Deutsche Bank fined $750,000 over HP-Compaq merger

Out-Law News | 21 Aug 2003 | 12:00 am | 2 min. read

The US Securities and Exchange Commission (SEC) charged a unit of Deutsche Bank on Tuesday for failing to disclose a material conflict of interest in its voting of client proxies for the merger between Hewlett-Packard (HP) and Compaq. The Bank has been fined $750,000 and agreed to ensure that there will be no such violations in future.

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".