Smith v. Van Gorkom
Citation: 488 A.2d 858 (Delaware Supreme Court, 1985)
Facts
Jerome Van Gorkom, CEO of Trans Union Corporation, unilaterally negotiated a leveraged buyout with Jay Pritzker at $55 per share without prior board authorization, financial advisor opinion, or review of Trans Union’s intrinsic value. He presented the deal to the board at a two-hour meeting with no advance notice and no written materials. The board approved the merger. Shareholders sued, arguing the directors were grossly negligent in approving the transaction.
Issue
Whether the Trans Union board of directors was grossly negligent in approving the merger agreement, thereby failing to satisfy the duty of care and losing the protection of the business judgment rule.
Holding
Yes. The Delaware Supreme Court held in a landmark 3-2 decision that the board acted with gross negligence by approving the merger without adequately informing itself of the company’s intrinsic value. The directors were personally liable for damages.
Rule
The business judgment rule protects directors only when they act on an informed basis. To satisfy the duty of care, directors must inform themselves of all material information reasonably available to them before making a decision. Approval of a major transaction based on two hours of deliberation, without financial studies, without investment banker advice, and without adequate information about the company’s value constitutes gross negligence that strips the board of business judgment rule protection.
Significance
Van Gorkom sent shockwaves through the corporate world and is one of the most significant — and controversial — Delaware corporate law decisions ever. It is taught for: (1) the content of the duty of care (informed decision-making), (2) the requirements for business judgment rule protection, (3) the distinction between negligence and gross negligence, and (4) its aftermath: Delaware’s enactment of DGCL § 102(b)(7), which allows corporations to exculpate directors from monetary liability for duty of care violations, essentially gutting the damages remedy that Van Gorkom imposed.