Angry HP investors seen having thin legal case

Thu Sep 22, 2011 6:47pm EDT

(Reuters) - Hewlett-Packard Co directors may have embarrassed themselves by keeping former Chief Executive Leo Apotheker on the job for less than a year, but the board is unlikely to face serious legal action from shareholders angry over its drooping stock price.

Legal experts said directors are generally protected from making bad decisions that were done in good faith, so any shareholder lawsuit related to the executive shake-up likely would be a stretch. In addition, showing the door to the CEO of a company with a plummeting stock price is generally considered a sign of a responsive board.

Hewlett-Packard said on Thursday it removed Apotheker because the company needed a leader with "additional attributes" to implement the company's strategy.

The company's board is already facing several shareholder lawsuits. One stems from the resignation of Mark Hurd, who quit following a company investigation into sexual harassment allegations that revealed falsified expense reports.

Shareholders have also sued over allegations of bribery by current and former Hewlett-Packard employees in Europe.

Legal experts predict there may be new cases, or some existing cases may be amended, to include recent claims by shareholders that the board fell down on its duty in overseeing management. The shareholders could argue that the board was negligent and is responsible for losses on their stock, which lost nearly half its value over the past year.

"I would be very surprised if more claims are not filed and if some of them don't get into discovery," said Christopher Keller, a partner with Labaton Sucharow LLP in New York. Keller is not involved in litigation with Hewlett-Packard.

Hewlett-Packard's board certainly has plenty of critics. The board could be most vulnerable to claims that it did not properly vet Apotheker. Reuters reported that the full board did not meet with Apotheker before hiring him.

But Delaware, where Hewlett-Packard is incorporated, protects directors from being liable for poor decisions so long as they can prove they were not consciously trying to harm the business.

That standard protected the board of Walt Disney Co when it paid former CEO Michael Ovitz a severance of more than $100 million for less than two years' work.

The outcome of that case would likely discourage most plaintiffs from bringing a similar case against the board of Hewlett-Packard over Apotheker, according to attorneys.

The fact that so much of the board's deliberations have spilled into the public suggests that there could be possible claims that board members were fighting each other rather than working for shareholders.

"The fact that all of this is being made public is a sign of breakdown of the cone of silence that most boards operate under," said Keller.

Still, a case of that type against the board, known as a derivative lawsuit, faces high procedural hurdles.

One legal expert said the failings of Hewlett-Packard's board shows the need to give investors a bigger role in the process of nominating directors.

A proposal by the Securities and Exchange Commission to open that process was struck down by the U.S. Court of Appeals this year.

That proposal gave "some modest hope of allowing shareholders to take some coordinated action that would save a company like HP from itself," said James Cox, a professor at Duke Law School.

(Reporting by Tom Hals; Editing by Richard Chang)

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