In re Gen. Motors Class E Stock Buyout Sec. Lit.

• Citation: 694 F. Supp. 1119
• Decision Date: 07 September 1988
• Docket Number: Master File No. Misc. 87-47.
• Parties: In re GENERAL MOTORS CLASS E STOCK BUYOUT SECURITIES LITIGATION.
• Court: U.S. District Court — District of Delaware

694 F. Supp. 1119

In re GENERAL MOTORS CLASS E STOCK BUYOUT SECURITIES LITIGATION.

Master File No. Misc. 87-47.

United States District Court, D. Delaware.

September 7, 1988.

COPYRIGHT MATERIAL OMITTED

Clark W. Furlow of Lassen, Smith, Katzenstein and Furlow, Wilmington, Del., Liaison Counsel, Nicholas E. Chimicles and Alfreda L. Verratti of Greenfield & Chimicles, Haverford, Pa., Lead Counsel, Michael J. Freed and Kenneth A. Wexler of Much Shelist Freed Denenberg Ament & Eiger, P.C., Robert A. Holstein and Stephanie Whitman of Holstein, Mack & Dupree, Marvin A. Miller and Patrick Cafferty of Washlow, Chertow & Miller, Frederic F. Brace, Jr. and Ellen A. Rubel of Law Offices of Frederic F. Brace, Jr., Chicago, Ill., for plaintiffs.

William O. LaMotte, III and Thomas Reed Hunt, Jr. of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., Stephen C. Neal, Robert J. Kopecky and Helen E. Witt of Kirkland & Ellis, Chicago, Ill., Michael J. Basford and Louis H. Lindeman, Jr., General Motors Corp., Detroit, Mich., for defendant General Motors Corp.

E. Norman Veasey, R. Franklin Balotti and Thomas A. Beck, of Richards, Layton & Finger, Wilmington, Del., Dennis J. Block, Irwin H. Warren, Stephen A. Radin and Timothy E. Hoeffner of Weil, Gotshal & Manges, New York City, for General Motors Corp. Director defendants except Donald J. Atwood, F. James McDonald, Lloyd E. Reuss, F. Alan Smith, Roger B. Smith, and Robert C. Stempel.

Grover C. Brown and Barbara MacDonald of Morris, James, Hitchens & Williams, Wilmington, Del., Roy F. Reardon and Joseph F. Tringali of Simpson, Thacher & Bartlett, New York City, for General Motors Director defendants Donald J. Atwood, F. James McDonald, Lloyd E. Reuss, F. Alan Smith, Roger B. Smith, and Robert C. Stempel.

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

OPINION

MURRAY M. SCHWARTZ, Chief Judge.

Plaintiff shareholders filed class and derivative claims against General Motors Corporation ("GM") as a nominal defendant, certain directors of GM, and H. Ross Perot, former director of GM and former chairman of the board of Directors of Electronic Data Systems ("EDS"). They contest GM's purchase of GM Class E stock and contingent note from Perot and three other EDS officers.

The defendants have filed motions to dismiss all six counts in the Second Amended Consolidated Complaint ("the Complaint"). The Counts are as follows: Count I, a class claim under Securities and Exchange Commission ("SEC") Rule 10b-5 alleging Perot and the director defendants made material misstatements and omissions; Count II, a class claim under SEC Rule 13c-4 alleging the transaction between Perot and GM was a tender offer and defendants failed to make the required disclosures; Count III, a class claim alleging Perot and the director defendants breached their fiduciary duty and injured plaintiffs by depressing the value of their stock; Count IV, a class claim alleging the director defendants breached their fiduciary duty by failing to extend the same offer to other GME stockholders as made to Perot and other EDS officers; Count V, a derivative claim against the director defendants and Perot as an aider and abettor alleging the buyout constituted a waste of corporate assets; and Count VI, a derivative claim against the director defendants alleging the buyout was a breach of their fiduciary duty.

Plaintiffs allege the jurisdiction for Counts I and II is based upon a federal question jurisdiction under 28 U.S.C. 1331 and 15 U.S.C. § 78aa, the Securities Exchange Act of 1934 ("Exchange Act"). ¶ 7. Plaintiffs allege jurisdiction for Counts II, IV, V and VI based upon diversity of citizenship under 28 U.S.C. § 1332 and pendent jurisdiction. ¶¶ 8, 9.¹

I. Background²

Perot founded EDS in 1962 and negotiated the merger of EDS and GM in 1984. ¶¶ 13, 14. Under the terms of the merger EDS became a wholly owned subsidiary of GM, and Perot continued as chairman of EDS and he became a member of the Board of Directors of GM ("the Board"). ¶ 14. In addition, EDS stockholders had the right to exchange each share of EDS stock for $44.00 in cash, or $32.50 in cash plus one-fifth of a share of the newly issued GM Class E ("GME") stock, one-fifth of a non-transferable contingent note and a "special interest" to compensate for federal tax consequences. ¶ 15. The contingent note entitled holders to receive, beginning in 1989, an amount of cash equal to the difference between a preset redemption price and the then current market price for GME stock. ¶ 16. The note also provided for a discount rate of 7.18% per six months for redemptions prior to the final redemption in 1991.³ Id. Perot exchanged his EDS stock for cash, GME stock and notes. ¶ 18. He thus owned 1% of GM's total outstanding stock and 18% of GME stock, and became GM's largest shareholder. Id. GME shareholders were to be paid dividends based entirely upon the profitability of EDS and not GM as a whole. ¶ 19(A). One of the significant goals of the merger was to assist GM by adding the "entrepreneurial spirit" of Perot and EDS. ¶ 19(D).

Although GM later became EDS's largest customer and accounted for 75% of its business, EDS was guaranteed a certain independence from GM. ¶¶ 19(C), 24. To maintain this autonomy, GM and EDS senior management negotiated agreements which provided: one, that separate financial records would be kept and GM would not do an internal audit of EDS; two, that Perot, in conjunction with EDS management, would continue to make EDS employment and compensation decisions; and three, that price for services EDS provided to GM would be negotiated on an arm's length basis. ¶¶ 26, 23. Disputes arose over the issues covered by these agreements. ¶ 28. GM demanded that it be allowed to conduct an internal audit of EDS, wanted a committee of the GM board to decide the EDS compensation package and sought favorable price and contract terms from EDS. ¶ 28. Perot opposed these measures by GM and also became a vocal critic of GM policy both publicly and internally. ¶ 29-33. Perot was the only board member to oppose GM's purchase of Hughes Aircraft. ¶ 34. In the fall of 1986, he was quoted in Newsweek as saying that changing GM was like "teaching an elephant to tap-dance." ¶ 35. He also criticized GM for making second-rate cars. Id. Despite Perot's disagreements with GM, EDS and GM resolved their disputes over audits, executive compensation and pricing. ¶ 37.

Perot suggested a buyout to Roger Smith, chairman and chief executive officer of GM in May, 1986 and a partial buyout in June, 1986, but was told by GM only a total buyout was acceptable. ¶ 45. Sometime during the summer of 1986, GM management decided that EDS would no longer be autonomous, that Perot's relationship with GM would be terminated and Perot's silence must be purchased. ¶ 39. No public statement was made on this decision. ¶ 41. In October, 1986 GM attempted to sell EDS to AT & T but the talks collapsed in early November. ¶ 42. On November 26, 1986 Smith claimed "EDS isn't for sale; we have never had it on the auction block or anything like that." ¶ 44. In response to an inquiry about whether Smith was saying GM never offered to sell EDS to AT & T, a GM spokesperson responded "That's correct." Id.

After collapse of the talks between AT & T and GM, Elmer Johnson, GM Vice-President and General Counsel, and Tom Luce, Perot's attorney, began discussions of GM's purchase of Perot's stock. ¶ 45. The negotiations concluded on November 28, 1986 when the final details were ironed out. ¶ 46. GM did not make these negotiations public. Id. On November 30, 1986 a small group of Board members met concerning the buyout and many Board members first learned of the proposed transaction. ¶ 48. A regularly scheduled Board meeting was held on December 1, 1986. ¶ 49.⁴ It was called for 9:00 a.m. and ended before noon. Id. GM management briefed the directors not present at the November 30 meeting on the transaction. Id. Although disputes over EDS's autonomy had been resolved, GM management told the Board that Perot's position on EDS created irreconcilable disputes and that GM should terminate its relationship with Perot. ¶ 50. The Board approved the terms of the buyout, which were announced to the public shortly after the meeting. ¶¶ 51, 53. GM agreed to purchase the stock of Perot and three other high-ranking EDS officers for $61.90 a share, or $742.8 million for the 12 million shares. ¶ 51. Of that $61.90 per share GM allocated $33 to GME stock, $23.50 to the nontransferable contingent notes and $5.40 to the Special Interest tax payment. ¶ 52. In return Perot agreed to resign from the GM directorship, not to purchase GM shares for five years, not to seek control of GM for five years, to pay a $7.5 million penalty for publicly criticizing GM or its management in the future, not to compete for three years and not to recruit EDS executives for eighteen months. ¶ 52.

Following announcement of the buyout, Perot stated the money would be in escrow for two weeks to allow the Board to change its mind, claimed the buyout was evidence of self-interest and questioned GM's use of its capital in this manner. ¶¶ 54-56. After the December 1 announcement, GME stock declined $4.50 per share and continued to fall for several months. ¶ 57. GM Common and Class H stock also fell. Id. GM publicly stated that the buyout of Perot was to eliminate Perot's demands for complete EDS autonomy and to allow for EDS's integration into GM. ¶ 58.

On January 21, 1987 a demand was made on GM's Board on behalf of Barbara Zarowitz and others, including a plaintiff in this action, that GM rescind the transaction with Perot or commence legal proceedings against the Board. ¶ 76 and letter of January 21,...