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.
In a class action against defendant Trans Union Corporation (“Trans Union”) and its board of directors, plaintiffs, who are shareholders of Trans Union, claimed that the approval of the cash-out merger of their corporation violated Del. Code Ann. tit. 8, § 251, and did not warrant business judgment rule protection. It appeared that Trans Union, though generating hundreds of millions annually, has difficulty offsetting large investment tax credits (ITCs), thus, Trans Union pursued a program of acquiring small companies to increase taxable income that may offset the ITCs. Thus, a cash-out merger was entered between Trans Union and New T Company (“New T”), a wholly-owned subsidiary of the defendant, Marmon Group, Inc. ("Marmon”). The merger was largely due to the efforts exerted by Defendant Jerome W. Van Gorkom, Chairman and CEO of Trans Union, who struck the deal with Jay A. Pritzker, a known corporate takeover specialist and owner of Marmon and its subsidiaries. Van Gorkom successfully convinced the board of the $55 price per share cash-out merger. The price was merely assumed by Van Gorkom and is not supported by any valuation information. Following trial, the former Chancellor granted judgment for the defendant directors. Judgment was based on two findings: (1) that the Board of Directors had acted in an informed manner so as to be entitled to protection of the business judgment rule in approving the cash-out merger; and (2) that the shareholder vote approving the merger should not be set aside because the stockholders had been "fairly informed" by the Board of Directors before voting thereon. The plaintiffs appeal.
Were the rulings of the Court of Chancery correct?
The Court here concluded that both rulings of the Court of Chancery are clearly erroneous. The Board's decision to approve the proposed cash-out merger was not the product of an informed business judgment since they based their decision on one Van Gorkom’s representations, which did not constitute a report on 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 directors of Trans Union breached their fiduciary duty to their stockholders (1) by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the cash-out merger; and (2) by their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the Pritzker offer.the court found that the stockholders' vote did not ratify the action, because the stockholders weren't aware of the lack of valuation information, and because defendant directors' statements were misleading.