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Smith v. Van Gorkom or the Trans Union case, 488 A.2d 858 (Supreme Court of Delaware, 1985) is an important Delaware Supreme Court decision, primarily because of its discussion of a director's duty of care.

The case involved a proposed leveraged buy-out merger. Van Gorkom, who was the company's Chairman and CEO, chose a proposed price of $55 without consultation with financial experts. The court was highly critical of this decision, writing that "the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company."

The proposed merger was subject to Board approval. At the Board meeting, a number of items were not disclosed, including the problematic methodology that Van Gorkom used to arrive at the proposed price. Also, previous objections by management were not discussed. The Board approved the proposal.

The Court found that the directors, because they approved the merger in minimal time and without seeking any expert advice, breached the duty of care they owed to the corporation and could not seek protection of the business judgment rule.

The Court stated: “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.” (872).

The decision also clarified the directors' duty of disclosure, stating that corporate directors must disclose all facts germane to a transaction that is subject to a shareholder vote.

The case prompted an outcry from boards of directors of public companies, a sharp increase in insurance premiums for directors and officers' insurance, and the eventual adoption by the Delaware legislature of a statutory provision (Delaware General Corporation Law 102(b)(7)) that permits Delaware companies (with shareholder approval) to adopt charter amendments that exculpate directors from personal liability for breaches of the duty of care. Nine out of 10 Delaware companies have by this method essentially overturned the result in the Van Gorkom case. Nevertheless, the case lives on as a reminder that directors should take reasonable actions to inform themselves before acting.

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Smith v. Van Gorkom

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