Too Soon? Is Bitterness Driving the HP-Autonomy Courtroom Saga?
The 'Bayesian' yacht, owned by the widow of Mike Lynch. PHOTO: PERINI NAVI PRESS OFFICE/ EPA-EFE/SHUTTERSTOCK
Corporate governance can get complex after an operational split such as when the Hewlett Packard Company broke into HP Enterprise (HPE) and HP Inc in 2015. A vestige of their former joint enterprise was a court case against former senior management of a company they acquired called Autonomy back in 2011. Acquired for $10.3 billion, (a 79% premium on the share price) in a move described by Bloomberg as part of “a rushed strategy” and by some insiders as “chaos” in the face of shareholder demands for growth. The civil case in the UK is ongoing with HPE now the lead plaintiff for the former company.
In a surprising public confirmation last week, HP confirmed it was pressing its claim for redress from their civil suit against the estate of Mike Lynch, former CEO of Autonomy, who died when his family’s yacht sank off Sicily on August 19th. The lawsuit that supports the claim was already resolved in the UK High Court mostly in favor of HPE but the settlement figure is not yet resolved. HPE was claiming $5.1Bn in redress over a 2011 $11Bn acquisition of Lynch’s Autonomy company that it said was based on fraudulent reporting.
In many ways, the risk and reputation timing of HP’s statement couldn’t be worse, given Lynch’s recent death along with his daughter, and with his wife still hospitalized. At worse, the HPE action appears bitter and predatory, even if the legal argument of establishing a claim before the estate is settled may have some judicial merit. HP’s criminal claim had previously been rejected by the UK’s Serious Fraud Office, although the UK Financial Reporting Council did fine auditors Deloitte £15 million for failings in its auditing of Autonomy’s accounts between January 2009 and June 2011.
This situation points to the complex interplay of stakeholders reflected in HPE having to settle a shareholder lawsuit in 2018 resulting from the write-down of the Autonomy asset to near zero, and legal fees that have been mounting over the years with UK law firm Travers Smith perhaps eyeing the prospect of a settlement bonus with some enthusiasm.
Two years after the civil claim in the UK was proven in HP’s favor, the judge has still to set compensation. Unlike the US, compensation is not set by a jury but by the presiding judge, in this case Mr Justice Hildyard. The judge indicated after the decision that any compensation would be considerably less than the sum HP was claiming, which HP then revised down to $4Bn in February 2024, perhaps in a bid to reach settlement. The fact that the decision on compensation is taking so long is an indication of both the complexity of the case, and that HP had resold several Autonomy assets to other companies in the period following their write-down, for undisclosed fees.
Autonomy had locations in San Francisco, where HP’s case was initially pressed, and Cambridge, UK which was the company’s global HQ. HP’s ire at its perceived injury has been so complete that it made legal claims in both countries.
Three individuals were the center of the claim of false accounting, financial misreporting and wire fraud, Mike Lynch the Autonomy CEO; Sushovan Hussain, CFO, and Stephen Chamberlain VP of Finance. Hussain was the first to be indicted in the US in 2016, was found guilty in 2018 and began serving a five-year sentence in 2020. Lynch and Chamberlain were indicted in a Federal case in 2018 for making materially false financial statements to HP in relation to the acquisition.
Lynch, who was in the UK, fought extradition to the US until May 2023. Under house arrest in California on a $100M bond, the case started in March 2024 and concluded in June with both defendants found not guilty on all counts. The boating accident that claimed Lynch’s life along with several others, was intended to be a celebration of that verdict.
Briefly, why was Lynch found guilty in the UK and not in the US? The first point is that the UK case was a civil matter and the bar to conviction is the “balance of probabilities” rather than “beyond reasonable doubt”. In the US case many have speculated that HP reaped what it sowed as far as the jury were concerned: HP’s loss resulted from not conducting sufficient due diligence, relying materially on Autonomy management’s own statements and reports. For a company the size of HP the mantra of ‘buyer beware’ should have rung loudly in any M&A activity. The driver was HP CEO Léo Apotheker, only eight months into the role, whose strategy to covert HP from hardware and services to software and services saw Autonomy as a number one acquisition target. No-one else was in that race so the impetus to close a deal was entirely internal.
In September 2011, and before the deal closed, Apotheker was fired by HP who announced Meg Whitman, previously CEO at eBay, as his replacement. The strike price for the acquisition of Autonomy was set under Whitman’s tenure when HP bought 87.34% of Autonomy for £10.3 billion, as was the dramatic subsequent write-down of $8.8Bn in impairment when details of sales performance came to light. Whitman had prior notoriety in the M&A space having acquired Skype for $4.1Bn in 2005, which it subsequently sold to Silver Lake Partners a few months after Whitman left the board of eBay for $2.75Bn, after eBay admitted they had overpaid for the asset. Perhaps this is why Whitman wasn’t called as a witness in the Federal case against Lynch & co. Jurors may have expected Whitman to testify, and the fact that she did not “may have raised significant suspicion and doubt in their minds about HP’s potential failures”. On the other hand, Lynch did testify and his careful explanations to the jury tended to endear him to the jurors.
Given the personal tragedies and the court failures, what would drive HP to believe that this was the time to confirm they would not be dropping their claim against the Lynch estate? Certainly, there is no probate imperative, given that Justice Hildyard has yet to determine compensation and Lynch’s death is still subject to an Italian judicial enquiry. Re-opening the saga doesn’t really paint HP in a good light, with many of its financial woes clearly of its own making and doesn’t bear revisiting. A private petition to Justice Hildyard would have seemed more appropriate but clearly there is enduring corporate bitterness associated with Lynch and the Autonomy saga.
HP isn’t the company it was either in stature or structure and any settlement would probably involve some split between HPE (The enterprise software entity) and the now separate hardware division HPI. HPE would certainly like to boost its 2023 reported net income of just over $2Bn with a one-time inflow of a significant share of that $4Bn claim, but that seems unlikely. As a B2B enterprise the impact to HPE’s business is probably low but the umbra cast over HPI could be more significant, especially if the story gains press interest.
What can we learn from a governance point of view? Clearly the HP brand’s reputation in all its forms was not considered when someone inside HPE decided to restate their commitment to the civil case in the UK, given the tragedy that had just befallen the Lynch family and following on so quickly from the failure of the Federal case against Mike Lynch. John Shultz has been Senior Council within HP/HPE for the entire duration of the various cases and it can be easy for a perception of justice to become a personal mission, although we don’t know if that was the case here. What is important is that appropriate communications advice is sought before any statement, formal or informal, are made during a sensitive period involving external events so that brand and corporate reputation can be safeguarded.