory, Hewlett said. That arrangement may be unseemly, but Chandler ruled that vote-buying alone does not constitute a violation of Delaware law. It is only when the vote-buying is combined with a failure to protect shareholder interests that the practice becomes problematic, he said. “Because the Hewlett parties successfully have alleged that HP bought votes from Deutsche Bank with corporate assets and because no steps were taken to ensure that the shareholder franchise was protected, HP’s motion to dismiss the plaintiffs’ vote-buying claim is denied,” Chandler said. Last week, Chandler agreed to let attorneys for Hewlett seek subpoenas on Deutsche Bank, Bankers Trust Co., Goldman, Sachs & Co. and McKinsey & Co. Hewlett’s lawyers have also told the court they plan to serve subpoenas on Compaq, Deutsche Asset Management, Deutsche Securities, Georgeson Shareholder, Innisfree M&A and Institutional Shareholder Services. Dow Jones Newswires contributed to this story. Copyright (c)2002 TDD, LLC. All rights reserved.

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