March 8, 2006

Hewlett-Packard Sued Over Severance Pay

According to this NY Times article, two large shareholders sued Hewlett-Packard on Tuesday, contending that a $21.4 million severance package for former CEO Carly Fiorina violated the company’s policy on executive compensation. The lawsuit was filed in US District Court in the Northern District of California; we have posted a copy of the complaint in the “Litigation Portal” (remember there are two other compensation lawsuits heading to trial shortly!).

Here is an excerpt from the NY Times article:

“The suit says Ms. Fiorina’s severance pay exceeded a limit shareholders approved in 2003 that restricted such compensation to 2.99 times an executive’s base pay plus bonus. The lawsuit seeks to recover the money paid to Ms. Fiorina, who was forced to resign in February 2005.

A Hewlett-Packard spokesman said the company “believes the suit is without merit” and declined to comment further. A spokesman for Ms. Fiorina said she had not seen the suit and would not comment.

The lawsuit shows that executive compensation is of increasing concern to owners of public companies, said Gary Lutin, an investment banker at Lutin & Company in New York who advises institutional investors in corporate control battles. “The lawsuit indicates a growing sense of shareholder responsibility for controlling the diversion of corporate assets by the property managers,” he said, “especially by the ones who failed.”

In the most publicized case, Disney shareholders fought their company to rescind the $140 million severance package that was given to Michael S. Ovitz, who was fired after 14 months as president. Disney won that case last year when the judge ruled that the Disney board “fell significantly short of the best practices of ideal corporate governance,” but it did not violate its fiduciary duty.

It was shareholder outrage at the size of Hewlett-Packard’s award of about $17 million to Michael D. Capellas, who was Hewlett’s president for seven months, that prompted stockholders to approve the policy that limited future severance awards. The shareholder proposal was sponsored by the Service Employees International Union.

The lawsuit notes that Ms. Fiorina’s severance package of $21.4 million was 3.75 times her $5.6 million salary and bonus. The suit contends that her severance package could be worth as much as $42 million when the potential value of her stock and options and her pension are factored in. Under the company policy, any award that exceeds the limit must be approved by shareholders.

The crux of the case depends on how one defines the bonus that Ms. Fiorina received under what Hewlett calls the long-term performance cash program. The three-year incentive plan, approved by shareholders in May 2003, provided bonuses to executives if certain financial targets were met. However, the plan stated that executives who were fired would not receive the bonuses.

The board gave Ms. Fiorina $14 million, which was 2.5 times her salary and regular bonus, and an additional $7.38 million from the long-term bonus plan. “It is a severance payment no matter what they call it,” said Michael Barry, a partner at Grant & Eisenhofer, which filed the lawsuit on behalf of the unions.

The company changed the terms of that plan to apply to fired executives after Ms. Fiorina received her severance in February 2005. The suit says the plan was amended secretly.”

House Representatives Oxley and Baker Support SEC Authority

On Monday, following the request for comment on the SEC’s Advisory Committee on Smaller Public Companies Final Report, House Financial Services Committee Chairman Michael Oxley (OH) and Capital Markets Subcommittee Chairman Richard Baker (LA) wrote a letter to SEC Chairman Cox to express their view that the SEC holds the necessary authority to act on the Committee’s recommendations should it choose to do so.

The letter likely was in response to Committee member Kurt Schacht, Director of the CFA Center for Financial Market Integrity, who wrote in dissent that “it is unclear to many whether the broad exempting recommendations of this subcommittee are even within the commission’s legal authority.”

Nasdaq Seeks “Covered Securities” Relief for Listed Companies

Last week, Nasdaq filed a rulemaking petition with the SEC so that securities listed on the Nasdaq Capital Market are considered “covered securities” for purposes of Section 18 of the ’33 Act (and hence be preempted from the reach of blue sky laws).

Particularly since NASAA doesn’t oppose Nasdaq’s request, it certainly seems like a “no-brainer” that the SEC would make this rulemaking, which is why I found it unusual that Nasdaq filed a rulemaking petition rather than informally ask the SEC to act. But since Nasdaq is allowed to file these petitions by statute, it’s not a bad move to provide people with an opportunity to comment (and voice their support, which perhaps might spur the SEC to take faster action).