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Smith v. Van Gorkom

33 Pages Posted: 12 May 2008  

Stephen M. Bainbridge

University of California, Los Angeles (UCLA) - School of Law

Date Written: May 2008

Abstract

Smith v. Van Gorkom arguably was the most important corporate law decision of the 20th century. The supreme court of a state widely criticized for allegedly leading the race to the bottom held that directors who make an uninformed decision face substantial personal liability exposure. In so doing, the court breathed new life into the law of fiduciary duties.

For example, Van Gorkom presaged Unocal's significant expansion of judicial review of corporate takeovers. Indeed, a Van Gorkom-based inquiry into whether the board was fully informed remains a key component of the Unocal methodology. Likewise, Van Gorkom laid the foundation for the subsequent Caremark decision and the resulting expansion of judicial inquiry into whether the board of directors exercised proper oversight of its subordinates. In fact, most of the modern edifice of corporate fiduciary duties rests in some degree on the Van Gorkom decision.

The perception that the decision had significantly increased director liability exposure drove dramatic changes in the D&O liability insurance market. In turn, important legislative initiatives soon followed, including the now nearly universal liability limiting charter provisions authorized by Delaware General Corporation Law ยง 102(b)(7).

Not surprisingly, the case generated great controversy and, in fact, continues to do so. Did the Trans Union board of directors actually deserve the criticism heaped upon it by the Delaware Supreme Court? Does the Court's decision actually deserve the criticism heaped upon it by most commentators? This essay provides the back story to this remarkable decision and concludes that the gist of the decision is sound.

Keywords: board of directors, business judgment rule, Van Gorkom, Trans Union, corporate governance, Delaware

JEL Classification: K22

Suggested Citation

Bainbridge, Stephen M., Smith v. Van Gorkom (May 2008). UCLA School of Law, Law-Econ Research Paper No. 08-13. Available at SSRN: https://ssrn.com/abstract=1130972 or http://dx.doi.org/10.2139/ssrn.1130972

Stephen Mark Bainbridge (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

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