Enterasys Reaches Corporate Governance Settlement

October 23, 2003 (PLANSPONSOR.com) - Cash, stock and improvements in the company's corporate governance structure were among the terms of a settlement between Enterasys Networks, Inc. and investors.

>The settlement, which is still pending court approval, would settle claims that the Andover, Massachusetts-based computer networking company violated federal securities laws over a period of nearly two years.    Terms include $17 million in cash, stock valued at $33 million and improvements to the company’s corporate governance, according to a release by lead plaintiff, the Los Angeles County Employees Retirement Association (LACERA).

>Corporate governance stipulations in the agreement provide that shareholders, owning at least 5% of Enterasys stock for a minimum of two years, may submit up to two candidates each year to Enterasys’ nominating committee for election to the board of directors. If the nominating committee rejects the nominations, it must explain its reasoning in the annual proxy report.

>Also included in the settlement was a provision for a shareholder vote on a proposal to declassify the board of directors. If approved, board members would be elected to one-year terms at each annual meeting, instead of the three-year, staggered terms they now serve.   Board members would also not be allowed serve as a director of more than three other public companies under terms of the agreement.

>Additionally, the networking company will be required to expand its annual proxy disclosures to include information that goes beyond regulatory requirements – such as detailing the chief executive’s compensation, comparing it to the salaries of heads of similar companies and putting the pay package in the context of Enterasys’ own stock performance.   Further, all executive vice presidents and the chief financial officer must report at least once a year to the independent members of the board, who may question them about the company without the presence of the CEO.

“The settlement opens Enterasys to greater outside scrutiny, makes the board of directors more independent and gives shareholders more say in the way the company is run,” said Glen DeValerio, a partner of Berman DeValerio Pease Tabacco Burt & Pucillo, which acted as lead counsel representing the $26 billion fund.

Case History

>The complaint was filled after allegations surfaced that Enterasys, a 2000 spin-off from Cabletron Systems, Inc., was engaged in a variety of accounting manipulations that artificially inflated the company’s stock price between June 2000 and February 2002.  

>However, the alleged accounting skullduggery began to unravel in February 2002 following the company’s delay in filing of its fourth quarter financial results due to “certain issues identified by management” tied to a sales contract in the company’s Asia Pacific operations. At the same time, Enterasys revealed that the Securities and Exchange Commission (SEC) had begun an investigation.

The next trading day immediately following the announcement saw Enterasys’ common stock plummet $6.60 per share (61%). Investors filed a number of lawsuits soon afterward and US District Judge Steven McAuliffe in the US District Court for New Hampshire consolidated the actions, appointing LACERA lead plaintiff in August 2002.