Trans Union’s CEO, Jerome Van Gorkom, negotiated a cash-out merger with Pritzker at $55 per share after limited internal analysis and without a market test. The board approved the merger at a brief meeting based largely on Van Gorkom’s oral presentation, without reviewing the merger agreement in advance or obtaining a fairness opinion. Shareholders later approved the merger, but a shareholder challenged the directors’ conduct as a breach of their fiduciary duty of care. The case focused on whether the board’s decision-making process was sufficiently informed to receive business judgment rule protection.
Did Trans Union’s directors breach their fiduciary duty of care by approving the merger on an uninformed basis, thereby losing the protection of the business judgment rule?
Under Delaware law, directors are protected by the business judgment rule only if they act on an informed basis, in good faith, and in the honest belief that their action is in the corporation’s best interests. A board’s grossly negligent failure to inform itself adequately before approving a merger constitutes a breach of the duty of care.
Yes. The Delaware Supreme Court held that the Trans Union directors were grossly negligent in approving the merger without adequate information or deliberation, so the business judgment rule did not protect them and they were liable for breaching the duty of care.
The court emphasized that the directors approved a sale of the company after only a short meeting, with no prior notice that merger approval would be considered, no expert valuation, and no meaningful review of the merger terms. The board relied too heavily on Van Gorkom’s unsupported assertions about the adequacy of the $55 price and failed to investigate alternatives or test the market before committing the company. Although later disclosures and shareholder approval occurred, they did not cleanse the initial uninformed board action because the shareholders were not fully informed and the board’s process itself was defective. The court treated this process as gross negligence sufficient to establish a duty-of-care violation.
Justice McNeilly dissented, arguing that the majority improperly second-guessed a board decision that was made in good faith and that the directors had enough information, under the circumstances, to approve the transaction subject to further developments.
Smith v. Van Gorkom is a leading Delaware duty-of-care case because it showed that directors can face personal liability for an uninformed decision-making process even absent self-dealing. The case prompted greater reliance on fairness opinions, careful board deliberation, and ultimately the adoption of exculpatory charter provisions under Del. Gen. Corp. L. § 102(b)(7). It is closely related to Aronson v. Lewis, 473 A.2d 805 (Del. 1984), on the business judgment rule; Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), on enhanced scrutiny in takeover contexts; Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), on sale-of-control duties; and In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), on board oversight obligations.
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