Levine v. Smith
| Decision Date | 03 October 1990 |
| Citation | 591 A.2d 194 |
| Parties | Morton LEVINE, Plaintiff Below, Appellant, v. Roger B. SMITH, James F. 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, 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, H. Ross Perot, Morton H. Meyerson, J. Thomas Walter, Jr., William K. Gayden, Defendants Below, Appellees, and General Motors Corporation, Nominal Defendant Below, Appellee. David GROBOW, Shelley 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, and Cross-Appellees, v. H. Ross PEROT, Roger B. Smith, James F. 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, 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 Cross-Appellants, and General Motors Corporation and Electronic Data Systems Corporation, Nominal Defendants Below, Appellees, and Cross-Appellants. . Submitted: |
| Court | Supreme Court of Delaware |
Upon appeal from Court of Chancery. Affirmed.
Curtis V. Trinko (argued), pro hac vice (Kevin J. Yourman, New York City, of counsel), John M. Bader of Tomar, Seliger, Simonoff, Adourian & O'Brien, Wilmington (James J. Koehler and John J. Hill of Gallagher, Sharp, Fulton & Norman, Cleveland, Ohio, of counsel), for plaintiff below, appellant Morton Levine.
Dennis J. Block (argued), pro hac vice, Irwin H. Warren, Stephen A. Radin and Jacqueline Abramson of Weil, Gotshal & Manges, New York City, E. Norman Veasey and Thomas A. Beck of Richards, Layton & Finger, Wilmington, for defendants below, appellees Anne L. Armstrong, Catherine B. Cleary, James H. Evans, Walter A. Fallon, Charles T. Fischer, 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, Thomas H. Wyman and General Motors Corp. Director.
Lowell E. Sachnoff (argued), pro hac vice, of Sachnoff & Weaver, Ltd., Chicago, Ill., Kevin Gross of Morris, Rosenthal, Monhait & Gross, P.A., Wilmington, Wolf, Popper, Ross, Wolf & Jones, New York City, for plaintiffs below-appellants and cross-appellees David Grobow, Shelley 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.
William O. LaMotte, III and Thomas Reed Hunt, Jr. of Morris, Nichols, Arsht & Tunnell, Wilmington, Stephen C. Neal, Robert J. Kopecky and Helen E. Witt of Kirkland & Ellis, Chicago, Ill., for nominal defendants below, appellees General Motors Corp. and Electronic Data Systems Corp.
Grover C. Brown, Barbara McDonald and Lewis H. Lazarus of Morris, James, Hitchens & Williams, Wilmington, Roy L. Reardon and Joseph F. Tringali of Simpson, Thacher & Bartlett, New York City, for defendants below, appellees Donald J. Atwood, James F. 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 (Thomas D. Barr, Evan R. Chesler, Thomas G. Rafferty and Bernardo Burstein of Cravath, Swaine & Moore, New York City, of counsel), for defendant below, appellee, and cross-appellant H. Ross Perot.
Michael J. Basford and Louis H. Lindeman, Jr., General Motors Corp., Detroit, Mich., of counsel, for defendant General Motors Corp.
Before HORSEY and MOORE, JJ., and TAYLOR, Judge (sitting by designation pursuant to Del. Const. Art. 4 § 12).
These separate shareholder suits, consolidated on appeal, challenge once again the business judgment rule's application to action of the General Motors Board of Directors which this Court addressed three years ago in Grobow v. Perot, Del.Supr., 539 A.2d 180 (1988) (hereinafter "Grobow I "). The appeals highlight the differing legal standards controlling shareholder standing to pursue derivative claims depending on whether the shareholder asserts a claim of demand futility or wrongful refusal of demand. In the Grobow appeal (hereinafter "Grobow II "), a derivative claim premised on futility of demand, the Grobow plaintiffs again contend that they have now met their burden of pleading, by their "Second Amended Complaint," particularized facts sufficient to excuse demand. Concurrently, shareholder Morton Levine, appealing the Court of Chancery's dismissal of his original suit, contends that his Amended Complaint pleads particularized facts sufficient to create a reasonable doubt that the General Motors directors wrongly refused Levine's presuit demand.
In Grobow II, we hold that plaintiffs' restated complaint fails to state a claim of demand futility. The Second Amended Complaint fails to plead with particularity facts which would raise a reasonable doubt of director disinterest and independence or that the challenged transaction was otherwise the product of a valid exercise of business judgment. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 814 (1984).
In Levine, we hold that the Amended Complaint fails to allege particularized facts sufficient to create a reasonable doubt that the General Motors outside directors were either manipulated or misled by management or were so uninformed as to fail to exercise due care. We reaffirm the rule that on a Court of Chancery Rule 23.1 motion to dismiss a derivative suit in a case of demand refused, director independence and lack of self-interest is conceded. Therefore, the trial court reviews the board's decision only for compliance with the traditional business judgment rule. The only relevant question is whether the directors acted in an informed manner and with due care, in a good faith belief that their action was in the best interest of the corporation.
Each of these derivative suits challenges General Motors Corporation's ("GM") repurchase on December 1, 1986 from H. Ross Perot, then GM's largest shareholder, of all his GM Class E stock and contingent notes and those of Perot's close associates of Electronic Data Systems Corporation ("EDS"), a wholly owned GM subsidiary. The facts underlying this transaction have been previously set forth at length in this Court's Opinion in Grobow I and in the reported decision of the Court of Chancery from which the Grobow I appeal was taken. Grobow v. Perot, Del.Ch., 526 A.2d 914 (1987), aff'd, Grobow I, 539 A.2d at 180. Therefore, we recite those facts only in a summary fashion, including such other facts as are pertinent to these consolidated appeals.
Both derivative actions are brought on behalf of GM and GM's wholly owned subsidiary, EDS, which was founded by Perot. The named defendants in both actions are all twenty-one members of GM's Board of Directors, Perot, and three of Perot's close EDS associates. In 1984, GM acquired by merger 100 percent of EDS' stock. By the terms of the merger, Perot, then EDS' chairman and largest shareholder, exchanged EDS stock for cash, GM Class E stock and a contingent note package. The transaction made Perot GM's largest shareholder with 0.8 percent of GM voting stock. Perot remained chairman of EDS and became a member of the GM Board of Directors. GM and EDS agreed that EDS, although a wholly owned subsidiary of GM, would be allowed to operate with a "substantial degree of autonomy" and would retain "significant control over its internal affairs."
While the GM-EDS merger proved to be largely successful, numerous disputes arose between GM and Perot regarding the management and operation of EDS. By mid-1986, Perot became increasingly critical of GM management concerning issues involving EDS and unrelated to EDS, including the quality of GM products. Perot's criticism received wide media attention, with Perot being quoted in Business Week as having criticized GM for "producing second-rate cars." Perot also believed that GM was not acting in accordance with agreements the parties had reached. By the summer of 1986, Perot made demands upon GM's chairman that GM either buy him out or else allow him to operate EDS as he saw fit. Perot also threatened to sue GM.
In the fall of 1986, GM and Perot entered into negotiations for GM to repurchase Perot's interest in GM. This followed an aborted effort by GM to sell EDS to American Telephone and Telegraph. By November 30, 1986, the terms of a definitive agreement had been reached; and on that date, the Oversight Subcommittee of the GM Board's Audit Committee met to discuss the proposed agreement. The members of the three-person Subcommittee were all outside, non-management directors. Other directors participated in the lengthy meeting, although the full Board was not present. The Oversight Subcommittee unanimously recommended that the GM Board approve the terms of the repurchase. At the time, GM's twenty-one member Board consisted of but seven inside, or management, directors and fourteen outside directors, excluding Perot. The next day, December 1, the full GM Board (excluding Perot) met and unanimously approved the transaction.
Under the terms of the repurchase transaction, GM purchased all of the GM Class E stock and contingent notes of Perot and Perot's three close EDS associates for $61.90 per share, including the note package, for a total sum of roughly...
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