CORPORATIONS: Victory for Investors

In a “Chicago federal court, the most important legal decision affecting U.S. business this year—and perhaps for years to come—was handed down last week by snow-mustached Judge Walter Jacob LaBuy. Framing the terms for the long-awaited divorce of Du Pont from its 23% control of General Motors stock, Judge LaBuy ruled that Du Pont may keep its 63 million shares (market value: $3.5 billion), but must give up its voting rights.

The decision closely paralleled the plan proposed by Du Pont itself after the U.S. Supreme Court had ordered the separation under the trustbusting Clayton Act (TIME, June 17, 1957) and sent the case back to Judge LaBuy to decide the details. He firmly rejected the Justice Department’s demands that Du Pont distribute two-thirds of its G.M. holdings to its shareholders, sell the other one-third on the open market over a period of ten years. Such a plan, said the court, would have a “serious impact on the market value of the stock of General Motors and Du Pont” and thus would cause “substantial losses to the many thousands of holders of such stocks who cannot conceivably be called guilty persons.”

Harsh & Punitive. It was clear to LaBuy that the Government’s plan would depress Du Pont stock by eliminating the huge dividends that the company is paid by G.M. (1958 total: $116 million). By forcing Du Pont to sell 2,000,000 G.M. shares yearly, it would also flood the market with G.M. stock, depress the price of G.M. More important to LaBuy was a ruling by the Internal Revenue Service that any G.M. shares spun off to Du Pont stockholders would be taxed at the full market value as ordinary income, i.e., up to 91%.

All told, Du Pont estimated that G.M.’s 744,000 stockholders and Du Font’s 209,419 stockholders would lose, in taxes and stock values, about $5 billion. Said the court, applauding Du Font’s presentation, and needling the Government: “The testimony [offered] by the defendants, that of men of wide experience and great responsibility for investing funds and marketing securities, must be given great weight. The type of evidence introduced by the Government, consisting of the testimony of economists without practical experience or management responsibility, cannot overcome the weight of such testimony.” Then, borrowing almost the same words used earlier by Du Pont attorneys, Judge LaBuy knocked down the Government plan as “unnecessarily harsh and punitive.”

Prescriptions & Precedents. The judge’s own prescription is much easier to swallow. Voting rights for some 43 million shares of G.M. stock held by the Du Pont company would pass to Du Pont shareholders on a pro rata basis (about 1⅓G.M. votes for each share of Du Pont held). Another 20 million shares would be “sterilized,” i.e., not voted at all. These are the shares held by the officers and directors of Du Pont and the two other Du Pont family-controlled companies: Delaware Realty & Investment Co., which controls Christiana Securities Co., which in turn controls Du Pont. Furthermore, no longer may Du Pont and G.M. have mutual officers, directors and employees. That means that G.M. will lose five of its 33 directors* unless they choose to give up their Du Pont positions. Altogether, said the court, these restrictions will amply satisfy the Supreme Court’s charge to him to “eliminate the effects” of the Du Pont-G.M. tie. Wrote LaBuy, in the meat of a fat (101 pages) decision: “Nothing would support the conclusion that Du Font’s possession of the bare legal title to G.M. stock would create any possibility that the stock would have any influence on the practices or policies of G.M.”

Many anxious stockholders could breathe easier and so could many businessmen. They had feared that the Supreme Court’s ruling in the Du Pont case would be used as a precedent to force companies, big and little, to shuck off blocks of stock in customer firms. But if LaBuy’s ruling stands, it could set a precedent of. its own: companies held in similar violation of the Clayton Act need only transfer their voting rights. Deeply disappointed, Department of Justice lawyers may appeal. They well recall that the Supreme Court has reversed LaBuy once before on the case; it upset his 1954 ruling that Du Font’s control of G.M. did not violate the Clayton Act. Last week LaBuy himself left the door slightly ajar. He noted that several bills are pending in Washington to ease the tax bite of an enforced stock distribution. If a bill should pass, said the judge, his decision is open for “review and reconsideration.”

* Among G.M.’s 33 directors, five are also directors of Du Pont: Du Pont Chairman Walter S. Carpenter Jr., Du Pont Vice President Lammot du Pont Copeland, Du Pont Vice President Henry B. du Pont, Emile F. du Pont and Donaldson Brown.