Winkelman v. General Motors Corporation

• Decision Date: 14 August 1940
• Citation: 39 F. Supp. 826
• Parties: WINKELMAN et al. v. GENERAL MOTORS CORPORATION et al. KAHN v. SAME.
• Court: U.S. District Court — Southern District of New York

39 F. Supp. 826

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

KAHN v. SAME.

District Court, S. D. New York.

August 14, 1940.

Charles Winkelman, of New York City, (Arthur Berenson, of New York City, of counsel), for plaintiffs.

Unger & Pollack, of New York City, for plaintiff Kahn.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City (Ralph M. Carson and S. Hazard Gillespie, both of New York City, of counsel), for defendants Prosser, Whitney and Morgan.

LEIBELL, District Judge.

Three of the defendants, Seward Prosser, George Whitney and Junius S. Morgan, move on supporting affidavits, pursuant to Rule 56(b), Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, for a summary judgment dismissing the complaint as to them. The action is a consolidation of actions brought by minority stockholders against General Motors Corporation, its officers and directors.

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.

The consolidated amended complaint contains many allegations asserting that all the defendants, beginning in 1918 and continuing to date, have been participants in a fraudulent scheme or conspiracy to loot General Motors Corporation of its assets through the payment of illegal bonuses and extra compensation. To do this, it is alleged, all the defendants coerced the corporation to enter into "illegal, improper and ultra vires transactions, arrangements and agreements" and, in effect, the charge is that the payments made amounted to mere gifts, without legal consideration in services rendered. It is also charged that the bonus plans were illegal because they provided for payment in stock at other than market prices and that the total amount available for bonuses under the terms of the corporate resolution was not correctly calculated. So far as they are relevant to this action, the particular plans under which the bonuses and extra compensation were paid are described below.

Original Bonus Plan.

1. On August 27, 1918, at a regular stockholders' meeting General Motors Corporation adopted a plan whereby not in excess of 10% of its net income over and above 6% (changed on November 16, 1922 to 7%) of the capital invested (later changed on November 26, 1923, to "capital employed") in its business was to be laid aside for distribution as bonuses to the officers and employees of the company.

The Managers Securities Company Plan.

2. On November 26, 1923, the stockholders voted to amend the bonus plan by providing that one-half of the 10% fund should be paid to a corporation called Managers Securities Company. Managers Securities Company was a Delaware corporation formed in 1923. Its capital stock consisted of 288,000 shares of 7% cumulative non-voting, convertible preferred stock of a par value of $100; 40,000 shares of Class A stock of a par value of $100; and 40,000 shares of Class B stock of a par value of $25. General Motors purchased the entire issue of Class A and Class B stock for $5,000,000 cash and sold the stock to about 80 of its executives at cost. General Motors Corporation under the plan had the right to fix and control the stock interests of the executives in the Managers Securities Company. As part of the plan General Motors entered into a contract to pay to Managers Securities Company each year from 1923 to 1930, 5% of its net earnings in excess of 7% on the capital employed in its business, and agreed to advance on January 1st of each year, $2,000,000 to the Managers Securities Company on account of any sum due under the agreement or as a loan, or both.

An integral part of the plan was the purchase by Managers Securities Company of a substantial number of shares of General Motors common stock, almost 2,250,000, at $15 a share from a Du Pont subsidiary, the General Company, paying for the same $2.20 per share in cash and $12.80 per share in 7% preferred stock of Managers Securities Company. The General Motors stock was escrowed and released proportionately as the preferred stock of Managers Securities Company was retired with the 5% bonus money reserved annually by Managers Securities Company from General Motors under its said agreement. Blocks of this General Motors common stock, as thus released, were annually allotted as dividends and credited to the accounts of approximately 80 executives of General Motors who were the stockholders of Managers Securities Company. Prior to 1929 Securities Company retired its issue of preferred stock and 30,000 shares of its Class A stock. For the year 1929 Securities Company received from General Motors on account of the bonus plan over $10,000,000. The Managers Securities Company plan was terminated December 31, 1929. When the Managers Securities Company was reorganized in December, 1930, General Motors received 868,557 shares of General Motors common stock for 2,890 shares of Class A and 7,040 shares of Class B stock of Managers Securities Company, which General Motors had acquired under its option to repurchase the stock sold to General Motors executives.

General Motors Management Plan.

3. As far back as May 1927, in anticipation of the termination of the Managers Securities plan, the General Motors stockholders, on the recommendation of the directors, authorized the expenditures of $35,000,000 before the end of 1930 for the acquisition of General Motors stock to be sold to a new company which would carry on the managers bonus distribution plan, when the Managers Securities plan expired in 1930 by limitation. Accordingly a second managers bonus plan was developed and approved by the Board of Directors of General Motors on February 6, 1930. It was known as the General Motors Management Corporation plan and was adopted at a special stockholders' meeting on March 5, 1930. The essential difference between the General Motors management plan and the former Managers Securities plan is that the General Motors stock which was to be distributed pursuant to the management plan was purchased directly from General Motors Corporation rather than from a third party.

Under this plan General Motors Management Corporation, a Delaware corporation, was formed. Its capital stock consisted of 50,000 shares of common at $100 par; 500,000 shares of Class A, and 500,000 shares of Class B, each of the par value of $10 a share. General Motors purchased all of the common stock of Management Corporation for $5,000,000 cash. It sold to Management Corporation 1,375,000 shares of General Motors common stock at $40 a share, which was $7.31 a share more than the stock had cost General Motors Corporation. For this stock Management Corporation paid $5,000,000 cash and gave, in addition, $50,000,000 of seven year 6% serial bonds, $7,000,000 of which fell due every year. Under the plan General Motors agreed to pay Management Corporation annually 5% of the General Motors' net earnings above 7% on the capital employed in General Motors business, i. e., one-half of the authorized 10% bonus.

General Motors then sold 38,800 shares of Management Corporation common stock to about 250 of General Motors executives at $100 a share. As in the Securities plan, General Motors retained the right to fix and control at all times the stock ownership in the Management Corporation.

Also as part of the plan, General Motors Corporation agreed to use the other one-half of the authorized bonus of 10%, in purchasing Class A stock of the Management Corporation, the purchase price of which was to be used by Management in acquiring General Motors stock in the market, at a ratio of one share of General Motors stock for each share of Class A stock. In the years 1930 and 1931, General Motors distributed to its employees the Class A stock of Management Corporation (instead of General Motors common stock) thus acquired, as the other one-half of the authorized bonus for those years. There was no bonus for the year 1932. Earnings for the latter half of 1933 made only a reduced bonus possible for that year. On March 28, 1934, the agreement between General Motors Corporation and General Motors Management Corporation was amended so as to relieve General Motors of the obligation to use one-half of the total yearly bonus in the purchase of Class A stock of the Management Corporation.

The obvious purpose of the Management Plan (eliminating the provision for the purchase of Class A stock) was to set aside annually a large block of General Motors stock at a fixed price to be acquired by Management Corporation and credited to the account of the executive stockholders of Management Corporation as a bonus during the years in which the plan was in operation. It was contemplated that the 5% of General Motors net earnings, above 7% on the capital employed, paid to the Management Corporation, together with the dividends on the General Motors common stock owned by the Management Corporation, would be sufficient to pay for the 1,375,000 General Motors common stock within the period of the plan. In the case of the former Securities Company a somewhat similar arrangement had been carried through. At...