HP has launched claims vs. Autonomy execs. Can they countersue?

March 16, 2015

It took three tries, but HP’s controversial no-money settlement of a shareholder derivative suit stemming from its disastrous 2011 takeover of the British software company Autonomy finally won preliminary approval Friday from U.S. District Judge Charles Breyer of San Francisco. After objecting shareholders kicked up a fuss about previous settlement proposals – the first, for instance, included a side deal in which HP agreed to pay as much as $48 million to hire the settling plaintiffs’ lawyers to help the company prosecute a case against former Autonomy officers – HP’s counsel at Wachtell Lipton Rosen & Katz and shareholder lawyers from Cotchett, Pitre & McCarthy and Robbins Geller Rudman & Dowd managed to assuage Judge Breyer’s concerns. Now that the deal specifically resolves only allegations against HP’s directors and officers from the Autonomy deal, Breyer said, the settlement’s corporate governance reforms appear to be fair and reasonable to shareholders.

There’s still a chance that Breyer won’t grant final approval to the settlement, which is scheduled for a fairness hearing on July 24. By my read, the most interesting challenge to the deal will come not from other HP shareholders but from the former CFO of Autonomy, Shushovan Hussain. Hussain’s lawyers at Keker & Van Nest have moved to intervene in the shareholder case, claiming that the proposed settlement breaches his constitutional due process rights because it bars him from suing HP directors and officers for mishandling the Autonomy acquisition.

In a little-noticed brief in February, HP confirmed that it has made good on its threats to bring claims against Hussain, former Autonomy CEO Michael Lynch and former Autonomy auditor Deloitte U.K. According to HP, it sent pre-suit letters last fall to the three prospective defendants, outlining the company’s allegations. British civil procedures, HP said in the brief, require a “pre-suit protocol” period between such letters and formal suits. HP said that unless the defendants settle, it will sue when the waiting period is over. (The company also said in the same filing that although Britain’s Serious Fraud Office announced in January that it would not bring charges against Autonomy’s former executives, U.S. prosecutors and regulators continue to investigate Hussain and Lynch.)

The settlement agreement before Judge Breyer includes a proposed injunction that would preclude “any and all persons” from suing HP’s CEO and board over their conduct in the Autonomy acquisition. Hussain, who is not a defendant in the shareholder case against HP, says the proposed bar order is too broad to be approved. “It would be an affront to fundamental due process principles to strip Mr. Hussain of his legal rights in a proceeding to which he is not a party,” his motion to intervene said. “In essence, HP and the individual defendants are trying to give Mr. Hussain’s house away while he is at work and then telling him he has no say in the matter when he asks what they’re doing.”

Hussain’s brief said the impact of the proposed injunction “is now clearer than ever” – presumably a reference to HP’s pre-action letter to him last fall – because he is preparing to bring counter- and cross-claims against the company and its directors and officers.

HP, meanwhile, said that Hussain has exaggerated the scope of the proposed order, which the company contends would only prohibit him from bringing a contribution claim against HP officers and board members. HP also said Hussain would receive “a judgment credit worth the full value of those claims” under the proposed order, so the settlement does not disadvantage the former Autonomy CFO.

According to the company, Hussain is attempting to hijack the shareholder settlement approval process, first to obtain discovery from HP and now to assert that the company is to blame for its $8.8 billion Autonomy writedown in 2012. “Hussain’s repeated attempts to usurp this process to serve his own ends are both transparent and improper,” HP said. “Hussain will have ample opportunity to make whatever arguments he wants in response to the civil suits in England (to say nothing of the ongoing criminal and regulatory investigations in the United States).”

HP asked Judge Breyer to deny Hussain’s motion to intervene. The judge didn’t mention the Hussain motion in his preliminary approval opinion but did say he would review the scope of the bar order before granting final approval to the settlement.

Hussain counsel John Keker didn’t respond to an email request for comment on HP’s claim that it has initiated the British litigation process against his client. A representative for former Autonomy CEO Lynch said that Lynch is “not aware of any litigation.”

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