Sample Smith v Van Gorkom Brief _cash out by liwenting



FACTS: The shareholders of Trans Union Corporation sought rescission of a cash-out merger of Trans
Union into New T Company, a wholly-owned subsidiary of Marmon Group, Inc. On September 13th,
1980, Jerome W. Van Gorkom, Trans Union’s chairman and Chief Executive Officer, met privately with
Jay A. Pritzker, a well-known corporate takeover specialist and one of the owners of Marmon, and
proposed to Pritzker an opportunity to enter into a $55 per share cash-out merger. On September 15th,
Pritzker notified Van Gorkom that he was interested in the cash-out merger proposal. On September 20th,
Van Gorkom held a special meeting with the Senior Management of Trans Union, and subsequently met
with the Company’s Board one hour later. At the meeting with Senior Management, Van Gorkom
disclosed the merger offer and described its terms, but did not furnish copies of the proposed Merger
Agreement. Similarly, at the meeting with the Board, Van Gorkom provided a 20-minute oral
presentation regarding the proposed Merger Agreement, but again failed to provide the written proposal.

Based solely on Van Gorkom’s oral presentation, supporting representations from Bruce Chelberg,
President and Chief Operating Officer of Trans Union, an oral statement from Donald Romans, Chief
Financial Officer of Trans Union, indicating that his preliminary study of the $55 per share did not
indicate either a fair price for the stock or a valuation of the Company, and on James Brennan’s legal
advice, the Board approved the proposed Merger Agreement within two hours. Neither Van Gorkom nor
any other director read the agreement prior to its signing and delivery to Pritzker.

The Board approved for mailing around January 27th, 1981, a Supplement to its Proxy Statement which
set forth details of the Merger Agreement, which had not been included in the first Proxy Statement
mailed January 21st. On February 10th, the stockholders of Trans Union approved the merger

ISSUE: Whether the Board’s decision reached September 20th, 1980, to approve the proposed cash-out
merger was the product of an informed business judgment and whether the Board provided complete
candor to the stockholders before securing the stockholders’ approval of the merger.

HOLDING: No, the Board’s decision reached September 20th, 1980, to approve the proposed cash-out
merger was not the product of an informed business judgment and the Board did not provide complete
candor to the stockholders before securing the stockholders’ approval of the merger.

REASONING: Under Delaware law, business and affairs of a Delaware corporation are managed by or
under its board of directors. Under the business judgment rule, there is no protection for directors who
have made “an unintelligent or unadvised judgment”, and is derived from the fiduciary capacity in which
he or she serves the corporation and its stockholders. Directors have an affirmative duty to protect the
financial interests of those whom he or she represents and to critically assess all pertinent information.
Since there were no allegations or proof of fraud, bad faith, or self-dealing, it is presumed that the
directors reached their business judgment in good faith. The concept of gross negligence is the proper
standard for determining whether a business judgment reached by a board of directors was an informed
one. Regarding a proposed merger of domestic corporations, a director has a duty under Delaware law to
act in an informed and deliberate manner in determining whether to approve an agreement of merger
before submitting the proposal to stockholders. Whether the directors reached an informed decision on
September 20th must be determined only upon the basis of the information then reasonably available to
the directors and relevant to their decision to accept the Pritzker merger proposal.
The Board did not reach an informed business judgment on September 20 th because the directors 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, were uninformed as to the intrinsic value of the Company, and
were grossly negligent in approving the “sale” upon two hours’ consideration, without prior notice, and in
the absence of a crisis or emergency.

None of the directors, other than Van Gorkom and Chelberg, had any prior knowledge that the purpose of
the meeting on September 20th was to propose a cash-out merger of Trans Union. Without any
documentation, the Board was required to rely on 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 the sale of the Company, and the
Board had nothing more than Van Gorkom’s statement of his understanding of the agreement which he
admittedly had never read, nor which any member of the Board had ever seen. Neither Van Gorkom’s
oral presentation nor Roman’s brief oral statement constitute a “report”.

The Company was also mis-valued by Van Gorkom, who reached a total value of the Company by
multiplying the $55 per share figure (based solely on the availability of a leveraged buy-out) by the
number of shares outstanding, to reach a valuation of $690 million. As such, Van Gorkom failed his
fiduciary responsibility to the Company.

The directors of Trans Union also failed to disclose “germane facts” to the shareholders relating to the
merger that required shareholder approval, according to the directors’ fiduciary duty. Since the
shareholders were not provided material facts regarding the proposed merger, the shareholders approval
of the merger was not based on an informed electorate.

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