Editorial

Why I Believe You Should Vote "No" On California Proposition 211 The politics in California can affect all high-tech companies. by Jonah McLeod

To set the record straight, I must tell you that I have a vested interest in defeating this initiative. If this bill passes and my company goes public, I will become personally liable for any significant declines in the stock price of my company.

High-tech companies are particularly targeted by this bill because their stock prices are typically more volatile than those of companies in more traditional industries. This volatility has created a thriving business for attorneys specializing in "strike suits."

One attorney in particular, Bill Lerach, of the San Diego, CA law firm Milberg, Weiss, Bershar, Hynes & Lerach, has profited handsomely from the practice. Lerach has been cited as a principle backer of the measure, and according to the San Francisco Chronicle's June 25, 1996 issue, his firm contributed half of the $5 million raised to support the initiative through March of this year.

The initiative is the strike-suit attorneys' counter-offensive against a federal law enacted last year that restricts the ability to sue a company when its share price falls unexpectedly. For example, the Federal Legislation created the so-called "safe harbor" provision that enabled company officials to make projections about future earnings without becoming liable for fraud.

Strike-suit attorneys have created Prop. 211 to gain in state courts what they lost due to federal legislation. Furthermore, the measure achieves this end outside of California. The ballot initiative allows an attorney to sue companies based outside of California as long as a single stockholder resides in the state where the company is based.

If passed, the initiative would make a company liable for any large drop in share price. Thus, company officers would be reluctant to make any public projections about their company's earnings. Furthermore, the proposition codifies the "fraud on the market" doctrine that allows plaintiffs to recover losses without having to prove they relied on allegedly false information.

The measure also makes liable all company officers, boards of directors, and any firms serving the company being sued, including stockbrokers, accountants, law firms, and public relations companies. For example, an accounting firm can be held 100 percent liable if their client loses a lawsuit. Such personal liability will force corporate officers to settle suits rather than run the risk of losing in court.

Companies located outside of California may be able to indemnify their corporate officers from being personally liable if the company loses such a suit. This has led to the belief that if the measure passes, many California-based companies will relocate outside the state to attract talented executives and board members.

Finally, the ballot measure prohibits legislative regulation of legal fees that strike-suit attorneys can charge. Thus, the overall effect of Prop. 211 is to make it much easier for strike-suit attorneys to pursue their lucrative business. For all these reasons, I encourage you to vote "No" on Prop. 211 in the California General Election this November. Any rebuttal to or comment on my editorial will be posted on our Web site www.isdmag.com.

Jonah McLeod is editor-in-chief of Integrated System Design.

To voice an opinion on this or any Integrated System Design article, please e-mail your message to michael@isdmag.com.

integrated system design  November 1996