488 A.2d 858 (Del. 1985)
Trans Union Corporation was a publicly traded diversified holding company whose principal earnings came from its railcar leasing business.1 During the late 1970s the company generated hundreds of millions of dollars in annual cash flow but faced difficulty utilizing accumulating investment tax credits because accelerated depreciation had reduced available taxable income.2 In the summer of 1980 Chairman and Chief Executive Officer Jerome W. Van Gorkom concluded that Congress would not make the credits refundable and began exploring a sale of the company.3
On September 13, 1980, Van Gorkom met privately with corporate takeover specialist Jay A. Pritzker at the latter's home.4 Without prior consultation with the Board or senior management except the controller, Van Gorkom proposed a cash-out merger at $55 per share, a figure he had selected solely because it appeared feasible for a leveraged buyout financed by Trans Union's projected cash flow and asset sales.5 Pritzker expressed interest and insisted that the Board act within three days.6
Van Gorkom called a special Board meeting for noon on September 20 with only two hours' prior notice to most directors.7 The ten-member Board, consisting of five inside and five outside directors, received a twenty-minute oral presentation from Van Gorkom but no copies of the proposed merger agreement and no independent valuation study.8 After roughly two hours of discussion the Board approved the merger agreement with Pritzker's New T Company, a wholly owned subsidiary of Marmon Group, Inc.9
Following public announcement of the agreement, senior management expressed strong opposition.10 On October 8 and 10 the Board approved amendments that permitted Trans Union to solicit competing offers during a market-test period ending February 10, 1981, although the amendments imposed strict conditions on any withdrawal from the Pritzker deal.11 Salomon Brothers was retained to seek alternative bids; only General Electric Credit Corporation showed sustained interest, but it declined to proceed without an extension of the February 10 deadline that Pritzker refused to grant.12
On February 10, 1981, Trans Union stockholders approved the merger by a vote of 69.9 percent in favor.13 Plaintiffs, a class of shareholders, had filed suit in December 1980 seeking rescission or damages.14 After trial the Court of Chancery entered judgment for the defendant directors on July 6, 1982, and the plaintiffs appealed to the Delaware Supreme Court.15
Whether the Trans Union Board of Directors reached an informed business judgment in approving the proposed cash-out merger on September 20, 1980?16
Under Delaware law the business judgment rule protects directors only when they have informed themselves prior to making a business decision of all material information reasonably available to them.17 Director liability is predicated on gross negligence.18 In the merger context a director has an affirmative duty under 8 Del.C. § 251(b) to act in an informed and deliberate manner before approving an agreement of merger and submitting it to stockholders.19
No. The Board failed to inform itself adequately as to Van Gorkom's role in forcing the sale and in setting the $55 price.2021 The directors were uninformed as to the intrinsic value of Trans Union.22 Given these circumstances the Board was grossly negligent in approving the sale after only two hours of consideration without prior notice and without any crisis or emergency.23 Van Gorkom alone selected the $55 figure solely because it appeared feasible for a leveraged buyout financed by projected cash flow and asset sales.24
He presented the proposal in a twenty-minute oral report at a meeting called with two hours' notice.25 No copies of the merger agreement were furnished.26 No independent valuation study was requested or received.27 The directors therefore lacked any competent evidence that $55 represented the per-share intrinsic value of the Company.28
The Board's September 20 decision was not the product of an informed business judgment.29
Related opinions on this issue
Justice McNeilly dissents on the ground that the ten directors were highly qualified and intimately familiar with Trans Union's affairs.30 He notes that the inside directors possessed 116 years of collective employment and 68 years of board service while the outside directors brought 78 years of chief-executive experience and 53 years of Trans Union board service. In his view the Board had repeatedly discussed the investment-tax-credit problem and had reviewed both the five-year forecast and the Boston Consulting Group study before September 20.31
He concludes that these directors acted with the utmost care rather than gross negligence when they approved the merger after hearing Van Gorkom's presentation and Brennan's legal advice.32
Whether the Board's subsequent efforts to amend the Merger Agreement and conduct a market test cured any deficiencies in the September 20 decision?33
A board that has failed to reach an informed business judgment on the initial decision may cure the deficiency only by later actions that themselves satisfy the duty of care.34 Post-hoc review of events occurring after the original decision cannot retroactively validate an uninformed judgment made on the earlier date.35
No. The October 8 and 10 amendments and the subsequent market test did not cure the September 20 deficiencies.3637 The amendments imposed stricter conditions on withdrawal than the original agreement and effectively locked the Board into the Pritzker deal.38 Salomon Brothers' efforts produced only one serious suitor, General Electric Credit Corporation, which refused to proceed without an extension Pritzker would not grant.39 The KKR proposal was never presented to the Board because Van Gorkom deemed it dead.40
The January 26 meeting occurred after the suit had been filed and after the proxy materials had already been mailed.41 The Board therefore never exercised an informed judgment on whether to accept or reject the Pritzker proposal on its own merits.42
The Board's post-September 20 conduct did not cure the initial failure to reach an informed business judgment.43
Related opinions on this issue
Justice Christie dissents on the ground that the record as a whole supports application of the business judgment rule.44 He concludes that the directors' collective experience, their review of the five-year forecast and Boston Consulting Group study, and the market test conducted by Salomon Brothers together demonstrate that the Board acted with due care throughout the four-month period.45 In his view the Chancery Court's finding that the directors remained free to reject the Pritzker proposal on January 26 is supported by the evidence and should be affirmed.46
Whether the Board of Directors dealt with complete candor with the stockholders by disclosing all material facts before securing approval of the merger?47
Corporate directors owe stockholders a fiduciary duty of complete candor to disclose all facts germane to the transaction, meaning all information a reasonable stockholder would consider important in deciding whether to approve the merger.48 The burden rests on the directors to establish that the stockholder vote resulted from a fully informed electorate.49
No. The proxy materials failed to disclose that the Board possessed no reasonably adequate information indicative of the intrinsic value of Trans Union other than a depressed market price.5051 The materials created the false impression that the Board had determined the inherent worth of the Company.52 They also misrepresented Romans' study by stating that he had found the value to be in the range of $55 to $65 per share.53 In fact Romans had testified that his calculations were only a search for ways to justify a leveraged-buyout price and did not constitute a valuation of the Company.54
The materials further failed to disclose that Van Gorkom had selected the $55 price solely because it made a leveraged buyout feasible.55 These omissions were material because they deprived stockholders of information necessary to evaluate the fairness of the $55 price.56
The Board breached its fiduciary duty of candor by failing to disclose all material facts to the stockholders.57
Whether the stockholder vote approving the merger had the effect of ratifying any failure by the Board to reach an informed business judgment?58
A discovered failure by the board to reach an informed business judgment renders the merger agreement voidable rather than void.59 Ratification by a majority of fully informed stockholders can cure the defect, but the directors bear the burden of proving that the stockholder approval resulted from a fully informed electorate.60
No. Because the proxy materials omitted material facts concerning the absence of any valuation information and the true basis for the $55 price, the stockholder vote of February 10, 1981, did not constitute ratification by a fully informed electorate.6162 The original proxy statement and the supplemental statement mailed only fifteen days before the meeting left stockholders without the information a reasonable stockholder would have considered important in deciding how to vote.63 The defendants therefore failed to carry their burden of establishing informed ratification.64
The stockholder vote did not ratify the Board's failure to reach an informed business judgment.65