In re General Motors (Hughes) Shareholder

• Decision Date: 20 March 2006
• Docket Number: No. 260, 2005.,260, 2005.
• Citation: 897 A.2d 162
• Parties: In re GENERAL MOTORS (HUGHES) SHAREHOLDER LITIGATION.
• Court: United States State Supreme Court of Delaware

897 A.2d 162

In re GENERAL MOTORS (HUGHES) SHAREHOLDER LITIGATION.

No. 260, 2005.

Supreme Court of Delaware.

Submitted: December 21, 2005.

Decided: March 20, 2006.

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Court Below — Court of Chancery of the State of Delaware, in and for New Castle County, C.A. No. 20269-NC.

Upon appeal from the Court of Chancery. AFFIRMED.

Michael Hanrahan, Esquire (argued) and Paul A. Fioravanti, Jr., Esquire, Prickett, Jones & Elliott, P.A., Wilmington, Delaware, Jay W. Eisenhofer, Esquire, Geoffrey C. Jarvis, Esquire (argued), James R. Banko, Esquire and Brad deLeeuw, Esquire, Grant & Eisenhofer, P.A., Wilmington, Delaware, co-counsel for plaintiffs-appellants.

R. Franklin Balotti, Esquire, Lisa A. Schmidt, Esquire, Srinivas M. Raju, Esquire, Richards, Layton & Finger, Wilmington, Delaware, and Robert J. Kopecky, Esquire (argued), Kirkland & Ellis, Chicago, Illinois, for defendant-appellee, General Motors Corporation and individual defendants-appellees.

Edward P. Welch, Esquire (argued), Edward B. Micheletti, Esquire, Seth M. Beausang, Esquire, T. Victor Clark, Esquire and Jenness E. Parker, Esquire, Skadden, Arps, Slate, Meacher & Flom, Wilmington, Delaware, for defendant-appellee/cross-appellant, The News Corporation Limited.

Before STEELE, Chief Justice, HOLLAND and RIDGELY, Justices.

HOLLAND, Justice.

In this appeal, we affirm the final judgments that were entered by the Court of Chancery. Wyser-Pratte Management Co., Inc., Robert La Marchi, Ronald Young and George Silverman (the Plaintiffs), instituted this lawsuit against the defendant, General Motors Corporation ("GM") and the defendant, The News Corporation Limited ("TNCL"),¹ challenging a series of transactions by which TNCL acquired a significant interest in Hughes Electronics Corporation ("Hughes").² Hughes was previously a wholly-owned subsidiary of GM. The individuals who were directors of GM at the relevant times have also been named as defendants (the "Individual" or "Director" defendants).³ The Plaintiffs were at all relevant times holders of GM's Class H Common Stock ("GMH"), which was a "tracking stock" representing the financial performance of Hughes while Hughes was wholly-owned by GM.

The Court of Chancery granted the motions to dismiss brought by GM and the Director defendants.⁴ The Court of Chancery held that the revised Complaint, as amended, fails to state a claim upon which relief can be granted as to GM and the Director defendants. The Court of Chancery also granted TNCL's motion to dismiss for the same reason. At the same time, however, the Court of Chancery denied TNCL's motion to dismiss for lack of personal jurisdiction and improper service of process.

Challenged Transactions⁵

The split-off of Hughes was accomplished in a series of transactions and announced to the public for the first time on April 9, 2003. Five days before the announcement, GM, as the 100% shareholder, caused Hughes to amend its certificate of incorporation to increase the number of authorized shares of Hughes common stock and Hughes Class B common stock from 1 million shares to 2.5 billion shares.⁶ Several other amendments were also made, e.g., an "excess shares" provision was added to the certificate of incorporation and Hughes' board of directors was staggered.⁷

Just before the split-off of Hughes was accomplished, Hughes paid a special dividend to its sole shareholder, GM, of $275 million in cash.⁸ The split-off occurred by GM's redemption of each GMH share in exchange for one share of Hughes' common stock, shares which Hughes had previously issued to GM.⁹ GM sold its economic interest in Hughes to TNCL in the form of Hughes Class B common stock.¹⁰ GM received a combination of cash ($3.1 billion) and stock (28.6 million News Corp. Preferred American Depository Shares ("News ADSs")) from TNCL.¹¹ The News ADSs were valued at approximately $1.0 billion, bringing the total compensation from TNCL to GM to $4.1 billion.¹² Including the $275 million dividend, GM received a total of $4.375 billion in compensation for divesting itself of Hughes, with $3.375 billion of that amount in cash.¹³

Immediately following the foregoing transactions, TNCL acquired an additional interest in Hughes via the merger of a subsidiary of TNCL into Hughes (the "Merger"), leaving TNCL with approximately a 34% interest in Hughes.¹⁴ The former GMH shareholders therefore received a combination of Hughes common stock and News ADSs in exchange for their GMH shares.¹⁵ TNCL later transferred its interest in Hughes to another subsidiary of TNCL, Fox Entertainment.¹⁶

Revised Amended Complaint

The operative complaint in this action is the Revised Amended Consolidated Class Action Complaint ("Complaint"), filed on May 7, 2004. It is ninety-seven pages long and, with more than 200 paragraphs, alleges seven claims. All of the claims except for Count VII are alleged against GM and the Director defendants. Count I is for breach of the duty of loyalty and unjust enrichment in the payment of the special dividend. Count II is for breach of the duty of loyalty in failing to deal fairly with the GMH shareholders and compensate them fairly in the transactions. Count III is for breach of the duty of loyalty in manipulating the shareholder vote. Count IV is for breach of the duty of disclosure. Count V is for breach of GM's Restated Certificate of Incorporation, Article Seventh. Count VI is for breach of GM's Restated Certificate of Incorporation, Article Fourth. Count VII is alleged against TNCL for aiding and abetting a breach of fiduciary duty by GM and the Director defendants.

Plaintiffs' Contentions

In this proceeding, the Court of Chancery held that the effect of shareholder ratification was to maintain the business judgment rule's presumptions.¹⁷ According to the Plaintiffs, the "lynchpin of the Court of Chancery's opinion dismissing all claims was stockholder ratification." The Plaintiffs argue that the Court of Chancery committed numerous errors in granting dismissal based on ratification, including (i) relying on facts outside of the Complaint, (ii) accepting a manipulated, uninformed vote by interested stockholders, (iii) ignoring claims against GM for breach of fiduciary duty and unjust enrichment, (iv) dismissing duty of loyalty claims based on ratification and (v) failing to apply the two-thirds vote requirement of Article Seventh of GM's Certification of Incorporation. According to the Plaintiffs, the Court of Chancery also misapplied the motion to dismiss standards in considering plaintiffs' claims against TNCL. We have concluded that none of the Plaintiffs' arguments are meritorious.

TNCL's Cross-Appeal

TNCL cross-appeals from the Court of Chancery's May 4, 2005 decision denying its motion to dismiss the Amended Complaint for lack of personal jurisdiction and improper service. The Court of Chancery denied TNCL's motion to dismiss the Amended Complaint for lack of personal jurisdiction and improper service pursuant to Court of Chancery Rules 12(b)(2) and 12(b)(4). TNCL argues that this Court should affirm the Court of Chancery's decision to dismiss the Amended Complaint pursuant to Rule 12(b)(6); or, in the alternative, this Court should reverse the Court of Chancery's decision to deny TNCL's motion to dismiss pursuant to Rules 12(b)(2) and 12(b)(4). We have concluded that TNCL's Rule 12(b)(6) motion to dismiss was properly granted. Therefore, we do not reach the merits of its cross-appeal.

Standard of Review

This Court reviews de novo the dismissal of a complaint pursuant to Rule 12(b)(6).¹⁸ This Court recently summarized the criteria applicable to a Rule 12(b)(6) motion:

The standards governing a motion to dismiss for failure to state a claim are well settled: (i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are "well-pleaded" if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the "plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof."¹⁹

In deciding a motion to dismiss under Rule 12(b)(6), a trial court must accept as true all of the well-pleaded allegations of fact and draw reasonable inferences in the plaintiff's favor.²⁰ A trial court is not, however, required to accept as true conclusory allegations "without specific supporting factual allegations."²¹ Moreover, a trial court is required to accept only those "reasonable inferences that logically flow from the face of the complaint" and "is not required to accept every strained interpretation of the allegations proposed by the plaintiff."²² We hold that the Court of Chancery properly applied these standards in granting all of the defendants' Rule 12(b)(6) motions to dismiss.

Matters Outside Complaint

The Plaintiffs argue that the Court of Chancery committed legal error because it relied on matters outside of the Complaint in granting all of the defendants' motions to dismiss. The complaint generally defines the universe of facts that the trial court may consider in ruling on a Rule 12(b)(6) motion to dismiss.²³ When the trial court considers matters outside of the complaint, a motion to dismiss is usually converted into a motion for summary judgment and the parties are permitted to expand the record.²⁴ Chancery Rule 12(b) provides:

If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the Court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.

Accordingly, if a party presents documents in support of its Rule 12(b)(6) motion...