Full opinion text
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 ISO 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 IS, 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 1Q% 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: The number of shares of General Motors stock distributed as bonus awards for the years 1937 and 1940 are set forth on page 81 of the General Motors Corporation annual report for the year 1940 (Ex. 2-K) as follows: Year Number of Bonus Awards Number of Shares of Common Stock Awarded (a)— 1937 10,026 252,086 (e) 1938 4,211 77,930(e) 1939 9,845 232,468(e) 1940 10,400(f) 226,190(f) The bonus participation of committee members of the Board of Directors (9 members) in the 1925 bonus fund was almost 23% and in the 1930 bonus fund was 17%%. In 1936 this percentage was 14%% and for 1937 it was further reduced to 12.8% of the total fund. Any consideration of the amount of the bonus awarded to any individual for the years prior to 1930 is barred by the six-year New York Statute of Limitations. Goldstein v. Tri-Continental Corp., 282 N.Y. 21, 29, 24 N.E.2d 728; Pollitz v. Wabash R. Co., 207 N.Y. 113, 100 N.E. 721. If it were possible to review them, I would be inclined to hold that some of the bonuses to the principal executives were so large as to constitute a waste of the corporation’s assets. A schedule of what each individual named as a defendant received by way of salary and bonus from 1918 through 1940 is set forth in Exhibit 31. In the course of the trial a number of accounting issues were presented, concerning the calculation of the bonus. It is plaintiffs’ contention that certain items were included in the “earnings” of General Motors Corporation which were no part of the Corporation’s earnings and that certain items should have been included in the “capital employed” which were improperly excluded. Two important claims also developed in the course of the trial; one relating to a so-called equalization payment to the principal executives of General Motors Corporation in February 1931 involving 36,071 shares worth about $1,540,000, and the other to a transaction between Donaldson Brown and John J. Raskob involving 243,392 shares of General Motors common stock on which the Corporation is alleged to have lost $427,000 while Mr. Raskob and his associate, Mr. Pierre S. duPont, are alleged to have profited to the extent of over $4,000,000. In this opinion I propose to discuss as briefly as possible the accounting issues and the other claims presented, my conclusions in respect thereto, and the reasons for those conclusions. But before doing so, a short statement concerning the most influential persons in the administration of the bonus in the General Motors executive group will assist in a better understanding of the facts and figures hereinafter discussed. Some of the executives who benefited greatly from the administration of the bonus plans were very influential in the affairs of the Corporation. Individually they held large blocks of General Motors stock, either in their own names or in the names of private holding companies. Beginning with the adoption of the Managers Securities plan in November 1923 they became the controlling figures in the Managers Securities Company, which owned 2,225,000 shares of General Motors Securities Company stock, the equivalent share for share of General Motors common stock. General Motors Securities Company itself owned about one-fourth of the common stock of General Motors Corporation. When Managers Securities Company merged with General Motors Securities Company the same executives were directors and some were officers of the latter company. In March 1930 General Motors Management Corporation was formed and acquired 1,375,000 shares of General Motors common stock from General Motors Corporation under the Management plan. The same group of prominent General Motors executives controlled the Management Corporation. In December 1938 the General Motors Shares Inc. was organized and General Motors Securities Company with General Motors Management Corporation were merged and consolidated in the new corporation. That corporation then became the largest stockholder of General Motors Corporation. Exhibit 22 lists the General Motors Corporation directors who, between 1918 and 1941, held offices or directorships in the various corporations just discussed. The General Motors directors who had most to do with the preparation and adoption of General Motors bonus plans were Mr. Raskob, Mr. Smith and Mr. Sloan. The administration of the bonus plans was guided by Mr. Brown, Mr. Sloan and Mr. Bradley. Mr. Raskob has not received any part of the bonus awards since his Class A stock of Managers Securities Company was recaptured by General Motors Corporation in May 1929. Mr. Sloan has not participated in bonus awards since the termination of the General Motors Management plan at the end of 1936. The administration of the bonus plans was under the jurisdiction of the Finance Committee until the Bonus & Salary Committee was created in the summer of 1937. Mr. Raskob was chairman of the Finance Committee from 1920 to 1928. Mr. Brown succeeded' him as Chairman in 1928 and continued in that office until the Bonus & Salary Committee took over in 1937. Mr. Bradley supervised the policy treatment of items going into the income account, reviewed the financial statements of the corporation, the general principles governing the method of bonus calculation and also the exclusions and inclusions. Mr. Bradley and Mr. Brown together submitted all questions of exclusions and inclusions in the bonus calculation to the Finance Committee. Mr. Bradley became a member of the Finance Committee in November 1933. Mr. Bradley was treasurer and a director of General Motors Management Corporation from the time of its organization in 1930 until it merged into General Motors Shares Inc. in December 1938. He was also a director of General Motors Securities Company. Mr. Brown while chairman of the Finance Committee was also Treasurer and a director of Managers Securities Company. He was a director of General Motors Management Corporation during its corporate existence. He was- a director of General Motors Securities Company from March 1918 to December 1938 when it merged into General Motors Shares Inc. at' which time he became a director of that corporation. Mr. Sloan has been a director of General Motors Corporation since November 1918 and was its president from 1923 until 1937, when he was elected Chairman of its Board of Directors. He was also President and a director of Managers Securities Company, and President and a director of General Motors Management Corporation, during the period those corporations functioned. He was a director of General Motors Securities Company from February 1931 to December '1938 and Chairman of the Board of Directors of General Motors Shares Inc. in December 1938. Mr. Smith has been a director of General Motors Corporation since March 25, 1920. He was a director of Managers Securities Company, and President and a director of General Motors Management Corporation during their existence. He served as a director - of General Motors Securities Company from February 1931 until December 1938, when he became President and a director of General Motors Shares Inc. He has been general counsel of General Motors Corporation since 1918. The duPont Company was named as a defendant herein. I dismissed the complaint as against that Company on the merits at the end of the plaintiffs’ case. The General Motors Bonus Plans were consistently supported by the duPont Company, the largest stockholder in General Motors, to promote the interest of the stockholders. Its attitude toward the plans and their administration was based solely on business judgment, gained in its own successful corporate experience, that such a compensation policy was an important factor for the success of General Motors and would benefit the stockholders. For this reason, the duPont Company supplied the block of shares necessary for the Managers Securities Plan. Certain of its officers and directors, as directors of General Motors and themselves General Motors stockholders, approved the plans, for the same reasons and in the exercise of an honest business judgment that such plans were reasonable and for the best interests of General Motors. The duPont Company derived no profit from the sale of the block of stock to Managers Securities Company. The General Motors stockholders were given a like opportunity to supply stock at the same price, $15.00 a share. The proposed transaction was fully and frankly disclosed to the General Motors stockholders in advance and they approved it almost unanimously. General Motors Corporation lost nothing by the sale. It profited to this extent, however, that it was enabled to build up and retain over a period of years a staff of executives who greatly increased the business of General Motors to the profit of all General Motors stockholders, including the duPont Company. The stock which the ■ duPont Company sold to Managers Securities Company in November 1923 for $33,750,000, produced within six years twice the selling price in dividends and increased in value more than five fold. The 70 executives of General Motors who under the plan were participants in Managers Securities Company made these profits, not the duPont Company. That company had the right to sell any part of its holdings of General Motors Securities Company without the approval of General Motors Corporation. It made the sale of 30% of those holdings to Managers Securities Company in order to assist General Motors Corporation in setting up a special bonus plan for General Motors’ executives. If the duPont Company had kept the stock, instead of selling it, these dividends and the increase in the value of the stock would have accrued to the duPont Company, not to General Motors. For any conduct on the part of said directors, acting independently, in transactions to which the duPont Company was not a party and from which it derived no advantage, the duPont Company would not be liable even if General Motors Corporation sustained a loss as a result of these directors’ acts. From January 1930 to May 1937 inclusive, the Finance Committee consisted of fourteen members (except from November 6, 1933 to November 5, 1934, when there were fifteen). During this period, eleven members were not eligible for and did not receive supplemental compensation, namely, Messrs. Baker, Carpenter, H. F. duPont, I. duPont, L. duPont and P. S. duPont, Morgan, Mott, Prosser, Raskob and Whitney. These members were substantially interested as stockholders directly or through the duPont Company. Mr. Brown, Chairman of the Committee, Mr. Sloan, President of General Motors and Mr. Bradley, a Vice-President of General Motors, were members of the Finance Committee and were bonus recipients. From and including the bonus year 1937, the bonus plan has been under the jurisdiction of the Bonus and Salary Committee of five directors ineligible for bonus, namely, Messrs. L. duPont, Carpenter, Pratt, Raskob and Whitney. All have been substantially interested as stockholders directly or through the duPont Company. Many of the accounting issues were involved in the calculation of the bonus fund and in the making of the bonus awards for periods subsequent to October 1936 when the original complaint was filed herein and subsequent to October 1938 when the second amended consolidated complaint was filed. In fact these accounting issues were covered by evidence at the- trial, for the entire period of bonus award for the calendar years 1930 to and inclusive of 1940, without the filing of any supplemental complaint and by consent of the parties during the trial. Rule 15(b) F.R.C.P. Towards the end of the trial (July 1, 1941) it was agreed that the second amended complaint was also a supplemental complaint and that it be deemed further supplemented to “include all acts and 'conduct of any officers or directors and of the defendants named herein in applying, carrying out or executing the bonus plan and making awards thereunder from the date of the said amended complaint down to the date the trial began” (May 7, 1941). The findings of fact and the conclusions of law therefore include the extended period. Compensation of Executives. Among the issues presented by this litigation is the propriety of the total compensation, salary plus bonus, paid to certain executives and managers of General Motors Corporation, many of whom were directors. (Ex. 31-1 to 42.) I am of the opinion that for the years 1930 to 1940 inclusive, these amounts were not in excess of the value of the services rendered by those individuals, excepting from said amounts the alleged equalization payment of February 11, 1931. A large part of the record in this case consists of testimony concerning the nature, extent and importance of the services of the recipients in the various corporate positions they held. The responsibilities they assumed and the broad scope of their duties as active and efficient members of the staff of General Motors Corporation are all in the record. I stated in an opinion, filed in August 1940 on the motion of the three of the defendants, Whitney, Morgan and Prosser, for summary judgment, that there were several of the years, to wit, 1930, 1935, 1936 and 1937, where the amounts awarded were so large that they required an investigation by a court of equity in the suit brought by plaintiff stockholders. Rogers v. Hill, 289 U.S. 582, 591, 53 S.Ct. 731, 77 L.Ed. 1385, 88 A.L.R. 744. This investigation has been had during the course of this trial and I am now satisfied that the compensation of these executives was not excessive as to those years also. Concerning the compensation of executives, I have made the following findings, among others: “There has always been keen rivalry for executives in the automobile industry. For example, General Motors lost to competítors — Charles W. Nash, who became head of the Nash Motors Company; Walter P. Chrysler, who developed the Chrysler Corporation; and K. T. Keller, who is now President of the Chrysler Corporation. Offers were made by competitors to Messrs. Knudsen and Raskob. It was necessary for the Corporation to hold out attractive financial benefits to prevent the loss of valuable executives. ■ “From the end of 1922 through 1929, total assets of the corporation (less depreciation) increased 140%. Net sales for 1929 increased nearly 225% over 1922 and income available for dividends increased 355%. Net income for the period 1923-1929 equalled $1,185,000,000, an average return on stockholder capital of 29.45%. After payment of 61.6% of such net income as cash dividends to stockholders, more than $455,000,000 was reinvested in the business during that period and constituted 40% of the total assets (less depreciation) owned by the Corporation at the end of 1929. “General Motors earned more in the decade of the thirties than in that of the twenties although almost a third of the period 1930-1940 was a time of severe economic depression. In 1930-1940 inclusive, it earned $1,500,000,000 upon net sales totalling more than $12,000,000,000. Return on stockholder capital averaged 14.3%, a performance equalled by few companies. Over this period General Motors increased its share of the total passenger car output from approximately 34% in 1930 to as much as 50% in 1941. “A comparison of General Motors passenger car sales with those of the Ford Motors Company, the dominant automobile manufacturer in 1923, illustrates the growth in market strength of General Motors to the present day. In 1923, Ford’s sales totalled approximately 1,773,000 units; General Motors sold about 774,000 cars, only 44% of Ford’s sales. In 1940, General Motors sales totalled approximately 1,748,000 cars; Ford sold about 717,000 cars, only 41% of General Motors sales.” Is a $500,000 total of salary plus bonus for the chief executive of a corporation of this magnitude, in very prosperous years, so excessive that its payment should be legally condemned as a waste of corporate assets? Having heard all the testimony and considered the exhibits I am of the opinion that the directors are not chargeable with waste for having approved these payments. These executives have built up a great industry; managed it successfully; given employment to hundreds of thousands of skilled workers; earned tremendous profits for the stockholders and contributed largely to the prosperity of the nation. Although in certain instances, hereinafter discussed, some of them have taken advantage of their position of influence to the detriment of the corporation, there is no denying the competence of their business management or its value to the Corporation. The plaintiffs offered nothing as a yardstick or comparison for determining the reasonableness of the salaries and bonuses. On the other hand the defendants have referred the Court to several reported stockholders’ suits (Gallin v. National City Bank, 152 Misc. 679, 273 N.Y.S. 87; Id., 155 Misc. 880, 281 N.Y.S. 795; Epstein v. Schenck, Sup., 35 N.Y.S.2d 969; Heller v. Boylan, Sup., 29 N.Y.S.2d 653), in which it was held that compensation which was about twice the amount of the highest total compensation paid to any of these executives, was not excessive. In determining that the salaries and bonus allotments in the present case were not excessive, that they were earned by the recipients, I do not thereby hold that the amounts of the bonus were properly calculated under the various bonus plans. The accounting methods and procedure followed in calculating the total bonus in which these defendants shared were, I believe, incorrect in certain particulars as hereinafter indicated. Further, I have concluded that the so-called equalization payment of 36,071 shares on February 11, 1931, in which many of these executives shared, was without any legal or moral basis whatsoever and constituted an illegal gift of corporate assets. Likewise, the reawarding of forfeited bonus stock was in violation of the terms of the bonus plan approved by the stockholders in August 1918. . My ruling that the salaries and bonuses paid to the executives were not excessive means only that they rendered services worth what they received, subj ect to the limitations above mentioned. The so-called equalization payment of 36,071 shares of General Motors common stock, made February 11,1931. Mr. Sloan in his letter of February 15, 1930, to General Motors common stockholders, briefly stated the purpose of the November 1923 Managers Securities plan as follows:' “The purpose of Managers Securities Plan was to enable the more important executives of the Corporation — numbering at that time about eighty — to become substantial stockholders through the purchase of a block of General Motors Common stock at the then market price.” ■ The purchase price was $33,750,000. The annual payments to Managers Securities Company by General Motors Corporation for the years 1923 to 1928 were as follows: 1923 — ? 1,876,119 1924 — 1,140,189 1925 — 4,633,535 1926 — 8,274,099 1927 — 10,488,071 1928 — 12,408,594 838,820,607 To the above should be added the $10,-181,835 paid to Managers Securities by General Motors for 1929, making a total of $49,-002,442, a sum $15,252,442 in excess of the $33,750,000 cost price of the General Motors Securities Company stock. Through a temporary borrowing Managers Securities Company was able to cancel its bonds and retire its preferred stock prior to April 1927 (Ex. 7-25). There were sixty-four participants in the Managers Securities Company at the end of 1929. Every year the plan continued the more unfair it became to the younger executives and managers, who with a greatly expanding business in the late 1920s were unable to participate in the Managers Securities plan. Every original November 1923 investment of $50,000 (a 1% interest) in stock of Managers Securities Company had yielded the older executives almost $700,000 in dividends and was worth as of December 31, 1929, a further sum of about $1,800,000 (Ex. 48-20). Under those circumstances General Motors Corporation had both the moral and legal right to terminate the plan at any time after 1928. It could have done this by recapturing the outstanding Managers Securities Company Class A stock from the participants, under the provisions of the plan itself. There were no intervening interests of third parties to prevent this. The General Motors Securities Company had been paid in full for the stock it sold to Managers Securities Company (Ex. 7-25). The assets of Managers Securities Company, in which its Class A stockholders had an interest, were at all times more than sufficient to pay its debts. In fact there was a surplus applicable to the Class A stock, over and beyond the debts and the par value of the Class A stock outstanding. Mr. Raskob testified that the Managers Securities Company plan should have been terminated a year before December 31, 1929, that it should have ended with the year 1928. This would have enabled some of the successful younger executives to obtain a proper share of the bonus intended for the executives and managers. In a letter to Mr. Raskob, dated December 3, 1929 (Ex. ZZZZ-1) which referred to the purpose of a meeting of the stockholders of Managers Securities Company to be held December 5, 1929, Mr. Brown stated: “The plans that we have in mind have in view the following general features: “(1) A termination as of January 1, 1930 of the contract existing between General Motors Corporation and Managers Securities Company, thus constituting Managers Securities Company as purely a holding corporation. The proposed termination of the contract one year ahead of its natural maturity presumably will require some form of suitable commitment on the part of the Corporation with the individual holders of Class A stock in the case of those who would not desire to waive what might be regarded as their rights in respect to the existing contract.” Apparently on December 3, 1929 there had been no determination that any commitment should be given. Mr. Brown merely expressed the opinion that the cancellation of the General Motors Corporation-Managers Securities Company contract a year ahead of its natural maturity (December 31, 1930) presumably would require some form of suitable commitment. On December 10, 1929, Mr. Brown, as Secretary-Treasurer of Managers Securities Company, wrote to the stockholders of that Company on the letterhead of the company and discussed fully a plan for its reorganization. He stated that: “The fundamental purpose of a plan involving a continuation of the Company in changed form would be to assure the preservation of the block of General Motors Common Stock in consolidated form to prevent any undue influence which otherwise might be thrown into the market, having a depressing effect upon the market price of General Motors Common Stock. If this purpose can be served through a plan otherwise constructive, a combination of benefits should likewise result.” A tentative plan of reorganization of Managers Securities Company was submitted with the letter, together with certain balance sheets relating to the plan. Three pages of the letter are given over to a discussion of the plan of reorganization of Managers Securities Company, its tax advantages, liquidity and other aspects. The fourth and last page of the letter contains this statement: “It has been further explained in the meetings in which this plan has been discussed that the General Motors Corporation desires to cancel the present contract with Managers Securities Company in order that a new plan of managers’ compensation may be started at the end of this year instead of a year later. In consideration for the present holders of Class ‘A’ stock consenting to the cancellation of the Contract, the Corporation would be willing to agree that these holders of Class ‘A’ who remain in the employ of the Corporation at May 15, 1930 would during the ensuing year receive an amount of additional compensation in one form or another commensurate with what he would have received under the present contract. Furthermore, the termination of the contract at this time permits the development of a plan resulting in making the stocks of Managers Securities Company liquid.” It is upon the last quoted paragraph that the defendants base their contention that there was a commitment given by General Motors, which on February 11, 1931, resulted in the so-called equalization payments of 36,071 shares of General Motors common stock to forty-seven Class A stockholders of Managers Securities Company. But Mr. Brown’s letter was not written as an official of General Motors Corporation. He was writing as Secretary and Treasurer of Managers Securities Company. He was never authorized to make any commitment for General Motors to the Management Securities Company Class A stockholders. The earliest General Motors record relating to any such alleged commitment is in a report, dated December 30th, 1929, from Mr. Brown, as Chairman, to the Finance Committee of General Motors Corporation. To that report he attached a copy of a second Managers bonus plan, the General Motors Management Corporation plan, to take the place of the old bonus vehicle, the Managers Securities Company plan. Mr. Brown’s report states: “In the consideration of the plan it will be necessary for the Finance Committee to take specific action in respect to the following features: “(1) Termination of existing contract with Managers Securities Company. “This contract it is recognized has one more year to run, and calls for the payment to Managers Securities 'Company of 5% of the excess net earnings of General Motors Corporation over and above 7% on the capital employed. It is desirable to. terminate this contract in view of the intended substitution of the General Motors Management Corporation, as concerns present existing participants. In this connection it is held to be desirable, as applying in cases of individuals who would not voluntarily waive their so-called rights in respect to the existing contract, for the Corporation to extend a commitment to the effect that for 1930 the extra compensation under the new plan will be not less than an amount which would have accrued in view of the continued holding of Class A stock of Managers Securities Company.” Six features or items were listed in the report. The preparation of the new bonus plan had been left to the Operations Committee and the Brown report mentions the action taken by the Operations. Committee at its meetings held December 5th and December 19th, neither of which contains any reference to any equalization payment to Class A stockholders of the Managers Securities Company. Mr. Brown’s December 30, 1929 report came before a meeting of the Finance Committee of General Motors Corporation on January 7, 1930. Although the Brown report stated that it would be necessary for the Finance Committee to take specific action in respect to the various items (features), the minutes of the meeting fail to disclose that any action was taken on item (1) as to the desirability of extending a commitment to certain Class A stockholders of Managers Securities Company. The minutes of the Finance Committee and of the Board of Directors, prior to the making of the equalization payment of 36,071 shares of General Motors common stock on February 11, 1931, contain no reference to any such commitment. The wording of the Brown report of December 30, 1929, shows that prior thereto the Finance Committee had never authorized any such commitment and that any statements that Mr. Brown as Secretary and Treasurer of Managers Securities Company-made in his letter of December 10, 1929, to the stockholders of Managers Securities Company had not been authorized by either the Finance Committee or the Board of Directors of General Motors Corporation. If there had been any such prior authorization for a commitment, it is reasonable to assume that he would have referred to it in his report and he would not have asked the Finance Committee to take specific action in respect to a commitment. I am not satisfied that the discussions at any of the Finance Committee meetings ever authorized any such commitment. The reference to “individuals who would not voluntarily waive their so-called rights in respect to the existing contract” in Mr. Brown’s report to the Finance Committee of December 30,1929 (Ex. 41) evidently had no real basis for the implication that some of them would. Mr. Brown testified that when he wrote and submitted the report he himself “did not expect to or offer to waive”. On February 13, 1931 he drew down 1,155 shares of General Motors common stock, worth $49,338, plus the March dividend thereon, as his share of the equalization payment. At no time did he ever ask any of the Managers Securities Company participants to waive any of their so-called rights and he knew of none who would. He admitted that he was the one who originated the idea of voluntarily waiving. He testified that, “there was the contemplation that conceivably it might be possible that someone would waive”. The waiver idea made more agreeable the suggestion that it would be desirable for the corporation to extend a commitment to those participants who would receive a smaller allotment under the new plan than under the old. Mr. Brown presided at the meeting of the Finance Committee (January 7, 1930) which considered his report of December 30, 1929. Mr. Brown and Mr. Sloan were both present at the meeting of the Board of Directors on February 6, 1930 (Mr. Sloan presiding) when the new Management Corporation plan was recommended to the stockholders of General Motors for their approval. Neither the minutes, nor the record of this trial, contain anything to show that either the 'Committee or the Board were informed that Mr. Brown and Mr. Sloan would refuse to.waive any of their so-called rights under the old agreement. Mr. Sloan in February 1931 received, as his part of the 36,071 share equalization payment, 4,044 shares of General Motors common stock worth $172,746 for his “so-called rights” under the old agreement. Neither the 36,071 share equalization fund nor any of the payments therefrom were ever reported to the stockholders at any stockholders’ meeting or in any annual report or in any manner whatsoever. When certain confirmatory action was sought from the Finance Committee at a meeting on July 14, 1930 (Ex. 40), the only thing ratified and approved was the cancellation of the Managers Securities Company contract. No approval was sought or given for any commitment to the Managers Securities Company participants. The officers of General Motors who were also participants in Managers Securities Company knew on July 14, 1930 that there had been no action of the Finance Committee specifically authorizing the cancellation of the Managers Securities Company contract. They must have examined the minutes of prior meetings, especially the meeting o'f January 7, 1930 (Ex. 43) to which Mr. Brown’s report of December 30, 1929 (Ex. 41) had been submitted. I fail to see how those who were to benefit by the commitment could have overlooked the passage of some resolution in respect to it, at the January 7th or the July 14th, 1930 meetings. Mr. Raskob testified that this was most unusual, and said “I don’t remember of a thing as important as that not being recorded” although he was of the opinion it must have been the Secretary’s error. Both sets of minutes of January 7th and July 14th, 1930 were later read by those who had attended the meetings and were signed by them. Mr. Smith, although not a member of the Finance Committee, was present at the meeting of January 7,1930. He was the general counsel of the corporation. The same Secretary, Mr. Beardslee, recorded and signed both sets of minutes. Mr. Brown presided at both meetings. I have concluded that there was no error in recording the minutes and that no authorization to give any commitment, and no approval of any commitment already given, was any part of the action taken by the Finance Committee at either meeting. Directors and officers who pay themselves large sums out of the corporate treasury for some extraordinary purpose should see to it that they are formally authorized to make the payment, if they expect to justify it at some future date. They make the record of what they do at the time it is done and the record should be specific, complete and unambiguous, where their interests conflict with those of the 'Corporation. The annual report to the stockholders of Managers Securities Company, for the fiscal year ending April 30, 1930 is dated July 18, 1930 (Ex. 11-E). The only reference in that report to the termination of the contract between Managers Securities Company and General Motors Corporation is the following “Although our contract with General Motors Corporation would not normally terminate until December 31, 1930, it has been agreed to cancel this contract as of December 31, 1929 in order that the General Motors Management Corporation might become operative during the year 1930”. The report makes no mention of any commitment made to stockholders of Managers Securities 'Company by General Motors Corporation or of any equalization payment to come. The members of the Board of Directors of Managers Securities Company listed at the end of the report are Mr. Sloan, Mr. Brown, Mr. P. S. duPont, Mr. F. J. Fisher, Mr. C. S. Mott, Mr. J. L. Pratt and Mr. J. T. Smith. The officers listed are Mr. Sloan, President; Mr. Mott, Vice President; Mr. Brown, Secretary-Treasurer. The minutes of the meeting of the board of directors of Managers Securities Company, held July 2, 1930, contain the following (Ex. JJJ) : “The Chairman stated that the officers of the corporation, with the approval of the officers of General Motors 'Corporation, had terminated as of December 31st, 1929, the agreement between General Motors Corporation and Managers Securities Company, dated November 27th, 1923, and requested that resolutions be passed ratifying and confirming the actions of the officers terminating said contract. “Upon motion duly made and seconded, it was “Resolved, that the actions of the officers and directors of Managers Securities Company, terminating as of December 31, 1929, the agreement between General Motors Corporation and Managers Securities Company dated November 27, 1923, be and the same hereby is in all respects ratified, confirmed, and approved. “Be It Further Resolved, that the proper officers of the corporation be and they hereby are authorized to execute any and all agreements in connection with the cancellation of the said contract.” It does not appear that any documents in reference to the cancellation were executed by the officers of Managers Securities 'Company other than the general release from Managers Securities Company to General Motors Corporation executed December 29th, 1930 (Ex. 7-27). On March 20, 1931, Mr. Sloan submitted to the Finance Committee a report (Ex. 39) “dealing with 1930 bonus distribution”. After showing the sources from which certain General Motors stock (40,855 shares) would be available in addition to 115,535 shares of General Motors Management Class A stock, the report states : “The above makes an aggregate of 156,-390 shares of stock valued at $6,984,772 available for bonus distribution. Of this amount, 36,071 shares of stock valued at $1,-540,830 was distributed to former Managers Securities participants under date of February 11, 1931 in order to bring their total supplementary compensation for 1930 up to what it would have been if the former Managers Securities contract had not been can-celled as of December 31, 1929. This is in accordance with the commitment made to these executives under date of December 10, 1929 to the effect that their total supplementary compensation during 1930 in one form or another would be commensurate with what would have been received by them if the Managers Securities contract had not been cancelled as of December 31, 1929. “After making the above-mentioned settlement with former Managers Securities participants, there remains available for bonus distribution 120,319 shares of Class A stock of General Motors Management Corporation, valued at $5,443,942 or $45.25 per share. The aggregate awards which are being recommended by me amount to 120,-319 shares of Class A stock. There will therefore be no part of the 1930 Bonus Fund carried over into 1931.” A share of Class A General Motors Management Corporation stock was the equivalent of a share of General Motors Corporation common stock. The alleged commitment of December 10, 1929, was nothing more than the letter Mr. Brown, as Secretary-Treasurer of Managers Securities Company had sent to the stockholders of that Company under said date. It was not a commitment from General Motors. Mr. Sloan’s report of March 20, 1931 came before the Finance Committee on March 23, 1931. The minutes of that meeting (Ex. 26), after referring to the number of shares available for bonus distribution, recite: “Of this amount, 36,071 shares of General Motors common stock, valued at $1,-540,830, was distributed to former Managers Securities participants under date of February. 11, 1931 in order to bring their total supplementary compensation for 1930 up to what it would have been if the former Managers Securities contract had not been can-celled as of December 31, 1929. This was in fulfillment of an agreement between General Motors Corporation and Class ‘A’ stockholders of Managers Securities Company in order that General Motors Management Corporation might commence as of January 1, 1930.” A resolution was then unanimously adopted, containing the following paragraph: “Resolved, that the delivery by the officers of the Corporation of 36,071 shares of the $10 par value common stock of General Motors Corporation to Class ‘A’ stockholders of Managers Securities Company, in full settlement of any and all claims which the Class ‘A’ stockholders of Managers Securities Company had or may have on account of the cancellation as of December 31, 1929 of the contracts between General Motors Corporation and Managers Securities Company dated November 27, 1923, and April 27, 1925, be and the same hereby are in all respects approved, ratified and confirmed, and that the bonus fund available for distribution be reduced by this number of shares and amount to 120,319 shares valued at $5,443,942, * * * ” When the Finance Committee approved on March 23, 1931, the action of the officers in distributing 36,071 shares of General Motors common stock as a so-called equalization payment to certain former Managers Securities participants they did not have before them any list of the beneficiaries of that distribution. No names or individual amounts were listed in Mr. Sloan’s report of March 20, 1931 (Ex. 39) on which the Committee based its action. The report did not even state how many participants shared in the distribution. Only the total amount of shares distributed, 36,071, and their value, $1,540,830, were disclosed. There was the same lack of specific information when the Board of Directors came to pass upon this 36,071 share distribution, at the Board meeting May 6, 1931. It does not appear that the Board of Directors had anything before them except the action taken by the Finance Committee at its meeting of March 23, 1931. Twelve directors of General Motors shared in the equalization distribution, receiving a total of 19,704 shares. Nine of the twenty-one directors who attended the meeting of the Board of Directors on May 6, 1931, and approved the distribution, received 15,829 shares thereof. The resolution adopted by the Board of Directors on May 6, 1931, reads as follows: “Whereas, the Finance Committee, pursuant to the Corporation’s Bonus Plan and upon the recommendation of the President has awarded bonuses, amounting in the aggregate to One hundred and twenty thousand, three hundred and nineteen (120,319) shares of the ‘Class A’ stock of General Motors Management Corporation, to certain employes for conspicuous services rendered during the year 1930, and has authorized the distribution of thirty-six thousand and seventy-one (36,071) shares of the Common Stock of General Motors Corporation to former participants in the Managers Securities Company in order to bring their total supplementary compensation for 1930 up to what it) would have been if the_former Managers Securities contract had not been cancelled as of December 31, 1929; be it “Resolved, that the action of the Finance Committee in making said awards and authorizing said stock distribution be and it is hereby in all respects approved, ratified and confirmed.” The statement in the preamble that the Finance Committee “has authorized the distribution” is more than inaccurate. It implies that before the 36,071 share distribution was made the Finance Committee had authorized it. That was not the fact. The officers had made the distribution to themselves and other executives on February 11, 1931 and the Finance Committee was not asked to ratify and approve it until March 23, 1931. The distribution was practically an accomplished fact before the Finance Committee was told about it. Their choice was narrowed and made difficult. To have ordered the forty-seven executives to return the stock would have required more courage than the Committee could muster under the circumstances. All but two of the forty-seven participants received their shares of the equalization payment before the Finance Committee on March 23, 1931, approved the bonus calculation for the year 1930. The amount of the equalization payment depended upon the amount of the 1930 bonus. Was the approval of the bonus calculation by the Finance Committee a mere formality, bound to be given? The haste of the executives may be attributed in part to the fact that by issuing these 36,071 shares under date of February 11, 1931, the recipients would be listed as the owners of the shares before February 14, 1931, the date on which the books closed for the next dividend, payable March 12th. In that way those who received the 36,071 shares also collected a total of $27,053.25 in dividends. Even this sum was not overlooked by these participants, who had received the lion’s share of the income and profits of Managers Securities Company, which in seven years amounted to $225,000,000.00, all made possible by the generous bonus provisions of the General Motors Corporation. Defendants contend that it was proper that the 36,071 shares should carry the first quarterly dividend for 1931 because it had been the practice, pursuant to a general ruling adopted at a Finance Committee meeting in February 1919, to have bonus stock include the first quarterly dividend, even if the bonus was awarded at a later date. But the 36,071 shares were not given as a bonus. They were supposed to be in settlement of a claim. If the equalization payment was partly in lieu of what Managers Securities Company would have received under the old contract, that contract called for payments in cash, not stock. It seems unnecessary to add that the stockholders were never, told of the equalization payment, either before or after the event. It came to light during the trial of this action. There were sixty-four participants in Managers Securities Company prior to the action of the Finance Committee in recapturing the Class A stock of eight participants on April 29, 1930. Nine of the remaining fifty-six received larger contract accruals for 1930 under the General Motors Management plan than they would have received under the Managers Securities Company plan. Forty-seven were given various amounts of the 36,071 share equalization distribution on February 11, 1930. Eleven of these received no participation in the General Motors Management Corporation plan and their A stock in Managers Securities Company should have been reacquired with the eight others on April 29, 1930. Of the remaining thirty-six, there were seven who received bonus stock in addition to their share of the equalization payment, and as to them it was not an equalization payment at all. For the others it is argued that they would have received a bonus award but for the equalization payment. That is an unsupported assertion. If the equalization payment was intended as a bonus it would have been paid as a bonus. The testimony is to the effect that it was not a bonus, but the settlement of a claim. The earliest subscription for allotments of stock in the General Motors Management Corporation was April 28, 1930 (Ex. 54). Nine such subscriptions were paid before May 1, 1930; only three were paid after May 15, 1930. Those participants in Managers Securities .Company who were not to receive an allotment of stock in General Motors Management Corporation were known prior to May 15, 1930, when the option of General Motors Corporation to reacquire Managers Securities Class A stock expired. Their Class A stock should have been reacquired before May 15, 1930. In the case of five of the participants the equalization payments over-shot the mark. Mr. Coyle, on top of his equalization payment and his interest in General Motors Management Corporation contract accruals, received an additional 255 shares of General Motors common stock valued at $11,-538. Mr. Alfred Fisher likewise received an additional 736 shares valued at $33,301; Mr. Edward F. Fisher 737 shares valued at $33,346, and Mr. William A. Fisher 737 shares valued at $33,346. It appears that $100,000 was divided among these three members of the Fisher family. Mr. William S. Knudsen received an additional 2431 shares valued at $109,993. In'those five cases the alleged commitment of Mr. Brown’s letter of December 10, 1929 was exceeded at a cost to General Motors Corporation of $221,524, the value of the additional 4895 shares of General Motors common stock which they received as an extra bonus for the year 1930. It should be said of Mr. Knudsen that he was a production executive. He had nothing to do with devising ways and means for the equalization payment, although he thought it was proper. Nor did he originate any of the accounting practices sanctioned by the financial executives which increased the amount of the bonus. He was not on the Finance Committee. Mr. Knudsen was worth the salary and bonus he received from General Motors and he rightly felt that he had earned it." But he was not entitled to the equalization payment. At this point it should be noted that although the Managers Securities plan approved by the stockholders at the meeting of November 26, 1923 provided that the shares themselves were to be delivered to the participants on April 15, 1931, on the surrender of the depositary certificates (Ex. 7 and 7-7) the agreement of November 30th between General Motors Corporation and the participants (Ex. 7-12) provided for the delivery of the certificates of A and B stock to the participants on May 16, 1930. The change in date from April 15, 1931 to May 16,1930 was favorable to the Managers Securities Company participants, many of whom were the principal executives as well as directors of General Motors Corporation. If a change in date was desirable an amendment of the plan should have been submitted to the stockholders for their approval. No approval of the change was sought by these executives from either the Finance Committee or the Board of Directors, although the Board of Directors adopted an amendment to the plan on another point on May 13, 1926. The agreement with the Managers participants (Ex. 7-12) was signed on behalf of the General Motors Corporation by its president, Mr. Sloan, who became the largest participant (8%) under the Managers Securities Company plan. He was also a director and President of the Managers Securities Company. The agreement between Managers Securities Company and General Motors Corporation dated November 27, 1923 (Ex. 7-10), which contains a recital that “the plan pursuant to which said Managers Company has been formed has been duly approved by the directors and stockholders of General Motors”, was signed by Mr. Sloan, as President of Managers Securities Company and by Mr. Brown as Vice-President of General Motors Corporation. Mr. Brown became a 4% participant in Managers Securities Company and was also one of its directors. Mr. Smith, another participant of Managers Securities Company was the general counsel for the General 'Motors and the Managers Securities Company and was a director of each. These facts emphasize the dual capacity in which these officers and directors of General Motors Corporation acted in the preparation and execution of the agreements with Managers Securities Company and with the participants of Managers Securities Company. Their obligation to refrain from entering into agreements -which modified the Managers Securities plan to their own advantage was clear. Exhibit 7-27 is a general release, dated December 29, 1930 from Managers Securities Company to General Motors Corporation which, in addition to the usual general language as to the nature of the claims released, specifies claims “on account of a contract between the parties dated November 27, 1923, and an agreement supplemental thereto, dated April 25, 1927, and the cancellation thereof as of December 31, 1929.” It was signed on behalf of Managers Securities Company by John T. Smith, Vice-President and acknowledged December 31, 1930. General Motors Corporation received general releases from forty-seven Managers participants between February 13th and March 28, 1931. These releases (Ex. WV, 1 to 47) were all in the same form and recited the consideration as “$10 and other valuable consideration paid” by General Motors Corporation. Each release ran to. “Managers Securities Company and/or General Motors Corp.”, their officers, directors and trustees. The claims released were those “on account of the cancellation as of December 31, 1929 of the contract between General Motors -Corporation and Managers Securities Company dated November 27, 1923 and amendéd as of April 25, 1927”. It is urged that the releases were given as part of the settlement of the claims of these forty-seven participants. True, that formality was followed, but the release could not lend validity to an unjust claim or excuse the dereliction of those who paid it. The equalization payment was a gift of corporate assets to these participants, of whom eleven were directors of the corporation and others, were officers and executives. The true character of the payment was not changed, either by the wording of the general releases or-by the resolutions of approval given after the event. The Managers Securities Company participants, as stockholders, executives and managers of General Motors Corporation, had read Mr. Sloan’s letter of February 15th, 1930 to the General Motors stockholders, in which he stated that the Managers. Securities Company plan could be terminated on December 31, 1929, a year ahead of time, “with perfect equity to all concerned”. That meant — with perfect fairness to all concerned. The letter itself pointed out why it was the fair thing to do. The letter also stated that “an important, contributing factor in the expansion of busi— ness and earnings” which the corporation had enjoyed “during the past few years” i. e., just prior to 1930, was the infusion of new blood into the organization. The General Motors Management plan was to give these younger executives proper recognition in the bonus plan for managers and executives. The efforts of the younger men had contributed greatly not only to the increased earnings but to the bonus based-thereon, of which a large part had gone to the older executives and managers under the Managers Securities plan. The letter indicated that the younger men were not getting a fair share of the bonus under the Managers Securities plan and that it was not possible to readjust these inequalities under that plan. Many of the older executives were getting too much. There