A Bird in the Hand and Liability in the Bush: Why Van Gorkom Still Rankles, Probably

They say opportunity is like the flight of time. It keeps on rolling; it'll pass you by. Take a lesson from a fool's advice. Opportunity knocks once, not twice.1 I. INTRODUCTION Seventeen years have passed since Smith v. Van Gorkom (the Trans Union case) imposed personal liability on Trans Union's directors for violating their duty of care.2 Time has not dimmed the initial luster of the Van Gorkom decision.3 Considered a legal disaster in 1985,4 it is judged no less disastrous today.5 If sheer wrong-headedness of result were disqualifying, Van Gorkom would not be worth rereading. With the folly of the opinion fully appreciated today, "there will never be another Van Gorkom. "6 It is submitted here, however, that at least two features of Van Gorkom, not apparent at the time, make it worth revisiting. First, perhaps remarkably, the Delaware Supreme Court never mentioned what (if anything) would have happened differently, had the directors done what the court believed their duty required. Under accepted rules of causation in duty-of-care cases, a showing that shareholders had actually been damaged by directors' commissions or (here) omissions would have been required. The Van Gorkom court never asked the question: compared to what alternative outcome were shareholders in fact hurt? Subsequent excoriations of Van Gorkom have likewise failed to ask the compared-to-what question in any detail. This Article constructs a simple probability-based model of the Trans Union board's decision that attempts to answer the question numerically. Second, Van Gorkom is noteworthy for the reactions it sparked in the corporate bar and state legislatures. While these subsequent developments are familiar to corporate lawyers, they have implications going beyond mere correction of the mischief that Van Gorkom unleashed. The reactions to the case illustrate, as few other examples can, the true source of vitality in American corporate law. That aspect of Van Gorkom, too, makes it worth remembering seventeen years later. II. BACKGROUND With the case now a staple of the corporate-law curriculum, the salient facts surrounding the Van Gorkom decision need no lengthy recitation. It suffices to recall only those essential to the analysis here. Trans Union, and in particular its board chairman and chief executive officer, Jerome Van Gorkom, had spent years trying to find ways to unlock the value contained in Trans Union's accumulated investment tax credits (ITCs). Absent changes in tax law (for which Van Gorkom had publicly lobbied), Trans Union could not realize the value of its ITCs, given the firm's future expected revenue flows and the tax-based accelerated depreciation schedules being applied to firm assets. Because the ITCs were nontransferable, Trans Union ultimately required some sort of acquisition or merger to maximize their value.8 Various fundamental corporate changes had been considered when Van Gorkom hit upon the idea of an outsider acquiring Trans Union in a highly leveraged buy-out of Trans Union shareholders. In September 1980, Van Gorkom proposed such a deal to Jay Pritzker, whom he knew socially, and Pritzker agreed within days to the essentials of Van Gorkom's proposal. Pritzker would offer $55 per share, a sizeable premium over market-some $21 over the mid-range of Trans Union share prices for 1980 and almost $18 more than its closing price on the last trading day before the Pritzker offer was announced.9 Thereafter, Trans Union would be merged into a Pritzker subsidiary formed to implement the merger. However, Pritzker demanded that the deal be completed quickly. He was concerned that his bid would put Trans Union in play, ultimately to be acquired by another bidder, and he did not want to be a "stalking horse" in that way. Van Gorkom, on the other hand, was concerned about any deal that would not leave the Trans Union board free to accept an offer higher than Pritzker's $55 per share proposal. …