The 'big bang' for director liability.

• Author: Van Gorkom, Jerome W.
• Position: Delaware Supreme Court decision on the Trans Union Corp. board of directors - Reprint from Directors & Boards, Fall 1987 - Putting In Place the Right Board for the 21st Century

One of the watershed governance court cases of the 1980s was Smith v. Van Gorkom, in which the Delaware Supreme Court, in a seeming refutation of the business judgment rule, held that the board of Trans Union Corp. breached its fiduciary duty of care in negotiating the sale of the company. The controversial decision sent shock waves through the boardrooms of Corporate America, contributed to a huge escalation in D&O insurance rates and a re-examination by many executives of the personal risks of board service. Jerome Van Gorkom was the chairman and CEO of Trans Union, a Chicago company involved in rail car leasing and other businesses. In a compelling article, he told DIRECTORS & BOARDS his side of the story -- a tale of merger negotiations, valuation issues, board decisionmaking, and a court ruling that landed him and his company on the front pages of the business press.

ON SEPTEMBER 20,1980, the directors of Trans Union (TU) met to review an unexpected offer to purchase all of the company's stock for cash at a price of $55 a share. The stock was then selling on the New York Stock Exchange for $37.

The directors did not decide that $55 was a fair price at which to sell the company. The shareholders made that decision at their meeting over four months later. All the directors decided was that the offer was too good to be allowed to expire without giving the shareholders a shot at it.

The court said the market value was depressed because the CEO of Trans Union had testified that prior to September 20 the market had not properly valued TU stock. So what? Market value is not based on the opinions of CEOs, most of whom probably think their stock is undervalued. Market price is based on what a willing buyer will pay. Nevertheless, the court held that the proxy, in describing the premium in the offer, should not have compared the $55 offer with the $37 market price, but with a price determined by "other relevant valuation techniques." That holding denies the very definition of "premium" in the business world and displays a disturbing ignorance of how that world functions.

The court defended its insistence on the "intrinsic" value as against market value by holding that "there is no evidence that a public auction was in fact permitted to occur." To support this position it relied on the tact that the press releases of TU never stated that TU had in fact reserved the right to accept alternative offers. To believe that it was necessary...