Smith v. Van Gorkom Revisited
Smith v. Van Gorkom, a Delaware Supreme Court decision of seminal importance regarding corporate governance and fiduciary duties, issued in 1985, is the subject of an article with the same name from Prof. Stephen Bainbridge. Here is the good professor's overview of his article:
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 § 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.
UPDATE: Here is a link to this post that appeared today on The Wall Street Journal's Law Blog as part of a compilation of "Most Popular Law Stories From Around the Web".
For a recent paper on Smith v. Van Gorkom which comes to the opposite conclusion and ironically cites Professor Bainbridge extensively for support in its position, see Bernard Sharfman, The Enduring Legacy of Smith v. Van Gorkom. The article can currently be found on SSRN at http://ssrn.com/abstract=1059962 and will eventually appear in The Delaware Journal of Corporate Law, Volume 33, No. 2.