Why would shareholders sue a company whose stock has jumped 29,000 percent in five years? Investors took such an action against NetManage Inc., a Sunnyvale, Calif.-based software firm, in a text-book example of how a class-action suit evolves.
The suit, brought by Milberg Weiss Bershad Hynes & Lerach, alleged that NetManage officials sold more than $2.8 million in stock before acknowledging that revenues and earnings were dramatically lower than first estimated.
NetManage was one of Silicon Valley's amazing success stories, growing an astonishing 29,278 percent from 1991 to 1995. Its intranet and Internet connectivity software sales were staggering and the stock quickly shot up to more $32 per share.
Things began to sour for NetManage in the summer of 1995, when Microsoft Corp. released its popular Windows 95 operating system software.
Windows 95, which included embedded TCP/IP protocols, eliminated the need for customers to buy NetManage's hallmark Chameleon software.
So, after being named the fastest-growing technology company the previous summer, NetManage saw its revenues plummet with its stock price, falling to $20 per share within three months. The slide continued throughout 1997 and the stock is now trading at $2.56 per share.
Attorneys for the shareholders argued that NetManage officials, who sold off large chunks of their own stock options near the peak, knew their sales were drying up but failed to make any public statements.
NetManage officials said the suit was without merit and, though they knew Windows 95 would have an impact on their sales, they say they never anticipated such a dramatic decline.
That's just one of the suits filed against more than 200 companies each year.
Throughout Silicon Valley, the mere mention of shareholders' lawsuits elicits a reaction from executives that's an equal mix of indignation and anger. Hundreds of millions of dollars evaporate each year from corporate coffers for high-priced legal representation or, in some cases, multimillion-dollar settlements to make these suits disappear.
In the cut-throat world of information technology perhaps no other issue galvanizes the warring parties more than their disdain for these suits. The premise of their argument is that technology is highly volatile and that no individual or company can anticipate market changes, production snafus or major economic dilemmas such as the current instability in Asia.
To this end, technology companies are spending millions to fight what they call frivolous lawsuits at the state and federal level. Indeed, Microsoft and Netscape stand side-by-side in this pursuit as do Dell, Compaq and even Anheuser-Busch.
In 1996, technology companies raised more than $40 million to fight California's Proposition 211, an initiative that would've allowed shareholders to seek punitive damages not only from companies but the individual executives as well. The measure was soundly defeated by a 3-to-1 ratio. The remaining funds in the war chest were subsequently moved to the Technology Network general fund.
"This is about the business community rallying to beat back a very serious threat," said Mike Engelhart, vice president for public policy at the Technology Network, a Washington, D.C.-based lobbying organization funded primarily by the technology industry. "We're doing everything we can to prevent the trial lawyers from pulling off this scam against the public."
Monday: Who fights big business?