IN RE GENERAL MOTORS CLASS E STOCK BUYOUT SEC. LIT.
Decision Date | 30 April 1992 |
Docket Number | Master File No. 87-47-SLR. |
Citation | 790 F. Supp. 77 |
Parties | In re GENERAL MOTORS CLASS E STOCK BUYOUT SECURITIES LITIGATION. |
Court | U.S. District Court — District of Delaware |
Clark W. Furlow, of Smith, Katzenstein & Furlow, Wilmington, Del., Liaison Counsel, Nicholas E. Chimicles and M. Katherine Meermans, of Greenfield & Chimicles, Haverford, Pa., Lead Counsel, Michael J. Freed and Kenneth A. Wexler, Esquire, 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 the Law Offices of Frederic F. Brace, Jr., Chicago, Ill., co-counsel, 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., for defendants General Motors Corp. and Electronic Data Systems Corp., Michael J. Basford and Louis H. Lindeman, Jr., of General Motors Corp., Detroit, Mich., of counsel, for defendant General Motors Corp.
Thomas A. Beck, of Richards, Layton & Finger, Wilmington, Del., Dennis J. Block, Irwin H. Warren, Stephen A. Radin and Kenneth J. Ashman, of Weil, Gotshal & Manges, New York City, for General Motors Corp. Director defendants 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., James D. Robinson, III, John G. Smale, Leon H. Sullivan, Dennis Weatherstone and Thomas H. Wyman.
Grover C. Brown and Lewis H. Lazarus, of Morris, James, Hitchens & Williams, Wilmington, Del., Roy L. Reardon and Joseph F. Tringali, of Simpson, Thacher & Bartlett, New York City, for General Motors Corp. Director defendants Donald J. Atwood, F. James McDonald, Lloyd E. Reuss, F. Alan Smith, Robert B. Smith, and Robert C. Stempel.
Bruce M. Stargatt and David C. McBride, of Young, Conaway, Stargatt & Taylor, Wilmington, Del., for defendant H. Ross Perot; Evan R. Chesler and Thomas G. Rafferty, of Cravath, Swaine & Moore, New York City, of counsel.
Plaintiff shareholders filed, inter alia, 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"). Plaintiffs challenged the repurchase by GM of stock and related contingent notes from H. Ross Perot and other EDS officers, contending that the buyout constituted a waste of corporate assets and a breach of the director defendants' fiduciary duty. Plaintiffs made a prelitigation demand upon the GM board of directors ("GM Board"), which was refused. Defendants moved to dismiss Counts V and VI on the ground that the refusal of demand allegations contained in the complaint were legally insufficient.
This Court concluded that plaintiffs' wrongful refusal of demand allegations were sufficient to state a cause of action under Delaware law. In re General Motors Class E Stock Buyout Securities Litigation, 694 F.Supp. 1119, 1132-34 (D.Del. 1988). More specifically, the Court opined that, in the context of a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court must accept as true the factual allegations of the complaint, even when contradicted by the record. Id. at 1133 n. 14. The standard embraced by the Court in reviewing the factual allegations of the complaint was that of gross negligence. The Court determined that under Delaware law, "plaintiffs at bar must allege facts to support the conclusion that the GM Board acted with so little information that their decision was `unintelligent and unadvised,' or outside of the `bounds of reason and recklessly.'" Id. at 1133 (citations omitted). The Court found the following allegations to be sufficient to withstand defendants' motions to dismiss under the gross negligence standard:
The Court did not consider in its 12(b)(6) analysis the Board's refusal letter, id. at 1133 n. 14, deemed a part of the record on the motion to dismiss, id. at 1124 n. 5.
Please be advised that on February 2, 1987, following review of the matters set forth in your January 21, 1987 letter, the Board of Directors of General Motors Corporation unanimously determined that an attempt to rescind, or litigation, or other action concerning the transaction involving the purchase of General Motors Class E stock and related contingent notes from H. Ross Perot, is not in the best interests of the Corporation. Accordingly, the Board refused your demands.
(D.I. 29, 57)1 The Court concluded:
Both the GM defendants and Perot filed motions for reargument (D.I. 94, 95), which motions were stayed (D.I. 135) pending resolution of related litigation in the Court of Chancery for the State of Delaware, Levine v. Smith, No. 8833, 1989 WL 150784 (Del.Ch. November 27, 1989), aff'd 591 A.2d 194 (Del.Sup.1991). For the reasons that follow, the GM defendants' motion will be granted.2
The GM defendants argue in support of their motion that "this Court should decide this issue of Delaware corporate jurisprudence in accordance with the Delaware Supreme Court's decision in Levine on either of two alternative grounds: (1) as a matter of res judicata or collateral estoppel ..., or (2) because Levine is a controlling authority under the Delaware law...." (D.I. 171 at 2) I decline to formally apply the doctrines of res judicata or collateral estoppel under the circumstances at bar where, inter alia, this Court's decision was issued prior to that of the Delaware Supreme Court and the only subsequent federal proceeding is on defendants' motion for reargument. Cf. Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979). Given the fact that the motion was specifically stayed, however, pending the decision in Levine, I believe it appropriate to review this Court's decision with the benefit of the Delaware Supreme Court's analysis in Levine.
In Levine v. Smith, the Delaware Supreme Court held that in order to rebut the business judgment presumption accorded a refusal of demand, the factual allegations must create a reasonable doubt of the inapplicability of the business judgment rule. Thus, in determining the sufficiency of a complaint to withstand dismissal under Court of Chancery Rule 23.13 on wrongful refusal of demand, such complaint must contain "well-pleaded allegations of fact which create a reasonable doubt that a board of directors' decision is protected by the business judgment rule." Levine v. Smith, 591 A.2d at 211.
Subsequent to both this Court's initial decision and that of the Delaware Supreme Court in Levine v. Smith, the United States Supreme Court in Kamen v. Kemper Financial Services, Inc., ___ U.S. ___, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991), examined the interplay between federal law and shareholder derivative actions in a demand excused context. The Court prefaced its analysis with an explanation of the precomplaint demand requirement:
The purpose of the demand requirement is to "afford the directors an opportunity to exercise their reasonable business judgment and `waive a legal right vested in the corporation in the belief that its best interests will be promoted by not insisting on such right.'"
Id. 111 S.Ct. at 1716 (citations omitted). Having recognized that "the function of the demand doctrine in delimiting the respective powers of the individual shareholder and of the directors to control corporate litigation clearly is a matter of `substance,' not `procedure'", id., the Court held that state law — not federal law — provides "the source and content of the substantive law that defines the demand requirement...." Id. at 1717. Thus, federal courts hearing derivative actions must construe the demand requirement "as it is defined by the law of the State of incorporation." Id. at 1723. See also Allison v. General Motors Corp., 604 F.Supp. 1106, 1120 (D.Del.), aff'd mem. 782 F.2d 1026 (3d Cir.1985) ().
Plaintiffs at bar contend, in opposing defendants' motion for reargument, that the procedural requirements of Fed.R.Civ.P. 12(b)(6) and 23.14 create a "federal standard as to the specificity of facts alleged with regard to efforts...
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