Grobow v. Perot, s. 8759

• Decision Date: 09 February 1987
• Docket Number: Nos. 8759,8760 and 8765,s. 8759
• Citation: 526 A.2d 914
• Parties: David GROBOW, et al., Plaintiffs, v. H. Ross PEROT, et al., Defendants. Beatrice L. RUSS, Plaintiff, v. Anne L. ARMSTRONG, et al., Defendants. Bronson MURRAY, Plaintiff, v. Roger B. SMITH, et al., Defendants. Civ.A. . Submitted:
• Court: Court of Chancery of Delaware

Page 914

526 A.2d 914

David GROBOW, et al., Plaintiffs, v. H. Ross PEROT, et al., Defendants.

Beatrice L. RUSS, Plaintiff, v. Anne L. ARMSTRONG, et al., Defendants.

Bronson MURRAY, Plaintiff, v. Roger B. SMITH, et al., Defendants.

Civ.A. Nos. 8759, 8760 and 8765.

Court of Chancery of Delaware,

New Castle County.

Submitted: Feb. 9, 1987.

Resubmitted: March 31, 1987.

Decided: April 13, 1987.

Joseph A. Rosenthal, of Morris and Rosenthal, P.A., Wilmington, Robert A. Skirnick (argued), Klari Neuwelt and Ellen P. Chapnick, of Wolf Popper Ross Wolf & Jones, New York City, Arthur N. Abbey and Judith Spanier, of Abbey & Ellis, New York City, Stanley N. Wolfe, Gary E. Cantor, and Susan Schneider Thomas, of Berger & Montague, P.C., Philadelphia, Pa.; Stuart H. Savett and Barbara A. Podell, of Kohn, Savett, Klein & Graf, P.C., Philadelphia, Pa.; Lowell E. Sachnoff, Charles R. Watkins, and Joel N. Shapiro, of Sachnoff Weaver & Rubenstein, Ltd., Chicago, Ill.; Law Offices of Joseph E. Weiss, New York City; Stull Stull & Brody, New York City; Meredith & Cohen, P.C., Philadelphia, Pa.; Garwin Bronzaft & Gerstein, New York City; Harvey Greenfield, and Schoengold & Sporn, New York City, for plaintiffs.

William O. LaMotte, III and Thomas Reed Hunt, Jr., of Morris, Nichols, Arsht & Tunnell, Wilmington, Stephen C. Neal (argued) of Kirkland & Ellis, Chicago, Ill. for defendants General Motors Corp. and Electronic Data Systems Corp.

Michael J. Basford and Louis H. Lindeman, Jr., of General Motors Corp., Detroit, Mich., for defendant General Motors Corp.

E. Norman Veasey and Thomas A. Beck, of Richards, Layton & Finger, Wilmington, Dennis J. Block (argued), Irwin H. Warren, and Stephen A. Radin, of Weil, Gotshal & Manges, New York City, for Director defendants.

Bruce M. Stargatt and David C. McBride, of Young, Conaway, Stargatt & Taylor, Wilmington, M. David Bryant, Jr., of Hughes & Luce, Dallas, Tex.; Thomas D. Barr and Christopher M. Mason, of Cravath, Swaine & Moore, New York City, for defendant H. Ross Perot.

OPINION

JACOBS, Vice Chancellor.

Presently pending are motions to dismiss in three ¹ consolidated shareholder derivative actions on behalf of General Motors Corporation ("GM"), challenging a repurchase by GM of certain securities and notes issued to defendant H. Ross Perot ("Perot"), a member of GM's Board of Directors, and to other persons. Named as defendants in one or more of the actions (in addition to GM) are GM's individual directors, Perot, Electronic Data Systems ("EDS") and certain of EDS' directors. The plaintiffs seek various forms of relief based on claims that GM's directors breached their fiduciary duty to the corporation and its stockholders by approving the challenged transaction.

The defendants have moved to dismiss the derivative actions on the ground that the plaintiffs failed to comply with Court of Chancery Rule 23.1, by not making a demand on GM's Board of Directors to redress the wrongs complained of, and by not pleading with particularity facts which would establish that a demand would be futile. This is the decision of the Court after briefing and oral argument, on the defendants' motion to dismiss. ²

I. The Facts

The pertinent facts, as alleged in the three complaints, ³ are as follows: In 1984 EDS became a wholly-owned subsidiary of GM as the result of a merger. (Grobow p 13). At that time Perot was EDS' Chairman and its largest stockholder. (Murray p 7). Under the terms of the GM/EDS merger, each EDS shareholder was given the choice of receiving, in exchange for his EDS shares, either $44 in cash or a combination of $35.20 in cash, plus .2 of a share of a newly issued GM Class E stock and a nontransferable contingent note maturing in 1991. ⁴ (Grobow p 14, Russ p 5, Murray p 8). Perot chose the latter alternative. By virtue of the GM Class E shares that he received in the merger, Perot became GM's largest shareholder, owning .8% of its stock. (Grobow p 18, Russ p 5). Perot also became a member of GM's Board of Directors and continued to preside as Chairman of EDS. (Grobow p 18, Murray p 9).

GM's acquisition of EDS proved to be mutually beneficial to both corporations: EDS was able to offer GM a broad range of data processing and telecommunication systems, and GM, in turn, came to represent approximately 75% of EDS' total revenues. In addition, many GM suppliers became EDS customers. (Grobow p 19, Russ p 6, Murray p 10).

Despite the early success of the combined GM/EDS entity, disagreements arose between the two companies over the pricing of EDS' services to GM and over certain long-term contracts that GM had allegedly promised to EDS. (Grobow p 19). Perot was prepared to sue GM to obtain those contracts, and he warned GM's Board that, in his opinion, GM would be violating the securities laws if it did not make good on its promises to EDS' shareholders. (Grobow p 20). In December, 1985, Perot was the lone dissenting vote in the Board of Directors' decision for GM to acquire Hughes Aircraft. (Grobow p 21). Increasingly Perot became critical of GM's management, and he urged GM's Board to "do the fundamentals" required to recapture GM's competitive position. Id.

During the summer of 1986, Perot announced that he could no longer be a GM "company man." (Grobow p 23). In June 1986, he wrote a letter to Roger Smith, GM's Chairman, demanding that GM either allow him to run EDS as he saw fit or buy him out. Id. Perot then began publicly to criticize GM. The Wall Street Journal quoted Perot as saying: "Until you nuke the old GM system, you'll never tap the full potential of your people," and "GM cannot become a world-class and cost-competitive company simply by throwing technology and money at its problems." (Grobow p 24). Over the ensuing months, Perot persisted in his criticisms of GM's management, which became more pointed. (Grobow p 25). GM's Board then caused GM to negotiate a possible sale of EDS to American Telephone and Telegraph Corp., allegedly (in part) to rid GM of Perot; however, those negotiations were unsuccessful. (Grobow pp 26, 27).

In the late fall of 1986, Perot told GM that he was willing to sell his interest in GM before the year-end. (Grobow p 27). GM representatives responded with a proposal, and, at Perot's request, submitted to him a draft containing terms that Perot allegedly considered to be "unbelievable" and something that the Board "will never approve." (Grobow p 28). Perot then proceeded to suggest additional, favorable terms for his representative to add to the agreement, including a "giant premium for [his] stock ... the right to hire the top 200 people from EDS ... [and] the right to start a new EDS...." ⁵ Perot is alleged to have reasoned that "no board of directors would ever buy a document like this." Id. GM's Board allegedly acceded to the terms demanded by Perot with "extraordinary speed," "little, if any study of [them]," and "no attempt to negotiate." (Grobow p 29). In Perot's words, they "came back and agreed to all that." Id.

On November 30, 1986, a Special Review Committee consisting of three GM directors approved the buy-back proposal. (Grobow p 29). GM's Board of Directors, a majority of whom were "outside" directors (Russ p 3, Murray p 3), approved the transaction at a meeting on December 1, 1986, which, as part of the arrangement, Perot was not invited to attend. (Grobow p 29).

The terms of the repurchase approved by GM's directors (referred to in this Opinion as the "buy-back transaction") were as follows: GM paid Perot approximately $693 million to repurchase his Class E stock and to redeem his contingent notes. (Grobow p 30). GM also repurchased the 800,000 shares of Class E stock, and the contingent notes, held by Perot's EDS associates. Id. The total cost of the buy-back transaction to GM was $742.8 million, ⁶ which Perot reportedly characterized as including a "giant premium" paid to him. (Grobow pp 30, 31).

As part of the buy-back transaction, Perot also gave GM certain covenants. He agreed to refrain from criticizing GM management, and to pay liquidated damages of up to $7.5 million, if that covenant were found to have been violated. (Grobow p 32). He agreed, for stipulated periods of time, to refrain from purchasing GM stock, from starting a business that would compete with EDS (for three years), and from recruiting EDS executives to another company (for 18 months). (See n. 5, supra; Grobow pp 32, 33, Russ p 10, Murray p 15). Finally, Perot agreed to (and did) resign from GM's Board of Directors and as EDS' Chairman. (Grobow p 32, Russ p 10, Murray p 15).

After GM announced the buy-back transaction, Perot advised the GM Board that he was placing his share of the cash proceeds into escrow until December 15, 1986, to give the Board an opportunity to "review this matter and the events that led to the decision." (Grobow p 58, Russ p 17, Murray p 21). Despite Perot's invitation to reconsider, the GM Board announced that it did not intend to rescind the agreement. (Grobow p 58, Russ p 21, Murray p 25). Despite protest from GM constituencies, the Board has adhered to that position. (Grobow p 59).

The buy-back transaction has been a subject of criticism by GM top management and by industry analysts (Grobow pp 39, 40), and it came at a time when GM had been experiencing financial set-backs and engaging in severe cost-cutting. (Grobow pp 38, 43, Murray, p 20). The plaintiffs charge that the buy-back transaction had no valid corporate purpose (Grobow p 42), that it constituted a waste of corporate assets (Grobow pp 43, 61, Russ p 23(a), Murray p 27(a)), and that it amounted to a breach of the GM directors' fiduciary duties. ⁷ (Grobow pp 41, 44, Russ p 23, Murray p 27).

II. The Contentions and Applicable Legal Principles

It is undisputed that the plaintiffs made no prior demand on GM's Board of Directors to redress the acts complained of. Plaintiffs allege, however, that any demand would have been futile, and their complaints...