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Hewlett Trial Gets Underway

Hewlett-Packard found itself in a Delaware court Tuesday facing allegations that it used its corporate muscle at the last minute to persuade shareholders to vote for its pending $19 billion merger with Compaq Computer .

Delaware Chancery Court judge William B. Chandler III heard opening statements from lawyers from the Palo Alto, Calif.-based computer and printer maker as well as its dissident board member Walter Hewlett, who is suing the company.

Outside the courthouse it was a mass of mostly attorneys, investors and journalists lined up to see how the biggest tech merger in history would play out. Some had paid between $20 and $40 an hour to hold their place in line overnight.

The lawsuit filed on March 28, charges that HP illegally approached Deutsche Bank's Deutsche Asset Management arm and Northern Trust and their respective affiliated parties at the last minute. Hewlett lawyer Stephen Neal came out swinging saying that HP management plotted to pay Deutsche Asset Management a $1 million bonus if the deal went through. "The evidence is going to show that sometime around the signing ... the top executives of H-P believed that Deutsche Bank was going to support the merger, and indeed they assumed that a company entering into a contract would in fact vote their shares in support of the merger," Neal said. HP chairman and CEO Carly Fiorina testified for 90 minutes before the lunch break. She persistently denied that the company was involved in any wrongdoing in either phone calls to shareholders or disclosing financial targets including revenues, earnings, and cost savings from the deal.

The three-day trial is expected to result in either the approval of the merger, Deutsche Asset Management shares being excluded from the final vote tally or a re-vote of the merger by HP shareholders.

The San Francisco office of the Securities and Exchange Commission and the U.S. Attorney's Office for the Southern District of New York are currently reviewing the March 19 proxy vote.

The two federal offices are also looking at any last minute shenanigans including a corporate voicemail between HP CEO Carly Fiorina and CFO Bob Wayman in which she suggests that HP might "have to do something extraordinary for those two (Deutsche Bank and Northern Trust ) to bring them over the line."

In the closing days of the proxy battle, Deutsche Asset Management helped HP prepare a new $4 billion credit facility in case the merger was successful.

While HP is acknowledging the conversation and the deal, it denies any wrongdoing.

Burden Of Proof

Despite the finger pointing since the March 19 vote, judge Chandler has said that the burden of proof lies with Hewlett's ability to show that any conversations or agreements with Deutsche Bank or its partners were factors in influencing their ballots.

A preliminary vote tally, prepared by IVS Associates shows that HP shareowners voted in favor of the merger by a margin of approximately 45 million shares.

Since Deutsche Bank only owns 20 million votes - 1.3 percent of HP stock - if the votes are thrown out, it should have little or no effect on the approval of the merger.

If Chandler favor's Hewlett argument and there is a recount, both parties will participate in a review of the proxies, which HP expects would begin immediately and last about a week.

In addition, the final tally is subject to a challenge process that could take another one to two days. Following completion of any recount and challenge, the independent inspectors of election will release a final, certified vote tally.

So far no contention plan has been discussed in the case of a re-vote.

Preparing The New Board

In a related issue, HP said it has set a date of April 26 for its shareholder's meeting in Cupertino with the purpose of electing its new board of directors.

Among the list of potential nominees are five current Compaq board members: Compaq CEO Michael Capellas; Verizon vice chairman and president Lawrence T. Babbio; Sanford M. Litvack of counsel, Dewey Ballantine LLP; Thomas J. Perkins, general partner, Kleiner Perkins Caufield & Byers; and Compaq co-president and LifeFX Networks CEO Lucille S. Salhany.

The list also includes HP nominees such as CEO Carly Fiorina; retired chairman, Vodafone AirTouch Sam Ginn; Boeing CEO Philip M. Condit; Barclay's Global Investors co-chairman and global chief executive Patricia C. Dunn; former HP chairman and retired executive vice president, Computer Products Richard A. Hackborn; Progress & Freedom Foundation chairman and senior fellow George A. Keyworth II; and Internet Access Technologies chairman and CEO Inc. Robert E. Knowling Jr.

On April 1, Walter Hewlett was asked not to return as one of its candidates to be nominated by HP's nominating committee.

If the merger has not resolved as of April 26, HP shareholder's will only vote on the current board of Condit, Dunn, Fiorina, Ginn, Hackborn, Keyworth, Knowling Jr. and Wayman.

If the merger passes, Wayman will resign from the board to keep inline with HP's guidelines that the board will have no more than two inside directors.