The opinion of the court was delivered by: LA Buy, District Judge.
This action is brought by the United States Government for
alleged violation by defendants of Sections 1 and 2 of the
Sherman Act, 15 U.S.C.A. §§ 1, 2, declaring illegal every
contract, combination or conspiracy in restraint of trade and
prohibiting monopolization or the attempt to monopolize trade
and commerce, and Section 7 of the Clayton Act, 15 U.S.C.A. §
18, declaring illegal the acquisition of stock by a corporation
in another where the effect of such acquisition may be to
substantially lessen competition or tend to create a monopoly.
The defendants against whom the action is brought are named
and identified in the amended complaint as follows:
The three defendant "manufacturers": E. I. du Pont de
Nemours and Company, General Motors Corporation, and United
States Rubber Company. All of these companies transact
business within the Northern District of Illinois and are
found here.
The three "corporate" defendants: Christiana Securities
Company; Delaware Realty & Investment Corporation; and
Wilmington Trust Company, individually and as trustee.
The remaining defendants come within the categoric
description of "members of the du Pont family." These members
of the du Pont family are divided into the following:
The three "defendant individuals": Pierre S. du Pont and
Lammot du Pont, for whom Suggestions of Death were filed May
6, 1954 and January 16, 1953, respectively; and Irenee du
Pont.
The twenty-six "beneficiary" defendants, ten of whom are
minors, also identified as "party in interest" defendants, who
are not named as conspirators and who are beneficiaries of one
or more trusts of which the defendant Wilmington is trustee.
With the exception of the twenty-six beneficiary defendants,
all defendants are alleged to have participated in acts which
violate the anti-trust statutes.
The Government's statement of the offense is stated as
follows:
The Amended Complaint charges that the defendants have
engaged in a conspiracy to restrain trade in certain products
produced by the du Pont Company, United States Rubber, and
General Motors, in violation of Section 1 of the Sherman Act,
and to monopolize a substantial part of such trade in
violation of Section 2 of the Sherman Act. It also alleges
that the defendant du Pont Company has acquired a controlling
interest in the stock or other share capital of General Motors
in violation of Section 7 of the Clayton Act. The Amended
Complaint states further that the defendants have done the
things which they conspired to do, namely, that they have
restrained trade and monopolized a part of the commerce in
certain products. (Post-trial Brief, U.S., Vol. I, p. 3.)
In its summary of the statement of evidence the Government
states that the evidence, when viewed as a whole, shows that
the defendants have designed and followed a pattern of
business conduct which has three basic objectives. The first
of these objectives has consisted of obtaining control of the
management and policies of the three manufacturing defendants,
du Pont, General Motors, and United States Rubber. The second
of these objectives has consisted of the creation and
exploitation of protected markets for certain of the products
produced by du Pont and United States Rubber, to the exclusion
of competitive suppliers. The third of these objectives has
consisted of the reservation of certain exclusive fields of
production to the du Pont Company. These three purposes have
been served by the fostering of a network of
interrelationships among the corporate and individual
defendants. This has insured the perpetuation of control of
the corporate entities under persons possessing in essence the
same interests, and has enhanced the market position of each
of the manufacturing defendants.
The Government further charges that the central thread of
the entire pattern of conduct is the acquisition of
interlocking stock controls and the use of such controls to
dominate the management of the controlled corporations.
(Post-trial Brief, U.S., Vol. I, p. 5.)
There is no dispute regarding the facts culminating in the
formation of the present du Pont Company. From 1802 to 1899 it
was operated as a family partnership. The first corporate
predecessor to du Pont was formed in 1899. In 1902 T. Coleman
du Pont, Alfred I. du Pont, and Pierre S. du Pont acquired the
assets of the 1899 company pursuant to a proposal advanced by
Alfred I. du Pont. These assets were later taken over by the
1903 company. Until 1915, T. Coleman du Pont was the largest
stockholder in du Pont; his holdings being about equal to the
combined holdings of Alfred I. du Pont and Pierre S. du Pont.
The present du Pont Company was organized in 1915 to succeed
the 1903 company.
The factual approach to the issues involved herein will be
clarified and simplified by division of this memorandum into
two general categories: First, the aspects of alleged control
reflected in stock holdings, selection of officers, board and
committee members; and, second, the trade aspects. The issue
of conspiracy underlying as it does both phases of the case is
of necessity interwoven and inseparable and is an ultimate
fact which permeates the entire case.
In December 1914 T. Coleman du Pont offered to sell a
substantial block of his du Pont stock to du Pont for resale
by the company to its principal younger executives, but the
offer was rejected since the price was considered too high.
In the early part of 1915 T. Coleman du Pont offered to sell
his stock to Pierre S. du Pont and others at a higher price.
It is admitted that in 1915 Christiana was formed by a
syndicate composed of Pierre S. du Pont, Lammot du Pont,
Irenee du Pont, together with A. Felix du Pont, R.R.M.
Carpenter, and John J. Raskob, for the purpose of acquiring
this stock.
The evidence shows that Christiana was organized so that
members of the syndicate could use the stock of the
corporation as security for a loan it was necessary for them
to obtain to buy the stock of Coleman du Pont.
This block of stock consisting of 63,314 shares of common
and 14,599 shares of preferred was transferred to Christiana
along with 28,177 shares of du Pont common transferred to it
by the six syndicate members. The six incorporators of
Christiana held all of the 75,000 shares of Christiana. The
day after Christiana was organized each returned to its
treasury approximately 15% of the Christiana stock to be
distributed to the chairman of the Executive Committee of du
Pont, the eight department heads of du Pont, and the General
Counsel of du Pont under an agreement that the stock so
assigned to each would become his property if he continued in
the employ of the company for one year and that no assignee
would sell or hypothecate the stock for three years. After
this allocation, the six incorporators held 68,250 shares of
the 75,000 outstanding shares of Christiana.
After Coleman's stock had been acquired, Alfred du Pont and
others brought suit alleging that Pierre and his associates
abused the trust of their official positions in obtaining the
Coleman stock. The trial court determined to submit to a vote
of the stockholders the question of whether or not the Coleman
du Pont stock should be acquired by the du Pont Company. In
the ensuing proxy battle, the Pierre S. du Pont group won.
Thus, Christiana at its inception held 91,491 shares of the
du Pont common stock amounting to approximately 27% of the du
Pont's outstanding common shares. The evidence shows that
commencing with the original acquisition of the Coleman stock,
this percentage has continued throughout the years and that
substantially all the stock now held by Christiana traces
directly to the stock transactions occurring in 1915. No
additional or other acquisitions of du Pont stock have been
made by Christiana, and the evidence shows that a majority, or
68% of the outstanding Christiana stock has been held
continuously by Pierre S. du Pont and the members of the du
Pont family, either directly or through Delaware.
In 1923 Pierre S. du Pont, having retired from active
business life, decided to invest in an annuity to provide
himself and his wife with an appropriate income. His decision
to buy an annuity was based in part on the favorable tax
treatment granted annuities under the existing tax laws.
Pierre S. du Pont being unable to find a standard life
insurance company which would offer him an arrangement not
involving the sale of his stockholdings which event would
depreciate the value of his estate, a group of his brothers
and brothers-in-law offered to sell him an annuity.
In 1923 Pierre S. du Pont transferred the bulk of his
holdings in Christiana consisting of 49,000 shares, together
with 24,000 shares of du Pont common, and other stock in other
companies to Delaware Realty & Investment Corporation, which
was specifically organized to hold the same and pay him and
his wife an annuity for life. The common stock of Delaware was
then divided into eight equal shares for Pierre S. du Pont's
eight brothers and sisters or their families.
The evidence shows that the stock of Delaware up to the date
of the filing of the complaint has continued to be wholly
owned by the members of the du Pont family and in many
instances transfers were made through the formation of trusts.
Delaware also holds 49,000 shares of Christiana, being Pierre
S. du Pont's previous holdings, which constitutes about 32% of
the outstanding Christiana stock.
On March 29, 1944 E.H. Tinney, Secretary of Delaware,
submitted a memorandum to members of the Advisory Committee of
Delaware Realty and Trust dealing primarily with tax
considerations on the advisability of liquidating that
corporation. In addition to the tax factor, he stated:
"Liquidation would afford greater flexibility,
including better marketability, and permit
diversification. Without liquidation, the
stockholders are practically compelled to go
along together; whereas if liquidated each
stockholder could do as he thought best suited
his individual purpose. There is no certainty
whether those factors would in the final analysis
represent reasons for or against liquidation.
Delaware Realty, at least to some extent,
facilitates control of the du Pont and General
Motors industries. While liquidation would not
eliminate this immediately, it would weaken it;
more particularly with the passage of time." (GTX
1335.)
There is no evidence that Tinney knew anything about the
relations between du Pont and General Motors and no evidence
that he knew anything about the intentions of the individual
defendants or other members of the du Pont family or that he
was acquainted with their state of mind as it related to
Delaware. Pierre S. and Irenee du Pont both testified that
Delaware was not organized for the purpose of controlling du
Pont or General Motors as charged by the Government and that
it was not used for that purpose. Similar testimony was given
by other individual defendants. Having heard the testimony of
these witnesses, the Court finds their testimony more
persuasive than the statement of opinion made by Tinney.
Defendants admit that Christiana holds 3,049,800 shares of
du Pont common stock out of 11,158,340 outstanding du Pont
stock, equivalent to 27%; that Delaware holds 304,480 shares
of du Pont common stock, or 3%, of the outstanding du Pont
stock; that defendant individuals and certain members of the
du Pont family, who are either officers or directors of du
Pont, own a further block of approximately 5.3% of the stock
of du Pont; while other members of the du Pont family, who are
not officers or directors of du Pont, own directly a further
2.2% of the stock of du Pont. Du Pont common stock at the time
the complaint was filed was held by 82,000 shareholders.
It is also admitted that 30% of the outstanding du Pont
common stock held by Christiana and Delaware has been
consistently voted as a block always in support of du Pont
management at du Pont stockholder meetings, that directors of
Christiana have in most instances been directors and officers
of du Pont, and that defendant individuals, younger members of
the du Pont family and officers and directors of Delaware have
assumed major responsibilities in du Pont management.
There is no evidence that either Christiana or Delaware, or
both of them, had voting control of du Pont. However, the fact
that the du Pont family had voting control of Christiana and
Delaware whose du Pont stock is consistently voted as a block
in favor of du Pont management, coupled with the fact that for
many years members of the du Pont family have been major
executives of the corporation, indicates control of management
of du Pont by the du Pont family.
The Government has failed to prove that the stock held by
the defendant individuals
and members of the du Pont family in Christiana and Delaware
was for the purpose of perpetuating control over the du Pont
Company, and has failed to prove that there was any agreement,
understanding, or conspiracy that they would continue to hold
such stock, keep it within their families, or dispose of or
vote the Delaware stock for the purpose of utilizing du Pont
to create protected markets for du Pont, or to otherwise
restrain or monopolize trade. The Government has further
failed to prove that either Christiana or Delaware, or both,
were formed, and their stock held, for the purpose of creating
protected markets for du Pont and to otherwise restrain or
monopolize trade.
General Motors Corporation
In the spring of 1914 Pierre S. du Pont purchased
approximately 2000 shares of General Motors upon the
recommendation of John J. Reskob. His personal holdings from
1914 to 1917 are set forth in GTX 114. Irenee du Pont
purchased 400 shares of General Motors in 1914 on the
expressed enthusiasm of John J. Reskob, but did not know his
brother had done the same, His personal holdings from 1914 to
1917 are set forth in GTX 115. He attended no General Motors
meetings during this period.
General Motors was organized in 1908 by W.C. Durant and had
acquired a number of previously independent automobile
manufacturing companies — Buick, Cadillac, Oakland and
Oldsmobile. In 1910 in order to raise needed working capital
Durant had been compelled to borrow $14,000,000 from a group of
"Boston" bankers under a voting trust agreement which
supplanted Durant as President by Charles W. Nash, and gave
control of the Board of Directors for five years to said
bankers. Upon leaving the active management of General Motors,
Durant and close associates incorporated the Chevrolet Motor
Company to manufacture a new low-priced car. The Chevrolet
Motor Company bought stock of General Motors until in 1916 it
owned 450,000 shares of common stock out of 825,000
outstanding.
About September 1915 Pierre S. du Pont and John J. Raskob
became actively involved in the affairs of General Motors when
both attended a stockholders meeting at the invitation of Mr.
Kaufman, who was president of the Chatham & Phoenix National
Bank of New York. At this meeting, Durant and the lending
bankers, who were operating General Motors under the voting
trust agreement which expired in 1915, became deadlocked on
the composition of a new Board. A compromise was reached
whereby both sides agreed that each name seven candidates and
Pierre S. du Pont was empowered to name three neutral
directors not connected with either Durant or the lending
bankers. Pierre S. du Pont submitted the names of J.A.
Haskell, who had been a vice-president of du Pont for many
years and now retired; John J. Raskob, Treasurer of du Pont;
and Lammot Belin, his brother-in-law. These were accepted by
both factions. Pierre S. du Pont was elected Chairman of the
Board.
Durant extended an invitation to Pierre S. du Pont and John
J. Raskob to become members of the General Motors Finance
Committee, which invitation was declined, and in October 1916
both declined chairmanship of that committee. In January 1916
Durant offered Pierre S. du Pont and Raskob the opportunity to
exchange their General Motors holdings for Chevrolet Motor
stock on the basis of five shares of Chevrolet for one share
of General Motors, which offer was declined. Raskob stated "we
were not sure he had control of the General Motors Company and
being in the position of neutral directors, we might be
charged with taking sides should we do anything which would
tend to give one side or the other control of the Company."
(GTX 119.) After it became clear in May 1916 that Durant,
through Chevrolet Motors holdings in General Motors, had
obtained control of General Motors, Pierre S. du Pont and
Raskob availed themselves of the offer which Durant had held
open for them, and as a result Pierre S. du
Pont and Raskob became large holders in Chevrolet Motors which
controlled General Motors.
In August 1917, Pierre S. du Pont and Raskob accepted
Durant's invitation to become members of the General Motors
Finance Committee, and Durant suggested that the "Wilmington
people, as he called it, take more stock and more interest in
the General Motors Corporation." (Pierre S. du Pont 1997.)
After Pierre S. du Pont and Raskob became members of the
Finance Committee both saw a "good deal" more of Durant and he
talked freely to them about operations and finances of General
Motors and plans for its future expansion.
Shortly prior to December 19, 1917, Raskob talked with
Pierre S. du Pont with respect to a proposed company
investment in General Motors. Raskob prepared a draft report
in connection with this proposal which was reviewed and
approved by Pierre S. du Pont and discussion was had between
them regarding parts of the report. Raskob proposed to Pierre
S. du Pont that he take on the promotion of such a plan with
the du Pont directors and it was submitted in final form as a
Report of the Treasurer to the Finance Committee of du Pont.
On December 21, 1917 the Executive and Finance Committees of
du Pont approved the acquisition of common stock in General
Motors and Chevrolet Company in the amount of $25,000,000.
General Industries, Inc., all of whose stock was held by du
Pont, was formed to acquire the General Motors stock. By March
8, 1918 General Industries, Inc., had purchased approximately
23% of the common stock of General Motors and Chevrolet.
During the next two years the investment was increased to
approximately $49,000,000 and in 1920 du Pont owned
approximately 23.96% of the outstanding stock of General
Motors.
The Raskob report submitted to the Finance and Executive
Committees of du Pont in connection with the proposed purchase
of General Motors and Chevrolet stock summarized the following
points in favor of a substantial investment in the motor
industry:
"1. With Mr. Durant we will have joint control
of the companies.
"2. We are immediately to assume charge and be
responsible for the financial operation of the
Company. This involves the direction of cash
balances which will aggregate upwards of
$25,000,000 and the handling of annual gross
receipts aggregating $350,000,000 to
$400,000,000. From a financial standpoint, I feel
that a consolidation of the financial divisions
of the du Pont and General Motors Companies will
be of tremendous advantage to us as well as to
the General Motors Company and is a thing to be
sought and desired from our standpoint.
"3. The du Pont Company, if the Class A stock
is sold to the stockholders, will share in the
profits of the industry to an extent equal to
120% on our investment and will receive 14% in
annual dividends thereon; or in the event of
carrying Class A stock in our Treasury the
dividend rate will be about 12.6% and will share
in the earnings about 42% and this after paying
$20,000,000 war taxes.
"4. Our purchase is on better than an asset
basis.
"5. Our interest in the General Motors Company
will undoubtedly secure for us the entire
Fabrikoid, Pyralin, paint and varnish business of
those companies, which is a substantial factor.
Announcement of the purchase was made in the annual report
of du Pont to its stockholders as follows:
"Announcement was recently made of the
acquisition of a large interest in the General
Motors Corporation and Chevrolet Motor Company.
Though this is a new line of activity, it is one
of great promise and one that seems to be well
suited to the character of our organization. The
motor companies are very large customers of our
Fabrikoid and Pyralin as well as paints and
varnishes." (P.S. du Pont 2245.)
Raskob's report, the testimony of Pierre S. and Irenee du
Pont and all the circumstances leading up to du Pont's
acquisition of this substantial interest in General Motors, as
shown by the record, establish that the acquisition was
essentially an investment. Its motivation was the profitable
employment of a large part of the surplus which du Pont had
available and uncommitted to expansion of its own business.
The Government asserts that an agreement was made in 1917 at
or about the time of du Pont's investment in General Motors
which bound the latter to purchase from du Pont substantially
all of its requirements of products of the kind made by du
Pont. It also argues that du Pont's investment in General
Motors was made with the purpose of using its alleged control
of General Motors to require it to buy from du Pont.
The principal basis for both of these contentions appears to
be the portion of Raskob's report wherein he stated:
"Our interest in the General Motors Company
will undoubtedly secure for us the entire
Fabrikoid, Pyralin, paint and varnish business of
those companies, which is a substantial factor."
(GTX 124.)
The Court has also considered in passing upon these
contentions of the Government the testimony of Pierre S. and
Irenee du Pont and other documents written at the time of or
within a few years following the investment.
The Court finds on the basis of all the evidence of record
that no agreement was made in connection with du Pont's
investment in General Motors, or subsequent thereto, which
bound the latter to buy any portion of its requirements from
du Pont. Raskob's report does not describe any such agreement.
Pierre S. du Pont was party to the preparation of this report
and he testified that he had no knowledge of any such
agreement. Irenee du Pont similarly testified that he knew of
no such agreement. The Court believes it most unlikely that an
agreement of the kind alleged by the Government would have
been made without the knowledge of these two important
officials. On the General Motors side, neither Sloan nor Pratt
was ever advised of any such agreement though both occupied
positions under Durant in which they would be expected to have
known of one had it existed. No document, either
contemporaneous with the making of the alleged agreement or
subsequently executed, makes reference even indirectly to an
agreement of the kind alleged by the Government. The Court
does not find in the actions over the years of du Pont's
executives or salesmen or General Motors purchasing personnel
corroboration of the existence of the alleged agreement.
Raskob's reports and other documents written at or near the
time of the investment show that du Pont's representatives
were well aware that General Motors was a large consumer of
products of the kind offered by du Pont. Raskob, for one,
thought that du Pont would ultimately get all that business,
but there is no evidence that Raskob expected to secure
General Motors trade by imposing any limitation upon its
freedom to buy from suppliers of its choice. Other documents
also establish du Pont's continued interest in selling to
General Motors — even to the extent of the latter's entire
requirements — but they similarly make no suggestion that the
desired result was to be acheived by limiting General Motors
purchasing freedom. On the contrary, a number of them
explicitly recognized that General Motors trade could only be
secured on a competitive basis.
At the time of this investment, Pierre S. du Pont, Haskell
and Raskob were members of the General Motors Board and after
the investment two additional du Pont nominees were elected to
that Board. In 1919 the Board was increased to twenty members
and the du Pont nominees remained at six.
The Finance Committee consisted of seven members, five of
whom were du Pont representatives — Pierre S. du Pont, Irenee
du Pont, John J. Raskob, Henry F. du Pont, and J.A. Haskell.
Mr. Raskob was appointed chairman. It is apparent, and it is
admitted, that a majority of this committee were officers and
directors of du Pont.
The Executive Committee consisted of ten members, including
one du Pont nominee, J.A. Haskell, with Durant as chairman and
the other members consisting of management representatives.
The evidence establishes that following the period of this
investment until 1920 du Pont and Durant jointly controlled
General Motors and that du Pont, through its affiliation with
Durant, assumed the responsibility for the financial operation
of General Motors.
During 1918 and 1919 General Motors acquired the assets of
the Chevrolet Company, United Motors, which was an
amalgamation of a number of accessory companies, the
McLaughlin Buick properties in Canada, and a sixty per cent
interest in Fisher Body Corporation. This expansion of General
Motors had required the raising of new capital.
The Board of Directors of General Motors in 1920, after a
previous unsuccessful effort to raise the necessary additional
capital by an issue of seven per cent debenture stock,
authorized an issuance of approximately 3,200,000 shares of
new common stock to the common stockholders at $20 per share.
It was also decided that du Pont and Durant would turn over
their stock subscription rights amounting to 1,800,000 shares
to Nobel and Canadian Explosives, Ltd., since Durant and du
Pont were reluctant to make any further investments. J. P.
Morgan & Co. subscribed to 600,000 shares of the new issue and
one of its partners was named to the Board, together with
representatives of Nobel and Canadian Explosives. The stock
acquisitions of Nobel and Canadian Explosives were in large
part taken over by du Pont at a later date.
The evidence shows that this new issue was accompanied by
the formation of a syndicate managed by J.P. Morgan to buy and
sell General Motors stock and subscription rights for the
purpose of supporting the value of General Motors stock in the
market. During the Fall of 1920, Durant, through individual
stock market operations apparently designed to support the
market price, had become indebted in the amount of $27,000,000
to various banks and brokerage houses for which he had pledged
some 2,700,000 shares of General Motors stock. These stock
market investments by Durant were disclosed to Pierre S. du
Pont and Raskob in November and
alarm was felt as to the possible consequences in the event
Durant failed in the market. Du Pont Securities Company was
organized to borrow $20,000,000 and take over Durant's loans,
pay his creditors and preserve for him a 40% equity in du Pont
Securities stock, which was later exchanged for 230,000 shares
of General Motors stock. The new company had seven million
dollars in cash and loaned 1,376,000 shares of General Motors
stock to borrow the balance needed. Du Pont in 1921 authorized
a bond issue in order to finance the transaction.
The net result of the foregoing stock transactions was that
du Pont owned, through du Pont Securities, the equivalent of
7,362,540 shares of General Motors stock at a cost of
$75,581,259 and in addition owned directly 200,000 shares
acquired at a cost of $4,000,000; being the equivalent of
approximately 38% of General Motors stock outstanding.
In 1923 du Pont sold about 2,250,000 shares of General
Motors stock (substantially the amount acquired through the
1920 stock transactions) to Managers Securities, a corporation
organized by General Motors for the purpose of providing
additional incentive to principal executives of General
Motors. Du Pont began to surrender the voting rights on this
stock in 1930, and from time to time thereafter surrendered
such rights as holders of Managers Securities stock
surrendered their stock and took down the underlying
securities. By 1938 du Pont had surrendered the voting rights
on all of this stock. It is admitted that since the release of
the voting rights to such stock, du Pont has for many years
owned 10,000,000 shares, or approximately 23% of General
Motors common stock, and that the remaining shares in 1947
were held by 436,510 stockholders, 92% of whom owned no more
than 100 shares each and 60% owned no more than 25 shares
each. In 1950 a two for one split was effected resulting in du
Pont holding 20,000,000 out of 88,000,000 shares, which did
not change the percentage of du Pont holdings.
At the conclusion of the 1920 events Pierre S. du Pont
became president of General Motors. He was urged to accept
this position by the du Pont Finance Committee since du Pont
had a large investment in General Motors to protect. In
addition, the record discloses that he was urged to assume the
presidency of General Motors by the bankers, by Sloan, and by
others in the management.
Pierre S. du Pont held the presidency of General Motors
until May 1923 when Alfred P. Sloan became president.
During Pierre S. du Pont's term of presidency significant
and important changes were effected within General Motors.
These were:
(1) A plan of reorganization for General Motors providing
for substantial autonomy of the operating divisions of General
Motors. The evidence shows that Pierre S. du Pont presented to
the Board a plan, originated by Sloan during Durant's
presidency, to decentralize the General Motors divisions.
(2) Certain changes in management and in the personnel of
the Executive Committee were made. Under Durant the ten man
Executive Committee consisted of managers of the operating
divisions. In 1921 the Executive Committee was reduced to four
members. They were Pierre S. du Pont, the President; Haskell
and Sloan, heads of the Line and Staff Divisions; and John J.
Raskob, Chairman of the Finance Committee. This four man
committee was enlarged to six in 1922 by the addition of
Charles Fisher, a General Motors director, and C.S. Mott, also
a General Motors man. Durant started a competing automobile
company and the question of loyalty on the part of some of the
car division managers to Durant was one of the reasons for
reconstituting the Executive Committee.
The Finance Committee of General Motors remained the same
except the Durant vacancy was filled by Donaldson Brown, a
former du Pont employee who was also a member of du Pont's
Finance Committee.
(3) A General Purchasing Committee was created in 1922. This
committee was created at the suggestion of Sloan in order to
enable General Motors to set up machinery for standardizing
items and for coordinating purchases where two or more
divisions used a common product. James Lynah, who left
employment of du Pont in 1919 under "acrimonious"
circumstances, was appointed secretary by Sloan and the
committee was composed principally of purchasing agents of the
General Motors divisions. It is this committee which in
September 1923 with Lynah's recommendation urged the adoption
of a rule requiring a second source of supply for leather
substitutes and rubber coated fabrics which were being
purchased in large quantities from du Pont. John L. Pratt, who
was a du Pont employee from 1905 to 1919 when he resigned and
went to work for Durant at General Motors, also became a
member of this committee and was its chairman from 1924 to
1929.
(4) In 1918, during the Durant regime, at the suggestion of
the du Pont nominees, General Motors initiated a bonus plan to
outstanding employees. Before retiring as president, Pierre S.
du Pont recommended that another plan be instituted providing
for additional compensation to principal executives of General
Motors.
Allotment of bonus awards was made by the Chief Executive
Officer of General Motors subject to the approval of the
Finance Committee. This procedure was followed until 1936 when
a Bonus and Salary Committee of the Board replaced that
function of the Finance Committee.
In addition to these changes in General Motors, two
important discoveries affecting the automotive industry
occurred.
In the latter part of 1920 Edmund M. Flaherty, an employee
of du Pont, invented and carried to the commercial development
stage a quick-drying, durable nitrocellulose lacquer, which
was patented and called "Duco".
The other was the discovery of tetraethyl lead. In 1918
General Motors engaged in an extensive investigation into the
nature and the causes of "knocking" in engines. In the General
Motors laboratories chemical research under the direction of
Charles F. Kettering and Thomas Midgely developed that the use
of tetraethyl lead blended with gasoline in proper proportions
constituted an effective anti-knock. It was further revealed
that TEL, as it was called, was a scarce and expensive
product, production of which was extremely hazardous. General
Motors discovered that TEL could be produced commercially from
ethyl bromide. In 1922 General Motors and du Pont entered into
an agreement under which du Pont manufactured TEL and it was
distributed through a General Motors subsidiary organized to
handle its marketing.
The record shows that during the 1920 to 1923 period du Pont
had a 38% interest in the stock of General Motors. Three of
the six members on the Executive Committee and seven of the
eleven members on the Finance Committee were du Pont men.
Haskell, former sales manager and vice-president of du Pont,
who was willing to undertake the responsibility of keeping du
Pont informed of General Motors affairs during Durant's
regime, was Vice-President in Charge of the Operations
Committee.
On April 24, 1923 Pierre S. du Pont informed the Finance
Committee of du Pont of his desire to retire as president of
General Motors and of his intention to recommend Alfred P.
Sloan, Jr., as his successor. Sloan was a vice-president of
General Motors and was in charge of the General Advisory
Staff. He had been president of Hyatt Roller Bearing Company,
one of the companies controlled by United Motors, which had
been organized in 1916 by Durant. When General Motors acquired
United Motors, Durant appointed Sloan as its president. The
Finance Committee of du Pont adopted a resolution acquiescing
in Pierre S. du Pont's decision and expressing confidence in
Sloan as his successor to the presidency. Thereafter, Pierre
S. du Pont informed the directors of General Motors of his
intention to resign and of his recommendation of Sloan for
president.
On May 10, 1923 Sloan was elected president of General
Motors and also was its Chief Executive Officer from 1937
until 1946. William S. Knudsen was elected president May 3,
1937 and served as such until September 3, 1940. In 1941
Charles E. Wilson was elected President and also became the
Chief Executive Officer in 1946. Shortly after Sloan became
president he was elected a director of du Pont.
On May 10, 1923 when Sloan became president, the Board
consisted of thirty-two directors. The evidence shows that
during the period of Sloan's presidency and that of Wilson,
the du Pont nominees on the Board never exceeded six. The
total number of members of the Board between 1949 and February
1, 1953 did not exceed thirty-two and was not below thirty.
Of the thirty-two directors when Sloan became president,
sixteen were so-called management directors and only two of
these had been connected with du Pont — Donaldson Brown and
Haskell. The other then management directors were five bankers,
three American industrialists and two foreign industrialists.
Sir Harry McGowan of Imperial Chemicals, William McMaster of
Canadian Explosives, Seward Prosser of Bankers Trust Co.,
Edward P. Stettinius of J.P. Morgan, William H. Woodin of
American Car & Foundry, C.M. Woolley of American Radiator, and
Owen D. Young of General Electric, all became members of the
Board during the 1920 financing. There is no evidence that
they were added at the suggestion of the du Pont nominees.
The defendants have admitted that in 1942 du Pont suggested
additional directors who were neither management nor du Pont
nominees. At that time there were only three directors on the
Board who were neither management nor du Pont nominees.
In July 1944 Carpenter wrote to Sloan urging selection of
additional non-management and non-du Pont directors. Sloan
testified he took the initiative in attempting to find
qualified men who would be willing to serve. He also testified
that in such search he sought suggestions from other members
of the Board, including du Pont nominees, and discussed
generally with all Board members the suggestions received.
In 1943 Sloan wrote to Carpenter, who was a member of the
General Motors Board, that in his search for "outside"
directors, he was "against Bankers on Boards of industrial
companies" and had therefore eliminated the suggestions of
Henry C. Alexander, Vice-President of J.P. Morgan, and R.K.
Mellon, President of Mellon National Bank, whose names had
been proposed by Carpenter some time previously. On January 8,
1948, five years later, R.K. Mellon was named to the Board of
General Motors.
at the suggestion of Donaldson Brown. Mellon had by this time
become "a very large stockholder in General Motors". In 1949
at the request of Sloan, Alexander, the other banker, was
added to the Board. Thus some period of time passed between
Sloan's indicated aversion to bankers on boards and the
subsequent appointments.
In addition, on December 18, 1944, Lammot du Pont wrote to
Sloan regarding Bernard Peyton, a nephew of Eugene du Pont who
owned 60,000 shares of du Pont common "which is more than
enough to give him a predominating interest in the affairs of
that company and indirectly in General Motors." (GTX 1230.)
Lammot du Pont wondered if "this would be a suggestion for
consideration from the standpoint of directorship in General
Motors". Sloan's reply admitted that neither he nor Donaldson
Brown, to whom he spoke about Peyton, knew Peyton, and replied
that if Peyton was the owner of a large block of du Pont
common involving indirectly substantial ownership in General
Motors, together with his past business experience as Vice
President and Treasurer of New York Air Brake Company, he
would be qualified. He further stated that if necessary he
would make inquiries regarding Peyton, but felt that since
Lammot du Pont knew him no more was needed. In any event,
Peyton never became a member of the Board.
On December 10, 1945 Sloan wrote to Carpenter, then
President of du Pont and a member of the General Motors Board,
regarding the suggestion of Mr. Pratt to consider General
Marshall as a member of the General Motors Board, and
indicated that he did not favor the suggestion. A reply came
from Lammot du Pont, Chairman of the Board of du Pont and also
a member of the General Motors Board, that he was not in favor
of General Marshall's membership. On Sloan's letter to
Carpenter, there appears a handwritten notation of the name of
"E.F. Johnson", and in the following month Johnson was elected
a director of General Motors. Prior to his service with
General Motors, he was an employee of du Pont.
On April 22, 1930, in an exchange of correspondence, Lammot
du Pont agreed with Sloan's suggestion that Mr. Bishop should
not be re-elected a vice-president of General Motors but
thought he should be retained as a director, and suggested
further that Curtis C. Cooper, who had severed connections
with the corporation, be dropped as a director. On May 1, 1930
Mr. Bishop was not re-elected Vice-President but continued as
a director, and Mr. Cooper was not retained as a member of the
Board.
In 1928, Raskob, while chairman of the General Motors
Finance Committee became Chairman of the National Democratic
Committee in connection with the candidacy of Alfred E. Smith
for President. Sloan testified he considered it unsound for
Raskob to manage a political campaign and at the same time
continue as "unofficial" spokesman for General Motors because
he felt it put General Motors in politics. Raskob differed
with Sloan's view and was supported by Pierre S., Irenee, and
Coleman du Pont. The episode resulted in Raskob's resignation
and also the resignation of Pierre S. du Pont as Chairman of
the Board. Both, however, remained as members of the Board and
the Finance Committee. Lammot du Pont succeeded Pierre S. du
Pont as Chairman of the General Motors Board and held that
position until 1937.
Mr. Sloan testified that he discussed prospective directors,
particularly "outside" directors, with the entire Board.
A majority of the directors have always been the nominees of
management. Sloan testified that management directors were
always nominated by him when they had achieved in the
management hierarchy of the corporation a position which
entitled or required that they be on one of the committees of
the Board, and further that he never discussed these
nominations with anyone except the management group and after
his recommendation their election was automatic. Sloan and
Carpenter testified that no du
Pont nominee ever objected to the number of management
directors which Sloan wanted on the Board.
The Executive Committee, until merged with the Policy
Committee in 1937, dealt with operational management problems.
In May 1923 when Sloan became president of General Motors
there were six members, three of whom were du Pont
representatives, i. e., Pierre S. du Pont, Chairman of the
Board, John J. Raskob, Chairman of the Finance Committee, and
Donaldson Brown, a member of the Finance Committee. The
membership of this committee was increased to twelve during
the period 1923-1934, and new members were added at the
suggestion and request of Sloan.
It is the Government's contention that du Pont directly
intervened in decisions touching on changes in the membership
of the Executive Committee and refer to the incident following
the resignation of Raskob and Pierre S. du Pont from the
Executive Committee. Irenee du Pont, then Vice-Chairman of the
Board of du Pont wrote to Lammot du Pont, Chairman of the
Board of General Motors, reminding him of the recommendations
made by Pierre S. du Pont and Raskob for their vacancies
— that Knudsen be placed on the Executive Committee for
Raskob, Mr. Mooney in place of Mr. Mott, and possibly Walter
Carpenter in place of Pierre S. du Pont. Knudsen was placed on
the Executive Committee within three months; Mooney became a
member of the Executive Committee some six years later; and
instead of Carpenter, Lammot du Pont took Pierre S. du Pont's
place on that committee. Neither Knudsen nor Mooney was
connected with du Pont.
On April 22, 1930 Sloan received a reply from Lammot du
Pont, then Chairman of the Board of General Motors, which
approved of Sloan's idea expressed in an earlier letter of
abolishing the Operations Committee and of placing its members
on the Executive Committee. Lammot du Pont went on to say this
meant that Bradley, Grant, Hunt and Wilson, all of whom were
vice-presidents, would have to become members of the Executive
Committee and presumably would have to be elected directors,
but added there was no reason why Glancey, Reuter and Strong,
who were also vice-presidents, should be added to the Board.
Some four or five years later, 1934 and 1935, Bradley, Hunt
and Wilson were-added to the Executive Committee and to the
Board. The others mentioned by Lammot du Pont never became
directors.
Lammot du Pont, Chairman of the General Motors Board, who
had become a member of the Executive Committee in 1930,
resigned as a member in 1934. In this connection Sloan wrote
to Lammot du Pont inquiring whether Lammot du Pont would like
to have Carpenter elected in his place. The evidence shows
that Carpenter did not go on the Committee and no one replaced
Lammot du Pont. After his resignation, du Pont had no
representative on the Executive Committee. Donaldson Brown
remained a member of this committee.
The Finance Committee until merged with the Policy Committee
in 1937 dealt primarily with financial matters. In 1923 of the
eleven members, seven were du Pont men. These were Pierre S.
du Pont, Chairman of the Board of du Pont, Irenee du Pont,
President of du Pont, Lammot du Pont, Vice President and a
director of du Pont, John J. Raskob, a director and member of
the du Pont Finance Committee, J.A. Haskell, a vice-president
and director of du Pont, H.F. du Pont, a director and member
of the Finance Committee, and Donaldson Brown, a director and
member of the Finance Committee of du Pont. With the death of
Haskell in 1923, the du Pont representation was reduced to
six. The Finance Committee in 1923 with continuing du Pont
representation reflected the original understanding with
Durant that in financial matters the du Ponts would assume the
primary responsibility.
In 1924 this committee was increased to twelve and
eventually to fourteen. In 1927 Carpenter became a member of
this committee.
With the resignation of Raskob from the Executive Committee
and Chairmanship of the Finance Committee, Lammot du Pont,
then President of du Pont and a director of General Motors,
wrote to Sloan regarding the chairmanship of this committee
stating that he felt it was up to du Pont to make a nomination
since du Pont "has always assumed the responsibility for the
financial direction of General Motors" and suggested the
appointment of Carpenter and, if not agreeable, Donaldson
Brown. The record shows that Donaldson Brown succeeded Raskob
as Chairman.
On May 3, 1937, the membership of the Finance Committee was
fourteen, seven of whom were du Pont representatives, i. e.,
Pierre S., H.F., Irenee, and Lammot du Pont, Raskob, Brown and
Carpenter. The other members were Baker, Prosser, Sloan,
Whitney, Morgan, Mott and Bradley. Sloan testified that most
of the additions to this committee during the period 1923-1937
had been at his suggestion.
In 1937 at the insistence of Sloan, the two committee
operation was consolidated into the Policy Committee. Sloan
testified that the change was desirable because experience
proved that the Finance Committee for some years prior to 1937
had dealt with problems which though financial in nature were
operating problems as well. After some discussion, his
recommendation was accepted and a Policy Committee which had
complete authority to deal with broad policy questions was
established. At this time Sloan resigned as President and was
succeeded by Knudsen. Sloan remained the Chief Executive
Officer and Chairman of the Board.
The one committee idea had been discussed with du Pont
representatives. It was considered by the Finance Committee of
du Pont and the committee was in favor of the objectives of
the proposal, but misgivings were expressed with respect to
the discontinuance of the Finance Committee without creating
some body whose particular function would be the handling of
financial problems. A proposed compromise plan was submitted
which was not adopted.
In connection with the 1937 reorganization, Lammot du Pont
wrote to Carpenter reporting on a conference held in New York.
Those present, including himself, were Alfred Sloan, Donaldson
Brown, J.T. Smith, John Raskob, John Pratt and Pierre S. du
Pont. At this conference it was agreed that the Board would be
reduced to 28 omitting McGowan, H.F. du Pont, W.A. Fisher,
Kaufman, Opel, Swayne, Woolley and Young; a Policy Committee
would be appointed consisting of Bradley, Brown, Knudsen,
Sloan, Smith, Wilson and three representatives of du Pont; and
an Administrative Committee would be appointed with Wilson as
Chairman. In addition it was agreed that eventually Sloan
should become Chairman of the Board and Knudsen, President.
Lammot du Pont stated that Sloan seemed so insistent on his
one committee idea, which was concurred in by the others, that
he felt any objections Carpenter or he had should be waived in
view of the fact that some other man of financial experience
from du Pont might be named on the Policy Committee.
The Policy Committee always consisted of nine members.
During the entire period of this committee the following du
Pont officers and directors, not including Sloan, were
members: Donaldson Brown, Carpenter and Lammot du Pont. The
management members were Bradley, Sloan, Smith, Wilson and
Knudsen, who was replaced by Hunt in 1940 on the nomination of
Sloan. The other member was George Whitney of J.P. Morgan.
With the exception of Knudsen, the personnel of this committee
remained the same throughout its life.
In 1943 Sloan wrote to Lammot du Pont asking his reaction to
the suggestion of Kettering as a member of the Policy
Committee. Lammot du Pont did not favor the suggestion and
Kettering was not appointed. Testifying regarding this
incident, Sloan stated that others agreed with Lammot du Pont,
including himself after giving the subject further
consideration. Sloan also testified that he consulted with all
the directors regarding the appointments to the Policy
Committee.
In 1946 with the change of committee organization, there
were no du Pont representatives on the Operations Policy
Committee. The Financial Policy Committee started with nine
members and was later increased to ten. At no time during its
existence were there more than three du Pont representatives
on this committee.
The evidence shows that since 1934, with the exception of
Donaldson Brown, no du Pont representative was on the
Executive Committee. Brown had been described by Sloan as a
General Motors man although he was a former officer of du
Pont, retained his membership on its Board and its Finance
Committee when he went to General Motors. Brown became a part
of the General Motors organization in 1921 when Raskob in a
letter to Irenee du Pont, who was then President of du Pont,
wrote that General Motors needed expert financial assistance
and that the person selected should not only be a man of
unquestioned ability but one who enjoyed the absolute
confidence of the directors of du Pont, which now controlled
General Motors. He recommended Donaldson Brown and stated that
since the financial interests of both companies were so
closely interwoven, Brown should be retained as a director and
member of the Finance Committee of du Pont. Brown eventually
succeeded Raskob in General Motors and became chief financial
advisor to its president.
There is no evidence that Brown was active in commercial
relations between du Pont and General Motors or that he ever
did anything to encourage the use of du Pont products by
General Motors.
During the life of the Policy Committee, of a membership of
nine, three, including Brown, were du Pont representatives.
There were no du Pont representatives on the Operations Policy
Committee.
On the Finance Committee, which was changed to the Policy
Committee in 1937, there were seven du Pont representatives,
including Brown, in a total membership of fourteen. Of the ten
members on the Financial Policy Committee in 1946, three were
du Pont representatives. Thus, numerically, the du Pont
representatives were not in a majority on the governing
committees of General Motors. The record shows that during
1941 du Pont was interested in the retention and placing of
able personnel in the financial departmert of General Motors.
The Court finds it highly significant that in all of the
correspondence regarding General Motors directors the attitude
of the suggested nominee toward du Pont was in no instance a
consideration in his approval or disapproval. Accordingly, the
Court finds, based on all the evidence, that du Pont's
participation in the selection of General Motors directors and
management does not establish that it controlled General
Motors or that it sought through such participation to place
people in General Motors who would further du Pont's interests
as a supplier or as a chemical manufacturer.
The record shows that in 1923 du Pont sponsored and
supported the Managers Securities Plan. The idea had been
suggested by Pierre S. du Pont, then President of General
Motors, and the details, with some variations before the final
adoption, are set forth in a report prepared by Raskob and
Brown. This report was submitted to the du Pont Finance
Committee and stated that Pierre S. du Pont's interest in the
plan caused the report to be made. The report stated that
Pierre S. du Pont felt that the most effective manner of
attaining maximum success in the conduct of the affairs of
General Motors was to interest its principal men as
substantial stockholders or partners in the business, that du
Pont with its large and controlling interest in General Motors
would enhance the value of its own investment by the adoption
of such a plan in General Motors and would retain the same
control of General Motors through owning two-thirds of the
stock of General Motors Securities Company, plus the fact that
"it will definitely tie up with us in the management and
control of this huge investment the men in General Motors
Corporation who are definitely charged with the responsibility
and success of the corporation." (GTX 235.)
Managers Securities Corporation was organized by General
Motors to purchase 2,250,000 shares, or approximately
one-third of the common stock of General Motors Securities
Company, the du Pont Company which held 7,500,000 shares of
common stock in General Motors. Du Pont from time to time
surrendered voting control of the 2,250,000 shares until 1938
when the successor corporations, General Motors Securities,
was liquidated.
In the course of evolving this additional compensation plan,
the evidence shows that Irenee du Pont had certain objections
and suggested that the stock for Managers Securities be
procured through circularization of General Motors
stockholders. Mr. Laffey, Chief Counsel for du Pont, advised
Irenee du Pont that a direct sale of the stock to General
Motors would have incurred a federal capital gains tax. Irenee
du Pont testified to this as one of the considerations for the
plan ultimately adopted. The plan originally proposed by
Raskob and Brown, and objected to by Irenee du Pont, was
retained and du Pont supplied the stock which was the sole
asset of Managers Securities. The Managers Securities common
stock was sold to General Motors and resold by it to about
eighty of its executives.
General Motors agreed to pay Managers Securities 5% of its
earnings annually, plus $2,000,000 per year, after deducting
7% on invested capital. Prior
to Managers Securities, General Motors had annually set aside
10% of its earnings, after deducting 6% on invested capital,
for the bonus fund. With the creation of Managers Securities,
one-half of the 10% previously set aside for the bonus plan,
or 5%, was allocated to Managers Securities for distribution
in Class A stock, having a par value of $100, and Class B
stock, having a par value of $25. Sloan testified that the
Class A, five million par value stock of Managers Securities
was not entirely allotted to executives, a reserve being held
so that in subsequent years the allotment to Managers
Securities was reduced below 6%, the balance going to the
bonus fund. The Class B stock of Managers Securities received
the dividends earned by 2,250,000 General Motors common
purchased by Managers Securities from du Pont.
The executives purchasing Managers Securities stock paid
one-seventh of the purchase price in cash and the balance was
paid on a deferred payment basis out of future bonuses and out
of the earnings of the stock purchased.
The Board of Directors created a committee which was
empowered to designate the employees of General Motors who
were to participate in the Managers Securities stock. This
committee consisted of three members — Pierre S. du Pont,
Chairman of the Board, and two other directors, Seward Prosser
of J.P. Morgan, and Arthur G. Bishop, President of a Flint,
Michigan, bank.
Sloan testified the stock allotments were made and
determined by the special committee, then submitted to him as
Chief Executive Officer for consideration and recommendation
in the way of changes in the allotments. The initial awards of
Managers Securities stock were made November 22, 1923 when
Pierre S. du Pont wrote to the two other members of his
committee making suggestions as to the distributions of stock.
Sloan testified that the original allotment by the committee
was made before submission to him, that Exhibit GM 30
contained the final allotment after submission to him, and
showed the changes he had made.
Pierre S. du Pont testified the general method followed in
bringing to the Special'Committee recommendations for
allotments for General Motors personnel of Managers Securities
stock was that allotments were initiated by heads of the
different departments of General Motors in a recommendation to
the president of the corporation, who expressed his opinion
thereon and passed the entire recommendation to the committee
of three and so far as he knew no recommendation was changed
by the committee after it came from Sloan. Sloan testified
that bonuses were distributed by the Chief Executive Officer
of the corporation whose recommendations went before the.
Finance Committee for approval. He further testified that
although the chief executive officer had jurisdiction so far
as the higher executives of the corporation were concerned,
their compensation came through Managers Securities and he
made no allotments to the higher officers since it was
automatic and determined by the Special Allotment Committee.
With respect to the operation of the bonus plan, he stated
that although the responsibility rested with the chief
executive officer he could not determine the allotments in the
lower echelon of authority. A certain amount was allocated to
a division and the chief executive of the division was the
responsible agent in distributing the bonus within that
division. He then submitted his recommendations to the chief
executive officer who in turn submitted them to the Finance
Committee until the year 1936 and thereafter to the Bonus and
Salary Committee. Sloan testified that he could not remember
any instance where the recommendations so made were changed by
the Finance Committee or the Bonus and Salary Committee.
For the years preceding 1941 there are no records of the
personnel of the Bonus and Salary Committee which replaced the
function of the Finance Committee in connection with the
compensation plan. From 1941 to 1948, Government Exhibit 276
shows that of the five directors constituting this committee,
the majority were du Pont representatives. They were W.S.
Carpenter 1941-1944; H.B. du Pont 1944-1948; John J. Raskob
1941-1945; Echols 1946-1948; and Lammot du Pont 1941-1945, who
was also its chairman during that period. The other members
were John L. Pratt 1941-1946; George Whitney 1941-1948; and
E.F. Johnson 1947-1948. Carpenter suggested his position on
the Bonus and Salary Committee in 1944 be taken by H.B. du
Pont and added that this would give H.B. du Pont "an excellent
opportunity to better familiarizing himself with the
personnel" of General Motors. (GTX 210.)
Mr. Sloan and Pierre S. du Pont testified that in the
allocations made no consideration was given to the purchasing
practices or attitudes of any executives toward du Pont.
The Managers Securities Plan as submitted and approved by
the General Motors stockholders gave the corporation an
irrevocable option to repurchase all or any part of the Class
A or B stock and provided that the Finance Committee make a
yearly review of the recipients of stock for the purpose of
determining whether their stockholdings were disproportionate
to the service being rendered, and providing for repurchase of
stock in the event it was so found.
The Managers Securities Plan was terminated in 1929 because
with the increase in the number of executives it was felt
"something had to be done to broaden the scope of the plan."
On January 1, 1930 a new seven year plan was developed and
General Motors Management Corporation was organized. Du Pont
did not provide any of the stock for this new corporation.
Upon the expiration of the Management Corporation plan in
1938, General Motors reverted to the old Bonus Plan as the
sole vehicle for rewarding its personnel.
The Court finds no evidence that any action taken by du Pont
representatives with respect to the compensation of General
Motors executives was intended to influence those executives
to deal with du Pont or to refrain from dealing with du Pont
competitors. Nor is there evidence of any instance in which a
General Motors executive favored du Pont out of consideration
for the latter's sale of stock to Managers Securities Company
or out of deference to the position of du Pont representatives
on the General Motors board.
Du Pont for many years has had supplemental compensation
plans in various forms. Pierre S. and Irenee du Pont testified
that they believed strongly that management should share in
the success of a company and should participate in its
earnings as owners. Their sponsorship of the Managers
Securities Plan was no more than the application to General
Motors of a business principle they had long practiced.
The record shows that some du Pont representatives did
participate in the determination of the allotments under the
Managers Securities plan and the bonus awards. There was
opportunity, therefore, for them, in passing judgment on such
matters, to attempt to further du Pont interests as a supplier
of General Motors and as a chemical manufacturer. However,
there is no evidence that any of them made any such attempt.
The witnesses who testified and who would have been parties to
such efforts vigorously denied the Government's charges. The
Court refers to Pierre S. du Pont, Irenee du Pont, and
Carpenter. A number of other executives who were witnesses
such as Sloan, Kettering, Pratt, Lawrence Fisher, Lynah, and
Wilson are
among those who would have been "influenced", if the
Government's contention is correct. These men, the record
shows, acted at all times solely in the best interest of
General Motors.
The record as a whole and the findings made in the previous
sections of this memorandum support these further findings on
the issue of the alleged control of General Motors.
After the dramatic collapse of Durant and the ensuing
financial crisis when du Pont representatives were thrust into
positions of responsibility in General Motors, and after
General Motors had been rescued from that crisis, du Pont's
influence and position in General Motors declined radically.
During the twenties, a force of considerable strength arose in
General Motors that was important in determining any question
of control. This force was the management, headed by such a
forceful and resolute character as Sloan and including such
positive personalities as Kettering, the Fisher brothers,
Knudsen, Pratt, Brown, and Wilson.
More than a quarter of a century has passed since the
twenties, and the strength and standing of the management have
continued to increase and improve. The du Pont representatives
who had originally been interested in General Motors have died
or retired. These developments are reflected in the
contemporaneous documents, the changes in the membership of
the board, the various committees of the board, and in the
testimony of Sloan and other witnesses.
Irrespective of what its position may have been before and
during the Durant crisis, since the 1920's du Pont has not
had, and does not today have, practical or working control of
General Motors. On the basis of all of the evidence the Court
finds as a fact that du Pont did not and could not conduct
itself, for the past 25 years, as though it were the owner of
a majority of the General Motors stock.
The Government cross-examined Sloan respecting GTX 1307
which shows the percentage that the du Pont stock voted at the
annual General Motors stockholders meetings bears to the total
stock voted at such meetings. Counsel for the Government
sought to obtain from him an admission or concession that du
Pont's block of stock was at all times sufficient to prevail
at a stockholders meeting. Sloan's position was that he did
not believe one could tell what would happen if there was a
conflict at a stockholders meeting. He pointed out that, for
instance, in the year 1932 there were 17 million shares which
were not represented at the meeting and further stated that,
if there had been a contest for directors, there would have
been a much larger representation than 26 million shares. His
conclusion was that he did not think that anyone could tell
how that large representation would vote because it would
depend upon the issue that caused a particular conflict. He
further stated that the stockholders owning those shares would
be guided by the record of General Motors Corporation with
respect to the advancement of its competitive position, its
earnings, and its dividends.
Sloan testified that at no time had there been a contest
over the selection of directors. He said that while it was
true that the du Pont block of stock represented over 51% of
the stock at certain of the meetings he emphasized that it was
not 51% of all the stock entitled to vote. In this connection
he said:
"In case of conflict you immediately — the
interest you arouse and all that, and the issues
that are put before the stockholders, would mean
that a much larger percentage of the stockholders
would come into the meeting, and that would dilute
in a way the du Pont interest. So I can't just say
what would happen. * * * It would depend, as I say,
upon a lot of circumstances that I can't evaluate."
(3087.)
The Court finds the testimony of Sloan on this question of
control both reasonable and persuasive.
United States Rubber Company
It is admitted that in June 1927 the defendant individuals,
together with Henry B. du Pont, Lammot du Pont Copeland and
certain other members of the du Pont family and their close
business associates formed a syndicate to purchase United
States Rubber stock. It is the Government's contention that
the syndicate's acquisition of this stock stemmed from a
scheme to bring United States Rubber into the alleged
conspiratorial plan involving General Motors and the du Pont
Company. United States Rubber Company at this time was one of
the largest manufacturers of rubber products in the United
States.
In 1913 Irenee du Pont purchased 400 shares of United States
Rubber common as a personal investment. He testified he made
this initial investment through his confidence in a former
fraternity brother, Raymond B. Price, who had invented a
rubber reclaiming process which was sold to United States
Rubber, and because he "was quite aware of the peculiar
properties of rubber" and felt a "rubber company ought to be
a good growing business." He later increased his holdings to
12,000 shares and the extent of his investment from 1913-1926
is set forth in GTX 1029. During this same period, Lammot du
Pont had also invested in United States Rubber common without
the knowledge of his brother, Irenee.
Irenee du Pont testified as to the background, the reasons
and circumstances which caused the formation of the syndicate
to buy United States Rubber Stock. He stated that in 1927 the
stock took a very "sudden nosedive", but the stock of other
rubber companies remained firm; that he believed the drop in
price was due to the fact that "somebody knew the position of
the United States Rubber Company was not what it ought to be;
that there had been mismanagement somewhere, and somebody
wanted to get out of it and get into something else"; that the
United States Rubber balance sheet showed excessive accounts
receivable, and excessive inventories, materials, supplies,
and finished products which he thought indicated incompetent
financial management. However, he thought this was a good time
for a profitable investment in United States Rubber, but since
it would have required a larger investment than he could
properly go into alone, he discussed the formation of a
syndicate to purchase United States Rubber stock with his
brother-in-law, William Winder Laird. He testified that he and
Laird were of the opinion that if they could get a group to
purchase a large block they would establish prestige with the
management and be in a position to make suggestions and offer
criticisms.
Without discussing the identity of the syndicate members
with Irenee du Pont, Laird drew a syndicate agreement. With
the exception of Raymond Price and Henry Davis, who were
solicited by Irenee du Pont, Laird solicited the other ten
members of the first syndicate who were, in the main, clients
of Laird's brokerage firm.
Irenee du Pont wired Raymond Price on June 17, 1927, as
follows:
"Would you join syndicate to buy control your
former company." (GTX903.)
The syndicate agreement dated June 30, 1927 recited that the
purpose was to acquire common stock in "quantities sufficient
to give practical control, or at least a voice in the
management". There were twelve persons in the syndicate at its
inception. With the exceptions of Price and Henry Davis, all
were stockholders in Christiana Securities and four — Irenee,
Lammot and H.B. du Pont and W.W. Laird — who subscribed for
over half of the amount were Delaware stockholders. Six of the
subscribers were directors of the du Pont Company and the rest,
with the exception of Price and Davis, were members of the du
Pont family. At this time Irenee du Pont was Vice-Chairman of
the Board of du Pont and Lammot du Pont was its President. Both
were serving on the Finance Committees of the General Motors
and the du Pont Company.
A report, addressed to Mr. Laird and presumably undertaken
at his suggestion, was submitted on August 4, 1927 by Mr.
Lytle on the problems and potentialities of United States
Rubber. It was brought to Irenee du Pont's attention and he
testified that it confirmed his views of the problems
besetting United States Rubber.
A second syndicate was formed September 2, 1927 after the
first syndicate had purchased 97,750 shares of United States
Rubber stock. The second syndicate was formed in order to
admit six additional subscribers. Among them was Pierre S. du
Pont, who was Chairman of the Board of du Pont and General
Motors, a member of the Executive Committee of General Motors,
and also a member of the Finance Committees of du Pont and
General Motors. With the exception of H.S. Meeds, Jr., the
additional subscribers were Christiana or Delaware
stockholders.
By December 9, 1927 the syndicate had purchased 154,750
shares of common stock, or 11% of the 1,379,503 total
outstanding shares, both preferred and common, since both had
voting rights. Of the 154,750 shares, the defendant
individuals and members of the du Pont family, all of whom
were stockholders in Christiana or Delaware, held 149,500
shares and the balance of 5,250 shares was held by Henry
Davis, Raymond Price, and H.S. Meeds.
In December 1927 the syndicate operation was closed and some
154,000 shares of United States Rubber common were distributed
to the syndicate members. Irenee du Pont testified that
because they already had the ear of management there was no
further need for the syndicate. In connection with the
syndicate dissolution, H.B. du Pont wrote to Irenee and Lammot
du Pont and other members on December 30, 1927 suggesting a
voting trust of the syndicate stock be formed. On January 25,
1928 Henry B. du Pont, in writing to Pierre S. du Pont,
indicated that all the members of the syndicate approved the
idea and it was agreed that the trustees — Irenee and H.B. du
Pont and H.S. Meeds — were to receive the stock from the
syndicate members, deposit it in a box at the Wilmington Trust
Company, and vote the stock as they saw fit. Irenee du Pont
testified the reason for this procedure was to reassure Seger,
then President of United States Rubber, that the investment by
the group was not for speculation and also to make it possible
to vote the stock as a unit.
In December 1929 after the termination of the second voting
trust, Rubber Securities Company was organized by the
syndicate members. Irenee du Pont had written to the syndicate
members the month preceding that Mr. F.B. Davis, Jr.,
President, Mr. Willliam de Krafft and Mr. Henry Davis,
Directors of United States Rubber, were willing to undertake
to organize a company to be known as Rubber Securities Company
with a capital
of 110,000 sharks for the purpose of centralizing control of
certain stock of United States Rubber. The syndicate stock of
254,300 common shares was to be sold at $26.50 to Rubber
Securities; Rubber Securities stock was to be issued and
subscribed to by such of the syndicate members who cared to
subscribe in an amount equal to $29.50 for each share of
United States Rubber common. This sale of syndicate stock to
Rubber Securities permitted the members to crystalize a tax
loss since the stock had been purchased at $40.50 per share.
Thus, H.S. Meeds, Jr. wrote to Irenee and Lammot du Pont on
December 14, 1928 proposing the formation of a corporation
with a view of taking advantage of such losses and expressing
the belief that a corporation would offer a better means for
"concerted action of the several interests involved" and
suggested a Delaware corporation be formed.
In connection with the formation of Rubber Securities,
Irenee du Pont invited Cyrus Eaton, a banker, to join in the
purchase of Rubber Securities stock and sell his United States
Rubber shares to Rubber Securities. It appears from the record
that Eaton, through Continental Shares, had about 100,000
shares of United States Rubber stock. Irenee du Pont testified
that he thought it would be a very good thing to have him
"definitely working with us rather than against us." Eaton
refused the invitation.
The idea of centralizing the stock holdings of the syndicate
members was one of the purposes for the creation of the new
corporation. This is shown by both the record and testimony of
Pierre S. du Pont.
Rubber Securities issued 106,335 shares of stock. A total of
101,146 shares was held by the members of the du Pont family;
80,930 shares were held by Delaware stockholders, and 5,159
shares were held by others who were not stockholders in
Delaware or Christiana. Thus, 95% of Rubber Securities stock
was held by Delaware and Christiana stockholders. Rubber
Securities Company in December 1929 held 314,000 shares of
United States Rubber common and 46,000 shares of preferred, or
about 17% of the voting stock of 2,107,915 shares. It is
admitted that this stock was voted as a unit at United States
Rubber stockholders meetings.
The stock of Rubber Securities was closely held and kept
intact until November 13, 1937 when, in anticipation of its
dissolution, its stockholders received United States Rubber
preferred and common stock on an approximate pro rata exchange
for Rubber Securities stock. The reason for the dissolution of
Rubber Securities, which was completed by December 1, 1938,
was stated by Irenee du Pont to be a feeling among the
stockholders that they would like to have something of
tangible value on the stock exchange that they could borrow on
as collateral and, further, the need for holding the group
together had disappeared because they had the ear of
management.
After the dissolution of Rubber Securities, the holdings of
United States Rubber stock were held by individuals and
members of the du Pont family. These holdings have remained
substantially intact since the dissolution of Rubber
Securities. On June 30, 1949 the members of the du Pont family
held a total of 324,516 shares of United States Rubber common,
or 18% of a total of 1,761,000 shares, and 75,619 preferred,
or 11%, of a total of 651,000 shares. The record shows that
there were 14,000 other stockholders in United States Rubber
besides the holdings above described. United States Rubber has
introduced evidence showing that from 71.7% to 76.8% of United
States Rubber stockholders were represented at the annual
stockholders meetings for the years 1947-1949. At no time
subsequent to the dissolution of Rubber Securities have the
members of the du Pont family held more than 17% of the United
States Rubber voting stock.
In this connection the Government asserts that the
Wilmington Trust Company is controlled by the du Pont family
and this control directed the voting of shares of United
States Rubber held by Wilmington Trust as trustee.
George Edmonds, President and Director of the Wilmington
Trust Company, testified that the provisions regarding the
holding and voting of securities underlying the trusts were
entirely usual and in common use throughout the country; that
specific or "blanket" approval by the Advisor to vote all the
stock in a particular trust in favor of the management,
provided there is no dispute, is required before the trustee
will vote the stock; that where there is no contest for
election of directors or other controversial question, the
trustee follows the policy of voting for the management.
The members of the du Pont family hold 31,590 shares of
voting stock in Wilmington Trust, and Christiana Securities
hold 7,210 shares, constituting 24% of the total 161,150
shares of outstanding Wilmington Trust stock. The Raskob
report lists the Wilmington Trust under the heading of "du
Pont control". The government has introduced GTX 3 and 1276 to
show that members of the du Pont family and their close
associates have been and are directors of Wilmington Trust. As
of June 1949, the board of Wilmington Trust consisted of
twenty-two directors, seven were members of the du Pont family
and three were their close associates.
Kuhn, Loeb & Co. had been issuing bankers for United States
Rubber since 1917 and had been underwriters for about twelve
issues of United States Rubber securities before 1927. It was
in connection with the 1917 financing that Seger became a
director in United States Rubber on recommendation of Kuhn,
Loeb.
Beginning in October 1927 Irenee du Pont had a series of
meetings with Charles B. Seger, whom he met for the first time
in July and who was the President and Chairman of the Board of
United States Rubber. Irenee du Pont testified that the first
time he met him, Seger inquired whether he had called to
obtain his resignation. Irenee du Pont replied that they had
bought into United States Rubber to support him and give what
assistance they could to effect an improvement in the
financial setup of the corporation. He also testified that he
was favorably impressed with Mr. Seger and that he felt
reassured that conditions would improve with guidance from
some one who had been "through the mill" in similar problems.
He sent Seger a copy of the Lytle report and a copy of the du
Pont bonus plan, with the suggestion as to the latter that
Seger see John J. Raskob, who had no interest in United States
Rubber, regarding his views on United States Rubber adopting
some such plan.
When the syndicate made its investment Irenee du Pont at a
meeting with Wiseman and Schiff of Kuhn, Loeb & Co.,
subsequent to his meeting with Seger, informed Kuhn, Loeb of
the syndicate investment in United States Rubber and asked for
their cooperation in improving its financial management. At
Schiff's suggestion, Irenee du Pont and the Kuhn, Loeb
representatives met with Seger. Irenee du Pont offered to help
Seger solve United States Rubber's problems of excessive
accounts receivable and inventories. Seger appeared receptive
to the views expressed at these meetings.
After the meetings with Irenee du Pont, Seger invited him to
become a member of the United States Rubber Board but he
declined for the reason he did not want to undertake the
burdens and feared the presence of a du Pont name on the Board
might mislead the public as to the value of United States
Rubber stock.
Early in 1928 when the price of crude rubber dropped from
forty cents to twenty cents a pound, United States Rubber
having a large inventory was faced with a possible inventory
loss of almost two million dollars. This drop in the price of
rubber reduced the value of the company's assets below the
point at which payment of dividends was permitted under the
terms of one of its note indentures, and the decline in the
value of its assets made it imperative to conserve the
company's cash for meeting approaching maturities on its
borrowings.
Wiseman and Irenee du Pont testified that Seger was
reluctant to recommend that no dividend be paid, but was
eventually persuaded by Kuhn, Loeb to recommend to the Board
that no dividend be declared. Seger, in a letter to the
stockholders on April 5, 1928, explained the action of the
company and stated that "except for the limitations imposed by
the Indenture" there was no reason why the dividend should not
have been declared at this time. Wiseman testified that
Seger's reluctance to recommend non-payment of the preferred
dividend strengthened the Kuhn, Loeb view that Seger needed
help in running the company.
During the Spring and Summer of 1928 the price of crude
rubber continued to decline and the company's loss of
inventory value, plus a twenty million dollar indebtedness,
created, concern among its creditors and it was feared that a
receivership might result.
In April 1928 Lewis L. Strauss of Kuhn, Loeb prepared a plan
for the issuance of new common stock by United States Rubber.
Irenee du Pont also regarded the raising of new capital
necessary. Seger, however, took no action regarding it.
In the Summer of 1928 the syndicate sold 27,600 shares of
United States Rubber stock at a loss. Irenee du Pont testified
the sale was made by the syndicate members for the reason that
they suspected there might be a receivership and "that we had
better sell some of the stock and reduce our commitments". In
October 1928 the Guaranty Trust Co. threatened to cut off its
credit to United States Rubber and several other banks
expressed concern to Kuhn, Loeb about the continuance of
credit to the company. Seger was finally persuaded that it was
necessary to raise new capital, and at his request in October
1928 Kuhn, Loeb drafted another plan for the issuance of
common stock. The issue of 728,412 shares of common was to be
offered to the existing common stockholders on a share for
share basis. Kuhn, Loeb invited other banking and brokerage
firms to participate in the underwriting, including Laird,
Bissell & Meeds, who were included at the request of Irenee du
Pont.
Sir William Wiseman testified that as early as 1927, Kuhn,
Loeb had come to the conclusion that Seger should be replaced
as President because of his poor health, his difficulty in
reaching decisions on pressing problems, and for the reason
that United States Rubber was making a poor showing in
comparison with its leading competitors.
Irenee du Pont, in November 1928, wrote the members of the
syndicate informing them of the decision for the new issue of
stock and suggesting that in order to improve the management
the Board be enlarged by three additional members and to fill
the two vacancies; that these appointees should be two from
Kuhn, Loeb, two from the syndicate, and the proposed new
president. In December 1928 Roger Winthrop and Sir Wiseman of
Kuhn, Loeb and Henry Davis, for the syndicate, were elected
members of the Board. In addition, it was contemplated that
these members of the Board would become members of the Finance
Committee. Irenee du Pont testified that the decision to
replace Seger as president became necessary because nothing
had been accomplished to improve the weak financial structure
of the company, and because of his unrealistic attitude in the
dividend controversy and the new stock issue.
With the exception of H.F. and H.B. du Pont, all of the
syndicate members decided to subscribe to the new stock issue.
H.B. du Pont testified he was discouraged over the prospects
of United States Rubber and did not wish to risk more capital
in the company.
In the underwriting of the new common stock issue, Kuhn,
Loeb allotted to Laird, Bissell & Meeds a 20% participation
which was approximately the percentage which the syndicate
members held in the common stock of United States Rubber.
Wiseman testified this was a common arrangement. Thereafter,
Laird, Bissell & Meeds and the syndicate members had an
agreement whereby the syndicate members would receive a
discount of $2.40 out of each $3.00 cost of underwriting their
stock. The new stock was issued January 11, 1929 and the
syndicate acquired 125,150 shares at a cost of over four
million dollars.
Preceding the investment and issuance of the new stock,
Irenee du Pont testified that the syndicate members had
decided that if they were to take up their subscription rights
to the new issue some safeguard against lack of proper
financial management would be necessary and took "the position
with Kuhn, Loeb that we should have some representation on a
body which might be termed a finance committee so that we
would have some control over the financial management of the
company". This concern over the financial structure and the
desire of the syndicate to assume that responsibility is
reflected in several letters written by Irenee du Pont.
Wiseman testified that he and Mr. Schiff, his partner, urged
Seger to become Chairman and that a younger and more active
man be made President. Kuhn, Loeb were unable to find anyone
whom they considered suitable and in November 1928 asked
Irenee du Pont to try to find such a person.
Irenee du Pont testified that H.S. Meeds suggested F.B.
Davis, Jr. to him and Davis stated that Meeds had advised him
he might be approached by Irenee du Pont. Shortly after the
suggestion of Meeds, Irenee du Pont saw Davis and asked if he
would be willing to take the post if elected, and Davis
accepted.
On January 5, 1929 Irenee du Pont wrote a letter to Schiff
of Kuhn, Loeb, sending a copy to Seger and Davis stating he
had found a suitable man for the office of President. That
same month, at the request of Irenee du Pont, Davis met with
Schiff and Wiseman of Kuhn, Loeb. Schiff and Wiseman
introduced Davis to some of the directors — J.S. Alexander,
H.R. Winthrop, Matthew Brush, and L.B. Gawtry. Wiseman stated
that they were impressed with Davis' qualifications and
concluded he was an excellent candidate for president. Mr.
Schiff advised Irenee du Pont that Seger had no objection to
bringing F.B. Davis into the situation, but that there was
difference of opinion as to how this could be accomplished
without unfavorably affecting the organization. Wiseman
negotiated with Seger as to the terms of his retirement. Irenee
du Pont in writing Wiseman January 11, 1929 stated he was in
favor of continuing Mr. Seger's contract with United States
Rubber and his salary payment "if it will assure the Rubber
Corporation of his good advice based on many years' experience
as head of that institution."
At a meeting of the Board on January 15, 1929 presided over
by Wiseman, Seger resigned as President and Chairman of the
Board, and F.B. Davis was elected President, Chairman of the
Board and a director. Wiseman testified that Kuhn, Loeb, when
sponsoring the election of Davis, did not know or inquire into
the amount of stock held by the syndicate.
Prior to Irenee du Pont's letter to Kuhn, Loeb suggesting
Davis as a suitable
candidate for president, he had written to the Voting Trustees
— H.S. Meeds, A. Felix du Pont, and Lammot du Pont —
summarizing the steps regarding the central organization of
United States Rubber which, as principal stockholders, the
syndicate should advocate. Irenee du Pont indicated the
recommended changes were to continue the body now known as the
Executive Committee under the name of the Finance Committee to
consist of five persons — two representatives of bankers,
William Wiseman and James S. Alexander; two representatives
from the syndicate, Henry Davis and William de Krafft; and the
new president. Irenee du Pont stated: "(This would leave our
group in control of those matters which will be delegated to
the Finance Committee * * *)". (GTX 988.) A real Executive
Committee was to be made up of not over eleven men familiar
with United States Rubber operations headed by the president or
one of the other principal employees, and the number and
personnel of this committee to be subject to change on the
advice of F.B. Davis, Jr. The evidence shows that the persons
recommended by Irenee du Pont were elected members of the
Finance Committee, and William de Krafft became its Chairman;
that an Executive Committee was organized with F.B. Davis as
Chairman and William de Krafft became a member the following
year.
At the time F.B. Davis, Jr. was elected President, the
syndicate's representation on the Board was one director
— Henry Davis. In addition there were the two representatives
from Kuhn, Loeb. There were fifteen members, including Seger,
on the Board at this time.
F.B. Davis, Jr. was the President of the Viscoloid Company,
a du Pont subsidiary, at the time he accepted the presidency
of United States Rubber. In 1909 he had been in charge of the
black powder division of du Pont, later becoming
superintendent of the sporting powder divisiou when Lammot du
Pont was its divisional manager. Following the end of World
War I, he was assigned to the du Pont Central Office as
assistant in charge of salvage and later became superintendent
of the Pyralin operations. He left du Pont because he was
ambitious and felt there were too many bosses over him, going
to General Motors as assistant in charge of its Saginaw
Products Division where he remained until 1923. He was asked
to return to du Pont by a member of the du Pont Executive
Committee and accepted because, as he stated, du Pont had
changed its organization to a decentralized type and because
the compensation offered was larger than he was receiving. He
became assistant general manager of the Pyralin Department,
later its general manager, and was also made a du Pont
director. The Pyralin Department was consolidated with the
Viscoloid Company and in 1927 Davis became its president.
After he became President of United States Rubber he continued
as a director of du Pont until about 1941. He was also one of
the incorporators of Rubber Securities, organized in December
1929. Irenee du Pont testified that F.B. Davis was known to
all members of the syndicate and that therefore they were
familiar with his record. He also said that he had discussed
the suggestion of Challen Parker as president with the
syndicate, but since none of the members knew him he withdrew
the suggestion. Irenee du Pont stated that he felt it was a
requisite that the new president be personally known so that
they would know what kind of a man they were getting.
Both Davis and Pierre S. du Pont testified that while Davis
was president of United States Rubber he visited with the du
Ponts, particularly Irenee and Lammot. He discussed with them
the affairs of United States Rubber, consulting with them
regarding the financial side, because as he said, "that was
the part of it that they were most vitally interested in", but
did not seek their advice on management or the operating end
except to report on accomplishments.
Prior to Davis becoming president, Lucius D. Tompkins, Vice
President of the Tire Division in United States Rubber,
testified that it was a centralized organization and "was run
by Mr. Seger as Chairman and President, and Mr. Homer Sawyer,
Executive Vice-President". One of the first steps undertaken
by Davis was to decentralize the organization and the
commercial activities were conducted by separate and
autonomous divisions, each under control of a general manager
having full authority and responsibility as to manufacturing,
selling, purchasing, accounting and research within his
division, subject to the over-all policies decided by the
Executive Committee.
Davis testified that the first thing he did on becoming
president was to get acquainted with the Board, appraise the
value of each individual member, and consult with them as to
their desire to continue with United States Rubber; that he
determined who would be most helpful to him and made up a
proposed slate to be elected at the annual meeting. He
testified further that he selected all the directors.
Davis testified that he not only discussed this proposed
slate with the du Ponts but also with Sir William Wiseman of
Kuhn, Loeb and "anyone else that seemed to me could be helpful
in giving me advice on that subject". In addition, he stated
he felt it was not only proper to discuss directors with
important stockholders, but also with each member of the
Board.
In March 1929, prior to the first meeting, Davis submitted
his proposed slate to the members of the syndicate. This list
consisted of twenty-eight names, some already members of the
Board, and indicated that as to non-company representation,
John W. Davis, and Samuel M. Nicholson desired to resign and
that he did not favor continuing Lewis Gawtry. In addition he
suggested that Henry L. Hotchkiss be dropped for reasons of
age and Homer E. Sawyer be discontinued since he was
relinquishing active duties with United States Rubber. He
listed eight directors as outside representatives and three
company representatives whom he considered desirable to
retain, and these were approved by the syndicate. The
syndicate also approved three suggested additions for company
representatives. Lammot du Pont replied to Davis' suggestions
stating the syndicate members approved the retention of the
men already on the Board; approved five of nine suggested
additions to outside representatives; and stated in the event
Gerard Swope, Victor M. Cutter and James A. Farrell would not
serve as outside representatives, that the syndicate did not
favor the suggestions made by Davis to substitute Carle C.
Conway, Harold E. Talbott, or Lewis Gawtry.
Charles B. Seger and Gerard Swope did not wish to serve and
Homer E. Sawyer and James A. Farrell were not elected. Lewis
Gawtry and Carle C. Conway were elected directors on April 16,
1929 and August 6, 1929, respectively.
Davis testified that following 1929 when he became more
experienced in United States Rubber operations there was no
necessity for discussing changes on the Board with the du
Ponts and syndicate members, but he did discuss the changes
with every member of the Board to obtain their approval.
B.W. Doyle, a former Vice President of du Pont's Viscoloid
Company, became a Board member in 1939; George P. Edmonds, a
du Pont son-in-law and president of the Wilmington Trust,
became a Board member in 1944; John L. Pratt was a director of
General Motors at the time of his election to the Board of
United States Rubber in 1937; W.P. Allen, a former
vice-president and director of du Pont became a Board member
in 1936; and H.E. Humphreys, Jr., a former employee of
Delaware Realty, went on the Board in 1938. Allen, Doyle and
Pratt were personally known to F.B. Davis. Between June 21,
1927 and June 30, 1949, a total of fifty-three men served on
the United States Rubber Board, seven of whom were elected as
temporary directors, leaving a total of forty-six regular
members of the Board who served during this period at
different times.
Davis and de Krafft did not get along together and
eventually de Krafft resigned on June 30, 1938. Davis had
previously met H.E. Humphreys, Jr., and thought he would be a
suitable replacement. He asked Irenee du Pont whether
Humphreys could be released from his duties as Secretary of
Delaware Realty. Irenee du Pont approached Humphreys regarding
United States Rubber, and when it was clear that he was
interested his release was obtained and Humphreys was proposed
by Davis as a member of the Board.
In 1942 Herbert E. Smith became President of United States
Rubber when F.B. Davis resigned. Davis remained as Chairman of
the Board and Chief Executive Officer. Smith had been an
employee of United States Rubber for about fourteen years
before the syndicate was formed. Smith testified that he had
only a casual acquaintance with the three du Pont brothers. He
stated that following his election he had discussions with the
du Ponts and many other stockholders a few times a year
regarding the financial situation in United States Rubber.
When Davis retired as Chairman of the Board on December 31,
1948, Smith became the Chairman and the office of President
was filled by Humphreys.
In this connection Lammot du Pont Copeland on April 5, 1948
wrote to the three defendant individuals and George Edmonds
about a discussion he and Wiseman had concerning the situation
when Davis would retire. Lammot du Pont wrote to Davis asking
what his views were and stated that he knew of no candidates
for president, with a single exception. Herbert E. Smith
testified that the "one man who had what it took, had all of
the qualifications that I recognized to succeed me, was Elmer
Humphreys".
After he became President, Humphreys stated that he
discussed with the du Ponts certain proposals of importance
involving financial matters, and followed their advice only
half the time and acted contrary to their advice at other
times.
In a letter to the stockholders on April 23, 1929 Davis
stated the Executive Committee was to be made up of those
members of the organization who had been heretofore charged
with the responsibility of some of the major activities of
United States Rubber and would hold meetings each week to
advise the president on all operations relating to
manufacturing, selling, development and research. On April 23,
1929 the Executive Committee consisted of Edward J. Coughlin
who had been with United States Rubber since 1892; William O.
Cutter, an employee since 1916 who resigned from the Executive
Committee in January 1930; William de Krafft who became a
member in 1930; Ernest Hopkinson, an employee of United States
Rubber since 1897; Herbert E. Smith, an employee since 1913;
Lucius D. Tompkins, an employee since 1916; Eric Burkman, an
employee since 1919; F.B. Davis, Jr., Chairman 1929. It is
this committee which had the responsibility of approving
contracts involving the sale or purchase of goods.
Six members of this Executive Committee were on Irenee du
Pont's recommended list in addition to five others who were
not elected. Irene du Pont had included all the company's
chief executive officers on this committee for the reason he
felt that experienced operating personnel should be members.
Tompkins stated he was approached by F.B. Davis with respect
to becoming a member and that thereafter Davis discussed with
him appointments or recommendations to that committee.
Tompkins testified that Davis indicated to him that length of
service was one of the qualifications for membership. Aside
from Davis and de Krafft, the other members of the committee
had all been employees of United States Rubber for many years
before 1929.
The old Executive Committee of United States Rubber served
the functions of a Finance Committee during the Seger regime
and when Davis became president it became the Finance
Committee. Its members on April 23, 1929 were James S.
Alexander, F.B. Davis, Henry Davis, and Sir William Wiseman.
William de Krafft became a member in January 1930 when James
S. Alexander's membership ended. Charles H. Sabin and D.
Dwight Douglas were also added to the committee the same year.
In November 1948 the following were members of the Finance
Committee of United States Rubber: Colgate W. Darden, Jr.,
F.B. Davis, Jr., Henry Davis, Bernard W. Doyle, George P.
Edmonds, H.E. Humphreys, Jr., Herbert E. Smith, and Sir
William Wiseman.
On Apri 8, 1947 Lammot du Pont Copeland wrote Pierre S. du
Pont, stating that he, Copeland, and Lewis Strauss had
resigned as members of the Board and Finance Committee, that
Colgate Darden was elected to fill his place but that the
bankers' nominee remained open on the Board, and that Wiseman
had suggested Schiff be appointed which idea was not accepted.
He stated that because Wiseman was frequently absent, the
management group on the Finance Committee were a majority, and
since United States Rubber was again pretty well in debt, the
Finance Committee should be strong and play a dominant part in
watching the finances. At that time the Finance Committee was
composed of three management representatives, F.B. Davis, H.E.
Smith, and Elmer Humphreys; and three non-management
representatives, B.W. Doyle, Henry Davis and Sir William
Wiseman. Copeland testified that his concern was that
stockholder representation on the Finance Committee constitute
a majority in order to maintain the proper balance between the
Finance Committee and the Executive Committee; otherwise, a
majority of management representatives on the Finance
Committee would be approving their own actions, which "seemed
like a weak position". In answer to this, Pierre S. du Pont
replied, stating:
"I do not fear the result of the management
group being in the majority. If such fear is
real, we should change the management."
Pierre S. du Pont testified that he used the noun "we" as
meaning all the stockholders. Copeland in his letter to Pierre
S. du Pont had suggested that Darden and Edmonds become
members of the Finance Committee but since Darden's other
interests were heavy, he suggested that Davis be urged to put
Edmonds and Whelpley on that Committee. Irenee du Pont wrote
Copeland April 21, 1947 stating that Darden should be given a
chance to refuse, that Edmonds had his approval, and that he
did not know Whelpley. Edmonds was elected to the Board and he
and Whelpley became members of the Committee.
The stockholders of United States Rubber adopted an
executive's incentive compensation plan in 1929 by a vote of
1,245,269 to 100. A study of several plans was made before the
Managers Share Plan was finally adopted. The Plan provided
that the Company should issue 100,000 shares of its common
stock at $35 per share and the trustees would issue to the
company 100,000 trust shares without par value, representing
ownership of the assets to be held by the trustees of the
plan. The plan further provided that the company should from
time to time sell the trust shares to employees occupying
responsible positions, including directors, actively engaged
as officers, employees or members of the Executive
Committee, to be chosen by a Special Committee of directors in
such quantities as the committee determined and on such terms
of payment, interest and prices as fixed by the Finance
Committee of United States Rubber.
On December 20, 1929 Irenee du Pont wrote to Lammot, A.
Felix and H.B. du Pont, H.S. Meeds and Henry Davis, officers
of Rubber Securities, that he had discussed with F.B. Davis
and William de Krafft the question of apportionment of
Managers Securities stock and the setting aside of some 3000
shares of Rubber Securities stock for Davis to be paid out of
bonuses voted him by Rubber Securities.
The members of the Special Committee appointed to act upon
the allotment of trust shares from 1930 to 1949 were:
Matthew Brush, Chairman, 1930-1936
Lewis L. Strauss, Chairman, 1936-1947
Bernard W. Doyle, 1947-1949
Sir William Wiseman, 1930 to date, Chairman since
1947
Henry Davis, 1930 to date
F.B. Davis, Jr., 1948 to date
Wiseman testified that he consulted with Irenee du Pont with
respect to the original allotment to be made under the plan in
1930 for the reason he had more experience than possibly any
of the directors of United States Rubber and also asked him
what allotment should be made for F.B. Davis. Irenee du Pont
stated Davis should receive 15,000 shares. On March 28, 1930,
Davis was allotted 20,000 shares by the Special Committee and
Wiseman advised Irenee du Pont of that action. This action of
the Special Committee was approved by the Rubber Securities
Board and Henry B. du Pont testified that when there was an
increase in Davis' allotment from 15,000 to 20,000 shares it
obviated the necessity of Rubber Securities assigning stock to
him.
Irenee du Pont stated that at the time F.B. Davis went to
United States Rubber his salary should not be less than Seger
was receiving. The salary was fixed at that figure by a
special sub-committee appointed for that purpose. Wiseman
testified he did not know that Irenee du Pont had discussed
with Davis the probability that his salary would be the same
as Seger's. In 1937, after a study by a sub-committee of the
Finance Committee, the company entered into an employment
contract with Davis for a term of six years effective January
1, 1938 which remained in effect until his retirement in 1948.
This action was adopted by vote of the stockholders. The
contract fixed his salary at a definite figure and made him
ineligible for any further participation under the incentive
plan.
There is no evidence that the syndicate, or Rubber
Securities Co., or the du Pont family in the aggregate ever
had voting control of United States Rubber. The Government,
moreover, has failed to show that the United States Rubber
stock held by the defendant individuals and the members of the
du Pont family was acquired with the intent to create a
protected market for du Pont or for United States Rubber, or
was ever used for that purpose. While much of the rubber stock
acquired by the syndicate continues to be held, directly or
indirectly, by members of the du Pont family there is no proof
of any agreement or understanding that it will continue to be
so held, or that it will be voted in concert.
Prior to 1910 du Pont had confined itself principally to the
manufacture of military and commercial explosives.
Nitrocellulose, a nitrated cotton, was the principal raw
material used by du Pont in the manufacture of both military
and commercial smokeless powder. Du Pont sold its military
powder largely to the United States Army and Navy. By 1908,
these principal customers had erected and were operating
plants of their own and du Pont foresaw the ultimate loss of
its smokeless powder business and recognized that
diversification and expansion into other fields was essential
to its progress.
To this end in 1908 the Executive Committee of du Pont
appointed a committee to report "what additional steps they
would recommend, in the direction of developing further uses
for guncotton or any of the other products of our smokeless
powder plants." The Development Department whose immediate
jurisdiction it was to explore these fields, made an
investigation of new outlets for the excess nitrocellulose in
1909 and found the most important industries in order of size
were celluloid, artificial leather, artificial silk, and
lacquer, which du Pont was already producing.
In 1910 du Pont purchased the Fabrikoid Company, the largest
manufacturer of artificial leather, which in 1913 was
incorporated as the du Pont Fabrikoid Company.
During World War I, du Pont plant facilities, sales and
profits in the powder and explosives fields expanded and its
net profits from all business during 1915-1918 totaled
approximately $232,000,000. In addition during 1917 the du
Pont Company, anticipating the end of World War I and the
cessation of orders for powder and explosives, determined to
utilize part of its war profits to expand into fields other
than gunpowder and explosives.
In September 1915 du Pont purchased the Arlington Company,
one of the two largest celluloid companies in the United
States.
In June 1916, the du Pont Fabrikoid Company, manufacturers
of artificial leather, purchased the entire stock of the
Fairfield Rubber Company, producers of rubber coated fabrics
for automobile and carriage tops. The principal customer of
Fairfield was the Ford Motor Company, which accounted for 60%
of Fairfield's total business. Fairfield was dissolved and the
entire stock was taken over by the Fabrikoid Company.
A report of the Development Committee of du Pont in August
1916 "recommended the paint and varnish industry shall be
accepted as a suitable expansion of operations at Parlin" and
it further recommended "to acquire by purchase one or more
suitable going concerns * * * with a view to transfer of
operations to Parlin at the first opportune time."
In March 1917, du Pont purchased Harrison Brothers &
Company, Inc. manufacturers of paint, varnish, acids, and
certain inorganic chemicals used in paint manufacture. The
Harrison Company owned 52% of the capital stock of the Beckton
Chemical Company, the other 48% being owned by Cawley Clark &
Company, a color manufacturer. In the middle of 1917 Harrison
purchased Cawley Clark & Company, including its interest in
Beckton Chemical Company. In 1917 the Bridgeport Wood
Finishing Company, a varnish manufacturer, was acquired by
Harrison.
After considerable study, du Pont in February 1917 decided
that consideration of new industries at that time should be
confined to five chemical fields: Dyestuff and allied organic
chemicals; vegetable oil industry; paint and varnish; water
soluble chemicals; and industries related to cellulose and
cotton purification.
Thus by the end of 1917, preceding the investment in General
Motors, du Pont had made investments in companies
manufacturing artificial leather, celluloid, rubber coated
goods, paints and varnishes. In 1917 du Pont was engaged in
the production of paints, varnishes and related products
although it was still principally producing powder and
explosives and manufactured few items used in the production
of automobiles; among these were celluloid, used in making
side curtains, and artificial leather, used in seats and
upholstery.
Following the investment in General Motors, du Pont in 1918
purchased a majority of the common and preferred stock of
Flint Varnish & Chemical Works. This event was preceded by a
letter from Raskob to Carpenter, Vice President of du Pont.
Raskob stated Durant had told him that W.W. Mountain,
President of Flint, had approached him about consolidating
Flint with Harrison, since Mountain
knew du Pont had bought a substantial interest in General
Motors and was interested in the paint industry; that Mountain
felt he would lose a valuable customer, General Motors. Durant
told him the du Ponts would not consider a consolidation but
suggested "that they deliver control of the common stock to du
Pont's" and that Willys-Overland, Mountain and General Motors
retain a 20%-25% interest. This was effected — du Pont
purchased 80% of the common stock; Willys-Overland, Mountain,
and General Motors acquiring 20%, which was later purchased by
du Pont. Flint was dissolved in 1924. At the time of the du
Pont investment, Flint made products primarily used in the
finishing of railroad equipment and automobiles.
A few months after the Flint investment, du Pont acquired
certain assets of the New England Oil Paint & Varnish Company.
A report by the Development Department in 1920 showed that
existing facilities at Flint were insufficient to meet the
demands of General Motors and a considerable volume of that
business was being diverted to competitors. In April, 1920,
W.S. Carpenter, Vice President of du Pont, reported to its
Executive Committee, that the Sales Department anticipated
increased orders from General Motors and other automobile
companies, prompting an interest in an additional plant, that
he favored acquisition of The Chicago Varnish Company. That
year du Pont acquired certain assets of the Chicago Varnish
Company, and in 1934 it acquired the assets of Mountain
Varnish and Color Works.
In addition to the above acquisitions, du Pont also made
investments in and acquisitions of other companies as set
forth in ¶¶ 88, 90, 91, 92, 94, 95, 96, 98, 99 100, 101, 102,
103 and 104 of the Amended Complaint.
It is admitted that du Pont is a substantial producer in the
United States of explosives, powder and chemicals and that its
principal manufacturing operations are conducted throught ten
departments. These departments and their products are:
Electrochemicals: Electro and industrial chemicals, including
sodium, cyanides, peroxides, chlorinated solvents for metal
cleaning, dry cleaning and extraction, refrigerants,
formaldehyde, polyvinyl alchohol and acetate, ceramic
decorations, and furfural products;
Explosives: Commercial explosives, blasting accessories,
miscellaneous chemicals, liquid and solidified nitroglycerin,
oil and gas well torpedo service, military and sporting
powders, and commercial nitrocellulose.
Fabrics and Finishes: Pyroxylin, synthetic resin, neoprene
and rubber coated fabrics, and processed plastic sheeting,
window shade fabrics, rug underlay, and synthetic rubberized
tubing, protective and decorative finishes for all industrial
automotive, marine, transportation, and household purposes,
wire enamels, automotive maintenance specialties, adhesives,
plasticizers, and pyroxylin solutions.
Film: Cellophane, cellulose bands, cellulose sponges and
sponge yarns, cellulose acetate film, and polythene film.
Grasselli: Inorganic and organic acids and heavy chemicals,
zinc and zinc products, fungicides, seed disinfectants,
household sprays and dusts, insecticides, animal remedies, weed
killers, adhesives, wood preservatives, and chemicals for the
textile, water purification, paper, leather, steel and food
industries.
Organic Chemicals: Dyestuffs, tetraethyl lead, neoprene,
ethyl alcohol, camphor, and other organic chemicals for the
rubber, petroleum, textile, ...