1. Assume that the directors were highly sophisticated business executives. Should they have to consult others on issues about which they already have sufficient knowledge (such as the company’s valuation)?

2. The court ruled that the directors were liable because they did not obtain “material” information. Give some examples of what may constitute material information.

3. In response to Van Gorkom, many states (including Delaware) passed statutes that extended the scope of the business judgment defense. Should the business judgment rule protect directors even when they fail to verify the statements of internal management concerning a corporate transaction that is being touted to officers as advantageous to the corporation?

Van Gorkom was an officer, director, and shareholder of Trans Union Corporation. Trans Union’s stock was traded on the New York Stock Exchange (NYSE) and had never sold for higher than $39 per share. Prior to announcing his retirement, Van Gorkom sought to sell his shares to Pritzker, an individual investor, for $55 per share. Because Van Gorkhom’s holdings in Trans Union were substantial, he was required to get the approval of Trans Union’s board of directors for the sale to Pritzker. Van Gorkom proposed the sale to the board in an oral presentation. Most of the other officers opposed the sale on the basis that the price was too low given the value of the company. Indeed, the chief financial officer advised the directors that the price was in the “low range.” The directors did not review the terms of the Van Gorkom–Pritzker agreement, did not perform any valuation analysis on the company, and did not consult any of the company’s investment bankers. After Van Gorkom pressured the directors by informing them that Pritzker would withdraw the offer within three days, the board deliberated for several hours and approved the transaction. A group of shareholders brought a law-suit against the directors of Trans Union based on a breach of the duty of care that resulted in the stock being sold at a value well under its actual worth. The directors sought protection under the business judgment rule, claiming they relied on Van Gorkom’s representations and the NYSE stock price. The Delaware Supreme Court ruled against the directors, holding that they could not be afforded the protection of the business judgment rule. The court’s decision was primarily based on the conclusion that the directors had failed to obtain all material information and had not conducted any investigation about the transaction. The court pointed to the fact that the board never even reviewed the Van Gorkom–Pritzker agreement, nor had the board undertaken anything more than a cursory inquiry into the actual value of the corporation. “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. [T]he directors were entitled to rely upon their chair-man’s opinion of value and adequacy, provided that such opinion was reached on a sound basis. Here, 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.

“None of the directors, management or outside, were investment bankers or financial analysts. Yet the Board did not consider recessing the meeting until a later hour that day (or requesting an extension of Pritzker’s deadline) to give it time to elicit more information as to the sufficiency of the offer, either from inside management or from Trans Union’s own
investment banker, Salomon Brothers, whose Chicago specialist in merger and acquisitions was known to the Board and familiar with Trans Union’s affairs. Thus, the record compels the conclusion that the Board lacked valuation information adequate to reach an informed business judgment as to the fairness of $55 per share for sale of the Company.”