Judge Allows Hewlett Suit to Proceed

A Delaware judge ruled that Walter Hewlett can proceed with his lawsuit against Hewlett-Packard Co., a decision that could ultimately block the computer maker's planned $19 billion buyout of Compaq Computer Corp.

A Delaware judge ruled Monday that Walter Hewlett can proceed with his lawsuit against Hewlett-Packard Co., a decision that could ultimately block the computer makers planned $19 billion buyout of Compaq Computer Corp.

Judge William B. Chandler IIIs decision marks a significant setback for HP, which argued during a special court hearing Sunday that the suit was without merit and should be thrown out. But the Delaware Chancery Court judge rejected HPs motion for dismissal.

Hewletts lawsuit accuses HP of illegally pressuring a major investor to vote in favor of the proposed acquisition during a shareholder election March 19. The 17 million shares voted by Deutsche Asset Management, a subsidiary of Deutsche Bank, may have been enough to secure an election victory for HP, Hewletts suit contends.

Specifically, Hewlett claims that HP threatened to stop doing business with Deutsch Bank if the company failed to support its buyout bid.

In addition, the lawsuit, filed March 28, accuses HP of misleading shareholders by offering unrealistically optimistic earnings and savings projections the company said it would reap should the deal be approved.

HPs lawyers on Sunday denounced Hewletts accusations, arguing in effect the reasons why Deutsche Asset Management voted to support the merger were irrelevant, and that the companys financial projections were obviously subjective.

Those arguments failed to sway the Delaware judge, who ruled that Hewletts allegations were reasonable and, if found to be accurate, posed potentially serious implications to HPs shareholders.

"Because the complaint raises reasonable inference, accepting its allegations as true, that HP management knowingly misrepresented material faces about integration in an effort to persuade shareholders to approve of the merger, HPs motion to dismiss the disclosure claim must be denied," Chandler wrote in his decision, released Monday afternoon.

The lawsuit is scheduled to go to trial April 23.

Following Mondays ruling, HP released a statement predicting that it will successfully defeat Hewletts lawsuit and proceed with its buyout of Houston-based Compaq.

"We remain confident, particularly based on the arguments presented, that once the facts are heard, we will prevail," said the statement released by the company, based in Palo Alto, Calif. "We remain optimistic we will be able to complete the merger on our current schedule. HP continues its progress in integration planning and looks forward to the receipt of the certified vote result from the HP shareowner meeting, which is expected within a few weeks."

Should HP lose the suit, the fate of HP, Compaq and their proposed deal will rest in the judges hands, said Martin Reynolds, an industry analyst with Gartner Inc.

"If the judge finds in Hewletts favor, he has a lot of latitude in what he can do to set things straight," Reynolds said. "He can rule that the merger cannot proceed, he can order another shareholder vote be held, or—if he finds HP had enough votes to support the merger regardless of Deutsch Banks vote—he could allow the merger to go forward and fine HP for illegal practices."

But until the case is decided, HP and Compaq must move forward with their integration efforts, he said.

"They need to stick with their chosen path and continue preparations for the merger," Reynolds said. "While they cant merge until this case is settled, the most damaging thing for them to do now is sit still and hold off making decisions. Theyve got to continue their integration efforts so that theyre ready to go if this merger is finally allowed to proceed."