Stern v. General Elec. Co.

• Decision Date: 16 November 1993
• Docket Number: No. 86 Civ. 4055 (MJL).,86 Civ. 4055 (MJL).
• Citation: 837 F. Supp. 72
• Parties: Henry D. Sedgwick STERN and Walter B. Slocombe, Personal Representatives of the Estate of Philip M. Stern, Plaintiffs, v. GENERAL ELECTRIC COMPANY, John F. Welch, Jr., Lawrence A. Bossidy, Edward E. Hood, Jr., Richard T. Baker, James G. Boswell, II, Silas C. Cathcart, Charles D. Dickey, Jr., Lawrence E. Fouraker, Henry H. Henley, Jr., Henry L. Hillman, Robert E. Mercer, Gertrude G. Michelson, Barbara Scott Preiskel, Lewis T. Preston, Frank H.T. Rhodes, Andrew C. Sigler, and Walter B. Wriston, Defendants.
• Court: U.S. District Court — Southern District of New York

837 F. Supp. 72

Henry D. Sedgwick STERN and Walter B. Slocombe, Personal Representatives of the Estate of Philip M. Stern, Plaintiffs, v. GENERAL ELECTRIC COMPANY, John F. Welch, Jr., Lawrence A. Bossidy, Edward E. Hood, Jr., Richard T. Baker, James G. Boswell, II, Silas C. Cathcart, Charles D. Dickey, Jr., Lawrence E. Fouraker, Henry H. Henley, Jr., Henry L. Hillman, Robert E. Mercer, Gertrude G. Michelson, Barbara Scott Preiskel, Lewis T. Preston, Frank H.T. Rhodes, Andrew C. Sigler, and Walter B. Wriston, Defendants.

No. 86 Civ. 4055 (MJL).

United States District Court, S.D. New York.

November 16, 1993.

Brown & Seymour by Whitney N. Seymour, Jr., New York City, for plaintiffs.

Davis Polk & Wardwell by Thomas P. Ogden, New York City, for the individual defendants.

E. Scott Gilbert, Fairfield, CT, for Gen. Elec. Co.

OPINION AND ORDER

LOWE, District Judge.

Before the Court are cross-motions by plaintiffs Henry Stern and Walter Slocombe, personal representatives of the estate of Philip Stern ("Plaintiff")¹, and by defendants General Electric Company and certain current and former members of its Board of Directors ("Defendants"), for summary judgment pursuant to Fed.R.Civ.P. 56. For the reasons stated below, Plaintiff's motion for summary judgment is denied and Defendants' cross-motion for summary judgment is granted.

BACKGROUND

This action challenges expenditures from the treasury of General Electric Company ("GE") in support of GE's political action committee. On May 21, 1986, Plaintiff, a shareholder of GE, filed this derivative action against GE and members of its board of directors² on behalf of himself and all others similarly situated. Both the procedural and substantive background of this diversity suit is set forth in the many prior opinions of this Court and the Court of Appeals.³

Plaintiff's original claims were dismissed by this Court. See footnote 3. However, Plaintiff was granted leave to replead claims pertaining to waste of corporate assets. Specifically, these claims are: (1) that GE realized no benefit from the activities of its political action committee, yet Defendants expended corporate assets to solicit contributions to and administer the committee, and (2) that the expenditures authorized by Defendants in support of the committee were excessive in relation to contributions collected. These claims revolve around the issue of waste of corporate assets.

The administrative expenses of the political action committee, the "General Electric Political Action Committee" ("GE/PAC")⁴, are paid by GE. Plaintiff argues in his amended complaint that GE's operation of GE/PAC wastes corporate assets, violates GE/PAC's Articles of Association, and breaches Defendants' fiduciary duty to shareholders. Seven causes of action seeking relief under New York state law are set forth in the amended complaint. See page 75 of this Opinion, infra.

Plaintiff previously filed an administrative complaint with the Federal Election Commission ("FEC") challenging Defendants' expenditures in support of GE/PAC as unlawful in violation of the Federal Election Campaign Act. See Stern v. Federal Election Comm'n, 921 F.2d 296 (D.C.Cir.1990) (giving background). Plaintiff complained of: contributions to virtually unchallenged political candidates; contributions to opposing candidates; post-election contributions; contributions to incumbents; and contributions made to candidates regardless of their attitudes toward business. The complaint was dismissed by the FEC. Dismissal was upheld by the district court for the District of Columbia. The court of appeals for the District of Columbia affirmed, finding that GE/PAC complied with the FECA. The federal courts in D.C. found that, despite various policy arguments made by Plaintiff, contributions were lawfully made to legitimate federal candidates.

Plaintiff's Claims and Supporting Facts

The ultimate relief sought by Plaintiff is the prohibition of the use of corporate funds for the support of GE/PAC. See Verified Amended Complaint, p. 36. The present action complains of many of the same practices as did the complaint with the FEC; however, Plaintiff is not estopped from seeking relief under New York state law for waste of corporate assets. See Opinion and Order filed January 14, 1992, 1992 WL 8195.

Plaintiff's first major point of contention raised in this motion is that Defendants have operated GE/PAC in violation of its Articles of Association. A statement of the purposes of GE/PAC is set forth in Article II of its Articles of Association, which reads as follows:

The purposes of the Committee are to support the nation's political processes and advance the nation's economic, social and political welfare by affording General Electric management personnel the opportunity to take a more active part in the political process by contributing funds to support candidates for federal office, national parties and state and local candidates where permissible under federal law....

Plaintiff contends that this Article sets forth three legal purposes of GE/PAC: (1) to support the nation's political process; (2) to advance the nation's economic, social and political welfare; and, (3) to afford GE's management personnel the opportunity to take a more active part in the political process. Plaintiff claims that Defendants have systematically violated each of these purposes, and that expenditures in violation of the Articles constitute a waste of corporate assets.

Plaintiff alleges that GE/PAC has supported incumbents and avoided challengers, and that this discourages competitive elections. Defendants do not deny allegations that contributions to House and Senate incumbents have surpassed those to challengers by a ratio of twenty-five to one. Defendants admit that GE/PAC contributed to opposing candidates in the same political race, and that it contributed money to candidates facing only limited opposition. Senate incumbents were also given money in non-election years. GE/PAC has contributed to members of congressional committees with jurisdiction over legislation potentially effecting GE's business. GE/PAC has also contributed to incumbent Congress members who have voted against legislation potentially beneficial to GE. See Plaintiffs' Rule 3(g) statement, and Defendants' response. Plaintiff opposes the lobbying activity of GE/PAC, and claims that GE/PAC seeks to preserve party balance and build relationships, or buy influence, rather than change the composition of Congress.

Plaintiff's second major point of contention is that Defendants have attempted to conceal the true use of GE/PAC. He claims that GE/PAC is run by management in their lobbying efforts, and that this direct involvement has been concealed from shareholders. Plaintiff points to his counsel's January 30, 1986 demand to the Board of Directors to correct abuses in GE/PAC operations, and to the April 26, 1986 response from Walter Schlotterbeck, Senior Vice President, General Counsel, and Secretary of GE. Plaintiff feels that the April letter is misleading when it mentions that GE/PAC is composed of management personnel and not members of the Board of Directors or the Executive Office, and that GE/PAC operation reflects the decisions of its participants. Plaintiff argues that while no directors are on the GE/PAC committee, there are directors who are active participants in GE/PAC fundraising. Plaintiff further contends that fund distribution is controlled by lobbyists rather than participants.

Plaintiff also points to Defendants' handling of a 1988 shareholder proposal. In November of 1988, shareholders submitted a proposal to be voted on at GE's 1989 Annual Meeting. That proposal would have required the Board of Directors to report to shareholders the contributions to congressional candidates by GE/PAC. In December 1988, Eliza Fraser, a GE attorney, wrote to the Division of Corporation Finance of the Securities and Exchange Commission ("SEC") pursuant to Rule 14a-8(d) of the Securities Exchange Act of 1934 seeking concurrence with the Board's decision to omit the shareholder proposal from GE's proxy statement. Plaintiff claims that this is evidence of bad faith by the individual Defendants.

Plaintiff's third major point is that Defendants, as members of a "Public Responsibility Committee", have violated their fiduciary duty towards GE's shareholders. Plaintiff claims that Defendants have a duty to inquire into the propriety of corporate funding of GE/PAC's operations, but have ignored this duty. Specifically, Plaintiff alleges that Defendants have disregarded: the January 30, 1986 demand to the Board to correct abuses of GE/PAC; the operation of GE/PAC in violation of its Articles of Association; and the wasteful expenditure of corporate assets. This alleged violation of fiduciary duty is said to have resulted in a waste of corporate assets.

Finally, Plaintiff challenges the expenditure of corporate funds, allegedly in violation of GE/PAC's Articles of Association and the Internal Revenue Code, as constituting an improper use and a waste of corporate assets. The administrative expenses of political action committees are not deductible under the Internal Revenue Code. However, Plaintiff claims that GE has treated certain expenses as ordinary business expenses in violation of § 162(e)(2) of the Internal Revenue Code (1992). Plaintiff contends that Defendants should not be able to claim benefit arising from this alleged illegal behavior or from the alleged violations of the Articles of Association.

Plaintiff's first claim in his amended complaint seeks damages resulting from Defendants' policy of "influence-buying." The second, third, and fourth⁵ claims seek relief from Defendants actions surrounding the 1988 shareholder resolution. The fifth claim seeks damages resulting from the alleged negligence and recklessness of Defendants in wasting corporate assets by supporting GE/PAC, which has contributed to the...