Smith v. Van Gorkom

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Smith v. Van Gorkom or the Trans Union case, 488 A.2d 858 (Supreme Court of Delaware, 1985) is a landmark United States decision on the duty of a director of a Delaware corporation to stay informed and the application of the business judgment rule. The Court found that the directors of Trans Union, who approved a merger in minimal time and without seeking any expert advice, breached the duty of care they owed to the corporation and could not seek protection of the business judgment rule. It did not help the directors that the merger agreement was signed at the Lyric Opera of Chicago.

The Supreme Court of Delaware stated: "The rule itself "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." (872).

The case prompted an outcry from boards of directors of public companies, a sharp increase in insurance premiums for directors and officers' insurance, and the eventual adoption by the Delaware legislature of a statutory provision (Delaware General Corporation Law 102(b)(7)) that permits Delaware companies (with shareholder approval) to adopt charter amendments that exculpate directors from personal liability for breaches of the duty of care. Nine out of 10 Delaware companies have by this method essentially overturned the result in the Van Gorkom case. Nevertheless, the case lives on as a reminder that directors should take reasonable actions to inform themselves before acting.