The Advisors' Blog

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A Massachusetts pension fund has filed a derivative lawsuit against Hewlett-Packard’s board members and former CEO that seeks an independent board chairman, three shareholder-nominated directors, and other novel governance changes. In an Aug. 10 lawsuit in California state court, the Brockton Contributory Retirement System alleges that HP’s board members breached their fiduciary duties, committed gross mismanagement, and wasted corporate assets by agreeing to pay as much as $40 million in severance benefits to outgoing CEO Mark Hurd. The pension fund further alleges that Hurd and interim CEO Catherine Lesjak engaged in insider trading in violation of California state law because they sold HP shares while in possession of non-public information.

Hurd was forced out by HP’s board on Aug. 6 after a company contractor made sexual harassment allegations, and a board-commissioned probe found that he falsified expense reports. The Palo Alto, California-based technology company’s shares lost almost $9 billion in value on Aug. 9, the first trading day after Hurd’s departure.

“Regardless of whether this was a firing ‘for cause,’ or a resignation, Hurd was not entitled to severance benefits under his employment agreement with HP, and the Board’s authorization of these payments was an abuse of their discretion and a violation of their duty of loyalty to HP and its shareholders,” the complaint asserts. HP has declined to comment on this lawsuit, according to news reports.

The complaint asks a court to compel the return of Hurd’s severance package and award triple damages based on the alleged insider trading. The Brockton pension fund also seeks a court order that directs the company to seek shareholder approval for an amendment to the company’s articles of incorporation to require that the chairman be an independent and non-executive director. The fund also seeks article amendments that limit the number of executive directors on the board, require stricter independence standards than mandated by the New York Stock Exchange, and require that all board committees be comprised of independent directors.

The pension fund also seeks the adoption of provisions to allow HP investors to nominate at least three board candidates, to permit greater shareholder input into board policies, to require that each board member attend a directors’ college to “ensure they understand their fiduciary obligations,” to permit shareholders to question all executive directors at annual meetings, and to “establish a more transparent process for receiving and evaluating shareholder proposals.”

The lawsuit was filed as a derivative compliant, which means that the company is the nominal plaintiff in the case and would receive any damages collected from Hurd, Lesjak, and the director defendants. In a typical derivative lawsuit, a shareholder must either ask the board to authorize the lawsuit or demonstrate that such a demand would be futile. In this case, the Brockton pension fund argues that the demand requirement should be excused because all the directors approved Hurd’s severance agreement and thus would not authorize a lawsuit that would expose them to personal liability.

HP’s board has faced derivative suits in the past. In 2006, two labor funds filed a derivative action over the $21.4 million severance package received by former CEO Carly Fiorina, who was forced out in 2005. A judge dismissed that case in 2007.

Investors also filed a derivative lawsuit over HP’s 2006 boardroom spying scandal, during which then-chairman Patty Dunn resigned. As part of a settlement with California’s attorney general and investors, the company adopted governance changes and revised its Standards of Business Conduct. In the most recent lawsuit, the Brockton pension fund contends that these measures “went largely unimplemented,” while the board allowed Hurd to serve both as chairman and CEO, and “was permitted to run HP as his own private fiefdom — free from Board oversight.”