Grobow v. Perot

• Citation: 539 A.2d 180
• Parties: , Fed. Sec. L. Rep. P 93,683 David GROBOW, Shelly Kostrinsky, Joyce L. Thomas, Drexel Home, Inc., Adelle Brody, Jerrold Schaffer, Phyllis Greenfogel, Martin Besen, Joseph Lieberman, Blanche Silverberg, Irving Kas, Beatrice L. Russ and Bronson Murray, Plaintiffs Below, Appellants, v. H. Ross PEROT, Roger B. Smith, F. James McDonald, Howard H. Kehrl, F. Alan Smith, Donald J. Atwood, Lloyd E. Reuss, Robert C. Stempel, Thomas A. Murphy, Anne L. Armstrong, Catherine B. Cleary, James H. Evans, Walter A. Fallon, Charles T. Fisher III, Marvin L. Goldberger, John J. Horan, Edmund T. Pratt, Jr., James D. Robinson III, John G. Smale, Leon H. Sullivan, Dennis Weatherstone, Thomas H. Wyman, Morton H. Meyerson, J. Thomas Walter, Jr., and William K. Gayden, Defendants Below, Appellees, and General Motors Corporation and Electronic Data Systems Corporation, Nominal Defendants Below, Appellees. . Submitted:
• Decision Date: 03 November 1987
• Court: United States State Supreme Court of Delaware

Page 180

539 A.2d 180

56 USLW 2601, Fed. Sec. L. Rep. P 93,683

David GROBOW, Shelly Kostrinsky, Joyce L. Thomas, Drexel Home, Inc., Adelle Brody, Jerrold Schaffer, Phyllis Greenfogel, Martin Besen, Joseph Lieberman, Blanche Silverberg, Irving Kas, Beatrice L. Russ and Bronson Murray Plaintiffs Below, Appellants, v. H. Ross PEROT, Roger B. Smith, F. James McDonald, Howard H Kehrl, F. Alan Smith, Donald J. Atwood, Lloyd E. Reuss Robert C. Stempel, Thomas A. Murphy, Anne L. Armstrong Catherine B. Cleary, James H. Evans, Walter A. Fallon, Charles T. Fisher III, Marvin L. Goldberger, John J. Horan, Edmund T. Pratt, Jr., James D. Robinson III, John G. Smale, Leon H. Sullivan, Dennis Weatherstone, Thomas H. Wyman, Morton H. Meyerson, J. Thomas Walter, Jr., and William K. Gayden, Defendants Below, Appellees, and General Motors Corporation and Electronic Data Systems Corporation, Nominal Defendants Below, Appellees.

Supreme Court of Delaware.

Submitted: Nov. 3, 1987.

Decided: March 15, 1988.

Klari Neuwelt (argued), Pro Hac Vice, Ellen Chapnick of counsel of Wolf Popper Ross Wolf & Jones, New York City, Joseph Rosenthal, Kevin Gross of Morris & Rosenthal, Wilmington, for appellants.

Stephen C. Neal (argued), Pro Hac Vice, Robert J. Kopecky, Helen E. Witt of Kirkland & Ellis, Chicago, William O. Lamotte, III, Thomas Reed Hunt, Jr. of Morris, Nichols, Arsht & Tunnell, Wilmington, for appellees Gen. Motors Corp. and Electronic Data Systems Corp.

Michael J. Basford, Louis H. Lindeman, Jr. of Gen. Motors Corp., Detroit, of counsel, for appellee Gen. Motors Corp.

Dennis J. Block (argued), Pro Hac Vice, Irwin H. Warren, Stephen A. Radin, Timothy E. Hoeffner of Weil, Gotshal & Manges, New York City, E. Norman Veasey, Thomas A. Beck, Kevin G. Abrams of Richards, Layton & Finger, Wilmington, for Gen. Motors Corp. Director appellees Anne L. Armstrong, Catherine B. Cleary, James H. Evans, Walter A. Fallon, Charles T. Fisher, III, Marvin L. Goldberger, John J. Horan, Howard H. Kehrl, Thomas A. Murphy, Edmund T. Pratt, Jr., Lloyd E. Reuss, James D. Robinson, III, John G. Smale, Leon H. Sullivan, Dennis Weatherstone and Thomas H. Wyman.

Evan R. Chesler (argued), Pro Hac Vice, Thomas D. Barr, Christopher M. Mason of Cravath, Swaine & Moore, New York City, Bruce M. Stargatt, David C. McBride of Young, Conaway, Stargatt & Taylor, Wilmington, Thomas W. Luce, III, M. David Bryant, Jr. of Hughes & Luce, Dallas, for individual appellee H. Ross Perot.

Grover C. Brown, Mary M. Johnston of Morris, James, Hitchens & Williams, Wilmington, Roy L. Reardon, Joseph F. Tringali of Simpson Thacher & Bartlett, New York City, for Gen. Motors Corp. Director appellees Donald J. Atwood, F. James McDonald, Lloyd E. Reuss, F. Alan Smith, Roger B. Smith and Robert C. Stempel.

Before HORSEY, MOORE, Justices, and McNEILLY, Retired Justice.

HORSEY, Justice:

In these consolidated shareholder derivative suits, plaintiffs-shareholders appeal the Court of Chancery's dismissal of their suits for failure of plaintiffs to make presuit demand under Court of Chancery Rule 23.1. The Court of Chancery held that plaintiffs' complaints as amended failed to allege particularized facts which, if taken as true, would excuse demand under the demand futility test of Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984). The Court interpreted Aronson 's "reasonable doubt" standard for establishing demand futility as requiring plaintiffs to plead particularized facts sufficient to sustain "a judicial finding" either of director interest or lack of director independence, or whether the directors exercised proper business judgment in approving the challenged transaction--placing the transaction beyond the protection of the business judgment rule. Grobow v. Perot, Del.Ch., 526 A.2d 914, 921 (1987). We find the Vice Chancellor to have erred in formulating an excessive criterion for satisfying Aronson 's reasonable doubt test. Moreover, the Vice Chancellor erred in his statement that fairness is a "pivotal" question under an Aronson analysis. See 526 A.2d at 927. Unless the presumption of the business judgment rule is overcome by the pleadings, questions of fairness play no part in the analysis. Aronson, 473 A.2d at 812. However, applying the correct standard, we conclude that the complaints (singly or collectively) fail to state facts which, if taken as true, would create a reasonable doubt either of director disinterest or independence, or that the transaction was other than the product of the Board's valid exercise of business judgment. Therefore, we affirm the decision below, finding the Court's error to have been harmless.

I

The well-pleaded facts of these proceedings come principally from the complaints, as amended, and are fully set forth in the Court of Chancery Opinion. See Grobow, 526 A.2d 918-20. They will thus be repeated here in summary fashion and only as necessary.

A.

In 1984, General Motors Corporation ("GM") acquired 100 percent of Electronic Data Systems' ("EDS") stock. Under the terms of the merger, H. Ross Perot, founder, chairman and largest stockholder of EDS, exchanged his EDS stock for GM Class E stock and contingent notes. Perot became GM's largest shareholder, holding 0.8 percent of GM voting stock. Perot was also elected to GM's Board of Directors (the "Board") while remaining chairman of EDS.

The merger proved mutually beneficial to both corporations and was largely a success. However, management differences developed between Perot and the other officers and directors of GM's Board over the way GM was running EDS, and Perot became increasingly vocal in his criticism of GM management. By mid-1986, Perot announced to GM that he could no longer be a "company man." Perot demanded that GM allow him to run EDS as he saw fit or that GM buy him out. Perot then began publicly criticizing GM management with such statements as: "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." Thereafter, GM and American Telephone and Telegraph entered into exploratory negotiations for AT & T's purchase of EDS from GM allegedly as a means of GM's eliminating Perot. However, their negotiations did not proceed beyond the preliminary stage.

By late fall of 1986, Perot, anxious, for tax reasons, for a definitive decision before year-end, offered to sell his entire interest in GM. GM responded with a purchase proposal. Perot replied, suggesting additional terms, which Perot characterized as "a giant premium." When a definitive agreement was reached, the Board designated a three-member Special Review Committee ("SRC"), chaired by one of the Board's outside directors to review its terms. ¹ The SRC met on November 30, 1986 to consider the repurchase proposal and unanimously recommended that GM's Board approve its terms. The following day, December 1, 1986, the GM Board of Directors met and approved the repurchase agreement.

Under the terms of the repurchase, GM acquired all of Perot's GM Class E stock and contingent notes and those of his close EDS associates for nearly $745,000,000. ² GM also received certain commitments, termed "covenants," from Perot. In addition to resigning immediately from GM's Board and as Chairman of EDS, Perot further agreed: (1) to stop criticizing GM management, in default of which Perot agreed to pay GM damages in a liquidated sum of up to $7.5 million; ³ (2) not to purchase GM stock or engage in a proxy contest against the Board for five years; and (3) not to compete with EDS for three years or recruit EDS executives for eighteen months.

At all relevant times, a majority of the GM Board of Directors consisted of outside directors. The exact number and composition of the GM Board at the time is not clear. However, from the limited record, it appears that the Board was comprised of twenty-six directors (excluding Perot), of whom eighteen were outside directors.

The GM repurchase came at a time when GM was experiencing financial difficulty and was engaged in cost cutting. Public reaction to the announcement ranged from mixed to adverse. The repurchase was sharply criticized by industry analysts and by members within GM's management ranks as well. The criticism focused on two features of the repurchase: (1) the size of the premium over the then market price of GM class E stock; ⁴ and (2) the hush mail provision.

B.

Plaintiffs filed separate derivative actions (later consolidated) against GM, EDS, GM's directors, H. Ross Perot, and three of Perot's EDS associates. The suits collectively allege: (i) that the GM director defendants breached their fiduciary duties to GM and EDS by paying a grossly excessive price for the repurchase of Perot's and the EDS associates' Class E stock of GM; (ii) that the repurchase included a unique hush mail feature to buy not only Perot's resignation, but his silence, and that such a condition lacked any valid business purpose and was a waste of GM assets; and (iii) that the repurchase was entrenchment motivated and was carried out principally to save GM's Board from further public embarrassment by Perot. The complaints charge the individual defendants with acting out of self-interest and with breaching their duties of loyalty and due care to GM and EDS.

All defendants moved to dismiss the suits for plaintiffs' failure to comply with Court of Chancery Rule 23.1, as construed and applied under Aronson--that is, either to make presuit demand on GM's Board or to plead particularized facts demonstrating that demand was excused as futile. ⁵ Plaintiffs responded that the complaints state a case for demand excusal. They contended that the complaints detail factual allegations that create a reasonable doubt that GM's Board was disinterested or independent, or that the transaction was the product of a valid exercise of business judgment. Defendants dispute the...