Tuesday, November 15, 2011

Smith v. Van Gorkom case brief

Smith v. Van Gorkom
(488 A.2d 858 (Del. 1985))

FACTS-A corporation (Marmon) was attempting a leveraged buy-out of TransUnion. TransUnion's CEO, Van Gorkom proposed a price of $55/share.
-Van Gorkom and his CFO didn't bother to do any research to see how much the company was worth. Van Gorkom did not even inform TransUnion's legal department about the transaction.
- $55 a share was only around 60% of what the company was later appraised at.
-At the time of the merger, the stock was 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 him preliminary approval.
-Van Gorkom did not disclose a number of things at the board meeting where the vote was to be 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 did not provide the directors with copies of the merger agreement.
-Some shareholders instituted a derivative lawsuit against the directors for breach of fiduciary duty.

 PROCEDURAL HISTORY
-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.
-Shareholders appealed.

ISSUE
-Were the directors grossly negligent due to approving the merger without substantial inquiry or procural of expert advice?

HOLDING
-Yes, they should have made inquiry and breached their duty of care.

RULES
-The Business Judgment Rule 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."

ANALYSIS
-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.

-The Court also found that there was a failure to disclose all material information such as that which a reasonable stockholder would consider important in deciding whether to approve the merger.
-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."
-Court found that the business judgment rule was not a defense because the directors and Van Gorkom did not use any "business judgment" when they came to their decision.
-The courts will ask: whether there was an adequate decision-making process.
-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 randomly pull numbers out of thin air or cast votes without due diligence, then the courts can (and will often) overturn your decisions.

-The idea behind the business judgment rule is people who work in the business have more experience and are better judges of what a corporation should do than a court would be.  The courts do not like getting involved in business decisions. However, 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.

NOTES
-Almost immediately after this decision, Delaware passed a law (DGCL §102(b)(7)) which allows corporations to limit the liability of their directors for breaches of the duty of care.

Course: Corporations.
Topics: Business Judgement Rule, Duty of Care

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