Smith v. Van Gorkom
(The Trans Union Case)
488 A.2d 858 (Del. 1985)

  • A corporation called Marmon was attempting a leveraged buy-out of TransUnion. TransUnion's CEO, Van Gorkom proposed a price of $55 a share.
    • Turns out, Van Gorkom and his CFO didn't bother to do any research to see how much the company was actually worth. He didn't even inform TransUnion's legal department about the transaction.
    • $55 a share was only about 60% of what the company was later appraised at.
      • In Van Gorkom's defense, at the time of the merger, the stock was only selling for $37.25 a share, so $55 seemed like a lot.
  • Van Gorkom called an emergency meeting of the board of directors, proposed the merger, and the directors gave preliminary approval.
    • Van Gorkom failed to disclose a number of things at the board meeting where the vote was taken, including the fact that there was no basis for the $55 price, and that there had been objections by TransUnion management regarding the merger. Van Gorkom didn't even provide the directors with copies of the merger agreement.
  • The facts get a little complicated, but basically, there was some wheeling and dealing and the directors eventually wound up recommending that the shareholders approve the merger, even though the directors never really bothered to learn if the terms of the merger were a good deal for the company or not.
  • Some shareholders instituted a derivative lawsuit against the directors for breach of fiduciary duty.
  • The Trial Court found for Van Gorkom. The shareholders appealed.
    • The Trial Court found that Van Gorkom's actions fell within the business judgment rule.
      • The business judgment rule says that the courts should not second guess business decisions made by directors.
  • The Appellate Court reversed.
    • The Appellate Court found that the directors were grossly negligent because they approved the merger without substantial inquiry or any expert advice. Therefore they breached their duty to care.
      • The Court found that the directors breached their fiduciary duty by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the merger, and
      • The Court found that there was a failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the merger.
      • The Court found that Van Gorkom breached his duty to care by offering $55 a share because, "the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company."
    • The Court found that the business judgment rule was not a defense because the directors and Van Gorkom didn't use any "business judgment" when they came to their decision.
      • "The rule itself 'is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.' ...Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one."
      • "Under the business judgment rule there is no protection for directors who have made an unintelligent or unadvised judgment."
      • Basically, the actual decision is not so important, what the courts will look to is whether there was an adequate decision-making process.
  • In this case, the Court basically said that in order to hide behind the business judgment rule, you have to show that you made an informed decision based on some principle of business. If you pull numbers out of thin air or cast votes without doing due diligence, then the courts can overturn your decisions.
    • The idea behind the business judgment rule is that people who work in the business have more experience and are better judges of what a corporation should do than a court would be. But when businessmen show that they didn't use any of that experience to make a decision, then there is no reason for the courts to defer to them.
  • Almost immediately after this decision, Delaware passed a law (DGCL 102(b)(7)) that allows corporations to limit the liability of their directors for breaches of the duty of care.