Smith v. Van Gorkom

Trans Union, a large publicly traded, diversified holding company, whose primary revenue stream was railcar leasing, was generating significant investment tax credits (ITCs), which they could not utilize because of insufficient taxable income. In response to the ITC problem, the management team presented the Board with a report, which recommended courses of action in dealing with the ITC issue. The sale of Trans Union was not one of the recommended strategies. Nevertheless, Jerome Van Gorkom, Trans Union's CEO and Chairman, pursued selling Trans Union to a company with a large amount of taxable income. Van Gorkom proposed a share price of $55, which was above market value, but there was no evidence that the $55 figure represented the per share intrinsic value of the company. Van Gorkom negotiated a deal privately with Jay Pritzker, a well-known corporate takeover specialist. Van Gorkom presented to the Board a merger proposal involving Pritzker. Subsequent to the board meeting and without any director reading it, Van Gorkom signed the merger agreement at the opening of the Chicago Lyric Opera. Pritzker and Van Gorkom then signed amendments to the merger agreement, which deviated from Van Gorkom's representations to the board and which made it difficult for Trans Union to negotiate a better deal. 70% of the shareholders approved the merger. The Court of Chancery found that the Board had given sufficient time and attention to the transaction to reach an informed business judgment on the cash-out merger proposal.

The concept of gross negligence is the proper standard for determining whether a business judgment reached by a board of directors was an informed one. In this case, the Court held that the Board did not reasonably inform themselves of the transaction and were therefore not protected by the business judgment rule.

Fiduciary Duties & Shareholder Litigation | The Business Judgment Rule and Duty of Care