Smith v. Van Gorkom

Jerome Van Gorkom (defendant) was the board chairman and longtime CEO of Trans Union Corporation (Union), a publicly traded company. Union was struggling to generate sufficient taxable income to offset investment tax credits. In September 1980, Van Gorkom privately negotiated with Jay Pritzker for a buyout that would merge Union with a company having a large taxable income. Prior to negotiations, Van Gorkom decided, without any supporting evidence, that Union’s value was $55 per share. At the time, Union’s shares were trading at about $38, but the company knew they were undervalued. Pritzker made a cash offer to buy Union at the requested $55 per share. The offer was to remain open for 90 days, during which time Union could accept a higher offer but could not solicit offers. Van Gorkom believed the so-called market test would constitute validation for the $55 share price. On September 20, Van Gorkom 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 primarily on a 20-minute oral presentation 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. When Union announced the proposed merger and the management’s dissatisfaction became common knowledge, Van Gorkom and Pritzker agreed to certain amendments. The board approved the amendments on October 8 based on Van Gorkom’s representations as to their contents. The actual amendments were not delivered to Van Gorkom until October 10. They allowed Union to solicit other offers. However, unbeknownst to the board at the time of approval, they also prohibited Union from abandoning the merger unless Union had entered a merger agreement or executed a merger with a third party by February 10, 1981. On December 19, 1980, certain 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. Nevertheless, at a January 26, 1981, board meeting, the board voted again to approve the merger. On February 10, Union’s shareholders, who were unaware of certain material facts, voted to approve the transaction. The trial court ruled in the directors’ favor, finding that they were protected by the business-judgment rule. The shareholders appealed.