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Law School Case Brief

Smith v. Van Gorkom - 488 A.2d 858 (Del. 1985)


The business judgment rule 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. 


A class action brought by shareholders of the defendant Trans Union Corporation (Trans Union), sought rescission of a cash-out merger of Trans Union into the defendant New T Company (New T), a wholly-owned subsidiary of the defendant, Marmon Group, Inc. (Marmon). Alternate relief in the form of damages was sought against the defendant members of the Board of Directors of Trans Union. The Court of Chancery (Delaware) ruled in favor of defendants. Plaintiff shareholders appealed, arguing that defendant directors' decision to approve a cash-out merger of Trans Union into another violated Del. Code Ann. tit. 8, § 251, and did not warrant business judgment rule protection. 


Were the directors protected by the business judgment rule?




The Supreme Court of Delaware reversed the judgment, holding that defendant directors' decision to approve the merger was not the product of an informed business judgment, that efforts to amend the merger agreement were ineffectual, and that defendant directors had not disclosed all material facts to the stockholders. The court found that defendant directors based their decision on one person's representations, which did not constitute a report upon which they could reasonably rely under Del. Code Ann. tit. 8, § 141(e), and that they did not seek documentation of either the merger terms or the adequacy of the proposed price per share. The court also found defendant directors were grossly negligent in permitting the agreement to be amended in a way they had not authorized. Finally, the court found that the stockholders' vote did not ratify the action, because not only were the stockholders not aware of the lack of valuation information but also that defendant directors' statements were misleading.

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