Smith v. Van Gorkom

Jerome Van Gorkom (defendant) was the CEO and board chairman of Trans Union Corporation (Union), a publicly traded company. Union was struggling to generate the taxable income needed for certain federal income-tax benefits. Van Gorkom engaged in his own negotiations with a third party for a buyout that would merge Union with a company having a large taxable income. Prior to negotiations, Van Gorkom determined, without any supporting evidence, that Union’s value was $55 per share. The negotiations resulted in an agreed-upon merger pending corporate approval. Van Gorkom promptly called a meeting of Union’s senior management, followed by a meeting of the board of directors (board) (defendants). Senior management reacted very negatively. However, after a two-hour board meeting, the board approved the buyout. The board’s decision was based on a 20-minute oral presentation by Van Gorkom, plus brief supporting representations from Union’s president, its chief financial officer, and an attorney retained by Van Gorkom. The directors did not have an opportunity to review the merger agreement before or during the meeting. The directors also had no documents summarizing the merger or supporting the $55 share valuation. Alden Smith and other unhappy Union shareholders (plaintiffs) filed a class-action suit against the directors, alleging they breached their duty of care by making an uninformed decision to approve the merger. The board nevertheless proceeded with the merger, submitting it to a shareholder vote. It was approved. The trial court ruled in the directors’ favor, finding that they were protected by the business-judgment rule. The shareholders appealed.