Smith v. Van Gorkon (Del.).

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Facts.  Trans Union Corporation (Trans Union) was a publicly traded, diversified holding company that was incorporated in Delaware. Its principal earnings were generated by its railcar leasing business. Jerome W. Van Gorkom was a Trans Union officer for more than 24 years, its chief executive officer for more than 17 years, and the chairman of the board of directors for 2 years. Van Gorkom, a lawyer and certified public accountant, owned 75,000 shares of Trans Union. He was approaching 65 years of age and mandatory retirement. Trans Union's board of directors was composed of ten members--five inside directors and five outside directors. In September 1980, Van Gorkom decided to meet with Jay A. Pritzker, a well- known corporate takeover specialist and a social acquaintance of Van Gorkom's, to discuss the possible sale of Trans Union to Pritzker. Van Gorkom met Pritzker at Pritzker's home on Saturday, September 13, 1980. He did so without consulting Trans Union's board of directors. At this meeting, Van Gorkom proposed a sale of Trans Union to Pritzker at a price of $55 per share. The stock was trading at about $38 in the market. On Monday, September 15, Pritzker notified Van Gorkom that he was interested in the $55 cash-out merger proposal. Van Gorkom, along with two inside directors, privately met with Pritzker on September 16 and 17. After meeting with Van Gorkom on Thursday, September 18, Pritzker notified his attorney to begin drafting the merger documents. On Friday, September 19, Van Gorkom called a special meeting of Trans Union's board of directors for the following day. The board members were not told the purpose of the meeting. At the meeting, Van Gorkom disclosed the Pritzker offer and described its terms in a 20-minute presentation. Neither the merger agreement nor a written summary of the terms of the agreement was furnished to the directors. No valuation study as to the value of Trans Union was prepared for the meeting. After two hours, the board voted in favor of the cash-out merger with Pritzker's company at $55 per share for Trans Union's stock. The board also voted not to solicit other offers. The merger agreement was executed by Van Gorkom during the evening of September 20 at a formal social event he hosted for the opening of the Chicago Lyric Opera's season. Neither he nor any other director read the agreement prior to its signing and delivery to Pritzker. Trans Union's board of directors recommended the merger be approved by its shareholders and distributed proxy materials to the shareholders stating that the $55 per share price for their stock was fair. In the meantime, Trans Union's board of directors took steps to dissuade two other possible suitors who showed an interest in purchasing Trans Union. On February 10, 1981, 69.9 percent of the shares of Trans Union stock was voted in favor of the merger. The merger was consummated. Alden Smith and other Trans Union shareholders sued Van Gorkom and the other directors for damages. The plaintiffs alleged that the defendants were negligent in their conduct in selling Trans Union to Pritzker. The Delaware Court of Chancery held in favor of the defendants. The plaintiffs appealed.

Issue. Did Trans Union's directors breach their duty of care?

Opinion. Horsey, Justice.  In the specific context of a proposed merger of domestic corporations, a director has a duty, along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Certainly in the merger context, a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement. Only an agreement of merger satisfying these requirements may be submitted to the shareholders. It is against these standards that the conduct of the directors of Trans Union must be tested, as a matter of law and as a matter of fact, regarding their exercise of an informed business judgment in voting to approve the Pritzker merger approval. The issue of whether the directors reached an informed decision to sell the company on September 20, 1980 must be determined only upon the basis of the information then reasonably available to the directors and relevant to their decision to accept the Pritzker merger proposal. On the record before us, we must conclude that the board of directors did not reach an informed business judgment on September 20, 1980 in voting to sell the company for $55 per share pursuant to the Pritzker cash-out merger proposal. Our reasons, in summary, are as follows: The directors (1) did not adequately inform themselves as to Van Gorkom's role in forcing the sale of the company and in establishing the per share purchase price; (2) they were uninformed as to the intrinsic value of the company; and (3) given these circumstances, at a minimum, they were grossly negligent in approving the sale of the company upon two hours' consideration, without prior notice, and without the exigency of a crisis or emergency. Without any documents before them concerning the proposed transaction, the members of the board were required to rely entirely upon Van Gorkom's 20-minute oral presentation of the proposal. No written summary of the terms of the merger was presented; the directors were given no documentation to support the adequacy of $55 price per share for sale of the company; and the board had before it nothing more than Van Gorkom's statement of his understanding of the substance of an agreement that he admittedly had never read, or that any member of the board had ever seen. Thus, the record compels the conclusion that on September 20 the board lacked valuation information to reach an informed business judgment as to the fairness of $55 per share for sale of the company. We conclude that Trans Union's board was grossly negligent in that it failed to act with informed reasonable deliberation in agreeing to the Pritzker merger proposal on September 20, 1980.

Holding.  The supreme court of Delaware held that the defendant directors had breached their duty of care. The supreme court remanded the case to the court of chancery to conduct an evidentiary hearing to determine the fair value of the shares represented by the plaintiffs' class. If that value is higher than $55 per share, the difference shall be awarded to the plaintiffs as damages. Reversed and remanded.

Case Questions Ethics.  Do you think that Van Gorkom and the other directors had the shareholders' best interests in mind? Were the plaintiff-shareholders being greedy?

Policy.  What does the business judgment rule provide? Is this a good rule? Explain.

Business Implication.  Is there any liability exposure for sitting on a board of directors?