Submitted: January 21, 2014
This case once again calls upon this Court to state the obvious: that the right of stockholders to documents under Section 220 is both essential to good corporate governance, and capable of being exercised in a manner that is inimical to such governance; and that we therefore must be vigilant in enforcing both rights under that Section and the limits to those rights. The Defendant Company here acquired an asset the value of which it shortly had to write down substantially, due to accounting irregularities at the acquired company before the acquisition. Those irregularities are being investigated by, at least, the United States Department of Justice, the Securities and Exchange Commission, and the Serious Fraud Office of the United Kingdom. The Plaintiff here seeks to investigate wrongdoing by the Company and its board in connection with this acquisition; he seeks not only documents necessary to that inquiry (which the Company has already produced to him), but also all documents produced by, or sought from, the Company by all governmental authorities investigating wrongdoing by the acquired entity, together with any communications by the Company concerning those investigations. Because this material is beyond what is necessary to the Plaintiff's purpose—it is, in fact, profoundly overbroad—the Plaintiff's request must be denied.
Hewlett-Packard Co. ("HP, " or the "Company"), a Delaware corporation headquartered in Palo Alto, California, is one of the largest global technology, software and technological services providers in the country. On August 18, 2011, HP announced its plan to acquire Autonomy Corporation plc ("Autonomy") for $10.2 billion, explaining:
Autonomy presents an opportunity to accelerate our strategic vision to decisively and profitably lead a large and growing space . . . Autonomy brings to HP higher value business solutions that will help customers manage the explosion of information. Together with Autonomy, we plan to reinvent how both unstructured and structured data is processed, analyzed, optimized, automated and protected. Autonomy has an attractive business model . . . which is aligned with HP's efforts to improve our portfolio mix.
Shortly after announcing the acquisition, HP's CEO, Leo Apotheker, was replaced by Margaret Whitman. On December 14, 2011, HP owned a 99% equity interest in Autonomy and "expect[ed] to acquire a 100% equity interest before the end of the first quarter of fiscal 2012." At that time, HP filed a Form 10-K disclosing that:
The acquisition date fair value consideration of $11 billion consisted of cash paid for outstanding common stock, convertible bonds, vested in-the-money stock awards and the estimated fair value of earned unvested stock awards assumed by HP. In connection with the acquisition, HP recorded approximately $6.6 billion of goodwill and amortizable purchased intangible assets of $4.6 billion. HP is amortizing the purchased intangible assets on a straight-line basis over an estimated weighted-average life of 8.8 years.
Initially, Michael Lynch, Autonomy's pre-acquisition CEO, stayed on with HP, but after two unsuccessful quarters, Lynch left the Company in May 2012. On November 20, 2012, HP disclosed that it had taken an $8.8 billion goodwill impairment charge within its software segment due to accounting improprieties at Autonomy that had occurred prior to its acquisition; HP had discovered the improprieties after Lynch's exit, when an Autonomy executive came forward and notified HP's general counsel of Lynch's pre-acquisition conduct, and accounting firm Price water house Coopers confirmed that Autonomy had engaged in accounting fraud. At that time, HP issued a press release, explaining:
HP is extremely disappointed to find that some former members of Autonomy's management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy's acquisition by HP. These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management's ability to fairly value Autonomy at the time of the deal. . . . HP launched its internal investigation into these issues after a senior member of Autonomy's leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP. This individual provided numerous details about which HP previously had no knowledge or visibility.
HP's stock price dropped $1.59 per share as a result.
Following the discovery of accounting fraud at Autonomy, the news media sized up Autonomy's previous accounting practices, explaining that "Autonomy had the hallmarks of a company that recognized revenue too aggressively." Notably, these newspaper articles, which the Plaintiff incorporates into his Complaint, do not suggest that HP itself was involved in Autonomy's illicit accounting practices, but suggest that "questions are mounting about how H-P failed to uncover the alleged irregularities ahead of buying Autonomy;" that "to juggle two transformative initiatives at once, the board divided itself into two separate teams and skirted some standard company procedure;" and that some proxy advisory firms "blamed the [HP] directors for inadequate due diligence."
Upon HP's disclosure of the accounting improprieties at Autonomy, government authorities, including the Department of Justice, Securities and Exchange Commission, and UK Serious Fraud Office (the "SFO"), began investigating Autonomy's pre-acquisition accounting procedures. These investigations are ongoing, and HP is cooperating with each of these departments' investigations.
In addition, three securities fraud class action suits, three ERISA-based class action suits, and eight stockholder derivative suits were filed in the U.S. District Court for the Northern District of California, and several other stockholders made demand on HP's board to initiate derivative suits. In response to those requests, the HP board formed a Demand Review Committee, the purpose of which was to investigate whether any HP officers or directors had committed wrongdoing with respect to the Autonomy acquisition. That investigation is ...