Summary
finding no improper influencing of votes even where the chairwoman promoted a merger to shareholders by saying, "This is obviously of great importance to us as a company. It is of great importance to our ongoing relationship"
Summary of this case from In re Transkaryotic TherapiesOpinion
C.A. No. 19513-NC
Date Submitted: April 27, 2002
Date Decided: April 30, 2002
Lawrence C. Ashby, Stephen E. Jenkins, Richard D. Heins, Philip Trainer, Jr., Richard I. G. Jones, Jr., Carolyn Hake, Tiffany L. Geyer, of ASHBY GEDDES, Wilmington, Delaware; OF COUNSEL: Stephen C. Neal, James Donato, Linda Callison, Neal Stephens; of COOLEY GODWARD LLP, Palo Alto, California; Paul H. Schwartz, Steven G. Sklaver, J. Lucas McFarland, of COOLEY GODWARD LLP, Broomfield, Colorado, Attorneys for Plaintiffs.
Robert K. Payson, Donald J. Wolfe, Jr., Peter J. Walsh, Jr., John F. Grossbauer, Matthew E. Fischer, Nancy N. Waterman, Richard L. Renck, of POTTER ANDERSON CORROON LLP, Wilmington, Delaware; OF COUNSEL: Steven M. Schatz, Boris Feldman, David J. Berger, Douglas J. Clark, Ignacio E. Salceda, Ellen H. Solomon, Cynthia A. Dy, John Stigi, Daniel W. Turbow, Kimberley A. Fonner, of WILSON SONSINI GOODRICH ROSATI, Palo Alto, California, Attorneys for Defendant.
OPINION
This lawsuit challenges the shareholder vote in connection with the proposed merger of defendant Hewlett-Packard Company ("HP") and Compaq Computer Corporation ("Compaq"). HP is a publicly traded Delaware corporation with its principal place of business in Palo Alto, California. Compaq is a publicly traded Delaware corporation with its principal place of business in Houston, Texas. Both companies are global providers of computers and computer-related products and services. Plaintiff Walter B. Hewlett ("Hewlett") has been a director of HP for approximately 15 years. He is the son of the late William R. Hewlett, one of HP's founders. Hewlett and plaintiff Edwin E. van Bronkhorst serve as co-trustees of the William R. Hewlett Revocable Trust (together with Hewlett and van Bronkhorst, the "Hewlett Parties").
After a hotly contested proxy battle between Hewlett and HP, HP's shareholders approved the issuance of shares in connection with the merger at a special meeting on March 19, 2002, by a very slim margin. On March 28, the Hewlett Parties filed this action pursuant to 8 Del. C. § 225 (b) challenging the validity of that vote. The Hewlett Parties attack the vote on two grounds: first, they assert that HP management knowingly misrepresented material facts about the integration of the two companies throughout the proxy campaign; second, they contend that HP management improperly coerced and enticed Deutsche Bank into voting 17 million HP shares in favor of the transaction. Accordingly, the Hewlett Parties seek an order declaring Deutsche Bank's final voting proxy cards to be invalid, invalidating all proxies voted in favor of the merger, declaring that the proposal to issue additional HP shares in connection with the merger was defeated, or declaring that a new vote must be held on the proposed merger.
I. PROCEDURAL HISTORY
This action was filed just over a month ago, on March 28, 2002. HP moved to dismiss the complaint on April 1. After oral argument on April 7, that motion was denied on April 8. The parties conducted discovery on an expedited basis and a three-day trial was held from April 23 to April 25. Six witnesses testified at trial, and several other witnesses gave deposition testimony. The parties submitted post-trial briefs on April 27. Having considered the testimony and reviewed these filings, together with more than 500 trial exhibits, I now set forth my findings of facts and conclusions of law.
The Court herd live testimony from Carleton S. Fiorina, CEO and Chairwoman of HP; Robert Wayman, HP's CFO and a director of HP; Hewlett; Spencer C. Fleischer of Friedman Fleischer Lowe, financial advisor to the Hewlett Parties; Philip M. Condit, a director of HP and the CEO and Chairman of Boeing, Inc.; and Jeff Clarke, CFO of Compaq and co-head of the integration team.
Of more than twenty depositions offered into evidence, the parties focused primarily on those of the live witnesses and on the following six, which pertain to HP's relationship with Deutsche Bank: Benjamin H. Griswold, Senior Chairman of Deutsche Bank Securities, Inc.; Robert Thornton, Managing Director for Technology Mergers and Acquisitions of Deutsche Bank Securities, Inc.; Dean Barr, Global Chief Investment Officer of Deutsche Bank's Private Client Asset Management division; Robert M. Laverty, Director of Deutsche Bank Asset Management, Inc. and Chairman and voting member of Deutsche Bank's Proxy Working Group; Daniel H. Burch, proxy solicitor for Hewlett; and Alan M. Miller, proxy solicitor for HP.
II. FACTUAL BACKGROUND
The merger between HP and Compaq was first rumored in the market in late summer of the year 2000. In the spring of 2001, HP began to consider seriously the prospect of acquiring and merging with Compaq. The merger was first discussed by HP's board as a whole at a board dinner in May, 2001. From that point forward, the HP board met thirteen times to discuss the proposed merger before it finally voted unanimously in favor of the merger on September 3, 2001.
In connection with the proposed merger, HP engaged McKinsey Company ("McKinsey") to assess its strategic alternatives. At a board meeting on July 17, 2001, McKinsey made a presentation to HP's board. One portion of this presentation addressed the long-term strategic options available to HP, a subject on which the board conducted a "pretty rich dialogue." Another portion of the presentation addressed the projected effects of a merger with Compaq and identified five main areas of synergy and risk that would aggregate to create the overall financial impact of the merger. HP decided to focus specifically on two of these five items, hard cost synergy and revenue risk, in its external models. The other three items, all of which would have positive financial effects, were purposely omitted from external models in order to allow HP to "under-promise and over-deliver" on its targets.
Tr. 228:23 (Fiorina). Citations in this form are to page and line numbers of the trial transcripts, with witness names in parentheses.
These two items reappear later as the $2.5 billion cost synergy and 4.9% revenue loss numbers that were repeated by HP throughout the proxy campaign. Those numbers were presented in the first public announcement of the merger and they were repeated thereafter in the S-4 proxy statement/prospectus filed by HP and Compaq and in several presentations made by HP management. HP focused on these numbers, which indicate management's estimate of the effects of the merger on the combined company, rather than on specific revenue or profit targets. This was because it wanted to use numbers that would show the effects of the merger in a variety of different economic contexts. Tr. 88:11-89:4 (Fiorina); Tr. 451:24-452:15 (Wayman); Tr. 735:4-6 (Clarke) ("[T]his merger is about the consolidation of the two firms. It's not about the macroeconomic trends, the changes in our industry.").
Tr. 231:22 (Fiorina). The factors that HP identified but decided not to include in external communications were hard revenue synergies, such as printer pull-through generated by bundling HP printers with Compaq computers in place of the Lexmark printers currently used by Compaq; revenue aspirations, such as improved product momentum; and cost synergy upsides, or cost synergies not yet supported by firm data. DTX 7 (McKinsey presentation to the HP board dated July 17, 2001) at HP 012076. Citations in this form are to the trial exhibits submitted by the defendant. Citations to "PTX" are to the plaintiffs' trial exhibits.
HP management, including CEO and Chairwoman Carleton S. Fiorina, CFO Robert Wayman, and others, believed that the integration of the two companies would be vital to the ultimate success of the merger. Accordingly, HP began planning the integration process very early on. Fiorina asked McKinsey to present a report about integration to HP's board at a meeting on July 30, 2001, because she wanted to ensure that HP "had thought early and thoroughly about integration." In this report, McKinsey outlined the integration process that ultimately was followed by HP and Compaq in the months following the announcement of the deal.
Tr. 239:9-10 (Fiorina).
DTX 8 (McKinsey report to the HP board dated July 30, 2001) at 8-13.
On September 3, 2001, HP and Compaq entered into a merger agreement, effective September 4, 2001. The merger was announced publicly on September 4. In connection with this announcement, HP made its first public statements about the financial effects of the merger, emphasizing the projected cost synergies of $2.5 billion and noting a projected revenue loss of less than 5%. HP and Compaq also announced on September 4 that the two co-leads of the integration effort would be Jeff Clarke, CFO of Compaq, and Webb McKinney, a senior executive of HP.
The integration effort headed by Clarke and McKinney was overseen by an Integration Steering Committee consisting of Fiorina, Wayman, Michael Capellas (Compaq's CEO), Clarke, McKinney, Bob Napier (the Chief Information Officer of the new company), and Susan Bowick (the Human Resources Vice President of the new company). The Steering Committee met weekly throughout the process to review the status of integration. At these meetings, the Steering Committee reviewed a standard status chart that consisted of updated status reports from each of 23 different integration teams (a central program management office; one team for each of four business units; 13 teams representing "horizontal processes," such as information technology, finance, and human resources, that are common to the entire merged company; and five "program specific" teams, including the "value capture" team, an important group for purposes of this litigation). Top executives of both companies also obtained information about integration through conversations with the managers in charge of specific integration functions.
Tr. 246:5-9, 251:1-5 (Fiorina); PTX 66 (HP Rule 425 Filing dated December 19, 2001) at 35.
Throughout the process, integration planning focused on four main pillars: product roadmaps, go-to-market, financial accountability, and launch. From a logistical standpoint, integration initially was to be conducted by a "clean team," a select group of HP and Compaq employees who had access to sensitive, nonpublic information from both companies in a "clean room." The clean team, through its access to this information, was able to start immediately identifying and estimating specific cost synergies (such as those related to procurement), determining what products and services the new company would offer, and working on plans to market those products and services, among other things. As integration progressed, the clean team grew from several hundred employees to well over a thousand, and ultimately integration planning expanded to include "unclean" members of the company's business units.
Shortly after the merger was announced, Fiorina and Wayman attended a meeting in New York with several people from Deutsche Bank, including George Elling, a senior research analyst at Deutsche Bank who was an early and enthusiastic supporter of the merger. At the meeting, HP and Deutsche Bank discussed the merger and their commercial relationship. Deutsche Bank had a prior business relationship with HP, and since August 2001 Deutsche Bank's investment bankers had been working to expand that relationship. At this meeting, Deutsche Bank attempted to convince HP that Deutsche Bank should be a co-lead bank on the merger along with Goldman Sachs, echoing the requests of "virtually every other bank" at the time. HP indicated that it would be happy to continue its dialogue with Deutsche Bank about expanding their commercial relationship but informed Deutsche Bank that it did not want to have multiple co-lead banks for the merger.
Specifically, Deutsche Bank had participated in HP's 1997 credit facility, which was set to expire in 2002, as well as working with HP on foreign exchange, bond offerings, and a pension plan. Tr. 467:5-14 (Wayman); see also DTX 183 (Deutsche Bank's HP Client Service Team memorandum dated August 2001).
See Griswold Dep. at 16:16-17:8 (explaining that HP became a "major client" of Deutsche Bank in August 2001).
Tr. 174:9-10 (Fiorina); see also Tr. 197:8-15 (Fiorina) (explaining that "[e]very other investment bank sought that status").
On September 19, 2001, Deutsche Bank sent a letter to Wayman urging HP to engage Deutsche Bank as an advisor in support of the merger. Wayman initially was not sure he wanted to hire Deutsche Bank at that time. Then, on November 6, 2001, Hewlett publicly announced his opposition to the merger. Wayman testified that "it wasn't really until the proxy battle was announced" that he decided to consider Deutsche Bank's offer. At that point, Wayman arranged to meet with Robert Thornton (a managing director of Deutsche Bank) and other Deutsche Bank representatives to discuss what Deutsche Bank proposed to do for HP. This face-to-face meeting did not take place until early January, although Wayman had decided in November, based on phone conversations and e-mails, to retain Deutsche Bank. On February 22, 2002, after negotiations about the fee and the scope of the engagement, the parties entered into an engagement letter according to which HP paid Deutsche Bank $1 million, with an additional $1 million to be paid in the event the merger was consummated.
DTX 113 (letter from Tony Meneghetti of Deutsche Bank to Wayman dated September 19, 2001).
Tr. 469:17-18 (Wayman).
DTX 305 (engagement letter dated February 22, 2002). Pursuant to this agreement, Deutsche Bank performed a variety of services for HP, including tracking information about the views of signficant shareholders, analyzing possible divestitures for the combined business, monitoring arbitrage activity, and informing HP about Wall Street's view of the merger. Id.; see also Thornton Dep. at 161:13-163:1.
At or around the same time that HP and Deutsche Bank were negotiating the engagement with respect to the proxy contest, negotiations for HP's new revolving credit facility were also ongoing. The credit facility negotiations appear to have been entirely separate from and unrelated to any negotiations pertaining to the merger. Deutsche Bank signed a commitment letter to participate in the facility in December 2001, ultimately committing several hundred million dollars as a co-arranger of the multi-billion dollar facility. Each of the many banks participating in the new credit facility is compensated on a pro-rata basis. Due to protracted negotiations between HP and the two lead investment arrangers (JP Morgan Chase Co. and Solomon Smith Barney) over terms of the credit facility, the final contract was not signed until March 15, 2002, just four days before HP's special meeting for shareholders to vote on the merger.
DTX 308 (letter from Deutsche Bank to HP dated December 28, 2001). The size of Deutsche Bank's commitment under the credit facility would be reduced if the proposed merger was not consummated. See Griswold Dep. at 25:9-17.
Meanwhile, on November 8, 2001, two days after Walter Hewlett's announcement that he would vote against the merger, HP management received the first of several value capture updates ("VCUs," and each individually a "VCU") from the value capture team, one of many groups involved in the integration process. The value capture team's mandate is to "drive [the] overall top-down corporate planning process to achieve full value of the merger by 2004." The November 8 VCU was generated primarily from clean team reports, with some management oversight, and it analyzed whether the numbers established earlier in the process by management and its consultants were attainable. Although overall revenue estimates were lower than they had been in September due to economic changes affecting the combined entity as well as the standalone prospects for HP and Compaq, the November 8 VCU indicated that the projected effects of the merger remained accurate and were, in fact, conservative. The projected revenue loss arising from the merger remained at or below 4.9%, and the estimated synergy target increased to approximately $4 billion instead of $2.5 billion. HP management viewed this report as a validation of the assumptions it had made and the targets it had created with McKinsey in the summer of 2001.
DTX 277 (HP Rule 425 filing dated February 27, 2002).
DTX 15 (VCU dated November 8, 2001) at 3, 9.
Tr. 249:12-22, 277:6-22, 335:1-6 (Fiorina).
On December 19, 2001, HP filed with the SEC, pursuant to Rule 425, the contents of a presentation to HP stockholders (the "December 19 425 Filing"). This document contained the same information about cost synergies and revenue loss that HP consistently presented since its first public announcement in September 2001. It also contained examples of the effects of these numbers based on management's September 2001 forecasts for fiscal year 2003, as well as analysis based on the then-current Wall Street estimates for that same period. Fiorina and Wayman testified at trial that pages 25 to 28 were always covered in HP management's presentations to shareholders. On page 26, the document explains the basis for the estimated $2.5 billion cost synergies, while noting that that estimate does not include potential revenue synergies and further upside to the cost synergies. On page 27, the document discloses the expected revenue loss for each of several product lines and applies the cumulative effect on exposed revenue to a set of revenue numbers. At trial, the plaintiffs emphasized the title of this page, which is " Revenue Forecast Based on Detailed Segment Analysis" (emphasis added). Significantly, however, the footnotes to page 27 indicate that the illustrative revenue numbers used were "[b]ased on management estimates as of 9/4/01" and that page 27 "contains forward-looking information that involves risks, uncertainties and assumptions." On page 28, the document shows the effect of the estimated revenue loss from page 27 on operating profits and earnings per share ("EPS"), assuming a weighted average contribution margin on revenue loss of 12% on operating profits. Finally, on page 25, the document applies all of the merger-related numbers — $2.5 billion in cost synergies and a 5% revenue loss with a 12% contribution margin — to the then-current Wall Street estimates of the standalone EPS for HP in fiscal year 2003. This calculation shows the merger to be 13% accretive to HP shareholders, with a standalone EPS of $1.28 and a post-merger EPS of $1.44. The footnotes to page 25 indicate expected fiscal year 2003 revenues, based on Bank of America research dated October 11, 2001, of $78.5 billion.
This report is found in the record as PTX 66.
On January 17, 2002, HP announced that it had established January 28, 2002, as the record date for a special meeting of its shareholders to consider and vote upon the issuance of shares required for the proposed merger. The meeting date was set for March 19, 2002, and management's final joint proxy statement/prospectus (the "S-4") was mailed to shareholders on or about February 6, 2002. The final version of the S-4 included the same relevant financial information that appeared in the public announcement of the merger on September 4 and also in the December 19 425 Filing. Specifically, in the section entitled "Financial Benefits of the Merger," HP management disclosed exactly the same cost synergy, revenue loss, and operating profit loss numbers — $2.5 billion, $4.1 billion (representing 4.9% of estimated revenue for fiscal year 2003), and $500 million (applying a 12% contribution margin to the expected revenue loss), respectively — that it had disclosed in the December 19 425 Filing and indeed in nearly every public statement since the announcement of the merger. HP also indicated that it expected the merger to result in EPS accretion of approximately 13% in fiscal 2003, based on consensus Wall Street projections. Once again, as in the December 19 425 Filing, these numbers are clearly described as "assumptions" based on "estimated" results and "anticipate[d]" savings.
PTX 15 (final S-4) at 60-61.
Id. at 64.
Id. at 60, 64.
While HP was making these presentations and engaging in the proxy contest with Hewlett, the integration process was continuing. The integration process consisted of three separate phases, with the launch date for the new combined company set for May 7, 2002. Sometime in mid-January, HP entered into Phase III of its integration planning. This meant that management and the clean team had completed substantial detailed plans and, for the first time, "unclean" members of the business units were to be involved in the integration process. HP reached this point in the integration process at least two weeks earlier than it originally expected. In addition to being ahead of schedule, the integration teams continued to provide positive reports to HP management, especially with respect to cost synergies and revenue loss goals. According to a VCU dated January 30, the integration teams had identified $3.728 billion in cost synergies, well in excess of HP's public target of $2.5 billion. Moreover, the supply chain value capture team had identified significant additional procurement synergies. HP had also exceeded its revenue targets. It had expected immediate revenue loss due to uncertainty surrounding future product lines, especially in areas in which one of the two companies was significantly stronger than the other, but these immediate revenue losses had not occurred. Fiorina testified that by February 4:
Tr. 249:7-8 (Fiorina) ("We entered [Phase III] several weeks earlier than our original schedule called for."); DTX 29 (Master Schedule Overview) at HP 011586 (showing, as of January 15, 2002, that HP had entered Phase III, ahead of its January 30 target).
See Tr. at 289:19-23 (Fiorina); DTX 179 (VCU dated January 30, 2002) at HPE 8248.
Tr. 720:14-721:12 (Clarke) (discussing procurement savings, which were expected to be one percent of $60 billion, or $600 million, but are now estimated to be between two and three percent, $1.2 to $1.8 billion); Tr. 276:15-23 (Fiorina) (same).
For example, HP management "assumed that Compaq would lose 40 percent of its UNIX revenues because of this combination because we figured customers would figure out that HP UNIX was the stronger surviving platform. In fact, during this period, Compaq's high end grew sequentially. We thought we would lose 30 percent of our NT [industry server] business . . . [a]nd in fact, we were seeing sequential growth." Tr. 270:18-271:4 (Fiorina); see also Tr. 729:15-731:7 (Clarke) (discussing the success of Compaq's UNIX business); Tr. 507:2-4 (Wayman) ("[N]ot only did we have no revenue loss during this period of time, we clearly outperformed our competitors."); Tr. 269:21-270-17 (Fiorina) (noting that this was "a maximum time of uncertainty and a maximum moment of opportunity for [HP's] competitors").
our revenue loss assumptions were validated, that they were conservative and that we were doing better than those revenue loss assumptions in the market currently, during a period of great uncertainty. I knew, as well, we had revenue synergies, revenue upsides, that were real, that were achievable, that were not part of the financial model we had delivered to the street at all.
Tr. 290:2-10 (Fiorina); see also DTX 40 (minutes of an HP board meeting on January 17-18, 2002) at 15 ("Carly Fiorina reminded the Board of revenue loss assumptions that were built into merger models and analyses and emphasized that thus far the assumptions appear to be conservative. She also discussed with the Board that customers appear not to be shying away from doing business with either company."). These statements were corroborated by Wayman in a subsequent presentation and were validated when it was later revealed that HP and Compaq both performed better than expected and better than most of their competitors in the last quarter of 2001. In a presentation to security analysts on February 27, Wayman discussed the companies' revenue loss experience, noting that contrary to expectations neither HP nor Compaq had experienced any significant merger-related revenue losses since announcement of the merger. HP's and Compaq's revenue for the quarter totaled 98% and 97%, respectively, of analyst consensus estimates that existed as of the date the merger was announced, versus a peer average of 86%. DTX 276 (HP Rule 425 filing dated February 27, 2002); Tr. at 504:20-507:15 (Wayman).
Accordingly, at a Goldman Sachs Technology Conference on February 4, Fiorina stated that HP had "now entered the third and final phase of our integration planning. We are at the point where detailed business plans are being drawn up for the new company. We are over-achieving on both our cost-reduction and revenue targets."
DTX 268 (Fiorina's comments at the Goldman Sachs Technology Conference on February 4, 2002).
The January 30 VCU was the first of several VCUs to include "bottom-up" numbers generated by the business units instead of focusing solely on the "top-down" numbers from management as previous VCUs had done. At this point in the process, the goal from HP management's perspective was to identify the relevant gaps between top-down and bottom-up numbers so that those gaps could be closed. To that end, the January 30 VCU identified specific actions, on a group-by-group basis, that could be used to bridge the gaps between those two sets of numbers. The January 30 VCU also discussed the "interlock" process — a process that remains to be completed — in which business groups and functional groups (such as procurement) coordinate their estimates of cost synergies in order to make the business unit reports more accurate.
The value capture team and management establish top-down or "stretch" targets. Tr. 714:18-715:9 (Clarke). The business units develop plans to meet those targets and provide them to the value capture team. The value capture team works with the business groups to assist them in implementing the top-down targets. Tr. 715:10-717:2 (Clarke) (describing this process); see also DTX 179 (VCU dated January 30, 2002) at HPE 8248-50. Clarke made this point at trial when he testified:
Financial planning is also important but a different part of the process. It is a process that every company goes through on a regular basis. We build financial plans. We look at them. We revise them. Very frequently you need to keep working on them to get to the right level of what can be. I think one of the geatest jobs of senior management is to determine how high to set the bar. If you set it too low, people underachieve. If you set it too high, they give up because they don't know how to get there. So the challenge is to make them be better than they think they can be but make it reachable.
Tr. 816:9-19.
DTX 179 (VCU dated January 30, 2002) at HPE 8239-42.
Clarke Dep. at 177:20-178:7; DTX 179 (VCU dated January 30, 2002) at HPE 8239-42.
The next several VCUs — dated February 14, February 28, and March 14 — all reflected growing gaps between the top-down and bottom-up numbers. Each VCU was worse than the previous one, and by March 14 the bottom-up numbers were significantly below the numbers implied in the S-4. The Hewlett Parties contend that this is because the underlying facts about the progress of the integration effort did not support the positive statements about the merger being made by HP management. HP responds, to the contrary, that lower numbers from the bottom-up roll-ups are to be expected, for three main reasons. First, the bottom-up plans are generated with imperfect information because the business units do not have complete access to all of the clean room information generated by the 23 integration teams. Second, the bottom-up plans are generated by people who are contemplating the newly combined business units for the first time and are essentially unfamiliar with half of their new businesses. Third, because the business units are accountable for the numbers they report, the numbers will naturally be conservative.
In the March 14 VCU, the values contained in the bottom-up plans yield an EPS of $1.23, or roughly 25% below the EPS implied in the S-4. PTX 162 (VCU dated March 14, 2002) at HPE 11241.
See, e.g., Tr. 121:23-122:2 (Fiorina) ("They were not presenting in full, for example, the full amount of procurement synergies that the clean team knew was available but the business units didn't have full visibility to."); Tr. 716:15-717:2 (Clarke) ("There are certain parts of the clean room in this process that come in at different points. So, I have visibility and the value capture team has visibility to key opportunities that the business groups don't have yet, for multiple reasons."); Tr. 462:23-463:13 (Wayman) (indicating that as of March 14, the VCUs did not reflect full integrations of functions).
See, e.g., Tr. 273:23-274:6 (Fiorina) (noting that the business units "were not focused on the revenue upsides. They weren't focused on the total cost synergies. They were focused on learning their business. And it would take some time for them to learn their business and understand how to execute."); Tr. 344:3-345:3 (Fiorina) ("The business units in February and March were, for the first time, being asked to roll up plans for how to hit targets. Not surprisingly, the first and second passes, they didn't know how to hit those targets."); Tr. 716:24-717:2, 722:10-18 (Clarke) (noting that the business units were leanly staffed at the time the VCUs were created and that many important managers were not named until March).
Clarke, Wayman, and Fiorina all testified about the business units producing conservative numbers because they were commiting to targets for which they would be held accountable. Fiorina described this aspect of the process as follows:
What happens in February that is different is all of a sudden, but as planned, when we entered Phase III, you bring new people into the planning process, people who haven't been spending months in the clean room, people who in many cases have literally just been named. We don't, for example — we didn't name the CFOs of the new businesses until late February or early March. And so what you had going on is new people being introduced who are grappling for the first time with their new businesses, for which they will be held accountable, and not only have they not had as much time, not only are they not fully familiar with all that has gone into this, but as well, as is the human dynamic in this, they want to come up with a set of numbers that they think they can knock out of the park, because they know ultimately they will be held accountable.
Tr. 283:6-24 (Fiorina).
HP's explanation of the gaps between the bottom-up and top-down numbers is compelling. Clarke, who is one of the heads of the value capture team (in addition to being one of the heads of the entire integration process) and who has access to clean room information, testified credibly that he believed all along, and continues to believe, that the merger-related targets are attainable. Wayman and Fiorina, who have a broad understanding of the progress made by the 23 integration teams through their positions on the Integration Steering Committee, reached similar conclusions. Fiorina explained in her testimony why the bottom-up plans are inherently based on imperfect information and indicated that this was, in fact, by design. Clarke testified that if there were not sufficient gaps between the two sets of numbers at this point then he would make new numbers to create gaps. Finally, all three of them testified, to use Wayman's phrase, that "closure comes towards the end," meaning that all budgeting and planning processes typically have similar gaps that are rapidly eliminated as the processes reach their conclusions.
Tr. 725:12-726:16, 731:17-732:16, 763:11-764:1 (Clarke).
Tr. 269:1-14 (Fiorina); Tr. 503:5-504:1 (Wayman).
Tr. 123:1-7 (Fiorina) ("[B]y design, because we are focused on capturing the maximum value from this merger, we explicitly withheld from that business unit process upside to cost synergies, revenue upsides we knew existed.").
Tr. 742:2-3 (Clarke) ("If the gaps got very small, I would create more gaps by putting out different topics.").
Tr. 464:16-17 (Wayman); Tr. 274:9-17 (Fiorina) ("[E]very planning process has gaps. And in fact, every planning process that I have ever been associated with, there is a pattern, a standard pattern. You start the process. The gaps are little. You go into a trough were the gaps are really big. Then you come out as people figure out how to deliver on the targets."); Tr. 741:21-742:1 (Clarke) ("[I]n all budgeting processes — in value capture processes you will have ups and downs as different people get added in the process, as different assumptions come out.").
This testimony is corroborated by evidence in the record. For example, although the February 14 VCU indicates that the bottom-up group plans would yield an EPS for fiscal year 2003 of $1.30, or 21% less than the number implied by the estimates contained in the S-4, there are several limiting factors affecting the validity of the group plans. First, the VCU itself contains six pages of synergy analysis, noting that the group plans "are not fully reconciled with integration team synergy plans" and that the "interlock process [is] underway," among other things. Second, the appendix to the February 14 VCU presentation identifies the sources of many of the gaps in the VCU and contains detailed steps that can be taken to close those gaps. Finally, the minutes of a February 14, 2002, meeting of the new company's Executive Council (the "EC") reflect that the EC was not overly concerned by the gaps because the group numbers were incomplete and based on faulty assumptions. The minutes indicate that procurement savings (which appear to be substantial) were "still not factored in" and that "[i]n some cases it looks like we are assuming way too much share loss."
PTX 107 (VCU dated February 14, 2002) at 15.
PTX 106 (Appendix to the February 14 VCU).
DTX 39 (EC minutes dated February 14, 2002) at HPE 3351. As Fiorina testified, "there were clearly upsides to cost synergies of which we have talked. There were not 2 to 2-and-a-half [billion dollars]. It was 3.4 to 3.9 [billion dollars]. There were clearly revenue synergies that aren't even in here. And as well, there were assumptions being made at this time by business units which were unrealistic and overly pessimistic about gross margins, about market share, about a whole host of things. Which is typical for this point in the planning process." Tr. 294:3-11 (Fiorina).
The February 28 and March 14 VCUs appear to be similarly limited. Management was aware of additional cost and revenue synergies that the business teams were not including, partially for the reasons described above and partially by design. The EC, in its March 14 meeting, reiterated the stance it had taken one month earlier, rejecting several of the pessimistic assumptions behind the bottom-up plans. Management identified specific problems with the group reports; for example, every group assumed that it would lose market share, an assumption not shared by management, and the group plans still did not include cost synergies from two key functional integration teams, information technology and facilities. Moreover, management also believed that the current negative state of the economy was affecting the bottom-up numbers.
As Wayman testified in his deposition: "I'm sitting here as CFO evaluating this planning process, knowing full well that I have things in my pocket; and specifically no revenue in here for printer pull-through, specifically a $2 1/2 billion cost synergy plan. And I can show you a [McKinsey] document in July where it was $4 billion. We went with the 2 1/2. Upside revenue synergies. I can show you a document in July, range of X to $X billion. Those are in my pocket today." Wayman Dep. at 172:6-15; see also id. at 175:3-11 ("I have high confidence, as a very experienced CFO, that the ultimate cost synergy goals that are the basis of people's meeting their performance plan will be above $2 1/2 billion and that the revenue numbers, which do not yet have any revenue synergies up there, will include some revenue synergies. We don't have people working on that yet because we don't want them to use that to meet the plan yet." (emphasis added)).
PTX 162 (VCU dated March 14, 2002) at HPE 11239.
DTX 62 (Steering Committee minutes dated March 14, 2002) at HPE 3100 ("Bob pointed out that the prevailing view of economists is that [the second half of 2002] will be much stronger than [the first half], and that Business Leaders are generally too conservative in predicting recoveries (since the[y] usually didn't predict the down turn either and are gun shy."); see also Tr. 300:3-15 (Fiorina) ("[W]hat was bugging people that day and what you see in the minutes here, is people's sense of the overall economy. February was a soft month for both companies. It was a soft month for the technology industry in general. One of the things — one of the human dynamics about planning processes is people's view of the future tends to be colored by their current sense of the economy. And people's current sense of the economy was that the economy was soft. And so this was all about what are we really assuming about the water level, the level of economic activity by the time we get to 2003.").
Top HP management was receiving negative financial information at this time from other sources as well. First, on March 10, 2002, Ken Wach, who had been "named on a future basis when the company is combined to be the chief financial person for the enterprise systems group," sent Wayman and others an e-mail indicating that the report he attached to the e-mail was "a frightening reality check on the clean room and value capture revenue work." Then, two days later, Clarke sent virtually identical e-mails to Wayman and Capellas, attaching "the latest roll-up from the value capture" and indicating that "[i]t is ugly — both companies are deteriorating." The Hewlett Parties again contend that these e-mails, like the February and March VCUs, show that the integration process was not going as well as HP management was stating publicly. HP again responds, as with the VCUs, by attempting to explain away the discrepancies between the data in the e-mails and the top-down plans.
Tr. 423:13-15 (Wayman).
PTX 197 (e-mail from Wach to Wayman and others dated March 10, 2002).
PTX 156 (e-mail from Clarke to Capellas dated March 12, 2002); PTX 155 (e-mail from Clarke to Wayman and others dated March 12, 2002).
HP asserts that Wach's study is bounded by the same limitations as the VCUs and that, in fact, the numbers generated by Wach are identical to those contained in the March 14 VCU. Specifically, Wayman explained at trial that Wach was new to the value capture process and was in a position of having to learn about half of his new business at the same time that he was learning how to work with a new boss (formerly from Compaq). Moreover, although Wach's e-mail contained numbers for 2003 that were later incorporated into the March 14 VCU, it appears to focus much more on revenue for the second half of 2002 rather than for fiscal year 2003. With respect to Clarke's e-mail, Clarke testified as follows:
Wach's report identified a revenue gap of $964 million between a value capture plan and what he referred to as a "likely" plan for the enterprise systems group. PX 197 (e-mail from Wach to Wayman and others dated March 10, 2002) at HP 2097. Ultimately, however, the revenue number generated by Wach, $ 18.220 billion, appeared in the March 14 VCU. Compare id. with PTX 162 (VCU dated March 14, 2002) at HPE 11245. The gap identified by Wach was not an additional billion dollars off the most current VCU; instead, he had identified a gap between his numbers and the February 14 VCU. Tr. 438:12-439:9 (Wayman).
Tr. 439:14-441:6 (Wayman) (explaining these factors and noting that he "had fairly low expectations in terms of the stability of the value capture process while all of that was going on").
The text of the e-mail notes that there is "nothing behind" the 2003 numbers, which were generated simply by applying a stated growth rate to the revised 2002 numbers. PX 197 (e-mail from Wach to Wayman and others dated March 10, 2002).
I was frustrated. I was sending a note to Michael. I also sent a note to Bob Wayman that evening. I was frustrated that the work that we had done in the executive committee was not and the targets we had set were not being accepted by the business groups. I had a visibility to substantial opportunities around procurement, around upside revenue, around other areas, and the business groups were not addressing those. They were not working on those.
Tr. 762:8-17 (Clarke).
In early March, as management was receiving these e-mails and the controversial VCUs, Hewlett and HP were actively engaged in the proxy contest and each was trying to secure as many votes as possible. In this regard, it was widely known that Institutional Shareholder Services, Inc. ("ISS") played a critical role, because several institutions usually follow ISS recommendations and in this case Barclays Global Investors had committed to voting its approximately 60 million shares of HP stock in accordance with the ISS recommendation. On March 5, 2002, ISS issued a report to its subscribers recommending that HP shareholders vote in favor of the merger. The ISS report notes that both sides had made various claims about the financial benefits of the merger. ISS did not try to resolve this debate, reasoning that "the financial and strategic prospects of an HP-Compaq combination are a matter on which reasonable people can (and do) disagree. The accretive or dilutive impact of the merger, and the corresponding appreciation or depreciation of HP's stock value, is highly sensitive to a number of assumptions about which there is no clear agreement among expert observers." Accordingly, ISS focused instead on the integration process and how that process would affect long-term value. With respect to integration, ISS concluded in its report that it would be "hard to remain unimpressed in the face of such enthusiastic attention paid to the integration effort," and that "management has done everything it can to maximize the chance that integration will be a success." The plaintiffs contend that HP obtained ISS's endorsement by misrepresenting the financial benefits of the merger and the progress of the integration efforts.
DTX 49 (ISS recommendation) at HPE 0594. The author of the ISS report on the merger testified: "We assumed that the numbers we were receiving from each side were accurate. I think we understood, of course, that each side has a perspective and took the numbers with a grain of salt." Kumar Dep. at 105:23-106:3.
DTX 49 (ISS recommendation) at HPE 0594-96; see also Kumar Dep. at 102:15-20; 129:5-130:2.
DTX 49 (ISS recommendation) at HPE 0596.
The plaintiffs also allege that HP improperly enticed or coerced Deutsche Bank to vote in favor of the merger by using the "carrot" of potential future business. Deutsche Bank is a global banking company comprised of three separate groups: Corporate and Investment Bank ("CIB"), Corporate Investments ("CI"), and Private Clients and Asset Management ("PCAM"). Deutsche Bank Asset Management ("DBAM"), which is part of PCAM, is a very large asset fund manager that operates a number of funds that invest money on behalf of individuals and institutions worldwide. DBAM had voting authority over approximately 17 million shares of HP stock as of the record date for the special meeting. Most of those shares were held in United States funds, with the remainder held in funds in Germany.
See DTX 318 (Deutsche Bank 2001 annual report) at 10-12.
See id. at 15.
Most of these were "passive" shares held in funds — primarily index funds — administered by DBAM. Consequently, DBAM was not the beneficial owner of these shares, and in voting them, it owed a fiduciary duty to its clients, who were the beneficial owners of the HP shares. See Laverty Dep. at 172:3-21.
Thornton Dep. at 71:7-16.
Voting decisions for shares held by DBAM are made by a five-member committee known as the Proxy Working Group (the "PWG"). For much of the proxy contest, both HP management and Spencer Fleischer, one of Hewlett's advisors, believed that DBAM would follow its common practice and vote its shares in accordance with ISS's recommendation. Thornton and Griswold, the Deutsche Bank commercial bankers advising HP, were told by Margaret Preston of DBAM that this was the case, and they informed Wayman accordingly. Deutsche Bank had also told both Hewlett and HP that it did not meet with participants in proxy fights. Consequently, HP never arranged a meeting with DBAM or the PWG to present on the merits of the merger.
See DTX 166 (Deutsche Bank Proxy Voting Guidelines Policies and Procedures Manual) at DBAM 003371.
Tr. 177:11-178:15 (Fiorina); Tr. 677:2-678:15 (Fleischer). The PWG, and more generally DBAM, usually follows ISS recommendations on questions of corporate governance or proxy issues. See DTX 246 (e-mail from Steven C. Balet, VP of MacKenzie Partners, Inc., to Fleischer dated February 22, 2002). For this reason, because Deutsche Bank had volunteered its services in the. proxy contest, and because George Elling, a Deutsche Bank analyst, had strongly supported the merger since it was announced in September 2001, HP assumed that DBAM would be voting in favor of the merger. Tr. 474:4-476:10 (Wayman).
Griswold Dep. at 60:5-10, 62:6-12, 63:1-2; Barr Dep. at 48:15-22.
Tr. 651:6-10 (Fleischer).
The PWG first met to discuss the merger on March 11, 2002. At that point, the PWG had not met with representatives for either side; the PWG members had merely reviewed the ISS report and certain public information about the merger. The PWG made no decision on the merger at this meeting, but instead arranged another meeting on Friday, March 15, in order to allow additional time for research and deliberation. At the March 15 meeting, the PWG decided to vote its Compaq shares in favor of the merger, but its HP shares against the merger. Dean Barr, Global Chief Investment Officer of PCAM, informed Fleischer later that day of this result and of the similar independent determination by Deutsche Bank's European Proxy Committee.
DTX 200 (PWG minutes dated March 11, 2002).
Mr. Hewlett's advisors had been requesting a meeting with the PWG since at least February 2002. Tr. 648:8-651:3 (Fleischer). Mr. Barr had consistently told Mr. Hewlett's advisors and others that he would only schedule a meeting if both sides wanted, and had, the opportunity to present their respective positions to the PWG. Barr Dep. at 53:6-18; Tr. 692:16-24 (Fleischer); Thornton Dep. at 76:13-18.
DTX 200 (PWG minutes dated March 11, 2002); see Laverty Dep. at 27:9-28:3. 35:15-36:17.
DTX 208 (PWG minutes dated March 15, 2002).
Id.
Tr. 655:8-16 (Fleischer).
On Friday, March 15, and Sunday, March 17, Alan Miller, HP's proxy solicitor, contacted Fiorina to tell her he had heard rumors that DBAM was voting against the merger. Miller told Fiorina that she might need to arrange a meeting with Deutsche Bank to argue the merits of the merger. On Sunday night, Fiorina called Wayman and left him the now-famous voicemail that was leaked to the San Jose Mercury News informing Wayman of Miller's concern. Fiorina asked Wayman to contact Deutsche Bank and told him that HP might have to do "something extraordinary" to try to secure DBAM's vote.
Tr. 178:8-14, 179:11-20 (Fiorina).
Miller Dep. at 31:18-32:1; Tr. 204:17-205:5 (Fiorina).
DTX 65 (copy of the voicemail from the San Jose Mercury News website).
On Monday, March 18, the day before the special meeting, Wayman called Deutsche Bank to try to arrange a meeting with DBAM to discuss the merger. Thornton and Griswold, "embarrassed" that they had earlier given Wayman incorrect information about DBAM's voting procedures, offered to arrange a meeting between HP and the PWG. They called Barr, who agreed to set up the meeting, but only if, as before, there would be an opportunity for both sides to present. Accordingly, Barr's assistant attempted to reach Hewlett and his advisors on Monday night and eventually reached him early Tuesday. It was decided that the PWG would meet telephonically with Hewlett and Fleischer at 6:30 a.m. Pacific Time and then with Fiorina and Wayman at 7:00 a.m.
Tr. 482:1-17 (Wayman).
Griswold Dep. at 66:11-67:8; Thornton Dep. at 90:14-91:4.
Barr Dep. at 47:4-48:14, 88:10-89:02.
Id. at 59:18-60:21.
Tr. 693:11-19 (Fleischer); Tr. 184:24-185:4, 185:21-24 (Fiorina).
The discussion at the March 19 meeting is recorded on tape and reflected in various contemporaneous notes and minutes. On Deutsche Bank's side, the PWG, several other DBAM representatives, and Thornton, the commercial banker, participated in the call. Hewlett and Fleischer made a presentation and then answered several questions about the merger. After they left the call, Fiorina and Wayman joined the call, presented their views, and then also answered a series of questions from the bankers. After Fiorina and Wayman left the call, the PWG deliberated about the merits of the merger and re-voted, this time deciding to vote DBAM's HP shares in favor of the merger. During the conference call, no one from HP used any threats or inducements regarding future business relationships in an attempt to persuade the PWG to support the merger. Instead, Fiorina and Wayman argued HP's case entirely on the merits.
DTX 314 (recording of the March 19 conference call); DTX 316 (transcript of the March 19 conference call); DTX 221 (PWG minutes dated March 19, 2002).
DTX 314 (recording of the March 19 conference call).
Id.; Tr. 187:2-188:5 (Fiorina).
While the PWG was debating about the merger, Fiorina was beginning to conduct the special meeting of HP shareholders. The meeting, which was scheduled to begin at 8:00 a.m., actually began around 8:30 a.m. because of long lines and heightened security. Fiorina conducted the meeting, closing the polls "when I ascertained that we had no more lines, the cards had been collected and I could see no further hands in the audience indicating they had cards that they wanted to be collected," and ending the meeting shortly after 10:00 a.m. Following the special meeting, HP management publicly claimed that the HP shareholders had approved the proposed merger by a "slim but sufficient" margin, which currently appears to be approximately 45.2 million votes (subject to successful challenges to individual votes in the "snake pit" process) out of 1,644,781,070 shares present at the special meeting. This lawsuit was then filed on March 28, 2002.
Tr. 214:11-215:20 (Fiorina). Fiorina also testified that she first learned that Deutsche Bank had switched its vote after the meeting had ended. Tr. 189:1-5 (Fiorina).
III. THE DISCLOSURE CLAIM
This Court stated in its opinion denying HP's motion to dismiss that the burden on the plaintiffs with respect to the disclosure claim would be as follows: "At trial, the plaintiffs have the burden of proving, through analysis of reports of the integration team," that "HP management knowingly misrepresented material facts about integration in an effort to persuade ISS and possibly others to approve of the merger." The question before me, therefore, is whether HP management knowingly and intentionally made material misrepresentations about the progress of the integration process.
Hewlett v. Hewlett-Packard Co., Del. Ch., C.A. No. 19513-NC, slip op. at 27-28, Chandler, C. (April 8, 2002).
To support their claim that it did, the Hewlett Parties rely on the VCUs generated in February and March and on the early March e-mails sent by Wach and Clarke. The plaintiffs contend that these documents all demonstrate that the integration process was going poorly, contrary to public statements by HP management, and that the combined company would not meet the revenue projections implied in the S-4. The plaintiffs also question the accuracy of Fiorina's statements at the Goldman Sachs Technology Conference on February 4, 2002. Ultimately, the plaintiffs' allegations boil down to two arguments: that HP management overstated the progress that was being made on the integration process, and that HP management was overly optimistic about the substantive results that the integration process would create. In connection with the second of these claims, the plaintiffs contend that HP should have made corrective disclosures about its financial projections after receiving the VCUs and the March e-mails.
I find both of these contentions to be without merit. The public statements made by HP management about the progress of the integration process, specifically Fiorina's February 4 statements, were supported by the facts when they were made and were neither false nor misleading. HP had entered Phase III of its integration planning by February 4, and detailed business plans were being created. Information available to management also indicated that the company was overachieving on both its cost-reduction and its revenue targets. Specifically, the January 30 VCU identified $3.728 billion in cost synergies, or more than $1 billion over HP's external target of $2.5 billion in synergies, and expected revenue losses following the announcement of the merger had not materialized. Moreover, HP management continued to be aware of revenue synergies and other cost upsides that were not included in the external projections.
DTX 179 (VCU dated January 30, 2002) at HPE 8248.
See supra notes 26-27 and accompanying text.
Tr. 290:2-10 (Fiorina); Wayman Dep. at 172:6-15.
The evidence before me also supports ISS's conclusion that "management has done everything it can to maximize the chance that integration will be a success." As indicated by the McKinsey report presented to HP's board on July 30 and by the naming of the integration team heads on the same day as the first public announcement of the merger, HP management focused on integration even before the merger was announced. HP's board believed from the beginning that successful integration of the two companies would be critical to the success of the merger. HP acted accordingly by planning its integration efforts carefully and thoroughly. It selected hundreds of its "best" and "brightest" managers for the integration teams. It also involved key senior executives in the process through the Integration Steering Committee, which was actively involved through, among other things, weekly meetings about integration. Nothing in the record indicates that HP lied to or deliberately misled ISS or the HP shareholders about its integration efforts.
DTX 49 (ISS recommendation) at HPE 0596.
Tr. 338:19-339:2 (Fiorina).
Tr. 245:24-246:13 (Fiorina) (describing the role of the Steering Committee).
The crux of the Hewlett Parties' second argument is that HP learned in February and March that the top-line revenue projections implied in the S-4 and used illustratively in the December 19 425 Filing were unattainable. This argument proceeds from two faulty premises: first, that the revenue numbers generated in the value capture process and contained in the VCUs represent realistic projections of expected future results; and second, that the estimated revenue, profit, and EPS numbers found in the S-4 and the December 19 425 Filing represented firm commitments by HP management. I am persuaded by HP's arguments that several factors limit the accuracy of the VCUs. Consequently, I find that it is reasonable for HP to believe that it will achieve better results than those contained in the VCUs. Additionally, I am unable to conclude that HP committed to the financial numbers implied in the S-4. The projections in the S-4 were clearly labeled as forward-looking estimates, and the December 19 425 Filing clearly indicates that those projections were made on September 4. More importantly, however, the numbers relied upon by the plaintiffs are purely illustrative and indeed are only one set of several presented by HP. The important numbers discussed repeatedly by HP management are the merger-related numbers of $2.5 billion in cost synergies and not more than 4.9% revenue loss. No evidence in the record before me contradicts the reasoned views of HP management about the limitations of the VCUs or suggests that HP will be unable to meet its to meet its merger-related targets. To the extent that the plaintiffs need to prove a subjective element for this claim to succeed, they fail completely to do so.
Failing to prove that HP affirmatively and knowingly misrepresented facts about integration, the plaintiffs fall back on the argument that HP should have disclosed the negative information contained in the VCUs and the early March e-mails because that information would have been material to shareholders. It is well-settled that omitted facts are material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." I cannot agree with the plaintiffs that the VCUs and the e-mails from Wach and Clarke were material. While this information clearly would be material if presented in final reports or projections, that is simply not the case here. There is no reason for management to disclose preliminary reports that are generated early in a planning process, based on imperfect information, and limited both by the unfamiliarity of the people creating the report with the business and by the desire of those people to commit to conservative numbers that are definitely attainable. There is also no reason to require HP to disclose Wach's e-mail to shareholders, because it suffers from the same flaws and limitations as the VCUs (and indeed was later rolled up into the March 14 VCU). Significantly, like the VCUs and like Wach's e-mail, Clarke's e-mails also address value capture roll-ups. The numbers included in Clarke's March 12 e-mails and their attachments are identical to those found in the March 14 VCU. As a result, those numbers reflect the same gaps and are bounded by the same limitations as the VCUs. Moreover, Clarke testified credibly, as the head of the integration process, that he was frustrated with the value capture numbers because the business units were unwilling to address cost and revenue synergies that he knew existed. Accordingly, I find Clarke's e-mails to be immaterial as well.
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
Compare PTX 156 (e-mail from Clarke to Capellas dated March 12, 2002) at CPQ 010357 with PTX 162 (VCU dated March 14, 2002) at HPE 11241.
The plaintiffs have been unable to prove that HP misrepresented or omitted material facts about integration in the proxy contest. Instead, the evidence demonstrates that HP's statements concerning the merger were true, complete, and made in good faith. During the trial, members of HP's senior management testified credibly, in accordance with the evidence and without exception, that throughout the proxy contest they believed that the cost synergy and revenue loss targets were realistic and, in fact, would be exceeded. Finally, there is no legal requirement that companies disclose all documents generated in a budgeting process. I therefore find in favor of HP on the disclosure claim.
IV. THE VOTE-BUYING CLAIM
I note initially, although the matter is disputed, that it appears at this point that the number of votes switched by Deutsche Bank likely will not be enough to change the ultimate outcome in this case. Hewlett's vote-buying claim, therefore, may be of greater academic than practical interest. At the special meeting on March 19, HP's shareholders approved the transaction by a preliminary margin of 45,240,287 votes. The defendants, relying on discovery documents, an April 27 letter from Deutsche Bank's counsel, and voting results provided by IVS Associates, Inc., contend that the participants in the March 19 conference call voted 17,015,988 HP shares in favor of the merger on March 19. Even assuming that all of these shares initially were voted against the merger (a matter that is also in dispute), HP's margin of victory would still be more than 11 million votes, probably enough to withstand the remaining "snake pit" challenges. The plaintiffs, however, also relying on record evidence, contend that the number of shares voted by Deutsche Bank (as a whole, apparently, and not just by the participants in the March 19 call) may be as high as 24 million. If this number is in fact correct, and if all of these shares were initially voted against the merger and then later voted in favor of the merger as a result of improper influence by HP management, then the resulting swing — 48 million votes — would appear to be outcome-determinative.
The Hewlett Parties' vote-buying claim centers on the March 19, 2002, telephone conference at which members of Deutsche Bank's PWG entertained competing presentations on the merits of the proposed merger from Walter Hewlett and HP management. The plaintiffs contend that during the telephone conference, Deutsche Bank was coerced by threats, either implied or explicit, from HP management that Deutsche Bank's future business relationship with HP would suffer if the shares of HP held by Deutsche Bank were voted against the merger. Accordingly, they ask this Court to set aside the resulting vote of a portion of the HP shares held by Deutsche Bank in favor of the merger.
As stated in the opinion denying HP's motion to dismiss, the Hewlett Parties bear the following burden with respect to the vote-buying claim:
At trial, 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, 2002 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.
Hewlett v. Hewlett-Packard Co., Del. Ch., C.A. No. 19153-NC, slip op. at 17, Chandler, C. (April 8, 2002). In other words, the plaintiffs must establish that HP in effect substituted its decision making for Deutsche Bank's with regard to Deutsche Bank's vote on the merger. My statement in the opinion on the motion to dismiss was not intended to imply that, in its role as a fiduciary to the beneficial owners of HP shares held by Deutsche Bank, it would be proper for Deutsche Bank to advance its own business interests rather than the best interests of the beneficial HP owners. The plaintiffs' argument that Deutsche Bank, as a shareholder, can vote HP shares in any way it chooses is incorrect to the extent that it implies that Deutsche Bank could make that determination based on considerations other than the best interests of the beneficial owners of the HP shares.
Therefore, the plaintiffs must prove that HP management used the business relationship between HP and Deutsche Bank as a weapon to coerce Deutsche Bank into voting for the merger. That is, they must establish that it was HP management's improper influence that caused Deutsche Bank to switch some of the proxies it had voted against the merger on March 15 to favor the merger on March 19.
The vote-buying claim turns entirely on circumstantial evidence. The Hewlett Parties point to circumstances surrounding the arranging of the March 19 telephone conference and to one statement by Fiorina at the end of HP's presentation during that call to support their claim of illegal vote-buying. Having considered all of the testimony and exhibits offered at trial, I conclude that plaintiffs have failed to meet their burden of proving the existence of such a vote-buying arrangement.
The plaintiffs first rely upon a voicemail message left by Fiorina for Wayman on March 17 after HP management became aware that Deutsche Bank might have voted against the merger. In that message, Fiorina told Wayman:
Talking to Alan Miller again today. He remains very nervous about Deutsche . . . And so the suggestion is that you call the guy at Deutsche again first thing Monday morning. And if you don't get the right answer from him, then you and I need to demand a conference call, an audience, etc. to make sure that we get them in the right place. . . . So if you take Deutsche . . . get on the phone and see what we can get, but we may have to do something extraordinary for those two to bring 'em over the line here.
DTX 65 (copy of the voicemail from the San Jose Mercury News website).
The plaintiffs contend that Fiorina's comment that HP "demand a conference call" and her reference to "do[ing] something extraordinary" support their allegation that HP management was willing to, and did, improperly pressure Deutsche Bank to switch its vote.
The plaintiffs next question the motive behind the scheduling of the March 19, 2002, conference call. The parties acknowledge that Deutsche Bank had existing commercial relationships with HP. Deutsche Bank was also providing services to HP in connection with the merger. It is undisputed that Deutsche Bank desired to continue and expand its business relationships with HP. Because of this desire, the plaintiffs contend, Deutsche Bank was susceptible to the threat that business opportunities would be withheld if Deutsche Bank voted against the merger.
See supra notes 9 and 14.
Based on these statements and inferences, the plaintiffs allege that HP management coerced Deutsche Bank by using the threat of lost future business opportunities to compel the CIB group, through Griswold and Thornton, in turn to force PCAM, of which the PWG was a part, to reconsider its vote against the merger. In the face of this threat, the plaintiffs insist, the PWG ignored its fiduciary duty to the beneficial owners of HP shares controlled by PCAM and voted in favor of the merger so that Deutsche Bank's CIB group might avoid the loss of some unspecified future business. Based on the evidence before me, however, I cannot agree that these circumstances are sufficient to demonstrate a vote-buying scheme.
First, I do not believe that Fiorina's voicemail evidences an intent to employ improper means to persuade Deutsche Bank to vote in favor of the merger. Fiorina testified credibly at trial that by "do[ing] something extraordinary," she meant that HP management needed to take the steps necessary to gain an audience at Deutsche Bank for HP's presentation in favor of the merger. These steps included flying to New York for a personal presentation to Deutsche Bank, making independent HP board members available to speak to Deutsche Bank, or having someone from Compaq speak to Deutsche Bank. Under the circumstances, with the hotly contested shareholder vote less than 48 hours away, such actions would be somewhat extraordinary. In light of the proximity of the shareholder vote and the perceived narrow margin separating votes for or against the merger, I believe the contents of Fiorina's message are not sufficient to support an inference that HP management intended to coerce Deutsche Bank. Rather, Fiorina's message reflects reasonable actions taken by an executive faced with unexpected adverse information.
Tr. 206:4-207:4 (Fiorina). HP had made presentations to many investors whose vote on the merger was uncertain, but had not previously requested the opportunity to make its case to Deutsche Bank because of its long-held belief that Deutsche Bank would vote in favor of the merger. See supra note 62.
Second, although members of Deutsche Bank's CIB group were contacted by HP management and attempted to arrange a meeting with the PWG, the evidence does not show that the intervention of the commercial bankers resulted from a threat by HP to withdraw future business from Deutsche Bank. Other than introducing the participants in the March 19 conference call, the CIB individuals (Griswold and Thornton) neither contributed to the substantive discussions of the proposed merger nor offered any input during the PWG's consideration of how to vote the HP shares controlled by Deutsche Bank. Moreover, it appears that Griswold and Thornton helped arrange the hastily convened conference call because they were distressed that they had misled their client, HP, about the process DBAM would follow in voting shares on the merger. Both Griswold and Thornton testified, without exception, that they had erroneously advised HP that shares held by DBAM as index, or passive, shares would be voted according to the ISS recommendation. Feeling "stupid," "shocked," and "embarrassed" about having misstated the facts regarding the voting process, both Griswold and Thornton believed that it was only appropriate to create an opportunity, albeit at the last minute and with no assurance as to its outcome, for the proxy contestants (and particularly their client) to present their positions on the merits of the merger to the PWG. This was the good news that Griswold and Thornton could offer HP in conjunction with the bad news that the vote was against the merger. From these circumstances, the plaintiffs contend that the only reasonable inference is that Griswold and Thornton, responding to HP's threat to withhold future business, coerced and pressured the PWG to switch its vote.
Griswold Dep. at 66:21-67:8; Thornton Dep. at 90:14-91:4.
The circumstances surrounding the March 19 conference call give rise to reasonably conflicting inferences, not all of which are benevolent. It is troubling, for example, that the March 19 telephone conference was initiated at the urging of individuals from the CIB group of Deutsche Bank and that those individuals also attended the telephone conference. This fact raises clear questions about the integrity of the internal ethical wall that purportedly separates Deutsche Bank's asset management division from its commercial division. Nevertheless, no evidence credibly demonstrates that Griswold and Thornton arranged the conference call in response to a threat from HP management to withhold future business.
Ultimately, the recording of the March 19 conference call, as well as the testimonies of Fiorina, Wayman, and the individuals at Deutsche Bank participating in the call, fail to support the plaintiffs' vote-buying contention. This testimony, which I find credible, disproves the assertion that HP management improperly coerced or influenced the PWG in the ultimate deliberations about the vote. The recording reveals that the presentation made by Fiorina and Wayman on behalf of HP, the questions posed by Deutsche Bank, and the responses by Fiorina and Wayman all concerned the merits of the proposed merger and not the effect of Deutsche Bank's vote on its future business relationship with HP.
DTX 314 (recording of March 19 conference call). The call was recorded in Germany by Klaus Kaldermorgen (a representative Deutsche Bank's European Proxy Committee) and produced for the first time during trial. The fact that the call was being recorded apparently without the knowledge of either the Hewlett Parties, the HP representatives, or Deutsche Bank's American participants reinforces my conclusion about the innocuous nature of the call. This lack of knowledge makes it less likely that discussions during the call were merely scripted as a smoke screen for an improper voting agreement.
Following HP management's presentation on the merits, the PWG debated about the merger without reference to how its decision would affect business between HP and Deutsche Bank. The PWG focused instead on the harm the companies and their shareholders would suffer if the merger was not approved, as well as other substantive issues relating to the merits of the merger, such as the revenue synergy from printer pull-through. After this substantive discussion, the PWG voted 4-1, by secret ballot, in favor of the merger.
The committee then spoke to Klaus Kaldermorgen, Deutsche Bank's European Proxy Committee representative, about how he would vote the shares he controlled. Again, the discussion concerned the substantive merits of the merger and no mention was made of any threat to Deutsche Bank from a business relationship standpoint. All of this evidence indicates that the ultimate decision of the PWG to vote the shares of HP it controlled in favor of the merger was made with regard to what the PWG believed to be in the best interests of the beneficial owners of those shares. On its face, none of the evidence suggests an effort was made to coerce or manipulate the PWG's vote.
The final circumstance offered by the plaintiffs to prove that the PWG's vote was the result of improper influence from HP management is Fiorina's closing remarks during the conference call. Fiorina ended her presentation by stating:
Gentlemen, we appreciate your time. I need to go try and get ready for a shareowner meeting. We very, very much appreciate your willingness to listen to us this morning. This is obviously of great importance to us as a company. It is of great importance to our ongoing relationship. We very much would like to have your support here. We think this is a crucially important decision for this company.
DTX 316 (transcript of March 19, 2002 telephone conference) (emphasis added).
This is the only statement from HP management that plaintiffs point to as evidence that Deutsche Bank was coerced during the March 19, 2002, telephone conference. That statement does not, in my opinion, demonstrate that Fiorina was attempting to coerce Deutsche Bank. Fiorina testified that the statement was the typical way she ended similar calls after making HP's standard presentation to investors. For thirty minutes prior to that closing statement, Fiorina and Wayman presented management's case for the merger and responded to concerns specifically raised by members of the PWG. The plaintiffs can point to nothing in those exchanges that indicates a threat from management that future business would be withheld by HP from Deutsche Bank and there is no indication that the PWG believed its discretion had been limited because of such a threat. Instead, the record establishes that all of the questions posed by the proxy committee — some of which were prompted by concerns raised just minutes before by Walter Hewlett's presentation in opposition to the merger — went to the merits of the transaction. Accordingly, I must find in favor of HP on the vote-buying claim.
V. CONCLUSION
Based on all of the testimony and exhibits and for the reasons set forth above, I conclude that plaintiffs have failed to prove that HP disseminated materially false information about its integration efforts or about the financial data provided to its shareholders. In addition, I conclude that plaintiffs have failed to prove that HP management improperly enticed or coerced Deutsche Bank into voting in favor of the merger. Accordingly, I will enter judgment in favor of HP and dismiss the plaintiffs complaint. An Order has been entered consistent with this determination.
ORDER
For the reasons assigned in this Court's Opinion entered in this case on this date it is
ORDERED that final judgment is entered in favor of defendant Hewlett-Packard Company on all claims asserted in plaintiffs' complaint and the complaint is dismissed.