The Expert Witness: The unusual and continuing case of General Motors

By John F. Sase

“Switch on the box! Mr. Spock is on the table /
“Dr. McCoy is unable to connect his brain /
“Sweating and straining /
“Well, it seemed so simple at the time”
—Semisonic, “Never You Mind,” Feeling Strangely Fine (MCA Records, 1998)

During this past week, an industry-wide strike by the UAW has emerged. In this month’s column, we will revisit some history from the 1950s and the GM bankruptcy of 2009 in order to highlight the division(s) that have appeared currently and that must be addressed.

Ancient History

Members of the White House Automotive Task Force spent the first part of April 2009 in meetings and conference calls with the officials of General Motors and their advisors. On 12 April 2009, Micheline Maynard and Michael J. de la Merced of the New York Times introduced us to a new term—“surgical bankruptcy.” They wrote that the goal of the Task Force “is to prepare for a fast ‘surgical’ bankruptcy ... GM, granted $13.4 billion in federal aid, insists that a quick restructuring is necessary, so its image and sales are not damaged permanently” (“‘Surgical’ Bankruptcy Possible for GM,” NYT, 12 April 2009). Could the term “surgical bankruptcy” herald back to the battle between scalpels and chainsaws during the Presidential Debates of 2008?

The Past Is the Prelude to the Present

In March 2009, we wrote that, from the point of view of GM shareholders, the decline in the equity position of the company, the probability of its recovery, and the duration of a possible recovery remained critical concerns. Since 2004, GM Shareholder Equity decreased from a high of $27.4 billion to a negative low of ($86.2) billion at the end of 2008. This decline amounted to $113.6 billion over five years.

In addition, we asked if a viable, surviving GM could continue to support multiple secondary vehicle brands. If not, then the options for action at the time included the following: 1) Sell the three smaller brands to other producers, assuming that a viable purchaser steps forward. 2) Fold their productive capacity into Chevrolet to create one strong survivor, though we must recognize that the resulting excess capacity would constitute a costly burden at this time. 3) Shut them down, though recent episodes suggest that this option may prove too costly and lengthy for the near term. Over the past month, the opinions of more stakeholders, including the Federal Government, have paralleled our thoughts. This month, we will explore some recent developments that have come to the table and add a few of our own.

Montgomery “Scotty” Scott: “A Few Seconds after They Sent This One Up through the Transporter, That Duplicate Appeared. Except It’s Not a Duplicate, It’s an Opposite: Two of the Same Animal, but Different.”

—Star Trek, “The Enemy Within,” Episode of 6 October 1966

For those fans of Star Trek (whether they have grown into successful attorneys, have remained residents of their parents’s basement, or both), the restructuring scheme laid on the table of General Motors reminds one of the Star Trek episode in which Captain James T. Kirk splits into the “Good Kirk” and the “Evil Kirk.”

The White House Automotive Task Force announced that it had considered splitting GM into two companies in bankruptcy court. Restructured to survive, the Court would create a “Good GM” with strong brands, including Chevrolet and Cadillac. The Court would saddle the other firm, the “Bad GM,” with weaker brands like Saturn and Hummer, brands to be sold off later during extended bankruptcy proceedings.

This idea circulated swiftly through the media and received further endorsement from GM’s then-interim Chairman, Kent Kresa. Mr. Kresa, Chairman Emeritus of the aerospace defense contractor Northrop Grumman, received credit for keeping his company afloat during its bankruptcy proceedings. On 2 April 2009, Kresa told Jamie LaReau of the Automotive News (autonews.com) that, if GM must go into bankruptcy, then splitting the company into two entities would be “a great idea.” Kresa floated that, if the company must enter Chapter 11 bankruptcy, it could break into a “good GM” and a “bad GM.” Such a plan would help the “good GM” to recover quickly and emerge unencumbered as a viable company. Kresa maintained that the concept presented a “wonderful idea for allowing a new General Motors to emerge.”

However, Kresa warned that this reorganization technique “has problems, and everyone is looking at it very hard.” He added, “There are a lot of constituents right now that have some dibs on the assets…”. The bankruptcy dealt with each of those and ensured that whatever came out was reasonable. We must note that, as Non-Executive Chairman, Kresa stated that he was not personally involved in negotiations with the UAW or bondholders.

363 – The Number of the Beast? Probably Not.

On 2 April 2009, Frank Langfitt of the National Public Radio program All Things Considered (npr.org) discussed that the Obama administration explored Section 363 within Chapter 11 of the Bankruptcy Code.

Section 363 often provides a vital element of the bankruptcy process for the sale of assets. Under Section 363(f), a bankruptcy trustee or debtor-in-possession, in this case, “parent GM,” may sell assets of the bankruptcy estate--in this case, “good GM”--free and clear of any interest in such property. This “free-and-clear” provision would allow the debtor to consummate the sale quickly, as competing interests in the property do not require resolution.

However, when the corporate parent remains the debtor in bankruptcy, Section 363 also considers the shares of the debtor’s subsidiaries as “assets” they may sell. As a caveat, attorneys Lisa Jack and George W. Shuster Jr. of the law firm Wilmer Hale (wilmerhale.com) offer an example from the U.S. Bankruptcy Court for the District of Delaware. The authors recount the case of Insilco Technologies. Before filing for bankruptcy, Insilco closed a deal with Amphenol Corporation to sell Insilco’s subsidiaries and all of the stock in its wholly-owned subsidiary, Precision Cable Manufacturing Co. Inc. (PCM). Two years after the sale, the liquidating trustee filed a preference action for more than $1 million against PCM, which had become a subsidiary of Amphenol Corporation. Though those involved sold both the co-debtor assets and the PCM stock free and clear of interest, the support of PCM had not. Jack and Shuster explain that the assets of PCM were not transferred under the Sale Order, so that order did not urge the pursuit of claims or interests against PCM or its assets.

This case provides a cautionary reminder to buyers from Jack and Shuster that “a stock sale is still a stock sale, and that a buyer who takes the shares of a corporation under a 363 order will still be responsible for the subsidiary’s indebtedness.” (Amphenol Corp. v. Shandler [In re Insilco Technologies, Inc.], Adv. Proc. No. 05-52403 [Bankr. D. Del. 18 September 2006]).

Jack and Shuster also make this critical point: “[A] stock sale of a non-debtor subsidiary ‘free and clear’ offers minimal protection to the buyer. In buying a corporation—not merely its assets—a buyer does not receive any discharge or protection from the corporation’s indebtedness under Section 363.” (Bankruptcy Section 363 Sales: Buyers Beware of “Free and Clear” Sales of Non-debtor Subsidiaries, wilmerhale.com, 24 October 2006).

Rebirth of an Old Plan

I (Dr. Sase) have sketched a series of discussions from the mid-1950s relating to General Motors and the plans that emerged from these events. The approximate time frame extended from 1954, the year after the CEO of GM, Charles E. Wilson, divested himself of his holdings in General Motors to avoid potential conflicts of interest in his new position as Secretary of Defense with the Eisenhower administration, to the Court’s decision in the 1957 case of the United States v. Du Pont & Co., 353 U.S. 586. This decision required DuPont to divest itself of GM shares to preserve its contract as the primary paint supplier to GM. (My knowledge of the situation stems from my experience as a youngster. For a few years, I was an eyewitness to this situation, which was explained to me by my parents and others who were involved in it.)

In essence, this series of events enabled interested parties from the first generation of GM wealth to establish a group of 28 male children in Metro Detroit to whom they could pass a significant amount of what was then 88 million shares of stock in General Motors. In addition, a group of 23 male children from the State of Delaware, the center of DuPont de Nemours Inc. (commonly referred to as DuPont), were added. A business relationship continues to exist between GM and DuPont, which provides paint for the auto company.

Furthermore, the parties involved identified or imposed an executive hierarchy upon the children based on kindred networks, cousinages, and bloodlines. More simply, the group of boys were kin to the vast number of employees at that time.

The powers and rights, which flowed ostensibly from the percentage of total corporate shares, passed through trust accounts. GM dowagers—spouses and widows of the founding group of the company—secured the hierarchy and held it in reserve. At the time, the dowagers created the original “estate” through a process that would transfer shares upon their demise.

The planned contribution of holdings amounted to approximately 28% of total outstanding GM shares. Following the Federal Court decision that required DuPont to divest itself of GM stock due to conflict of interest, the powers added an amount of GM stock to the Detroit trust to balance the holdings with the 23% that went to the Delaware group of boys. This combination of trust accounts then held 51% of company stock.

As part of the plan, 51% of holdings came under the management of the independent companies of Wilmington Trust (28%) and Christiana Trust (23%). More recently, I located the specifics of this plan in the 2015 documents of the New GM, for which Wilmington manages the 28% share of stock holdings and Christiana controls 23% for a combined majority at 51% plus all dividends received and re-invested through diversification. These 51 stockholders hold 51% of GM stock in the 21st Century at 1% each. However, these 51% shareholders do not have the direct power to divest their shares nor to draw upon the dividends from current holdings.

Over the past eight decades, this pair of trusts have invested all dividend payments diversely in the shares of other opportunities. These dividends from diversified investment provided the capital needed to invigorate GM, Part Two.

Takeaway

How does the history of GM relate to the current strike that we are experiencing? The 28% “Dowager Trust” was created explicitly by the women of the founding families of General Motors. Since blood relationships were so prevalent at the time, the dowagers felt that the creation of this trust protected the vast network of relatives and, importantly, helped to ensure the future of the company and the well-being of its employees. Therefore, we might view our current situation as continuing to maintain the standard and quality of life—hourly and salaried—of employees, not just at GM but possibly at the industry sisters as well.
————————
Dr. John F. Sase teaches Economics at Wayne State University and has practiced Forensic and Investigative Economics for twenty years. He earned a combined M.A. in Economics and an MBA at the University of Detroit, followed by a Ph.D. in Economics from Wayne State University. He is a graduate of the University of Detroit Jesuit High School (www.saseassociates.com).