The merger between HP and the Compaq Computer Corporation was
hotly contested, culminating in a lawsuit brought by Walter
Hewlett, decendent of its co-founder, who argued that the
shareholder vote on the company's proposed acquisition of Compaq
was conducted improperly.
Hewlett accused HP CEO Carly Fiorina of "buying" shareholder
votes and of misleading investors by exaggerating the benefits of
the $18 billion deal. He said that Fiorina "improperly coerced and
enticed" Deutsche Bank into voting in favour of the deal by
threatening to withhold future investment banking business.
However, the court found differently, and Hewlett then agreed to
work towards the merger.
The SEC's order relates to the investment advisory unit of
Deutsche Bank, called Deutsche Asset Management Inc (DeAM).
According to the Order, HP retained Deutsche Bank's investment
banking division in January 2002 to assist in the merger, agreeing
to pay a guaranteed $1 million, and another $1 million if the
merger went ahead. A confidentiality agreement between the two
meant that Deutsche Bank did not publicly disclose that it was
working for HP.
On Friday 15th March, 2002, the DeAM proxy committee cast all 17
million proxies on HP stock it controlled (on behalf of its
clients) against the merger. The following Monday, HP management
learned that DeAM had voted against the merger, and called
senior-level officials of Deutsche Bank's investment banking
division, and asked them to arrange for HP to make a last-minute
presentation to the DeAM proxy committee.
The Deutsche Bank investment bankers contacted DeAM's then Chief
Investment Officer, who agreed to allow HP, along with Hewlett, to
make presentations to the proxy committee the next day.
Immediately following these presentations, the members of the
DeAM proxy committee discussed whether they should switch their
vote and cast the proxies in favour of the merger. During the
discussion, the voting members were informed that Deutsche Bank's
investment banking division was working for HP on the merger and
that HP had an enormous banking relationship with Deutsche
Bank.
The committee then held a re-vote, and changed its vote in
favour of the merger. Shortly before shareholder voting on the
merger closed, DeAM personnel succeeded in recasting all 17 million
of its clients' votes in favour of the merger.
The Order finds that, due to the involvement of Deutsche Bank's
investment banking division in the HP-Compaq merger and its
intervention in the proxy voting process, DeAM had a material
conflict of interest.
As a result, prior to voting the proxies DeAM had a duty to
disclose to its advisory clients the circumstances of its
investment banking affiliate's work for HP on the proposed merger
and the bankers' intervention in DeAM's voting process.
"Voting client proxies is a critical function of an investment
adviser," said Stephen Cutler, the SEC's Division of Enforcement
Director. "If the adviser has a material conflict of interest, it
must tell its clients about the conflict before voting so the
clients can decide whether they want to vote the proxies
themselves, allow the adviser to vote them, or make some other
arrangement, such as having a shareholder service vote the
proxies."
DeAM has therefore been fined $750,000 and told not to do it
again.
The division of Deutsche Bank, while neither admitting nor
denying the findings, has accepted the SEC position. According to
Reuters, a spokeswoman for the Bank, Missy DeAngelis, said that
DeAM was pleased to have finally resolved the matter.
She added, "Even before today's settlement, we voluntarily
strengthened our policies regarding information barriers to ensure
that proxies will continue to be cast in the best interests of our
advisory clients".
