Re: Proposition 211. The Initiative That Would Kill Silicon

[Frank_Gruendel@ccl.lhag.de (Frank Gruendel)]

I'm sure this is a very important matter (though a little less important for
Germans like me and all the other participants of this board from all over the
world who expect PCI information here). Do you agree that proposition 211, no
matter how important it is for YOU, isn't exactly a PCI thing?
I'm sure there are more fitting locations on the internet to post articles like
that.
Regards 
Frank
_______________________________________________________________________________
Subject: Proposition 211. The Initiative That Would Kill Silicon


   Va
From:    tedlu@ix.netcom.com at Internet
Date:    10/24/96  11:02

                                From The Wall Street Journal, September 23, 1996

                                  The Initiative That Would Kill Silicon Valley

                                                        by T.J. Rodgers

Remember California's Proposition 13, the ballot initiative that started a
nationwide landslide tax revolt? Proposition 211 is the latest Golden State
innovation, but
this one would bury American business in a landslide of lawsuits.
Proposition 211 would make California the lawsuit capital of the U.S.,
giving trial lawyers more
power to fleece companies with frivolous "strike suits," supposedly on
behalf of defrauded shareholders. 

And that isn't Proposition 211's most destructive aspect. The initiative
would make it illegal for corporations to indemnify their directors against
liability in such
awards, forcing them to place their personal wealth at risk and making it
much harder for firms to find qualified directors. Just a California
problem? Hardly.
Proposition 211 applies to any company with even a single shareholder in
California -- that is, virtually every publicly held company in the U.S. 

Frivolous lawsuits are already far too common. My company, Cypress
Semiconductor Corp., was hit with one in 1992. The suit claimed we had
defrauded our
shareholders when we produced fourth-quarter 1991 earnings of 15 cents per
share, compared with the Wall Street consensus of 20 cents. I was sued
personally,
as were several of our officers and directors. 

The complaint was a joke. It claimed that some carefully selected quotes of
mine, combined with the earnings shortfall and subsequent drop in the share
price,
constituted fraud. The plaintiffs' lawyers failed to acknowledge my cash
purchase of 20,000 Cypress shares during the so-called class-action period,
when they
claimed Cypress insiders were dumping stock. One of the plaintiffs,
Frederick Rand, was practically a professional litigant, having been
involved in 17 previous
class-action suits. 

In June 1995 a judge granted our petition to throw the case out of court;
the plaintiffs are appealing. We have been forced to spend $5 million on
legal fees over
four years, and to produce 750,000 pages of documents during the discovery
phase of the case. That's how strike-suit lawyers try to wear down corporate
defendants in order to force lucrative settlements. 

Cypress refused on principle to settle, but less than 5% of high-tech
companies fight it out, the American Electronics Association estimates.
Instead, they opt to pay
a few million dollars (about what their legal bill would be if they fought)
to end the pain. According to the National Economic Research Associates,
class-action
lawyers pocketed $227 million in fees from 319 suits filed between 1991 and
1994 -- nearly a third of the $709 million awarded in settlements in these
cases. One
in three of these suits was brought against technology companies. More than
half of the top 150 technology firms in Silicon Valley have faced
class-action litigation,
the AEA reports, including such powerhouses as Sun Microsystems, Silicon
Graphics, and Apple Computer. Should we believe that 50% of America's high-tech
CEOs are scam artists? Or that our legal system is out of control? 

Congress restored balance last year by passing a bill that struck a
compromise between shareholders' legitimate rights and the elimination of
legal profiteering.
President Clinton vetoed the bill, abandoning his 1992 campaign pledge to
support Silicon Valley entrepreneurs, largely because of lobbying efforts
led by White
House dinner guest and Clinton fund-raiser William Lerach, a professional
class-action lawyer who is Proposition 211's author and primary financial
supporter. But
congressional Democrats joined Republicans to override the veto, and the
bill became law. Realizing that his veto had burned bridges in Silicon
Valley, Mr. Clinton
performed a double flip -- siding against Proposition 211 after a
$50,000-a-plate Silicon Valley dinner. 

Politics aside, Proposition 211 would kill 159,000 California jobs over the
next decade, according to the Law and Economics Consulting Group, a private
research
company. It would penalize business by relaxing the controls on intrusive
and expensive "fishing expeditions" in the discovery phase of class-action
proceedings and
by broadening the definition of "fraud," further inflating settlements and
legal fees. 

Of greatest concern to Silicon Valley entrepreneurs, the initiative would
prohibit director and officer indemnification, making board members
personally liable for
damage awards and even barring companies from picking up copayments on
directors' and officers' liability insurance. This would make it impossible
for Silicon
Valley companies to fill their boards with ex-CEO venture capitalists, a
practice that has been highly successful. 

Our company's start-up story is typical. At age 35, with a Stanford Ph.D. in
electrical engineering and big aspirations, I formed the Cypress team. We
snared $7.5
million from venture capitalists, but their human contribution to our board
of directors proved even more valuable. Our original board members included
L.J. Sevin,
our first chairman, and Pierre Lamond, our current chairman, both founders
of semiconductor companies and former CEOs. 

They had the business experience that I lacked. (I remember the time when
L.J. politely explained the nuances of a balance sheet to me in his living
room.) Cypress
might not have survived -- and certainly would not have been as successful
-- without their guidance. Of course, Mr. Sevin and Mr. Lamond would never have
joined our board of directors if their personal wealth had not been
protected by the basic principle of limited corporate liability. This
principle has been a
cornerstone of the American economic miracle for two centuries: In 1800,
America had only five million people but had more corporations than there
were in all of
Europe. 

I'm now 48 years old and have enough scars and savvy to help other young
Silicon Valley CEO-entrepreneurs. I am a board member of Vitesse Semiconductor
Corp., America's largest producer of gallium-arsenide chips, and of C-Cube
Microsystems, the nation's leading video-compression company. If Proposition 211
passed, would I be willing to expose my wealth -- the product of more than a
decade's hard work building Cypress -- to class-action lawyers, one of whom
might
get a lucky jury on a long-shot case? Not a chance. I would have to resign
both of my directorships -- as would the directors who guide my company. 

If Proposition 211 passes, think about dismantling the Silicon Valley
economic engine. Think about the demise of an entrepreneurial culture, which
has bred three
generations of businessmen and made America the world leader in
semiconductors, so that self-interested trial lawyers can make California
into a legal killing field.
Californians should consider these possibilities as Election Day draws near. 

                                                           
Mr. Rodgers is president and CEO of Cypress Semiconductor Corp. This article
appeared in The Wall Street Journal, in the "Manager's Journal" column on
the editorial page, and is published here with permission. 
ÀP?