Corporate Law
1985
Smith v. Van Gorkom
488 A.2d 858 (Del. 1985)
Supreme Court of Delaware
Issue
Director duty of care and board process in approving a cash-out merger.
Facts
Trans Union's chief executive, Jerome Van Gorkom, negotiated a cash merger with Jay Pritzker at $55 per share. The board approved the transaction after a short meeting, without a formal valuation study, without reading the merger agreement in advance, and with limited inquiry into the basis for the price and process.
Holding
The Delaware Supreme Court found the directors grossly negligent in approving the merger without adequate information and deliberation.
Reasoning
The court emphasized that the business judgment rule protects informed judgments, not uninformed approvals of major corporate transactions. Directors could not rely on the premium alone or on conclusory oral presentations; they had to inform themselves of all material information reasonably available before approving a sale of the company.
Why It Matters
The case is a canonical duty-of-care decision and a major background to later charter exculpation and board-process practice.
Institutional Analysis
Institutional problem
The case allocates responsibility for information production and deliberation when a board approves a control transaction under time and valuation uncertainty.
Economic analysis
A process-based duty of care can induce boards to obtain valuations, test assumptions, and document alternatives. Those benefits must be compared with delay, advisory costs, hindsight bias, and defensive process. The rule also affects bargaining: a credible review process may improve price discovery, while rigid procedure can reduce a board’s ability to act quickly on valuable offers.
Alternatives and limits
Independent committees, financial advice, market checks, disclosure, shareholder approval, insurance, indemnification, and charter exculpation distribute monitoring and liability differently. The decision establishes a legal standard for informed approval; it does not show that any particular volume of documentation is economically optimal.
This analytical supplement distinguishes institutional interpretation from the court’s holding and reasoning.
Research Questions
- Which board procedures generate decision-relevant information rather than litigation records?
- How do liability limits alter director care, recruitment, insurance, and settlement?
Case Text and Citation
Cite the reported decision as 488 A.2d 858 (Del. 1985). The linked copy is provided for reading access and may be hosted by a court, institutional repository, or secondary case archive.
Open case text: Justia