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To read comments to this article, go here
The HP Shareholder Lawsuit - Updated
Sunday, September 17 2006 @ 01:32 AM EDT

Some are speaking out now to defend Patricia Dunn, stressing the company's need to protect confidentiality. There's a very good rundown in the UK's Times Online, which quotes Jack Welch, the former Chairman of GE, among others:
Welch said Dunn may be a ‘sort of innocent victim in my view’. Dunn ‘had a crisis in the boardroom, and she had to deal with it,’ said Welch. “Now how they dealt with that may be up for some discussion. But the idea that a leak is out there destroying the confidentiality of the company ... if you had an employee that gave away the secrets of the company, you would fire them, instantly.’

He added that to the best of his knowledge GE had never used a private investigator during his 20 years at the top.

That last is the key, I think. It isn't just the pretexting; it's the damage caused by hiring PIs in the first place.

Update: Groklaw member rcbixler noted this very interesting sidebar in IR Web Report, under the header, "Did HP's Keyworth Really Leak Anything?" which points out that it's only a leak if what is said is confidential:

A review of the original CNET News.com article which sparked HP’s notorious probe finds that it contains no more information than had already been disclosed by the company or reported by the media.

Indeed, shortly before the article ran, HP itself provided a wide range of information about the company’s strategy to investment analysts at the company’s major annual analyst day meeting on December 13, 2005 at which CEO Mark Hurd and five other senior executives gave analysts a complete overview of the company’s strategy. That was about three weeks before the board session in early January 2006.

If this is accurate, then other laws come into play, and it would explain what I read somewhere that Keyworth and HP are negotiating a settlement. You can't say awful things about someone in public if they are not true. There are laws about that. It inevitably also raises the question, what was this spying really all about? The longer it continues, the more out-of-control it seems, like a spinning egg that spins so fast it loses contact with the table and starts to jump. As you can see, I am taking advantage of the Royal Society opening up for the next two months its entire collection of scientific journals to the public.

A colleague of Dunn's defends her even more strongly, though:

On Friday Martin Taylor, former chief executive of Barclays and a colleague of HP’s fallen chairman Dunn, made an extraordinary intervention. In a letter to the Financial Times he expressed sympathy for any director confronted by boardroom leaks. ‘People who have not served on boards have no idea how cancerous the presence of a leaker can be,’ he wrote.

‘It makes the development and execution of strategy impossible and it utterly corrodes the personal confidence that allows companies to work effectively. I have bitter experience of this. If I could have nailed a culprit by pretending to be his mother-in-law I should have been sorely tempted.’

Personal confidence is likely not enhanced by knowing the company spies on its own people, I don't think, though. What else could one do, aside from violating someone's privacy rights? One investigator interviewed provided a suggestion -- confront the person you think is the leaker and ask for his phone records.

I thought you might like to see the shareholder's complaint against HP, just filed in Superior Court of California, Santa Clara County, and I know I said yesterday in a comment I'd have it for you today. But when I read it, it is so strongly worded and raises some new issues, that I felt a bit odd about publishing it on Groklaw until I have the defendants' answer to publish at the same time. I hope you understand when I tell you that after thinking about it and wrestling with the question all day, I finally decided to wait until I have both. Being first isn't important to me compared with being fair and human. I'd like to retain those qualities, no matter what. And my heart just couldn't do it.

I put myself in HP's shoes, and if it were me, even if I'd made a huge mistake, I'd feel bad about having these accusations in the air for so long before I had a chance to respond. The thing that makes this different from earlier issues in the story is that HP can't really say much outside of the court filings, now that it's in litigation, so it just doesn't feel right to me to publish the accusations in the complaint without publishing the answer at the same time. And, unlike SCO v. IBM, which is two companies suing each other, this litigation is about people, flesh and blood people, and that doesn't feel the same.

So I am sorry I spoke too soon, but because I did, I felt I had to explain. And you are free to get your own copy at the courthouse, of course. Meanwhile, while we wait, I can tell you some things about it, because other journalists have done so already, and I've also looked around and found some articles that will help you understand the issues raised. One of the issues in the complaint is the assertion that HP ought to have hired new counsel to handle the problems that surfaced when the spy probe came to light.

It's not like the usual shareholder lawsuit I've seen. The why of that is because HP's stock hasn't been affected in any major way by the scandal, and usually shareholder suits seek to redress such financial losses to a company. This one seeks changes in HP's corporate structure, asking the court to direct HP "to take all necessary actions to reform and improve its corporate governance and internal control procedures..." For example, it wants that the court order that "the Chairman of the Board be an independent and non-executive director of HP." Of course, it asks for punitive damages too, but the emphasis is on specific corporate changes. FT.com describes it as "a derivative suit on behalf of the company alleging breach of fiduciary duty, waste of corporate assets and other wrongdoing by HP executives and company directors involved in the debacle."

The lawsuit is against Patricia Dunn, Mark V. Hurd, Ann Baskins, the rest of HP's current Board of Directors, and both Security Outsourcing Solutions, Inc. and Ronald R. DeLia and Caroline F. DeLia, as well as "DOES 1-50". They'll fill in the blanks as more information surfaces. In fact, it probably already has, with the New York Times reporting another name [sub req'd], Anthony Gentilucci, who, they say, "is based in Boston as manager of global investigations for Hewlett-Packard Global Security Services" and who reportedly was involved in the investigation. If so, he could conceivably be one of the Does who will get a name. The two board members who resigned are not defendants.

There are four causes of action, breach of fiduciary duty, abuse of control, gross mismanagment, and waste of corporate assets. I think it would be accurate to say that the complaint views the spy escapade as one of the defendants seeking power for themselves, to the detriment of the company, and subjecting HP to an unnecessary risk of liability.

Here's the relief the complaint asks for:

PRAYER FOR RELIEF

WHEREFORE, plaintiff, on behalf of HP, demands judgment as follows:

A. Declaring that the Individual Defendants, and each of them, have committed breaches of their fiduciary duties to HP, abused their control, grossly mismanaged HP, and committed the illegal and improper actions complained of herein; been damaged by reason of the conduct complained of herein;

B. Requiring the Individual Defendants to pay HP the amounts by which the Company has been damaged by reason of the conduct complained of herein and to indemnify HP for any claims brought against HP by any of its officers, directors, employees, or by any third party;

C. Directing HP to take all necessary actions to reform and improve its corporate governance and internal control procedures to comply with the Sarbanes-Oxley Act, including, but not limited to, putting forward for a shareholder vote resolutions for amendments to the Company's Articles of Incorporation and Bylaws (collectively, "Articles") and taking such other action as may be necessary to place before shareholders for a vote the following Corporate Governance Policies:

(i) an amendment to the Company's Articles requiring that the Chairman of the Board be an independent and non-executive director of HP;

(ii) an amendment to the Company's Articles limiting the number of executive directors on the HP Board to two;

(iii) an amendment to the Company's Articles requiring increased board member independence standards, more stringent than those required by the NYSE rules;

(iv) an amendment to the Company's Articles requiring that all Board committees be comprised of independent directors;

(v) a proposal to strengthen the HP Board's supervision of operations and develop and implement procedures for greater shareholder input into the policies and guidelines of the Board;

(vi) a provision to permit the shareholders of HP to nominate at least three candidates for election to the HP Board;

(vii) appropriately test and then strengthen the internal audit and control functions;

(viii) reform executive compensation;

(ix) require full compliance with Sarbanes-Oxley; and

(x) permit shareholders to question all executive directors of HP at the annual shareholder meeting and establish a more transparent process for receiving and evaluating shareholder proposals.

D. Ordering that the defendants personally bear their own legal fees in defending any and all claims arising out of these matters, whether asserted by stockholders or the government, and not be indemnified by the corporation or any insurance;

E. Awarding punitive damages;

F. Awarding plaintiff the costs and disbursements of this action, including reasonable attorneys' and experts' fees;

G. Granting extraordinary equitable and/or injunctive relief as permitted by law, equity, and state statutory provision sued hereunder, including enjoining defendants, their agents, counsel, employees and all persons acting in concert with them from further entrenching themselves and usurping control of the Company; and

H. Granting such other and further relief as this Court may deem just and proper.

The complaint asks for a jury trial, but this San Francisco Chronicle article quotes an expert, who says that usually lawsuits like this one get settled without ever making it to trial:

Michael Klausner, a law professor at Stanford University, said companies usually settle these cases by agreeing to make some governance changes "which often are purely cosmetic."

As part of the settlement, the plaintiff's attorney is usually entitled to a fee.

To prepare you, so you'll understand the complaint when I do publish it, I went looking for lawyers who have written about the situation. Here's the best explanation I could find of the email exchange between Larry Sonsini and Tom Perkins, in an article on the Corporate and Securities Law Blog. How, many lawyers have been asking, could Sonsini have originally told Perkins that the investigation and the pretexting was legal? This is Part V of its coverage of the HP situation, and I think it will help you to get the context and some of the nuances right. Here's the first in the series (keep in mind we know a few more facts than the attorney writing the blog had on that day, early in the scandal), and you can follow along with the rest of the series, if it interests you as it did me. It will help you very much to understand some of the allegations in the complaint.


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