Smith v. Van Gorkom

Brief Fact Summary.

Because Van Gorkom (Defendant) and the other Trans Union directors had three opportunities to reject the merger proposal, the trial court held that they acted with due deliberation and their conduct fell within the business judgment rule.

Synopsis of Rule of Law.

When making decisions on behalf of a corporation, the directors are bound to exercise good faith informed judgment.

Facts.

Van Gorkom (Defendant), Trans Union’s chief executive, solicited a merger offer from an outside investor.  Defendant acted on his own and arbitrarily arrived at a price of $55 per share.  Without any type of investigation, the full board of Trans Union accepted the offer.  Before its formal acceptance by the board, the offer was proposed two subsequent times.  The derivative suit was brought by Smith (Plaintiff) and other shareholders on the basis that the board had not given the offer due consideration.  The trial court held that the board’s action fell within the business judgment rule because it considered the offer three times before formally accepting it.  The appellate court affirmed, and this appeal resulted.

Issue.

When making decisions on behalf of a corporation, are the directors bound to exercise good faith informed judgment?

Held.

(Horsey, J.)  Yes.  When making decisions on behalf of a corporation, the directors are bound to exercise good faith informed judgment.  Here, the directors tentatively approved the merger the first time it was presented to them.  There was no substantiating data known or requested regarding the feasibility of the $55 per share price.  Allowing time to study the proposal or to gather more information was not considered.  Their decision, therefore, to accept the offer can be classified as nothing short of gross negligence.  Because of this, their actions cannot be imposed on the shareholders under protection of the business judgment rule.  Reversed and remanded for a determination of the value of the shares and an appropriate damage award.

Dissent.

(McNeilly, J.)  The Board was made up of very well-educated, experienced and successful business people.  All were very aware of their duties and of the merits of the offer.  Their actions appear subjectively imprudent, however, this does not preclude application of the business judgment rule.

Discussion.

The decisions of a corporation are left up to the board of directors.  Shareholder approval or ratification is required for some major decisions, such as mergers and acquisitions.  Within certain parameters, board decisions are upheld on review based on the business judgment rule.  When a board makes decisions based on its business experience, this rule grants immunity from liability.  Such decisions are generally upheld as falling within the board’s discretion, so long as gross negligence is not involved.