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Levine v. Smith

Delaware Supreme Court
591 A.2d 194 (Del. 1991)


Facts

Ross Perot was a director of General Motors Corporation (GM) and its largest shareholder. Perot disagreed with GM’s senior managers about the way a GM subsidiary was being run. Perot vocally criticized GM about the subsidiary and its automobile business. A committee of outside directors negotiated a deal to buy back Perot’s shares, and those of a few other associates, for $743 million. The deal included Perot’s agreement that he would not compete with or publicly criticize GM. The board approved the deal. GM shareholders (plaintiffs) filed a derivative suit against Perot and the directors (defendants) to challenge the buyback, without first making a demand on the board. The shareholders initially asserted that the directors were interested or that the buyout constituted waste, but the restated claim rested on a theory that the directors lacked independence. The defendants moved to dismiss under Rule 23.1 of the Rules of the Court of Chancery of the State of Delaware for failure to make a demand that the board bring the lawsuit. The chancery court concluded that the shareholders had only shown that two of GM’s fourteen outside directors had misunderstandings about the buyout. Thus, the chancery court dismissed the complaint for failure the plead demand futility. The plaintiffs appealed to the Delaware Supreme Court.

Rule of Law

Issue

Holding and Reasoning (Horsey, J.)

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