Hart v. General Motors Corp.

• Decision Date: 25 June 1987
• Citation: 129 A.D.2d 179,517 N.Y.S.2d 490
• Parties: Milledge A. HART, III, individually and on behalf of all holders of General Motors Corporation Class E Common Stock similarly situated and derivatively on behalf of General Motors Corporation, Plaintiff-Respondent, v. GENERAL MOTORS CORPORATION, Roger B. Smith, Anne L. Armstrong, Donald J. Atwood, Catherine B. Cleary, James H. Evans, Walter A. Fallon, Charles T. Fisher, III, Marvin L. Goldberger, John J. Horan, Howard H. Kehrl, F. James McDonald, Thomas A. Murphy, Edmund T. Pratt, Jr., Lloyd E. Reuss, James D. Robinson, III, John G. Smale, F. Alan Smith, Robert C. Stempel, Leon H. Sullivan, Dennis Weatherstone, Thomas H. Wyman and H. Ross Perot, Defendants- Appellants.
• Court: New York Supreme Court — Appellate Division

Page 490

517 N.Y.S.2d 490

129 A.D.2d 179

Milledge A. HART, III, individually and on behalf of all holders of General Motors Corporation Class E Common Stock similarly situated and derivatively on behalf of General Motors Corporation, Plaintiff-Respondent, v. GENERAL MOTORS CORPORATION, Roger B. Smith, Anne L Armstrong, Donald J. Atwood, Catherine B. Cleary, James H Evans, Walter A. Fallon, Charles T. Fisher, III, Marvin L Goldberger, John J. Horan, Howard H. Kehrl, F. James McDonald, Thomas A. Murphy, Edmund T. Pratt, Jr., Lloyd E Reuss, James D. Robinson, III, John G. Smale, F. Alan Smith, Robert C. Stempel, Leon H. Sullivan, Dennis Weatherstone, Thomas H. Wyman and H. Ross Perot, Defendants- Appellants.

Supreme Court, Appellate Division, First Department.

June 25, 1987.

Dennis J. Block, of counsel (Irwin H. Warren, Stephen A. Radin and Timothy E. Hoeffner, with him on the brief; Weil, Gotshal & Manges, New York City, attorneys), for Individual Directors of General Motors Corp.

Roy L. Reardon, Joseph F. Tringali, New York City, Stephen C. Neal, Robert J. Kopecky and William F. Dolan, Chicago, Ill., of counsel; Simpson Thacher & Bartlett, New York City, Kirkland & Ellis, Chicago, Ill., and Michael J. Basford (Louis H. Lindeman, Jr., Detroit, Mich., attorneys), for defendant-appellant General Motors.

Evan R. Chesler, of counsel (Thomas D. Barr, Robert N. Feltoon, Robert B. Silver, Christopher M. Mason, New York City, Thomas W. Luce, III and M. David Bryant, Jr., Dallas, Tex., with him on the brief; Cravath, Swaine & Moore, New York City, and Hughes & Luce, Dallas, Tex., attorneys), for defendant-appellant Perot.

Melvyn I. Weiss, of counsel (Michael C. Spencer and Steven G. Schulman, with him on the brief; Milberg Weiss Bershad Specthrie & Lerach, New York City, attorneys), for plaintiff-respondent.

Before MURPHY, P.J., and SULLIVAN, ROSS, ASCH and WALLACH, JJ.

SULLIVAN, Justice.

In October 1984, General Motors (GM), a Delaware corporation with its principal place of business in Michigan, acquired 100% of the voting securities of Electronic Data Systems Corp. (EDS), a highly successful computer services firm, at a cost of some $2,500,000,000. Under the terms of the acquisition, each outstanding share of EDS stock was exchanged, at the option of the EDS shareholder, for either $44.00 in cash or a combination of $35.20 in cash, a share of a newly created class of GM common stock (Class E stock), a non-transferrable contingent promissory note, maturing in 1991, entitling the holder to an amount equal to the difference between $62.50 and the 1991 market price of Class E stock, and a "Special Interest" designed to compensate for certain federal tax consequences. H. Ross Perot, the then Chairman of EDS, chose the second option and became GM's largest individual shareholder in the process. Perot remained as Chairman of EDS and was also named a director of GM.

Problems began to develop between EDS and GM almost immediately, and Perot became an increasingly vocal critic of GM. As the end of 1986 approached, Perot's differences with GM's Board of Directors had intensified to the point that they decided to buy him out. Accordingly, GM's directors and Perot negotiated an agreement whereby GM, for a total price of approximately $750,000,000, the purported equivalent of approximately $61.90 per share and related note, would purchase Perot's Class E stock and corresponding contingent notes and those of three of his associates in return for, inter alia, Perot's resignation as a GM director and chairman of EDS and his agreement not to criticize GM publicly or repurchase its stock or otherwise seek to exercise control over GM for the next five years. If Perot were to voice any public criticism of GM or its management he could be penalized up to $7,500,000. On November 30, 1986, approval of the transaction was recommended by a special review committee of GM's Board of Directors, which, itself, on the following day, gave its unanimous approval. The transaction was consummated that same day.

On December 5, 1986, plaintiff, a Texas resident who had become a holder of several hundred thousand shares of GM Class E stock and related notes in 1984 in exchange for his stock holdings in EDS, purporting to act derivatively on behalf of GM and as a class representative of all its Class E stockholders, commenced this action against GM, its directors and Perot, challenging the Board's December 1, 1986 decision authorizing the purchase transaction. Alleging breach of fiduciary duty and waste, plaintiff claims that GM's purchase of Perot's stock and notes, as well as Perot's resignations from both GM and EDS, damaged GM, EDS and GM's Class E stockholders. In essence, plaintiff contends that the payment of $750,000,000 incorporated a premium amounting to hundreds of millions of dollars over the fair market value of the surrendered stock and notes, and that the premium was paid to induce Perot to remove himself from his corporate offices and directorship of GM. In effect, plaintiff alleges a sale of corporate office for personal gain. In the only cause of action asserted against Perot, plaintiff seeks rescission of the transaction. Plaintiff did not, however, prior to the commencement of this action, make a demand on GM's Board of Directors that it cause GM to pursue the claim. In conclusory terms, he alleges that such a demand would have been futile.

On December 4, 1986, the day before the commencement of this action, two similar derivative actions were filed in the Delaware Chancery Court by other GM shareholders, and four additional state court actions were instituted in Delaware between December 5, 1986 and February 4, 1987. On April 13, 1987, during the pendency of this appeal, the Delaware Chancery Court dismissed one of the December 4th actions on the ground that the plaintiffs had failed to make a prelitigation demand on the Board of Directors, or to plead with particularity facts which, if proved, would excuse such demand. We note that the complaint there apparently contained allegations substantially more particularized than those pleaded here as to the futility of a pre-litigation demand.

A total of nine additional actions have been filed in federal courts in five different states. These actions also include the same common law claims of breach of fiduciary duty and waste as are alleged in the instant action and the Delaware actions, as well as allegations under the federal securities laws. These nine actions, four of which currently name Perot as a defendant, were referred to the Judicial Panel on Multidistrict Litigation, which consolidated them and transferred the eight actions pending in districts other than the District of Delaware to the Delaware court "to prevent duplication of discovery and avoid inconsistent pretrial rulings (especially with respect to class and derivative action issues)."

After the defendants had moved in the Delaware state court actions to dismiss due to the plaintiffs' failure to make a demand on GM's Board of Directors, the GM defendants moved, at the court's direction, to dismiss this action on two independent grounds: plaintiff's failure to make a demand on GM's Board of Directors--the precise issue already before the Delaware Chancery Court--and forum non conveniens, or, alternatively, on the latter ground only, for a stay of the action. Perot also moved to dismiss or to stay the New York proceedings. ¹ The motions were denied in all respects, and this appeal followed. We reverse and dismiss the complaint on the ground of forum non conveniens.

The nature of the challenged transaction itself, as well as the equitable relief sought, militates against separate determinations by courts in different jurisdictions. One of the abiding principles of the law of corporations is that the issue of corporate governance, including the threshold demand issue, is governed by the law of the state in which the corporation is chartered, in this case, Delaware. As the Court of Appeals stated in Diamond v. Oreamuno, 24 N.Y.2d 494, 503-504, 301 N.Y.S.2d 78, 248 N.E.2d 910, in discussing the duties and obligations of directors and officers and their relation to the corporation, "The primary source of the law in this area ever remains that of the State which created the corporation." The United States Supreme Court has recently observed, "No principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations...." (CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 107 S.Ct. 1637, 1649, 95 L.Ed.2d 67.) In upholding the concept of single state resolution of issues of corporate governance against a Commerce Clause challenge, the court noted: "This beneficial free market system depends at its core upon the fact that a corporation--except in the rarest situations--is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation." (Id. 107 S.Ct. at 1650.) Thus, in accordance with well-settled principles these derivative claims should be resolved under the law of Delaware, the state of GM's incorporation. ²

In this regard, the motion court erred in concluding that the December 1st transaction "falls within that category of corporate acts where the liability of a director can be decided by different local law rules in different states." The validity of the GM/Perot transaction cannot be decided on a state-by-state basis. In this case, for example, plaintiff asks the court to order "the return to GM of the payments made to Mr. Perot and the return to him of his Class E shares and the contingent notes." Plaintiff also seeks Perot's reinstatement as a director of GM and EDS. Most of the other fifteen pending derivative actions also seek rescission. The confusion which would be created by a New York judgment granting rescission nullifying the December 1st transaction and...