Voters reject Prop. 211

California's landmark shareholder lawsuit initiative is defeated by an overwhelming margin.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
5 min read
President Clinton is in. California's Proposition 211 is out.

Wall Street reacted with a yawn, while Intel (INTC) is now sharing its fourth-quarter forecasts.

California's landmark shareholder lawsuit initiative was trounced at the polls, surpassing predictions of its demise made only days ago.

"The market had already discounted the status quo with Clinton remaining in office and the Republicans holding onto both houses in Congress. No one thought Prop. 211 had a chance of winning," said Bruce Lupatkin, director of research for Hambrecht & Quist.

He noted that the market had been down a few weeks ago as investors were concerned that the Democrats were gaining ground in Congressional elections. The concern was that Democrats would take control of Congress and raise interest rates, making it more expensive for companies to access funds to expand, Lupatkin said.

But in the past few days the market has ticked up in anticipation of fewer changes in the political landscape. Tom Thornhill, technology stocks director for Montgomery Securities, noted that Nasdaq, a market that is largely comprised of high-tech firms, and the Philadelphia Semiconductor Index, or SOX, were up slightly this morning.

"There is one view that with a Democrat in office and a Republican house, there'd be gridlock, and that means less gets done and [there's] less government interference," he joked.

Thornhill added that Federal Reserve chairman Alan Greenspan has more influence on the market with his decisions on interest rates than the election itself.

Meanwhile, Prop. 211, a measure that would have relaxed restrictions on shareholder lawsuits, failed to pass by an overwhelming ratio of about 75 percent opposed and 25 percent in favor. Many Silicon Valley companies were concerned they would be slapped with frivolous lawsuits if the measure was approved.

Prior to the election, a number of companies discontinued the practice of giving forecasts on their future performance. Analysts said as many as 70 of the high-tech firms either avoided this altogether or reigned in their comments for fear that Prop. 211 would pass.

The measure, which would have made shareholder lawsuits easier to lob at companies when earnings fall short of expectations or stock prices take a tumble, was closely watched not only in California but also across the nation.

"If Prop. 211 appeared like it was going to pass, there would have been more pressure on tech stocks," Lupatkin said.

Thornhill said that investors would have found themselves seeking such guideposts as time passed, because for many investors the most recent forward-looking glimpse they received was in the past month or two as companies reported their earnings for the September quarter.

Meanwhile, Thornhill added it will be interesting to see how quickly companies reinstate their forecasting following the defeat of Prop. 211.

Intel was one company that was first out of the chute. The chip giant, which had earlier stated it would withhold forward-looking statements if Prop. 211 passed, today released its forecast for the fourth quarter.

Intel, which is an investor in CNET: The Computer Network, said it expects revenue for the fourth quarter to be "significantly higher" than the $5.14 billion generated in the third quarter.

The company anticipates its gross margin--the difference between the cost of sales and the price they are sold--to be greater than the 57 percent level in the previous quarter.

Expenses, meanwhile, will run about 17 to 20 percent higher in the fourth quarter, compared with the previous quarter. Intel attributed the higher expenses to additional marketing and advertising during the holiday season.

The company also expects its capital expenditures for 1996 to fall below previous estimates of $3.6 billion because of delays in construction. The expenditures aren't expected to exceed $3.4 billion.

With 100 percent of precincts reporting, the initiative failed by almost 3 to 1, with 74.4 percent opposed and 25.6 percent in favor. Prop. 211 opponents spent $32 million to fight the measure.

"It's a decisive rejection of 211," said John Doerr, cochair of the Taxpayers Against Frivolous Lawsuits opposition group. Doerr, whose venture capital firm Kleiner Perkins Caufield & Byers has funded many high-tech firms in Silicon Valley, was among the initiative's opponents who had gathered at the Holiday Inn in Palo Alto, California, to celebrate the apparent victory.

Opponents of Prop. 211 claim that had the measure passed, many companies would have gone bankrupt, while others might have left the state. Moreover, opposition extended beyond the state's borders because the law would have allowed California residents to sue any U.S. company if fraudulent earnings reports were suspected.

Proponents of the initiative, including consumer groups and attorneys who specialize in shareholder lawsuits, had the scales tipped in their favor earlier this month with 39 percent in favor, 31 percent opposed, and the remainder undecided. "It is one of the great class-action frauds ever perpetrated in California," said Larry Ellison, chief executive of Oracle. "The lawyers collect millions but the shareholders only receive pennies."

Opponents of Prop. 211 raised so much money that they ended up with a surplus. The group donated at least $1.75 million to fight Prop. 217, which would reinstate a higher tax bracket for affluent California residents, and Prop. 207, which would prohibit restrictions on attorney fees.

That move angered some Prop. 211 opponents who supported these other initiatives. But any fallout from that decision was not evident at the polls. Prop. 217 did not prevail by less than a percentage point, while Prop. 207 failed with over 66 percent of voters voting against the measure.

But the diversion of funds angered supporters of 211. Sean Crowley, spokesman for the pro-Prop. 211 Citizens for Retirement Protection and Security, said the decision to divert campaign funds reflects "deceit and fraud"--two areas his measure would have prohibited.

Despite their defeat, 211 supporters remained undeterred. "We know from experience that a 'no' campaign is much easier to win than a 'yes' campaign," Lois Wellington, president of the Congress of California Seniors said in a statement. "Our opponents now claim that Californians are adequately protected from fraud, so if they try to strip those investors' protections in the future, we will fight them tooth and nail to prevent it."