Smith v. Gorkom

Supreme Court of Delaware · 1985 · Corporations

CorporationsDirectors' duty of careBusiness judgment ruleMergersDisclosurebusiness judgment ruleduty of caregross negligence

Facts

Trans Union's board approved a cash-out merger at $55 per share after a two-hour meeting called on short notice, based largely on CEO Van Gorkom's oral presentation, limited comments from management, and no valuation study or fairness opinion. Van Gorkom had himself proposed the $55 price to the buyer based on rough leveraged-buyout feasibility calculations, but he did not disclose that methodology to the board. The board later approved amendments to the merger agreement without reviewing the actual documents, and the agreement materially constrained Trans Union's ability to pursue superior offers. In proxy materials sent to shareholders, the board failed to disclose material facts about the lack of valuation information and the basis for the $55 price, and shareholders then approved the merger.

Issue

Whether Trans Union's directors were protected by the business judgment rule when they approved the merger, despite acting without adequate information and deliberation, and whether the shareholder vote ratified the merger despite alleged deficiencies in the proxy disclosures. Also, whether the directors' post-approval actions cured any defects in the original approval.

Rule

Under Delaware law, the business judgment rule presumes directors act on an informed basis, in good faith, and in the honest belief that their action is in the corporation's best interests. The informed-basis requirement asks whether directors informed themselves, before making the decision, of all material information reasonably available to them; director liability for violating that duty of care is measured by gross negligence. In the merger context under 8 Del. C. 251(b), directors must act in an informed and deliberate manner before approving and submitting a merger to shareholders. Shareholder ratification is effective only if the vote is by a fully informed electorate after complete candor as to all material facts.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Summit Freight Holdings, a Delaware corporation based in Chicago, received an unsolicited cash merger proposal from North Harbor Capital. CEO Daniel Mercer called a Saturday board meeting on one day's notice, gave a 25-minute oral summary, and urged approval that afternoon; the directors had no written deal summary, no valuation materials, and no chance to review the merger agreement before voting.

If shareholders later sue the directors for breach of the duty of care, which is the strongest argument against business-judgment-rule protection?

Explanation. The majority held that the business judgment rule presumes an informed decision, but that presumption is rebutted if directors fail to inform themselves, before acting, of all material information reasonably available. In the merger context, directors must act in an informed and deliberate manner before approving and submitting the deal to shareholders. A rushed approval based only on oral presentations and no meaningful valuation information supports gross negligence. Good faith alone is not enough, and the board may not abdicate its § 251(b) role to shareholders. (Derived from Smith v. Gorkom (n.d.).)