Summary of Smith v. Van Gorkom
Relevant Facts: Marmon was trying to buyout TransUnion. TransUnion’s CEO suggested a sale price ($55/share) which turned out to be an artificially, speculative price that did not reflect research into the company’s actual worth. Van Gorkom called an emergency meeting with the board of directors in which he proposed the merger without disclosing all of the relevant information regarding the proposed share price. Additionally, Van Gorkom did not provide directors with copies of the merger agreement or provide information to shareholders. Consequently, shareholders filed suit, arguing that Van Gorkom did not meet his fiduciary duties.
Issues: The central legal question presented was whether the directors (including Van Gorkom) were grossly negligent to approve the merger without any disclosures or proof that what Van Gorkom had provided was sufficient.
Holding: The Court held that the directors should have been assertive and inquired as to the in depth nature of the deal in order to serve their shareholders.
Reasoning: The Court (Supreme Court of Delaware) found that that directors had breached their fiduciary duties. Additionally, it found that the directors were grossly negligent because they failed to take the prudent amount of time to investigate whether the merger was in fact in the best interests of shareholders. The Court reasoned the following:
“The rule itself ‘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."
Dissent: The dissenting opinion was made on the grounds that the directors were not grossly negligent because there was no indication that if they had had additional time, they would have come to a better decision (deny the merge), because ultimately, it added to the company’s financial stature.
Conclusion: The case was significant because it was perceived to be an affront by many in the business/corporate community that courts had infringed on the rights of business executives to make sound and independent judgments concerning matters of private enterprise.