Winkelman v. General Motors Corporation

• Decision Date: 10 April 1942
• Citation: 44 F. Supp. 960
• Parties: WINKELMAN et al. v. GENERAL MOTORS CORPORATION et al.
• Court: U.S. District Court — Southern District of New York

44 F. Supp. 960

WINKELMAN et al. v. GENERAL MOTORS CORPORATION et al.

District Court, S. D. New York.

April 10, 1942.

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Unger & Pollack, of New York City (Milton Pollack, of New York City, of counsel), for plaintiff Winkelman.

Charles Winkelman, of New York City (Arthur Berenson and Lawrence Berenson, both of New York City, of counsel), for plaintiffs Nishman and Schiff.

John Thomas Smith, of New York City (David Sher, of New York City, of counsel), for defendant General Motors Corporation and others.

Root, Clark, Buckner & Ballantine, of New York City, additional counsel for Donaldson Brown.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City (John W. Davis, Ralph M. Carson, and S. Hazard Gillespie, Jr., all of New York City, of counsel), for defendant George Whitney and others.

LEIBELL, District Judge.

This suit is a consolidation of several actions brought by minority stockholders against General Motors Corporation, its officers and directors, and certain other corporations to which reference will be made later. The actions are all derivative in their nature. The claims are asserted on behalf of General Motors Corporation, on the allegation that General Motors Corporation is not itself in a position to bring these actions, because the individual defendants constitute a large majority of the Board of Directors of General Motors. In August 1940 I ruled upon a motion of three of the defendants, Messrs. Prosser, Whitney and Morgan for a summary judgment. In my opinion on that motion (39 F.Supp. 826, 827) I gave a short resume of the history of this litigation as follows:

"The earliest action of the present consolidated actions was instituted in this court October 19, 1936, by Harry Jacobson holding 150 shares. A few days later the plaintiffs, Augusta Winkelman, Daniel Nishman and Charles Schiff, together with the said Harry Jacobson, instituted a similar action in the New York state court. That action was removed to this court and later consolidated with the original Jacobson action. Kahn v. General Motors Corp., D.C., 29 F.Supp. 802. The latest complaint in the consolidated action is a second amended complaint served October 10, 1938. On April 21, 1938, Fannette S. Kahn instituted in the state court an action identical with that of these other plaintiffs. The Kahn suit was removed to this court June 10, 1938, and by stipulation of attorneys, dated November 28, 1939, the second consolidated and amended complaint in the Winkelman-Jacobson action, with slight changes, was adopted as the amended complaint in the Kahn action."

Thereafter and about August 15, 1940, Fannette S. Kahn sold her stock in General Motors. On motion of the defendants made at the trial, the Kahn action was severed from the consolidated cause, and after severance the Kahn complaint was dismissed by order of this Court, on the ground that she was no longer a stockholder of General Motors.

During the pendency of this suit as consolidated the plaintiff, Harry Jacobson, also sold his shares of General Motors and he is no longer a stockholder. By leave of Court, granted at the trial, another plaintiff, Charles Schiff, duly intervened in and continued the suit originally commenced by Jacobson in this Court.

The remaining plaintiffs own, since the dates given opposite their names, the following shares of stock in General Motors:

                Charles Schiff               —10 shares—acquired
                                                        May 27, 1929
                Augusta Winkelman            —30 shares—acquired
                                                        October 17, 1930
                Daniel Nishman               —50 shares—acquired
                                                        February 19, 1932
                

No relief can be granted in this action for any transaction of the defendants prior to May 27, 1929. Rule 23 (b) Federal Rules of Civil Procedure, 28 U.S. C.A. following section 723c. Rule 81 (c) F.R.C.P. provides: "These rules apply to civil actions removed to the district courts of the United States from the state courts and govern all procedure after removal." Jacobson v. General Motors Corp., D.C., 22 F.Supp. 255. The requirements of Rule 23 (b) apply equally to intervening stockholders in a derivative action. Piccard v. Sperry Corp., D.C., 36 F.Supp. 1006, affirmed 2 Cir., 120 F.2d 328.

The various General Motors bonus plans are described in my opinion on the motion for summary judgment and they are also set forth in considerable detail in the findings of fact (Nos. 28 to 30 inc.).

In 1918 the General Motors bonus plan provided that 10% of the net income of General Motors Corporation, after deducting 6% (in 1922 increased to 7%) on the capital employed, would be set aside each year as a bonus fund to be distributed among the executives and employees of the company. For the calendar years 1923 to 1929 inclusive, one-half of this fund was paid in cash to the Managers Securities Company and was used by that company to pay for an interest of 30% in the General Motors Securities Company. The latter company owned 7,500,000 shares of General Motors stock so that the 30% interest was the equivalent of 2,250,000 shares of General Motors stock. Through the medium of these bonus payments to Managers Securities Company, about 70 of the chief executives and managers of General Motors Corporation, who were the stockholders of Managers Securities Company, were enabled to acquire an interest in this large block of stock at a very cheap price. Beginning with the calendar year 1930 the General Motors Management Corporation was used as a vehicle through which the principal executives and managers were enabled to acquire 1,375,000 shares of General Motors common stock from General Motors under the Management plan. The arrangement was similar to that used in the Managers Securities plan, but the number of participating executives was increased to 249. The August 1918 bonus plan, the Managers Securities Plan of 1923 and the General Motors Management Corporation plan of 1930 were all duly adopted by an overwhelming vote of the stockholders, are legal and valid. The various amendments to the plans adopted by the stockholders are likewise legal and valid. This includes the 1934 amendments to the General Motors Management plan.

The extent to which the principal executives, managers and employees shared in these bonus funds for the period from 1923 to 1936 is set forth in the report of Mr. Sloan to the Bonus and Salary Committee of the Board of Directors under date of March 22, 1938 (Ex. 44) from which the following is quoted:

"From 1923 through 1929, the supplemental compensation (including bonus awards received over and above the Managers Securities total participation) to the participants in the Managers Securities Company averaged 48.8% of the total 10% Bonus Fund. During this seven year period the total Bonus Fund averaged $13,859,500 a year.

"There were 66 Managers Securities participants at the inception of the plan. Through recaptures of Managers Securities stock from 24 withdrawing executives, the number who participated during the full period was reduced to 42. Following 1923, there were 31 additional participants brought into Managers Securities Company, and the allotments of 7 of these executives were recaptured prior to 1929. The maximum participation was 80 executives in 1925 and 1926, with 66 participants remaining at the end of 1929.

"In 1930 there were 249 executives who received allotments in the newly organized General Motors Management Corporation. It was anticipated that this group of 249 participating executives would receive total supplemental compensation, including bonus awards, amounting to 49% of the total fund under normal conditions. Management Corporation allotments to the participants, other than to certain principal Corporation executives, were made on the basis that the fixed supplemental compensation of such participants received through the Management Corporation would average approximately 70% of the total normal supplemental compensation for their positions. The supplemental compensation of the twelve principal Corporation executives who were Committee Members was intended to be represented in full by their Management Corporation allotments. The maximum participation in the Management Corporation was 249 executives, with 175 participants remaining in 1936 when the plan terminated.

"It is also interesting to note that during the seven years, 1930 through 1936, that the Management Corporation was in operation, the total Bonus Fund averaged only $7,125,700 a year, or 51.4% of the previous seven year average. No bonus was earned in 1932, and the Bonus Fund for the other six years averaged $8,313,300."

The following table sets forth the amount of the total Bonus Fund and the number of participants in each year over the fourteen year period, 1923 through 1936:

                      Period of Managers Securities            Period of Management Corporation
                                   Plan                                       Plan
                            Total 10%        Number of                 Total 10%          Number of
                Year        Bonus Fund     Participants     Year     Bonus Fund (a)     Participants
                1923       $ 3,782,600           679        1930      $ 9,870,600          2,027
                1924         1,925,800           720        1931        3,965,700          1,479
                1925         8,602,800         1,008        1932           --                --
                1926        16,548,200         1,584        1933        2,736,000          1,282
                1927        20,976,100         2,077        1934        3,677,800          1,530
                1928        24,817,200         2,570        1935       11,355,800          2,374
                1929        20,363,700         2,889        1936       18,273,800(b)       9,534(b)
                Average                            Average
                Per Year                           Per Year
                for Seven                          for Seven
                Years      $13,859,500

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