Q1: What area of law does Smith v. Van Gorkom (Trans Union) primarily address?
Corporations
Q2: What was the central legal issue in Smith v. Van Gorkom (Trans Union)?
Whether the Trans Union directors breached their duty of care—and thereby lost the protection of the business judgment rule—by approving a merger at $55 per share without adequately informing themselves and by disseminating a proxy statement that omitted material information about the board's decision-making process and the basis for the price.
Q3: What rule did the court apply?
Under Delaware law, the business judgment rule presumes that directors of a corporation act on an informed basis, in good faith, and in the honest belief that their decisions are in the company's best interests. The presumption may be rebutted by evidence of director gross negligence—i.e., a reckless indifference to or a deliberate disregard of the whole body of stockholders or actions without the bounds of reason—particularly a failure to inform themselves of all material information reasonably available before making a decision of significance. Directors must also ensure that shareholder disclosures are full and fair; material omissions or misstatements violate the duty of care in the disclosure context. If the presumption is rebutted, the burden shifts to directors to demonstrate the entire fairness of the transaction or otherwise face liability for resulting damages.
Q4: What was the court's holding?
The Delaware Supreme Court reversed the Court of Chancery and held that the directors of Trans Union were grossly negligent in approving the merger without an informed process and in issuing a proxy statement that omitted material facts, thereby rebutting the business judgment rule's presumption and establishing a breach of the duty of care.
Q5: Why is Smith v. Van Gorkom (Trans Union) significant?
Smith v. Van Gorkom is a cornerstone of corporate governance doctrine. It operationalizes the duty of care by tying business judgment deference to a demonstrably informed process and robust disclosure, not to the eventual wisdom of the outcome. The decision accelerated best practices: boards now routinely obtain fairness opinions, build an evidentiary record of deliberation, demand time to review deal documents, consider alternatives, and ensure full and fair proxy disclosures. The backlash to potential monetary liability for care breaches led to widespread adoption of Delaware General Corporation Law § 102(b)(7) charter provisions, which exculpate directors from monetary damages for duty of care violations (while preserving liability for loyalty, bad faith, and other misconduct). For law students, the case illustrates the primacy of process in corporate law and the mechanics of rebutting the business judgment rule.