IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE. : Civil Action : No VCP - - -

Transcription

1 1 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE ERNESTO ESPINOZA, : : Plaintiff, : : vs. HEWLETT-PACKARD COMPANY, : : Defendant. : : Civil Action : No VCP Chancery Courtroom No. 12B New Castle County Courthouse 500 North King Street Wilmington, Delaware Friday, March 25, :00 a.m BEFORE: HON. DONALD F. PARSONS, JR., Vice Chancellor ORAL ARGUMENT - PLAINTIFF'S 220 REQUEST North King Street Wilmington, Delaware (302)

2 2 1 APPEARANCES: 2 CARMELLA P. KEENER, ESQ. Rosenthal, Monhait & Goddess, P.A. 3 -and- GREGORY E. DEL GAIZO, ESQ. 4 FELIPE J. ARROYO, ESQ. of the California Bar 5 Robbins Umeda LLP for Plaintiff 6 PETER J. WALSH, JR., ESQ. 7 STEPHEN C. NORMAN, ESQ. R. CHRISTIAN WALKER, ESQ. 8 Potter, Anderson & Corroon LLP -and- 9 STEVEN M. SCHATZ, ESQ. of the California Bar 10 Wilson Sonsini Goodrich & Rosati, P.C. -and- 11 MARC J. SONNENFELD, ESQ. JILL BASINGER, ESQ. 12 of the Pennsylvania Bar Morgan, Lewis & Bockius LLP 13 for Defendant 14 ROLIN P. BISSELL, ESQ. JAMES M. YOCH, JR., ESQ. 15 Young, Conaway, Stargatt & Taylor LLP for Intervenor

3 3 1 THE COURT: Good morning. 2 ALL COUNSEL: Good morning, 3 Your Honor. 4 MS. KEENER: Good morning, Your Honor. 5 Carmella Keener of Rosenthal, Monhait & Goddess for 6 the plaintiff. I'd like to reintroduce my co-counsel, 7 Felipe Arroyo and Gregory Del Gaizo from Robbins 8 Umeda. They have been admitted pro hac vice, and 9 Mr. Arroyo will make the argument on behalf of the 10 plaintiff. 11 MR. WALSH: Pete Walsh on behalf of 12 defendant Hewlett-Packard. I rise to reintroduce to 13 the Court Mr. Steven Schatz from the Wilson Sonsini 14 firm. He has been admitted pro hac and will be making 15 the arguments on behalf of the defendant. Seated next 16 to Mr. Schatz is Marc Sonnenfeld of the Morgan Lewis 17 from, and here again is Jill Basinger of the Morgan 18 Lewis firm, all of whom have been admitted pro hac. 19 THE COURT: Good morning. 20 MR. WALSH: I would like to mention at 21 the conclusion of the remarks, I would like to address 22 very briefly the order submitted by Mr. Hurd yesterday 23 with respect to his appellate motions. Thank you. 24 THE COURT: Do you want to continue

4 4 1 with our introductions? 2 MR. BISSELL: Yes, Your Honor. Rolin 3 Bissell from Young Conway for intervenor Mark Hurd. 4 With me is James Yoch. We don't anticipate making any 5 comments for the pending motion. We do thank the 6 Court for letting us appear today to discuss our 7 motions on the appellate issues. 8 THE COURT: Okay. 9 MR. ARROYO: Thank you, Your Honor. 10 My name is Felipe Arroyo. I am representing the 11 plaintiff in this 220 action. 12 To frame, from our understanding, what 13 the proceedings will be about today, I thought what I 14 would do is at least preview for Your Honor the action that we're undertaking today. We've got some 16 understandings with HP, the defendants here, regarding 17 how the proceedings -- at least some of the issues 18 that by and large have been worked out by the parties. 19 So, for example, Your Honor, the 20 first -- as we briefed in our opening papers and 21 somewhat in our answer, the procedural requirements 22 for a 220 action in this specific case, we've put 23 together and laid out how they're generally satisfied 24 and the technical requirements there, Your Honor, in

5 5 1 our brief. 2 THE COURT: We don't need to talk 3 about that. 4 MR. ARROYO: Correct. 5 THE COURT: So it just comes down to 6 the one document. Do you get the document or not? 7 MR. ARROYO: Thank you, Your Honor. I 8 was hoping you would get there with us, and we 9 appreciate that. 10 THE COURT: Right. 11 MR. ARROYO: So to generally just 12 quickly frame it, you recall, Your Honor, the reason 13 we're here on our 220 action is to evaluate and 14 investigate the facts and circumstances concerning the 15 board allowing Mr. Hurd to resign as opposed to firing 16 him for cause. 17 And I'm paraphrasing our proper 18 purpose which is conceded here. But I think it is 19 important, though it is conceded, not an issue to be 20 litigated, it's important to frame what we're here to 21 do and what we're not here to do. 22 This isn't a derivative action. We 23 haven't brought a claim against anyone that needs to 24 be resolved on the merits, Your Honor. This isn't the

6 6 1 time, as the case made clear, it's not the time to 2 litigate the underlying merits about whether in point 3 of fact a claim can or should be brought. 4 As HP makes in its papers the point -- 5 the point HP makes in its papers, the cases are filed, 6 and those points very well may need to be resolved in 7 those cases. Not here. Here, today, we're really 8 just about -- our proceedings today really are just 9 about trying to evaluate, one, what's styled as an 10 interim report. 11 And we've got a fairly targeted 12 exercise today, Your Honor. And by and large, what it 13 distills down to, if Your Honor will indulge me -- and 14 I think you're right there with me -- assertions by HP 15 as to why it shouldn't give us the interim report that 16 we're asking for. 17 I'm going to flag for Your Honor, 18 because Your Honor knows this case is somewhat 19 constrained by confidentiality orders that Your Honor 20 has entered, I'm just going to put a pin right here 21 and I'm going to obviously observe those orders 22 carefully and to the letter. To the extent there 23 might be a point I'd like to make that might impinge 24 upon Your Honor's orders of confidentiality, I just

7 7 1 want to keep them in mind, and potentially ask 2 Your Honor's indulgence to make the point toward the 3 end of the proceedings if that becomes an issue. 4 With regard to the reasons -- first, 5 Your Honor, I should -- 6 THE COURT: Let me -- I have some new 7 technology here in terms of more buttons than usual, 8 but in terms of whether we're turning things off or 9 not, that's being controlled. A group that we have, I 10 think it's called Courtroom Connect, is broadcasting, 11 I guess you could say, or streaming this presentation. 12 I have a screen which indicates what they're seeing. 13 And at this moment, it has been blanked off. 14 So if we get to the point where 15 there's something confidential, then they will turn it 16 off. But at this -- we haven't reached that stage 17 yet, if I understand it correctly. 18 MR. ARROYO: That's right, Your Honor. 19 While we're having this discourse, I want to make sure 20 there are no misunderstandings. I understand there is 21 technology at work, and I certainly like to flag it so 22 that we're all -- I'm in sync with Your Honor about 23 the sensitivities and the concerns that have been 24 previously raised that we've all respected and been

8 8 1 meticulous about observing. 2 THE COURT: All right. 3 MR. ARROYO: Your Honor, the unique 4 factual circumstances of this case, I don't want to 5 spend any time on them today. I think Your Honor 6 knows the critical issues here about what Mr. Hurd is 7 alleged to have -- 8 THE COURT: Right. I think I do. 9 MR. ARROYO: That's why I was going to 10 sort of move that material to the side and ask 11 Your Honor's indulgence and good memory and rely upon 12 it so I don't have to repeat it here. 13 The critical issues, then, Your Honor, 14 as they're framed for us today, really relate to the 15 materials that are at the margin. 16 I want to -- as we briefed, Your 17 Honor, I want to make -- give credit where credit is 18 due. HP has given us some material. And we've made 19 no secret about -- we know the parties here worked 20 together cooperatively to make sure we didn't bring 21 issues to you that have already been resolved. We're 22 not negating their significance. 23 In point of fact, Your Honor, the 24 materials that have been provided to us form the basis

9 9 1 for us seeking to request the interim report. It's 2 how we learned that it was so central to the 3 investigative purpose we've undertaken today. 4 And so one of the things that I wanted 5 to make sure I did was flag for you that while some 6 things have been given to us, it's important to note 7 that our investigative purpose concerning the 8 evaluative process that the board undertook in 9 allowing Mr. Hurd to resign rather than fire him is 10 the central core issue for us to try to THE COURT: Right. I'm proceeding on 12 the premise that there is enough information out there 13 to support a belief that Mr. Hurd did some things that 14 were wrong. 15 MR. ARROYO: Thank you, Your Honor. 16 THE COURT: And that's not the issue. 17 The issue is whether the board -- the issue from your 18 client's point of view, you want documents to enable 19 you to determine whether any wrongdoing occurred on 20 the part of the board in their decision to let 21 Mr. Hurd resign rather than fire him for cause. 22 MR. ARROYO: Your Honor, I think 23 you're doing some of the heavier lifting for us. 24 THE COURT: There is some heavy

10 10 1 lifting to be done, and I want to get to it. 2 MR. ARROYO: That's one of the points 3 I wanted to make, to distinguish between those two 4 kinds of issues. 5 THE COURT: All right. 6 MR. ARROYO: So the issue about the 7 report, it was a report prepared by Covington & 8 Burling, a reputable D.C. law firm. And the core 9 objections to producing those documents to us have 10 been attorney/client privilege and the work product 11 doctrine. And the Delaware Courts have made 12 abundantly clear, neither one of those assertions is 13 absolute. 14 I'm going to take them -- though 15 they're entwined, at least in substance, they probably 16 philosophically overlap, but I'm going to treat them 17 separately because I think the courts have really 18 asked us to approach them in a disciplined manner 19 separately. So I'm going to take attorney/client 20 privilege first. 21 In Delaware, the assertion of 22 attorney/client privilege, especially in a shareholder 23 litigation, there is a principle -- it's not an 24 exception, but there is a principal, as we briefed,

11 11 1 that says attorney/client privilege, especially in 2 shareholder litigation, I guess the way they put it is 3 it shouldn't apply in certain circumstances. It's not 4 an exception, but it shouldn't apply in certain 5 circumstances. 6 And Delaware has adopted these 7 so-called Garner factors, a 1970s Fifth Circuit case. 8 It enumerated I think there were about five of them 9 and, Your Honor, we briefed them for you. We also 10 briefed how, while there are five of them, the good 11 Courts of Delaware have by and large emphasized, 12 rather than the full five, though it doesn't negate 13 them, there are three that seem to be more weighty 14 than the others. I'm going to go through all five 15 anyway, Your Honor, just briefly, and note a couple of 16 things. 17 One of them is we shouldn't be on a 18 fishing expedition. And HP has been good enough THE COURT: Right. Now there is one 20 document involved, so there isn't a fishing 21 expedition. 22 MR. ARROYO: Correct. Thank you, Your 23 Honor. 24 At least a few Courts have said that

12 12 1 the factor concerning how many shares your shareholder 2 owns -- 3 THE COURT: You own only 250, so it's 4 minuscule. 5 MR. ARROYO: We have made no secret of 6 that, Your Honor. But at least the Courts have lent 7 weight to the notion that while it's something to be 8 considered, it's not one of the key factors for the 9 Court to evaluate, which leaves us with a few others, 10 Your Honor. 11 The core sort of meatier one is 12 whether we have a colorable claim. One that's also at 13 issue is whether the materials are, I think -- I'm 14 paraphrasing -- available from other sources, and 15 necessary. And that one will bleed into the work 16 product concepts later. And then there is always 17 whether the document itself relates to this specific 18 litigation. 19 And as to the colorable claim, the 20 claim that I think Your Honor has already helped me to 21 sort of highlight, the claim that we're bringing isn't 22 HP versus -- Fisher versus HP or Fisher versus Hurd or 23 even Hurd versus Fisher. The claim we're bringing is 24 an evaluative process, investigative type claim, which

13 13 1 means we're looking at what did the board do, and why 2 did it let Mr. Hurd resign as opposed to firing him? 3 So the colorable claim, if I recall 4 the standard, is not very high, Your Honor. I think 5 our friends on the other side are urging you to 6 consider perhaps that we have to, you know, show by a 7 standard -- or meet a standard that's much higher to 8 show a colorable claim. I think we're not here to 9 show probability of success on the merits. We're not 10 here to litigate that claim. We're not here to meet 11 an insuperable or high standard. Rather, we're just 12 here to show that there is a colorable claim. 13 And our colorable claim, as we 14 trumpeted in our papers, is that here is Mr. Hurd 15 doing what he's alleged to have been doing, and using 16 corporate funds in the manner in which he was alleged 17 to have done so, and ultimately, in the press, 18 admitting to things THE COURT: Hold on one second. 20 Excuse us for a minute. I'm sorry. 21 (Discussion held off the record with 22 the court clerk.) 23 THE COURT: Okay. I'm sorry. 24 MR. ARROYO: That's all right.

14 14 1 So the claim, the colorable claim that 2 we are pursuing, or at least that we would point to as 3 supporting the 220 action, is here's the board 4 allowing Mr. Hurd to resign, and allowing benefits to 5 inure to him worth tens of millions of dollars -- and 6 this is all in our papers, Your Honor -- rather than 7 fire him. 8 And a claim that we would attach to 9 that set of circumstance, not having finished our 10 investigation, certainly would at least point to that, 11 as we did in our opening letters to HP, as potentially 12 a waste claim. 13 Now, are we going to win that waste 14 claim? That's not at issue today. Do we have every 15 imaginable THE COURT: The way I see it, maybe 17 they could have dismissed him or not. Your view is 18 that what's really important is that they could have 19 dismissed him for cause, and if they had dismissed him 20 for cause, he would not have received any of the 21 benefits that he did. And those benefits have 22 allegedly been in the range of maybe $30 million or 23 higher. But the document that you want, the interim 24 report by Covington & Burling, according to the

15 15 1 defendants, and I'm quoting here, does not discuss the 2 "for cause," in quotes, "for cause" issue at all. 3 So they've given you all the facts 4 that -- the expense reports and so on. They agree 5 that it looks like Mr. Hurd violated their internal 6 policies; that he did things that aren't good as far 7 as his expense reports and those kinds of things. And 8 they -- you know that they got a report from Covington 9 & Burling, the lawyers who investigated it; and they 10 came back and gave that interim report to the board. 11 That interim report does not discuss "for cause." 12 Now, I'm taking them at their word. 13 If they come along later on in some derivative action 14 or something and decide they're going to rely on that 15 report, and therefore, the report ends up having the 16 attorney/client privilege or work product waived as a 17 result of their doing it, and it turns out that this 18 is not true, well, then who knows where all of that 19 would lead. 20 But these are very reputable counsel, 21 and they're stating that this report doesn't discuss 22 that issue at all. 23 MR. ARROYO: This is actually an easy 24 one, Your Honor. First, let me front-load that I have

16 16 1 the highest esteem for counsel as well, and Mr. Schatz 2 has been nothing but honest and respectful in his 3 dealings with us. It has been an extraordinarily 4 positive experience. But I will say that the issue 5 Your Honor is raising here, Your Honor, is an easy 6 one. 7 The colorable claim standard doesn't 8 require us to make the case that this document is 9 going to be a case cracker, that it's a smoking gun. 10 THE COURT: I think I'm assuming that 11 you've got a colorable claim. It's a low standard. 12 You know, it's a legitimate question. Why didn't this 13 board fire him for cause? So let's assume you've got 14 a colorable claim. I don't think I'm going to get that's not going to -- that's not a place where I see 16 a weakness in your argument, anyway. 17 MR. ARROYO: Okay. Well, so I'll move 18 to -- I'll assume Your Honor has a better -- sees a 19 weakness THE COURT: I am more concerned as to 21 whether the materials are available from other 22 sources. Is there really good cause here to ignore 23 the attorney/client privilege? And I -- you've said a 24 couple of times it's as though Delaware gives

17 17 1 exceptions to the attorney/client privilege in other 2 areas. I don't know about that. 3 In the shareholder area, because it's 4 the company, and the company is asserting the 5 privilege, and the shareholder is a shareholder in the 6 company, has an interest in the company and those 7 sorts of things, it's for those reasons that we get 8 into a Garner kind of analysis. 9 But generally speaking, outside that 10 context, there aren't exceptions to the attorney/ 11 client privilege based on you'd like to have it or 12 there's good -- we don't have that. So this is, 13 because you're a shareholder, do you need it? 14 MR. ARROYO: Oh, absolutely, 15 Your Honor. Now we're pinpointed on the issue that I 16 think is more central. The analysis that Your Honor 17 just undertook -- what we're investigating is given 18 what the board knew, why did they elect to let him 19 resign rather than fire him? You see the piece here? 20 Given what the board knew THE COURT: I know, it's interesting. 22 MR. ARROYO: But that's where the 23 report become central, though, Your Honor. 24 THE COURT: But the report doesn't

18 18 1 even discuss it. 2 MR. ARROYO: But the report is part of 3 what the board knew about the facts and circumstances 4 surrounding what Mr. Hurd was doing with Ms. Fisher. 5 And whatever can be said about what actually happened, 6 our undertaking, investigative undertaking, is to 7 investigate what the board actually did in its 8 deliberative process. So there is no substitute 9 anywhere in the world that could ever tell us what the 10 board evaluated in allowing Mr. Hurd to resign rather 11 than fire him. You see, it's the THE COURT: Why are you saying that? 13 You're going to be able, if you file a derivative 14 action or class action, whatever, to take the 15 deposition of the board members. You can ask the 16 board members what they did. You can have the people 17 who were in the meetings with the board, and ask them 18 what they said. 19 MR. ARROYO: In the 220 context, 20 Your Honor, it's not a precondition -- that is, 21 Your Honor, in the investigative role that we're 22 undertaking, we haven't determined to file a 23 derivative action. And the cases don't turn on what 24 might happen in the future. The cases turn on whether

19 19 1 and to what extent in this investigative process we 2 can sufficiently satisfy our investigative purpose 3 here and now. 4 And one of the things that's 5 important, Your Honor, if you look at the Grimes case, 6 the Grimes case is right dead center. I mean, there's 7 a case where a shareholder -- now, I'm going to give 8 you some facts here, and I don't want to encumber 9 Your Honor. I'm sure you know the case. But there is 10 a dead center case that deals almost directly with the 11 same kind of arguments that we're proposing. It's a 12 case that rejects almost to the letter the same kind 13 of arguments that the defendants are proposing. 14 Now, Your Honor is paraphrasing them 15 very well, and I understand THE COURT: Let's go over it. What 17 kind of a report was ordered produced in the Grimes 18 case? Grimes was a 220 action? 19 MR. ARROYO: Yes, and it was a demand 20 refused case, Your Honor. So the special -- a board 21 committee evaluated a demand, recommended that the 22 demand be refused, and then the board adopted that 23 recommendation. 24 THE COURT: All right. But in that

20 20 1 case, you've got a shareholder who wants to file a 2 derivative action. They make a demand on the board. 3 The board sets up a committee that's going to look 4 into it. The committee issued a report, I guess, to 5 the board. And then the board decides to accept or 6 not the recommendations of that committee. And the 7 committee's report is what was ordered produced. Is 8 that right? 9 MR. ARROYO: That's right, Your Honor. 10 THE COURT: Here, we're not dealing 11 with a committee of the board's report. We're dealing 12 with the outside lawyers for the board. 13 MR. ARROYO: Yes, Your Honor, but the 14 touchstone of the analysis, the touchstone of the 15 analysis on the Garner factors specifically relating 16 to an attorney/client privilege assertion, the 17 specific analysis turned not on whether it was a 18 special committee, but rather, what was the issue what was the investigative purpose of the shareholder 20 in that case. The deliberative process that the board 21 undertook, that was the touchstone. 22 Could there be a substitute anywhere 23 for what the deliberative process was of the board in 24 deciding to refuse that demand? That was the critical

21 21 1 issue, just as here. Where defendants there argued 2 that the report wasn't necessary because the 3 deliberative process could be divined from the 4 underlying documents that supported the report, that's 5 what HP is arguing here. It was equally unavailing 6 there as it should be here. 7 The underlying documents can't tell us 8 what the board ultimately evaluated in allowing 9 Mr. Hurd to resign rather than fire him. We might get 10 a lot of documents. We might be able to look at the 11 board minutes through HP's providing us this in this 12 investigative purposes. But what we'll never know, 13 Your Honor, when we ask ourselves, given what the 14 board knew, why did it let him resign, we'll never 15 know what the board knew if we don't get that report. 16 And that's the same issue that the 17 Grimes decision wrestled with and why the Grimes 18 decision rejected the notion that the underlying 19 documents could somehow remedy not giving the 20 shareholder the report. 21 THE COURT: But I've looked at the 22 board minutes, and I think their board minutes were 23 attached to one of the affidavits. 24 MR. ARROYO: That's right, Your Honor.

22 22 1 Mr. Del Gaizo's affidavit attached the board minutes. 2 And the one I would specifically refer you to, 3 Your Honor, is around July 28, where we don't get much 4 in these minutes. They don't tell us a lot about the 5 deliberative process. You get a line or two for hours 6 of discussion. But the one thing, the thing they tell 7 us about what they considered -- I happened to look at 8 the July THE COURT: I'm looking at it right 10 here. 11 MR. ARROYO: In the July 28th 12 meeting -- I'm picking one, Your Honor. There is no 13 more magic to one rather than the other. And I'm not 14 going to state it, Your Honor, because the document 15 was provided to us on a confidential basis; but, 16 Your Honor, I would just at least like to make sure 17 that Your Honor recognizes that the board minutes, 18 when they came to us, to the extent they reflected 19 anything regarding the deliberative process concerning 20 why Mr. Hurd was allowed to resign, they don't tell us 21 much, but they do tell us that they looked at this 22 report. And consequently, when we try to piece 23 together, given what the board knew, why did they let 24 him resign rather than fire him, we need to know what

23 23 1 the board knew. 2 By the way, Your Honor, I'll tell you 3 something else that's fairly critical here. There 4 have been news reports, and we gave you one, 5 Your Honor, concerning the dramatic detail concerning 6 what apparently was presented to the board. We don't 7 know because we don't have the report, but we can see 8 a great many facts that are out there that we don't 9 have. 10 I'll give you example after example. 11 Interviews that are referenced -- Your Honor, I can't 12 vouch for the Wall Street Journal. The reporters are 13 obviously reputable and I have no reason to doubt 14 anything they reported, but still, it's a newspaper 15 article. And I think it was a Mr. Worthing of the 16 Wall Street Journal, one of his fellow reporters there 17 who reported an array of detail regarding what the 18 board apparently had access to, apparently knew. 19 But some of it is breathtaking in its 20 scope. And in its detail. We are shareholders 21 undertaking a formal 220 action so that we can learn 22 as much as a reporter knows, foreign to these 23 proceedings. 24 And when you think about since we're

24 24 1 trying to undertake to know what the board knew before 2 it made its decision, how it came to this decision, 3 the fact that the report doesn't evaluate the "for 4 cause" clause of the contract, that's not the 5 touchstone for the ultimate determination whether in 6 point of fact the report is central to the 7 investigative process we're undertaking. 8 And as I state, Grimes does help 9 evaluate arguments like HP's that are aimed at having 10 shareholders settle for less than the central 11 documents that were involved in the deliberative 12 process. 13 And so when you look at that, I think, 14 from memory, Your Honor, and this is going to sound a 15 little geeky, but I thought it was about Footnote 9 16 where the Grimes opinion -- I hope I'm not wrong, but 17 it's in one of the footnotes, Your Honor. You want to 18 make sure you don't miss where the Court says, Well, 19 you know, the view regarding the report there is, Just 20 give them the underlying documents and that will be 21 enough, parroting HP's position. 22 And that's why it's not enough, Your 23 Honor. Because the deliberative process and what the 24 board considered in making its decision -- in Grimes,

25 25 1 it was a refusal of a demand. Here, it was in letting 2 Mr. Hurd resign rather than firing him. That's where 3 they're analogous and that's where they're hand in 4 hand. 5 Your Honor, I think in the course of 6 our discussion now, we've covered either, you know, 7 intentionally or unintentionally, all of the elements 8 of the Garner analysis. And I'm happy to answer more 9 questions about how we think it works, Your Honor. 10 But on balance, those five factors, in 11 our opinion, you know -- I interwove into the 12 discussion that, you know, there are press reports out 13 there. And I picked one, not to disfavor others or 14 not to give more credibility or less credibility, but 15 that one was pretty detailed. 16 And it would be a fairly anomalous 17 circumstance not found in any of the cases I read, any 18 of the 220 cases, where the very self-same information 19 that we are arguing we need for a conceded proper 20 purpose -- again, none of the other cases I saw said a 21 proper purpose conceded -- where in order for us to 22 form conclusions about our investigative purpose, 23 we're going to have to go back and read newspaper 24 articles because that's the best and only source of

26 26 1 what the board may have had, what it knew before it 2 made the decision to let him resign rather than fire 3 him. 4 The second proposition, Your Honor, if 5 you will indulge me -- there is a lot of overlap, and 6 I'm not going to repeat unless Your Honor would like 7 to hear it, and I'm happy to connect the dots. The 8 second proposition is the work product doctrine. 9 Now, the Garner factors don't apply to 10 the work product doctrine. And we were careful not to 11 make the mistakes that I think appear in some of the 12 cases. The work product doctrine also is not 13 absolute. It can be overcome. The same kind of 14 disciplinary fact analysis that we would apply in 15 applying the Garner factors apply with equal force to 16 the work product stage; but I still want to at least 17 take Your Honor through the analysis. 18 You know, by and large, the best way 19 to sort of, at least for conversational purposes, to 20 frame it is -- maybe -- I'm going to really distill 21 this down to sort of need and relevance. The big the big part of the analysis is, Do you have a 23 compelling need or substantial need? And would you 24 have undue hardship or can you get the stuff from

27 27 1 somewhere else? Those paraphrase the standard. 2 And the first part of it, Your Honor, 3 the compelling need or substantial need, I think the 4 same kind of facts and reasoning that we're offering 5 about the opacity of the board's deliberative process 6 apply with equal force whether you call it a 7 compelling need, a substantial need; it's a paramount 8 need. 9 Without it, we can't accomplish our 10 investigative purpose. With it, it will complete one 11 of the, you know, very few hints that the board gives 12 us in its minutes as to what it deliberated or what it 13 concluded in its deliberations. 14 As to the, you know, need or necessity 15 or question about getting it from somewhere else, I 16 think, Your Honor, I covered that in the 17 attorney/client privilege context. I will note in 18 our -- we briefed other points, Your Honor. It's not 19 my intention to waive those other points with regard 20 to the attorney/client privilege waiver or work 21 product doctrine. They're in our papers. Those are 22 arguments that we stand behind. 23 But I think, Your Honor, the central 24 analysis the Court touches on for me, and I think for

28 28 1 this analysis today, if the Court thinks that a 2 shareholder should be provided an opportunity to get a 3 window into what the board considered in letting 4 Mr. Hurd resign, we need that report. 5 And if the Court doesn't think that 6 that's part of our investigative process, and properly 7 so, I'm of the view, Your Honor, that maybe those 8 other arguments aren't going to sway you in the 9 direction we need. We don't want to waive them. 10 They're in our papers and we stand behind them. 11 Unless you have questions THE COURT: In terms of the timing, 13 the interim report was presented to the board of 14 directors around July 28th, something like that. So, 15 I mean, a reasonable inference on that is that the 16 interim report is on what the attorneys found based on 17 their investigations. And so I agree with you, it 18 falls in the category of what did the board know when 19 it made its determination. 20 So they received the report on 21 July 28th. They had a number of board meetings after 22 that where they continued discussing the issue of 23 Mr. Hurd and what should we do with respect to 24 Mr. Hurd, but all those things occurred after they

29 29 1 received the report. 2 So I am proceeding from the inference 3 that I'm drawing that the board's deliberations and 4 what they were deciding to do and why, that's not 5 reflected in this interim. What's reflected in the 6 interim report are the facts that were found by the 7 attorneys and then the attorneys' advice or report to 8 the directors regarding their investigation. 9 MR. ARROYO: Your Honor, I accept your 10 invitation to infer and speculate from the documents. 11 I don't know. I have never seen the report. 12 THE COURT: I haven't seen it either, 13 of course. 14 MR. ARROYO: I can only tell 15 Your Honor from what I see. When we asked what did 16 the board know, and then given what they knew, why did 17 they do what they did, there are three parts to that. 18 The first part is given what they knew -- and sure, 19 there is a second part -- once they knew what they 20 knew, then they did the things after they got the 21 report. They deliberated. 22 I don't want to speculate, but you saw 23 what they did there. But first, they had to upload 24 those facts. But certainly the parties and Your Honor

30 30 1 know what he was alleged to have done. I mean, we 2 looked at that and we wondered, given all that they 3 knew, we're investigating how could they possibly have 4 come to this final conclusion to let him resign? 5 We can't pass that first step. 6 Your Honor moves quickly to the second one. And I've 7 never seen that report so I can't speak to what it -- 8 THE COURT: But I think what I'm -- I 9 think we're saying the same thing. What I'm hearing 10 from you and what I think all of us are saying, there 11 was a lot of information out there, some of it public, 12 other information which the company itself has stated. 13 And then there are the underlying 14 expense records and so on which have been provided to 15 you now, together with the policies and codes of 16 conduct of Hewlett-Packard. 17 So you can match them up and draw your 18 own conclusions as to how bad the conduct was, if you 19 think it was bad. You've had that information. 20 Presumably, that's the kind of information that was 21 provided in this interim report. 22 But then, then the real puzzle that 23 you're pointing out is why, in the face of that kind 24 of evidence, would the board not have fired this man

31 31 1 for cause? 2 MR. ARROYO: That's our -- 3 THE COURT: I don't know that we're 4 going to find -- I don't know why you would think 5 you're going to find those answers in that report. 6 MR. ARROYO: Well, Your Honor, they're 7 certainly part of the investigative purpose we have 8 undertaken. We may not find -- the standard today, 9 Your Honor, isn't will you find the answer to your 10 investigative purpose in the document. That's not the 11 standard. 12 THE COURT: I agree. 13 MR. ARROYO: The standard is -- thank 14 you, Your Honor. I won't belabor it. It's lower. 15 We've given you the investigative purpose. We've 16 shown you how they're interrelated. We think there is 17 a direct nexus. Knowing what the board knew is part 18 of this equation. And I thank Your Honor for sort of 19 taking me through it. 20 I think without having seen the 21 report, I can't take issue with the logic that you're 22 following. I just think what I would do, because I am 23 an advocate for my client in this case, is that I 24 would focus on part of that analysis that Your Honor

32 32 1 moves past more quickly than I would. I want to 2 resist my instinct to belabor my point, but I see 3 Your Honor's inferences, and I certainly would -- 4 THE COURT: And your focus is on what 5 did the board know. This would be part of what the 6 board knew. 7 MR. ARROYO: I have to come back to 8 that newspaper article, Your Honor, because it's so 9 breathtaking. Some of the stuff that we didn't know, 10 still don't know, nobody knows. That reporter is who 11 he is, and I'm sure he does a good job, but some of it 12 is detailed. Some of it is awe-inspiring. Some of 13 it, to me, it is shocking, to put it in mild terms, 14 what is alleged to have occurred. 15 And we don't have access to Mr. Hurd. 16 We don't have access to interviews. We're not the 17 Wall Street Journal, so we can't interview folks. You 18 know our role. And as we look at those things and we 19 try to understand and investigate the outcome that the 20 board chose, we cannot ignore the overwhelming weight 21 of the details. The phrase, "the devil is in the 22 details," could not be more applicable than here. 23 Our view of it is the 220 action is a 24 vehicle the shareholders have been encouraged to

33 33 1 undertake. I've read cases, as many as I could, to 2 prepare for today, and I just didn't see a fact 3 pattern like this one. It is stunning in its scope 4 and magnitude. 5 Your Honor, I want to cede the podium 6 unless Your Honor has more questions. I'm happy to 7 respond. 8 THE COURT: That's fine. And if you 9 have additional comments after you've heard the other 10 side, you'll be free to respond. 11 MR. ARROYO: I thank you for your 12 time. 13 MR. SCHATZ: Good morning, Your Honor. 14 Steven Schatz. I want to thank Mr. Arroyo. I 15 normally don't get such high praise from my 16 adversaries. 17 When HP was first presented with the 18 Allred letter, it did precisely what a responsible 19 public company would do. It hired outside counsel, in 20 this case, Covington & Burling, to investigate those 21 allegations. 22 When it did so, it did so not only 23 with the explicit threat of a litigation from 24 Ms. Fisher, but well knowing that it potentially faced

34 34 1 litigation from Mr. Hurd and from a very active 2 shareholder -- plaintiff shareholder bar. 3 And indeed, they had been subject to a 4 number of suits, including a suit arising from the 5 departure of Mr. Hurd's predecessor, Carly Fiorina, 6 which suit was successfully defended. And just as 7 they expected, within days of their decision, eight 8 suits were filed. Four 220 demands were filed. 9 I say that to underscore that they 10 knew that there was a threat of litigation; and thus 11 there was threat that they would potentially have to 12 deal with these allegations. 13 There were those individuals who 14 thought that Mr. Hurd shouldn't have been fired and 15 there were those who apparently, like Mr. Espinoza, 16 believe that he should have been terminated for cause. 17 But it is indisputable that by that time, the 18 Covington report was prepared against the backdrop of 19 looming suits. 20 That's why Mr. Espinoza's counsel 21 gives relatively short shrift to the work product 22 doctrine here, because there are very, very few cases, 23 extraordinary cases, that override the work product 24 doctrine. And as Your Honor pointed out as well,

35 35 1 there are few cases, very few cases, that override the 2 attorney/client privilege. 3 And respectfully, Your Honor, to do so 4 at this stage, we believe, would be an unwarranted 5 erosion of those privileges. Because as Your Honor I 6 think signaled, if Mr. Espinoza chooses to file suit 7 and if his claim passes muster past the motion to 8 dismiss stage, he presumably will seek the depositions 9 of the decision-makers, and he can elicit what were 10 the bases of their decision; and he can do so without 11 invasion of those very, very important privileges. 12 His assumption, his premise, is that, 13 somehow, he's entitled to anything that the board 14 reviews; and that proves too much. Because to do so 15 would basically vitiate the work product and 16 attorney/client privilege. Without some requisite 17 showing, some showing that the information cannot be 18 gleaned somewhere else, it would render meaningless 19 those privileges. 20 And that's why, if you look at the 21 cases -- and I think we cite them on Page 13 and 14 of 22 our reply brief -- you will see that in virtually 23 every instance, there was, prior to overriding any 24 privilege, an underlying lawsuit in which there was at

36 36 1 least the possibility that the information could be 2 gleaned somewhere else. 3 He has certain flaws in his 4 assumptions, and I think Your Honor at least 5 indirectly addressed them. First, that this 6 somehow -- this Covington report was somehow related 7 to the thought processes of the board. It was not. 8 It was a lawyer's report to the board. Indeed, it was 9 an interim report. It was presented on the 28th. 10 There were eight or nine meetings subsequently, I 11 think after July 29th. Covington wasn't at any board 12 meetings. It was a preliminary report. 13 And Your Honor, we cite the Sutherland 14 case. And I won't belabor that as to THE COURT: Right, but I think it is 16 the only report. Covington didn't do any further 17 report. 18 MR. SCHATZ: It is the only factual 19 report. But, Your Honor, when they asked for the 20 underlying facts, we gave it to them. And what they 21 omit to state and what they have not emphasized is 22 that, in fact, unlike Grimes, which I will discuss, 23 the board did describe its reasoning. 24 Exhibit 1 to the Henderson affidavit

37 37 1 is the conference call of August 6th; and in that, the 2 board discloses its rationale. Now, he concedes that 3 he received the Allred letter which sets forth the 4 allegations. He's received the expense reports which 5 the board indicated in its communications were 6 inaccurate and designed to conceal Mr. Hurd's 7 relationship with Ms. Fisher. He's received the 8 compensation records of Ms. Fisher as well as the 9 skepticism about whether all of those expenses were 10 appropriate. 11 And as you go through the conference 12 call transcript, what else does he say? He said the 13 board found no violation of the sexual harassment 14 policy; that they found there was a violation of the 15 standards of business. It has found that Hurd had a 16 close business -- excuse me -- close personal 17 relationship with Ms. Fisher that was not disclosed to 18 the board. It was disclosed that there were numerous 19 instances where Fisher received compensation or 20 expense reimbursements where there was no legitimate 21 purpose. 22 It goes through the litany. I won't 23 go through all of them, but there was a finding of a 24 systematic pattern of improper expenses and inaccurate

38 38 1 reports, and that Hurd's conduct undermined the 2 standards expected of him as CEO. 3 This was a situation where not only 4 did HP provide the underlying documents, it set forth 5 its reasons. And unlike -- and that, among other 6 reasons, makes this very distinguishable from Grimes. 7 So let me address Grimes because he places a lot of 8 reliance on it. 9 Respectfully, Your Honor, Grimes falls 10 within the category of a demand refused case where the 11 board gives essentially no explanation for its action; 12 and in the words of the Court, it was a peremptory 13 refusal. And I think the procedural posture of that 14 case is illuminating. 15 As you may recall, Mr. Grimes actually 16 made a demand which was rejected. He had filed suit. 17 The suit was dismissed. The motion to dismiss was 18 granted. And the Court said, Use the tools at hand. 19 He makes another demand. Two or three weeks shy of a 20 year, the board again, in a perfunctory fashion, says 21 We deny your demand, with essentially no explanation. 22 Under those very limited circumstances 23 of demand refused with a history of not providing the 24 information, the board carved out this limited

39 39 1 exception. 2 And if you have any doubt that it 3 really is confined to a demand refused situation, I'd 4 like to refer the Court to Vice Chancellor Laster's 5 very recent decision in LAMPERS versus Morgan Stanley. 6 It came down after the last briefing. The cite is Westlaw I think it came down March 4th. 8 We believe that Vice Chancellor Laster made clear that 9 Grimes is essentially confined to the situation when 10 there is a demand refusal and essentially the 11 provision of no explanation. 12 So let's briefly run by why you 13 shouldn't reject his assertions. First, he has no 14 need. And we've gone through and the Court is well 15 aware of the information he's gotten, but I also think 16 you should focus as well on the information that was 17 provided in the conference call, because I think 18 that's illuminating. 19 That's obviously relevant under the 20 access standards for 220, that the information be 21 necessary or essential, but is also applicable as to 22 whether he has made the requisite showing to overcome 23 work product and attorney/client privilege. And he 24 clearly hasn't. This is clearly work product.

40 40 1 Indeed, we think it's almost entirely 2 opinion work product to the extent that Covington is 3 marshaling facts and determining which facts they 4 think are appropriate in rendering a judgment. And as 5 you know, for opinion work product, it has to be 6 directed at a pivotal issue and compelling need. 7 I would assume that Mr. Arroyo would 8 say the pivotal issue is, Why did the board make its 9 decision? And as Your Honor noted, the Covington 10 report relates to the allegations raised by Ms. Fisher 11 and Mr. Hurd's conduct and not the board's decision. 12 But in any event, we don't think he 13 meets the substantial need test and certainly do not 14 believe that he cannot obtain this information 15 elsewhere without undue hardship. 16 It's a preliminary report. It's a 17 preliminary report because there were eight or nine 18 subsequent meetings, and we think that that 19 independently is a basis to reject it. 20 We've listed in our brief numerous 21 instances in which investigative reports are not 22 produced. And as you know, it has become commonplace 23 in the world we live in of increased regulation, 24 increased activity among the plaintiffs' securities

41 41 1 bar, for corporations to call on independent counsel 2 to investigate, to get to the bottom of facts, so, if 3 you will, it can self-police. 4 And we believe that unless there is a 5 hurdle, a genuine hurdle that plaintiffs must overcome 6 to override those privileges, then those privileges -- 7 the overriding of those privileges will force 8 companies to think twice about undertaking those 9 investigations. They'll think twice about whether 10 there should be written reports. And we don't think 11 that that's helpful, and we think the Courts recognize 12 that. 13 I think Mr. Arroyo recognizes what a 14 tough hurdle the work product doctrine is for him. 15 And he doesn't spend much time, and he tries to 16 suggest that it has to be -- it doesn't apply here 17 because the Covington report was premised on risk of a 18 litigation with Ms. Fisher and not a potential 19 derivative case. I've indicated earlier that's not 20 the case, but he simply applies the prongs to the 21 standard. 22 He does rely on Ramada Inn, a Superior Court case. We cite -- and I'm not sure I'm 24 ever going to pronounce this case correctly -- the

42 42 1 Hoechst Celanese Corp. case, which we cite, says the 2 material can only be prepared in anticipation of any 3 litigation or trial. And the Hoechst case is 4 consistent with the United States Supreme Court's 5 decision in F.T.C. v. Grolier, which we did not cite. 6 In his initial brief, he relegated the 7 argument that the work product be confined only to the 8 situation with respect to allegations brought by 9 Ms. Fisher; but that's F.T.C. v. Grolier, 462 U.S. 19, 10 in which the Supreme Court, in applying essentially 11 the same rule, said that the work product privilege 12 applies to any litigation. 13 And again, I'll also refer the Court 14 to the Rembrandt Technology case, which we do cite, 15 it's 2009 Westlaw , which makes the same point. 16 So the information we believe is clearly and 17 unmistakably protected by work product. 18 I believe it's in Saito that 19 Chancellor Chandler, as of the time of that decision, 20 says that -- it refers to only two reported decisions 21 where opinion work product had been overridden. There 22 may be a few subsequently, but that should make it 23 abundantly clear that Courts make that a very 24 difficult process.

43 43 1 I'm going to briefly say that there's 2 been no waiver of the attorney/client privilege. He 3 basically says, Well, to the extent that they -- 4 THE COURT: I think I agree with that. 5 I can't see any evidence of any waiver. It is true 6 that there is information out there, and I don't know 7 how it got out there. There may be all kinds of 8 different reasons or ways in which it became public, 9 but there hasn't been any evidence presented to me 10 that indicates that the board on behalf of 11 Hewlett-Packard made a conscious decision to waive 12 work product or attorney/client privilege. 13 MR. SCHATZ: And with respect to his 14 point that if the board relied on it, somehow, that 15 renders it producible, I think he's conflating this 16 concept of putting a lawyer's advice at issue, which 17 is essentially injecting the advice and saying, 18 explicitly, I rely on that advice, with having the 19 benefit of the lawyer's work. Lawyers provide 20 information to clients all the time. 21 As I indicated, to merely say if they 22 saw it, they therefore relied on it, it's producible, 23 would really render meaningless any protection. 24 I'll briefly go to just a few of the

44 44 1 Garner factors, but I want to focus on his -- 2 Mr. Arroyo's position with respect to colorable claim. 3 The standard is not colorable claim. The standard is 4 obviously colorable claim. And his papers try to 5 equate obviously colorable with proper purpose. And 6 Your Honor, they simply are not. 7 Putting aside the fact that the 8 standard for waste is extremely hard to litigate the 9 case, we have found -- plaintiffs have not cited any 10 case that has found an obviously colorable claim to be 11 stated in a Section 220 proceeding before there was 12 some form of substantive action filed. 13 And we went through this litany again 14 on Pages 13 and 14 of our reply brief, and I won't 15 reiterate those, but I do want to refer the Court to 16 Page 4 of Chancellor Chandler's decision in the Fuqua 17 decision where he refers to one claim surviving, and 18 that being the claim that was obviously colorable. 19 So I think it gives you insight that 20 to be an obviously colorable claim, we believe it 21 either has to pass muster, pass muster in a motion to 22 dismiss context, or at least the Court needs to have 23 observed it enough in the course of the litigation so 24 that it can make an informed judgment as to whether it

45 45 1 is obviously colorable. 2 And with respect to the Garner 3 factors, can he get it somewhere else? We think that 4 if he files a lawsuit and the case gets past a motion 5 to dismiss, he presumably can ask the decision-makers 6 why did they decide what they did. 7 I just want to refer the Court to one 8 other case, and that's the Saito case which both sides 9 cited. 10 THE COURT: Let's come back to this 11 "obviously colorable" for a second. 12 MR. SCHATZ: Sure. 13 THE COURT: I mean, what does he need 14 to show to have an obviously colorable claim in your 15 view? He's got a claim of waste, so his claim of 16 waste is that here was a situation where the board, 17 clearly -- in his view, clearly could have dismissed 18 this gentleman for cause and not paid him any 19 severance. Instead, they didn't rock the boat and 20 they let him resign and gave him 30 to $40 million by 21 way of severance benefits. Why isn't that a colorable 22 claim of waste? 23 MR. SCHATZ: The way I see it is 24 that -- how do you balance the rights of a shareholder