MGMT520 Case Analysis Week 7


MGMT520 Case Analysis Week 7
In order to take advantage of a favorable tax situation, defendant Van Gorkom, chief executive…

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MGMT520 Case Analysis Week 7

MGMT520 Case Analysis Week 7

Smith v. Van Gorkom

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CASE 17-3 

Delaware Supreme Court 488 A.2d 858 (1985)

In order to take advantage of a favorable tax situation, defendant Van Gorkom, chief executive of Trans Union Corporation (Trans Union or the Company), solicited a merger offer from Pritzker, an outside investor. Van Gorkom acted on his own and arbitrarily arrived at a buyout price of $55 per share. Without any investigation, the full Trans Union board accepted the offer informally.

The offer was proposed two more times before its formal acceptance by the board. Plaintiff Smith and other shareholders brought suit, claiming that the board had failed to give due consideration to the offer. The trial court held 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 they voted on it.

The court also found that, because the board had considered the offer three times before formally accepting it, the board had acted in an informed manner and was, therefore, entitled to the protection of the business judgment rule. The plaintiffs appealed.

On Friday, September 19, Van Gorkom called a special meeting of the Trans Union Board for noon the following day….

Van Gorkom began the Special Meeting of the Board with a twenty-minute oral presentation. Copies of the proposed Merger Agreement were delivered too late for study before or during the meeting. He reviewed the Company’s ITC and depreciation problems and the efforts theretofore made to solve them. He discussed his initial meeting with Pritzker and his motivation in arranging that meeting. Van Gorkom did not disclose to the Board, however, the methodology by which he alone had arrived at the $55 figure, or the fact that he first proposed the $55 price in his negotiations with Pritzker.

Van Gorkom outlined the terms of the Pritzker offer as follows: Pritzker would pay $55 in cash for all outstanding shares of Trans Union stock, upon completion of which Trans Union would be merged into new T Company, a subsidiary wholly-owned by Pritzker and formed to implement the merger; for a period of 90 days, Trans Union could receive, but could not actively solicit, competing offers; the offer had to be acted on by the next evening, Sunday, September 21; Trans Union could only furnish to competing bidders published information, and not proprietary information; the offer was subject to Pritzker obtaining the necessary financing by October 10, 1980; if the financing contingency were met or waived by Pritzker, Trans Union was required to sell to Pritzker one million newly-issued shares of Trans Union at $38 per share.

The Board meeting of September 20 lasted about two hours…. The directors approved the proposed Merger Agreement.

On February 10, the stockholders of Trans Union approved the Pritzker merger proposal. Of the outstanding shares, 69.9% were voted in favor of the merger, 7.25% were voted against the merger, and 22.85% were not voted.

The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves “prior to making a business decision of all material information reasonably available to them.”

In the specific context of a proposed merger of domestic corporations, a director has a duty under 8 [Delaware Code §] 251(b), along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Certainly in the merger context, a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement.

On the record before us, we must conclude that the Board of Directors did not reach an informed business judgment on September 20, 1980 in voting to “sell” the company for $55 per share pursuant to the Pritzker cash-out merger proposal. Our reasons, in summary, are as follows:

The directors (1) did not adequately inform themselves as to Van Gorkom’s role in forcing the “sale” of the Company and in establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; and (3) given these circumstances, at a minimum, were grossly negligent in approving the “sale” of the Company upon two hours’ consideration, without prior notice, and without the exigency of a crisis or emergency.

Without any documents before them concerning the proposed transaction, the members of the Board were required to rely entirely upon Van Gorkom’s 20-minute oral presentation of the proposal. No written summary of the terms of the merger was presented; the directors were given no documentation to support the adequacy of [the] $55 price per share for sale of the Company; and the Board had before it nothing more than Van Gorkom’s statement of his understanding of the substance of an agreement, which he admittedly had never read, nor which any member of the Board had ever seen.

There was no call by the Board, either on September 20 or thereafter, for any valuation study or documentation of the $55 price per share as a measure of the fair value of the Company in a cash-out context. It is undisputed that the major asset of Trans Union was its cash flow. Yet, at no time did the Board call for a valuation study taking into account that highly significant element of the Company’s assets.

The record also establishes that the Board accepted without scrutiny Van Gorkom’s representation as to the fairness of the $55 price per share for sale of the Company—a subject that the Board had never previously considered. The Board thereby failed to discover that Van Gorkom had suggested the $55 price to Pritzker and, most crucially, that Van Gorkom had arrived at the $55 figure based on calculations designed solely to determine the feasibility of a leveraged buy-out. No questions were raised either as to the tax implications of a cash-out merger or how the price for the one million share option granted Pritzker was calculated.

We do not say that the Board of Directors was not entitled to give some credence to Van Gorkom’s representation that $55 was an adequate or fair price…. The issue is whether the directors informed themselves as to all information that was reasonably available to them. Had they done so, they would have learned of the source and derivation of the $55 price and could not reasonably have relied thereupon in good faith.

The defendants ultimately relied on the stockholder vote of February 10 for exoneration. The defendants contend that the stockholders’ “overwhelming” vote approving the Pritzker Merger Agreement had the legal effect of curing any failure of the Board to reach an informed business judgment in its approval of the merger.

The burden must fall on defendants who claim ratification based on shareholder vote to establish that the shareholder approval resulted from a fully informed electorate. On the record before us, it is clear that the Board failed to meet that burden.

To summarize: we hold that 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 Pritzker 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.

We hold, therefore, that the Trial Court committed reversible error in applying the business judgment rule in favor of the director defendants in this case…

MGMT520 Case Analysis Week 7


An analysis of the case Smith v. Van Gorkom. Here, the plaintiffs are Alden Smith ad John Gosselin, along with other shareholders of Trans Union. On the other hand, the defendants are Jerome Van Gorkom, Trans Union CEO, and the other Trans Union directors…

MGMT520 Case Analysis Week 7