By Dr. John F. Sase
Gerard J. Senick, chief editor
Julie G. Sase, copyeditor
William A. Gross, researcher
“Switch on the box / Mr. Spock is on the table /
“Dr. McCoy is unable to connect his brain /
“Sweating and straining /
“Well, it seemed so simple at the time”
—Semisonic, “Never You Mind,” Feeling Strangely Fine (MCA Records, 1998).
The Past: Prelude to the Present
Members of the White House Automotive Task Force devoted the first half of April 2009 to meetings and conference calls with the officials of General Motors, a company struggling to remain solvent, and their advisors. On 12 April 2009, Micheline Maynard and Michael J. de la Merced of the New York Times, who covered the findings of the Task Force for the paper, introduced a new term—“Surgical” Bankruptcy. They wrote that the goal of the Task Force “is to prepare for a fast ‘Surgical’ Bankruptcy ... GM, which [was] granted $13.4 billion in federal aid, insists that a quick restructuring is necessary, so its image and sales are not damaged permanently.” (“‘Surgical’ Bankruptcy Possible for GM,” NYT, 12 April 2009). Here is a question: did an understanding of “Surgical” Bankruptcy continue to evolve during the 2012, 2016, and 2020 Presidential Debates?
In our column of March 2009, we wrote from the point of view of GM shareholders about the decline of their equity position, the probability of the recovery of this position, and the duration of a possible recovery of General Motors—all critical concerns. Since 2004, GM Shareholder Equity decreased from a high of $27.4 billion to a negative low of $86.2 billion (in the hole) at the end of 2008. This decline amounted to $113.6 billion over five years. Upon the bankruptcy of GM in 2009, the equity of the Old GM dropped to zero. The federal courts and old-equity holdings led this major Michigan employer out of the hole by creating a New GM. As of today, the market value of the company is approximately $50 billion.
Some Historical Information
Through arrangements made in the mid-1950s, two “one-percenter” investment groups developed through a strategic transfer of Old GM shares. This transfer combined a combination of more than a half-dozen smaller trusts into two trusts. For simplicity, we will refer to the larger of the two as the Michigan-based Trust, which holds 28 percent, and the Delaware-based Trust, which contains 23 percent, for a combined total of a 51 percent majority-stake (see GM Quarterly reports of 2015, which list the holdings of these two funds within the Wilmington and Christiana groups). The contributing shareholders to these two groups established them so that $0 would flow from accumulating dividends to diversify the two holding groups by reinvesting the annual dividends into the stock and, possibly, the bonds of other enterprises and the U.S. government. From the catalytic reinvestment of these accumulated dividends and a great effort of all GM employees from top to bottom, the New GM was able to recover from Chapter 11 and to become profitable once again.
Montgomery “Scotty” Scott (Actor James Doohan): “A Few Seconds after They Sent This One Up through the Transporter, That Duplicate Appeared. Except It’s Not a Duplicate, It’s an Opposite: Two of the Same Animal, but Different.”
—”Star Trek,” “The Enemy Within,” Episode of 6 October 1966 (Desilu Productions)
For those fans of “Star Trek” (whether they have grown into successful attorneys and economists, have remained residents of their parents’ basements, or both), the restructuring scheme laid on the table of General Motors reminds one of the “Star Trek” episode quoted above in which Captain James T. Kirk splits into the “Good Kirk” and the “Evil Kirk.”
The Chapter 11 Reorganization of General Motors in 2009 enabled the NGMCO Inc. (“New GM”) to purchase the continuing operational assets of the Old GM. In that year, the White House Automotive Task Force announced that it considered the option of splitting GM into two companies in bankruptcy court. The court “created” a “Good GM,” one with strong brands, including Chevrolet and Cadillac, and saddled the other firm, the “Bad GM,” with weaker brands like Saturn and Hummer, brands to be sold off later during extended bankruptcy proceedings. Subaru, which had been acquired recently, spun off as Subaru of America, Inc., based in Camden, New Jersey, as the United States-based distributor of Subaru’s brand vehicles—a subsidiary of Subaru Corporation of Japan.
This “Good/Bad” concept circulated swiftly through the media and received further endorsement from the newly appointed interim GM Chairperson, Kent Kresa. Mr. Kresa, chairman emeritus of the aerospace defense-contractor Northrop Grumman, received credit for keeping his company afloat. On 2 April 2009, Kresa told Jamie LaReau of Automotive News (autonews.com) that, if GM must go into bankruptcy, then splitting the company into two entities would be “a great idea.” Kresa noted that, if the company must enter Chapter 11 bankruptcy, it could split into a “Good GM” and a “Bad GM” and that such a plan would help the “Good GM” recover quickly. Kresa maintained that the concept presented a “wonderful idea for allowing a new General Motors to emerge.”
However, Kresa warned that this reorganization technique “has its problems, and all of our people are looking at it very hard.” He added, “There are a lot of constituents right now that have some dibs on the assets…. The bankruptcy has to deal with each of those and make sure that whatever comes out is reasonable. This is not a done deal. We want to do something that would be done quickly.” We must note that, as non-executive chairman, Kresa did not involve himself personally in any of the negotiations with the UAW or with the bondholders.
363 – The Number of the Beast? Probably Not
On 2 April 2009, Frank Langfitt of the National Public Radio program All Things Considered (npr.org) discussed that the Obama Administration had explored Section 363 within Chapter 11 of the bankruptcy code.
Section 363 often provides a critical element of the bankruptcy process regarding the sale of assets. Under Section 363(f), a bankruptcy trustee or debtor-in-possession, in this case, “Parent GM,” could have liquidated assets of the bankrupt estate, leaving “Good GM” free and clear of any interest in such property. This “free-and-clear” provision provides a means for the debtor to consummate the sale quickly, as competing interests in the property do not require resolution.
However, when the corporate parent remains the debtor in bankruptcy, Section 363 also considers the shares of the debtor’s subsidiaries as saleable “assets.” As a caveat, attorneys Lisa Jack and George W. Shuster, Jr. of the Wilmer Hale law firm, which is co-headquartered in Washington, D.C. and Boston (wilmerhale.com), offered an example from the U.S. Bankruptcy Court for the District of Delaware. (Amphenol Corp. v. Shandler [In re Insilco Technologies, Inc.], Adv. Proc. No. 05-52403 [Bankr. D. Del. 18 September 2006]). The authors recount the case of Insilco Technologies. Before filing for bankruptcy, Insilco closed a deal with Amphenol Corporation to sell Insilco’s subsidiaries and all of the stock in its wholly-owned subsidiary, Precision Cable Manufacturing Co., Inc. (PCM). Two years after the sale, the liquidating trustee filed a preference action for more than $1 million against PCM, which had become a subsidiary of Amphenol Corporation. Though both the co-debtor assets and the PCM stock had been sold free and clear of interests, the remaining assets of PCM had not. Jack and Shuster explain, “As PCM’s assets were not transferred under the Sale Order, that order did not enjoin the pursuit of claims or interests against PCM or its assets.”
This case provides a cautionary reminder to buyers from Jack and Shuster: “A stock sale is still a stock sale, and that a buyer who takes the shares of a corporation under a 363 order will still be responsible for the subsidiary’s indebtedness.”
Jack and Shuster make this obvious but critical point: “[A] stock sale of a non-debtor subsidiary ‘free and clear’ offers minimal protection to the buyer. In buying a corporation—not merely its assets—a buyer does not receive any discharge or protection from the corporation’s indebtedness under Section 363.” (“Bankruptcy Section 363 Sales: Buyers Beware of ‘Free and Clear’ Sales of Non-debtor Subsidiaries,” 24 October 2006, wilmerhale.com).
Rebirth of an Old Plan
In past columns, we have sketched a series of events from the mid-1950s relating to General Motors and the plans that emerged from these events. The approximate time frame extended from 1954, the year after Charles E. Wilson divested himself of his holdings in General Motors to avoid potential conflicts of interest in his new position as Secretary of Defense with the Eisenhower Administration, and the Court’s decision in the case of the United States v. Du Pont & Co., 353 U.S. 586 (1957). This decision required DuPont to divest GM shares to preserve its contract as the primary paint supplier to GM.
In essence, this series of events enabled interested parties from the first generation of GM wealth to align a group of children to whom they could pass a significant amount of what was then 88 million shares of stock in General Motors. Furthermore, these parties identified and imposed an executive hierarchy among the children based on cousins, kindred networks, somewhat-ancient bloodlines, other criteria, and whatever floated the boat. With powers and rights that flow ostensibly from the percentage of total corporate shares passed through trust accounts, the establishing dowagers secured the hierarchy and held it in reserve.
The two dowager groups discussed above created the original estates to transfer the shares upon or before their demise. These appear as objects of titular ownership. A definition appears on the Cornell University Law School web site: “A titular ownership or investment interest is an ownership or investment interest that excludes the ability or right to receive the financial benefits of ownership or investment, including, but not limited to, the distribution of profits, dividends, proceeds of sale, or similar returns on investment.” (www.law.cornell.edu/cfr/text/42/411.354 - “Financial relationship, compensation, and ownership or investment interest”).
In 2009, the mammoth drop in the value of shareholder equity at GM to a negative $112 billion created a game-changer. The equity value of shares remained at zero, with no dividends paid. Therefore, any bid-price at this level only reflected then-current market speculation regarding possible future value and earnings. However, as a half-century of healthy dividends had found their way into diversified investments, tightening the reins led to the firm’s recovery during the second decade of this century.
Takeaway
Under the leadership of Mary Barra, (chairperson and CEO), Mark Reuss, (president), and Paul A. Jacobson (CFO), General Motors continues to thrive in its current iteration as “Good GM.” Through the surviving divisions of Buick, Cadillac, Chevrolet, and GMC, Production Output exceeded 6.8 million vehicle sales, with Net Income of $6.4 billion, Assets of $235 billion, and Total Equity of approximately $50 billion (2020 figures).
The concept and commitment expoused by the dowagers established and ensured the survival of a pair of combined trusts that they created. In their belief, real wealth exists in the form of all of the people involved. General Motors continues to exist through well-laid plans of the dowagers and others. Currently, the firm has some 155,000 employees spread across many levels and departments. By reduction of the current approximate value of the firm at $50 billion, this means that, through Wilmington Trust (now including the Christiana Fund), each of the 51% (28% plus 23%) titular shareholders maintain a social/economic responsibility to 1550 employees plus their dependent family members while touching neither a penny of the trusts nor the dividends generated. Attorneys can take note of the events of the past thirteen years and reflect on the plan of the dowagers that enabled the reemergence of a business entity that continues to be vital to Michigan and the world.
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Dr. John F. Sase teaches Economics at Wayne State University and has practiced Forensic and Investigative Economics for twenty years. He earned a combined M.A. in Economics and an MBA at the University of Detroit, followed by a Ph.D. in Economics from Wayne State University. He is a graduate of the University of Detroit Jesuit High School (www.saseassociates.com).
Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a supervisory editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication (www.senick-editing.com).
Julie G. Sase is a copyeditor, parent coach, and empath. She earned her degree in English at Marygrove College and her graduate certificate in Parent Coaching from Seattle Pacific University. Ms. Sase coaches clients, writes articles, and edits copy (royaloakparentcoaching.com).
