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In one of the first government investigations into allegations of corporate vote buying, the Securities and Exchange Commission and a federal prosecutor are investigating Hewlett-Packard Co.’s efforts to woo votes for its $19 billion merger with Compaq Computer Corp. HP disclosed in a Securities and Exchange filing April 15 that the U.S. Attorney’s Office for the Southern District of New York has subpoenaed information related to management’s dealings with Deutsche Bank AG, Northern Trust Corp. and their affiliates in the Compaq merger. The SEC’s San Francisco office also has requested documents related to HP’s relationship with Deutsche Bank and its affiliates, the Palo Alto, Calif.-based computer maker said. Representatives for the SEC and the U.S. Attorney’s Office declined to comment. HP did not return calls for comment. HP claims that shareholders narrowly approved the Compaq merger at a March 19 meeting and proxy vote. But Walter Hewlett, an HP board member who opposed the transaction, has sued to block the merger in the Delaware Court of Chancery. A hearing on Hewlett’s suit is scheduled to begin April 23. Hewlett alleges that HP coerced Deutsche Bank into casting in favor of the deal 17 million of the 25 million shares the bank controls by implying that the German company would miss out on investment banking opportunities if it opposed the merger. The suit also accuses HP leaders of lying to investors about the success of its integration planning. The inquiry comes a week after public disclosure of a voice mail sent two days before the merger vote in which HP chief executive Carly Fiorina appears to ask Chief Financial Officer Bob Wayman to pressure Deutsche Bank into voting for the merger. In that message, which was leaked anonymously to the San Jose Mercury News, Fiorina says she will contact Northern Trust to ensure the bank also supports the deal. The investigations mark one of the first times the federal government has looked into allegations of vote buying, indicating that securities regulators are taking Hewlett’s allegations seriously, corporate governance experts said. “Anytime the SEC and the U.S. Attorney’s Office gets involved, it’s problematic,” said Charles Elson, a professor at the University of Delaware’s Center for Corporate Governance. “I haven’t heard of one of these before.” Hewlett’s suit against HP is not the first time an investor has accused a company of using financial clout to sway important shareholders. But the suit could become an important test case, as courts have typically given management the benefit of the doubt rather than challenge ballot counts. What distinguishes Hewlett’s litigation are the enormous stakes for the hardware and computer industry giants and the narrow vote margin in HP’s merger vote. Over a three-month proxy campaign, both camps spent millions on financial reports and advertisements in an aggressive appeal to both institutional and rank-and-file investors. HP claimed that it had managed a “slim” victory, while Hewlett has said the results are too close to call. HP has not yet released a tally of shareholder votes, which IVS Associates Inc. of Newark, Del., is counting. The government’s interest in the case likely stems from fears that HP’s actions harmed other company shareholders. Although vote buying may appear unseemly, securities regulators have typically viewed it as legal, unless a company disenfranchises or deceives other investors, experts said. “The SEC doesn’t care about vote buying,” said one source. State courts have also turned a blind eye to vote buying. Judges typically have taken care not to set a precedent by overturning a merger without clear evidence that the vote buying harmed investors. “There has been very little intervention,” said Lucian Bebchuk, a professor at Harvard Law School. “There’s been a judgment call that this is something that it is better the courts did not enter into.” The HP case may represent a turning point, though. In the past, some companies have put vote-buying schemes to a shareholder vote, thereby protecting themselves from charges that investors were disenfranchised, or they have disclosed the arrangements. HP, however, said nothing about its last-minute conversations with Deutsche Bank until after the polls had closed. Hewlett’s allegations represent the first vote-buying case since the collapse of Enron Corp., Bebchuk noted. The energy company’s fall has underscored the conflict of interests facing investment banks, which routinely pursue banking business from companies at the same time analysts rate them as investments. Finally, Fiorina’s voice mail gave the government and Hewlett’s lawyers a basis for forcing HP to turn over more information about its actions leading up to the vote. Those investigations could dig up the kind of evidence that might prompt a court to block the deal or penalize HP after it closes. “The voice mail is just a particular fact, but it is one that can be used to justify starting the machinations of discovery,” Bebchuk said. Copyright (c)2002 TDD, LLC. All rights reserved.

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