Levine v. Smith

Ross Perot was a director of General Motors Corporation (GM) and GM's 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 of Perot's associates, for roughly $743 million. The deal included Perot’s agreement that he would not compete with or publicly criticize GM. The board approved the deal. Several GM shareholders filed derivative suits against Perot and the directors (defendants) to challenge the buyback. One shareholder group (the Grobow plaintiffs) did not make a demand on the board before bringing their action. The defendants moved to dismiss the Grobow plaintiffs' action 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 granted the motion to dismiss, and the Delaware Supreme Court appealed. The Grobow plaintiffs subsequently moved to vacate the judgment and file an amended complaint based on newly discovered evidence; the chancery court again dismissed that complaint under Rule 23.1. Another shareholder, Morton Levine (plaintiff), made a written demand on the directors to rescind the Perot buyback, but the directors voted unanimously to reject Levine's demand. After GM informed Levine's counsel of the unanimous decision that litigation would not be in the interests of the corporation, Levine filed his action. The defendants also moved to dismiss Levine's action under Rule 23.1, and the chancery court granted the motion to dismiss. The Delaware Supreme Court consolidated the Grobow and Levine suits on appeal and considered whether the chancery court had appropriately dismissed the actions.