Source: HP board to vote out Hewlett

A source close to the company told CNET News.com that the directors were to meet late Sunday to vote on two slates of directors: one if the Compaq merger is not completed, and one if early results are declared official.

The source said Hewlett's name was not expected to appear on either list given the ill will caused by his opposition to the Compaq deal and the lawsuit he filed last week seeking to invalidate shareholder votes that were cast in favor of the merger.

A representative for HP declined to comment.

Shareholders will vote on the new directors during the company's annual shareholder meeting, tentatively scheduled for late April. HP directors serve one-year terms, and the entire group is elected each year.

HP is expected to announce the results of Sunday's directors' meeting early Monday. Hewlett could not immediately be reached for comment.

A vote excluding Hewlett would likely spark sharp criticism from some employees, investors and others who have a stake in HP's leadership. Hewlett's decision to publicly fight against HP's $20 billion acquisition of Compaq has been hailed by advocates for shareholder rights as well as by large institutional investors.

In addition, many HP employees--who face being among the thousands who will lose their jobs if the merger is completed--have rallied behind Hewlett.

Not having Hewlett on the board could also present other problems. His exclusion would mean that no Hewlett or Packard family member would be included on HP's board--no trivial matter considering that the family groups hold about 18 percent of HP shares through various trusts, foundations and personal holdings.

However, if the merger is completed, the power of their voting bloc would be somewhat diluted.

A long battle
Sunday's anticipated meeting marks the latest chapter in an incredibly nasty five-month proxy battle over HP's proposed acquisition of Compaq that has pitted HP against one of its own directors. Just four days ago Hewlett filed a lawsuit charging HP with improperly garnering votes for the merger and requesting that a judge invalidate the shares cast in favor of the deal.

Hewlett announced last November that he would oppose the merger, even though he initially voted for it as an HP director. Since then, both sides have traded caustic personal attacks: HP has dismissed Hewlett as a "musician and academic," and Hewlett has called for CEO Carly Fiorina's ouster.

Letters of recrimination also flew back and forth between the outside directors and Hewlett over such issues as Hewlett's release of board minutes on executive compensation, a topic he felt should be shared with investors before the merger vote.

With such a contentious proxy battle, many industry observers have speculated that if HP's pending merger with Compaq is successful, Hewlett would not be renominated. Sunday's vote, however, is expected to show that HP's directors are willing to act before an official tally is available from the March 19 shareholders' meeting.

HP claimed victory after that meeting, based on an informal count. But Hewlett has maintained that the results are too close to call.

What's next
If Hewlett isn't renominated by the board, he has at least two options to get his name before shareholders at the upcoming annual meeting. He can ask the HP board to waive a Nov. 29 deadline for write-in candidates to declare their candidacy, or he can ask a court to waive the deadline.

Hewlett knew of the deadline when he launched his proxy fight in early November and could have entered his name as a write-in candidate early on. However, he "knowingly let the time go by," said a source close to Hewlett.

Without the deadline waiver, Hewlett would be off the board for a year with the possibility of submitting his name as a write-in candidate when the one-year term for HP directors expires.

"I won't speculate about what I'll be doing in a year's time," Hewlett said at a press conference this month when asked about serving as a write-in candidate if the board should not renominate him.

Hewlett said he is interested in serving another term. If he is not renominated, he could develop his own slate of directors--a move that would cast him in another contentious proxy battle.

"There's been several cases where a slate of directors was introduced and replaced the incumbent board," said Charles Elon, professor of corporate governance with the University of Delaware.

Last year, timber giant Weyerhaeuser successfully unseated three board members of rival Willamette in favor of its own slate. The proxy battle was part of Weyerhaeuser's effort to acquire Willamette.

Broken family ties?
Hewlett's expected departure would signal the end of family participation on the board. Over the past several years, founding family members David Woodley Packard, Susan Packard Orr and Hewlett's brother-in-law, Jean-Paul Gimon, have left the board for a variety of reasons.

Hewlett's potential exclusion could also stir discontent among shareholder advocates.

Institutional Shareholder Services, a proxy adviser to about 23 percent of HP's institutional investors, had strongly urged the company to have a director with a large stake on the board and one who is willing to be a shareholder activist. ISS noted that Hewlett embodies both such traits.

"We believe that the board would benefit materially from the continued presence of a significant shareholder on the board, however--a presence that would be lost if Mr. Hewlett leaves and is not replaced by another member of the Hewlett or Packard families," ISS stated in its HP merger recommendation to institutional investors.

One family member, who asked not to be identified, agreed with ISS's assessment about significant shareholders, but noted that representation did not necessarily have to come from a blood relation.

"When you have two families with 18 percent of the shares, you should have one person on the board who will represent the point of view of the families," said a family member. "It doesn't necessarily have to be a family member, but it should be someone who represents their views."

The family member added that if Hewlett isn't renominated, it will be hard to predict whether the Packard and Hewlett families will seek a board seat via a write-in candidate or work together to jointly find a board member to represent their views.

"We've never really worked together before (on HP business matters)...The families are fairly independent from one another," the family member said. "(HP's) board seems to value directors who have business experience. But company boards are supposed to represent all shareholders, and not all shareholders are in business. I think it is important to get balance on the board, any board."

Elon said there are other reasons why Hewlett should be renominated, particularly because of the support he receives from a large percentage of shareholders.

"He has close to half of the shareholders who think he's doing the right thing," Elon said. "Given these circumstances, he represents an important constituency."

During the March shareholders' meeting, Hewlett received rousing applause and a standing ovation when he gave a five-minute presentation. Hewlett's reception was in sharp contrast to that of Fiorina, who at one point was booed when she said a majority of employees favored the merger.

Ironically, Hewlett's presentation almost helped him dodge a bullet.

HP directors were on the verge of nixing his renomination and had even scheduled a board meeting for later that day after the HP shareholders morning vote, said a source familiar with the company.

"Originally, that was the objective," said a source. "But Walter made a number of conciliatory comments at the shareholders' meeting about supporting the merger if it went through."

The final blow
That March 19 board meeting was canceled and a new one scheduled for last Wednesday. During last week's board meeting, Hewlett discussed his views on corporate governance and how he would view his responsibilities if he were to stay on as a director.

"He said if the merger goes through, he's not one to fight lost battles," the source said. "He also said he now has international stature, which may help him do things for the merger that others could not."

During that meeting, Hewlett later signed off the conference call to enable the directors to go into executive session to further discuss his status on the board. The board voted to renominate Hewlett, on the contingency that nominating-committee members Ginn and Condit have one last discussion with Hewlett to re-confirm the board's understanding of how Hewlett viewed his director's role.

Ginn and Condit would be empowered to tell Hewlett he was renominated, provided they were satisfied with his answers. But Hewlett was not available to take Ginn's call later that day, and arrangements through Hewlett's attorneys were made to call back after a specific time Thursday morning.

That morning, however, Hewlett filed a lawsuit before Ginn could call, alleging that HP used questionable tactics to solicit votes for the merger.

"The board was stunned. There was no warning a lawsuit was coming," said a source. As a result, Ginn never made that Thursday-morning call, the source said. "He made a series of allegations that question HP's corporate governance."

HP's board once again held a conference call to resolve the nominating issue, this time on Sunday night. Although Hewlett had been notified and asked to attend, he elected not to.

In an 8-0 vote, the board voted to forgo renominating Hewlett to its slate of directors.

"When he entered into the lawsuit, that places him in a position of an adversary," said a source. "It would not be considered good corporate governance to renominate him as a director."