A Kinder, Gentler Critique of Van Gorkom and Its Less Celebrated Legacies

We all know about the treatment in Smith v. Van Gorkom' of the director's fiduciary duty of care. It has been discussed extensively, and we continue to discuss it today, over sixteen years later. It would be unfortunate, however, if Van Gorkom were widely known only for its treatment of the duty of care. Many commentators have sternly criticized Van Gorkom's legal analysis of that duty.2 Moreover, and like many others, I believe the result in the case was wrong and that damages actions premised solely upon an alleged lack of director care are a poor, even destructive, corporate governance tool.3 Indeed, I have gone so far as to suggest that Van Gorkom is an inappropriate case to teach in an introductory business organizations course.4 Van Gorkom, however, was about much more than the director's duty of care. Its legacies in other areas, while less celebrated (or bemoaned), deserve separate attention and even commendation. For looking back at the development of corporate law jurisprudence, especially in the mergers and acquisitions field, it is striking how clean the slate was-how little guidance the Delaware Supreme Court had-when Van Gorkom was decided. As demonstrated below, Van Gorkom exposed and took on deeply important issues that judges and practitioners had either not perceived or had preferred not to wrestle with. And it resolved these issues correctly, setting the stage for important developments in the fiduciary law that became central to the takeover jurisprudence that subsequently blossomed in the Delaware courts. While many of Van Gorkom's legacies beyond the general subject of the director's fiduciary duty of care have already been noted, I hope that gathering them together in one place may illustrate Van Gorkom's considerable impact upon corporate law. 1. REjECTING THE PASSIVITY THESIS According to the court's opinion, the directors of Trans Union believed they were entitled to submit the challenged merger agreement to a vote of the stockholders without endorsing it themselves; in other words, they could "take a noncommittal position on the merger and `simply leave the decision to [the] shareholders. "5 No case had ever held that such a position was legally untenable, and indeed, there was strong academic support for the view that such a position was appropriate with respect to any acquisition bid at a price above prevailing market prices.6 That academic view argued for a passive role for directors in dealing with takeover bids-one in which decisions about selling stock to a bidder for the company should rest with the stockholders themselves.7 A less perceptive court might have been inclined to condone the Trans Union directors' willingness to let the stockholders exclusively determine the merits of the merger. The Delaware Supreme Court, however, must be credited with recognizing the close link between the Trans Union directors' position and the developing controversy over the proper role of directors in hostile takeover bids.8 In an environment in which such bids were burgeoning, a ruling that a board of directors could passively allow stockholders to determine whether and on what terms the company should be sold could have significantly bolstered the proponents of director passivity in the face of hostile takeover bids. Thus, the Trans Union directors' position presented an issue that the Delaware Supreme Court was not inclined to finesse. To the contrary, that court surely saw the Van Gorkom case as a rare opportunity to address the proper role of directors in dealing with acquisition bids. The court took up that opportunity eagerly, ruling unequivocally that the board of directors could not "take a neutral position and delegate to the stockholders the unadvised decision as to whether to accept or reject the merger. "9 According to the court, the pure "shareholder choice" approach held out by the Trans Union directors was not even an option, let alone a legally required approach: The court explained that this approach simply was "not viable or legally available to the Board under 8 Del. …