Smith v. Van Gorkom

Facts

D1 was a publicly traded, diversified holding company, the principal earning of which were generated by its railcar leasing business. Jerome Van Gorkom, D's Chairman and Chief Executive Officer, met with the senior management on August 27, 1980, to discuss D1's difficulty in producing sufficient taxable income to offset its increasing investment-tax credits and accelerated depreciation deductions. Romans, Chief Executive Officer of D1, stated that his department was working on a rough draft of a buy-out plan. At another later meeting, Romans again brought the idea of a buy-out as a possible strategic alternative. Romans, President, and Chief Operating Officer were working on that plan before the meeting, but they did not come up with a price for a D1. They merely ran the numbers at $50 a share and $60 a share with the rough form of their cash figures at the time. Their figures indicated that $50 would be very easy to do, but $60 would be very hard. Their work was merely intended to determine the cash flow needed, not to establish a fair price. Van Gorkom stated that he would be willing to take $55 per share. He met with Pritzler, a well-known corporate takeover specialist without consulting whether with the Board or any member of Senior Management except D1's Peterson. Van Gorkom proposed a per share price for sale of the Company and a financing structure by which to accomplish it. They met on Saturday in Van Gorkom's home. Van Gorkom stated that to be sure that $55 was the best price obtainable, D1 should be free to accept any better offer. Pritzler demurred, stating that his organization would serve as a stalking horse for an auction contest only if D1 would permit Pritzkel to buy 1,750,000 shares of D1 stock at market price, which he could then sell to any higher bidder. On September 15, Pritzkel informed Van Grokom that he was interested in the $55 cash-out proposal. On September 18, they met again. Pritzker instructed his attorney to draft merger documents and the number of shares to be offered to Pritzkel was negotiated down to one million shares; the price was set at $38.75 above the per share price at the close of the market on September 19. On September 19, Van Grokom, Pritzkel and D1's Chelberg, President and Chief Executive Officer consulted with D1's lead bank regarding the financing of Pritzkel's purchase. The bank said that it could form a syndicate of banks that would finance the transaction. On the same day, Van Gorkom retained James Brennan, Esq. to advise D1 on the legal aspects of the merger. He did not consult with any member of D1's legal department. On September 19, Van Gorkom called a special meeting of the D1 for noon the following day. He also called a meeting of the Company's Senior Management to convene at 11:00 a.m., prior to the meeting of the Board. Van Gorkom did not invite D1's investment banker, Salomon Brothers or its Chicago based partner. Of those present at the Special Meeting on September 20, only Chelberg and Peterson knew the reason for the meeting. The offer and its terms were disclosed, but no copy of the Merger Agreement was presented. Romans said that his department did a second study between $55 and $65 per share. No members of the Management supported the idea. Van Gorkom told the Board of the offer and outlined its terms. He framed a decision before the Boards not as to whether the $55 per share was the highest price that could be obtained, but whether the $55 price was a fair price that the stockholders should accept or reject. Brennan advised the Board that they might be sued if they failed to accept the offer and that a fairness opinion was not required as a matter of law. The Directors approved the proposed merger. However, they later claimed to have attached two conditions to its acceptance: (1) that D1 reserved the right to accept any better offer that was made during the market test period; and (2) that D1 could share its proprietary information with any potential bidders. However, they did not reserve the right to actively solicit offers. The Merger Agreement was executed by Van Gorkom during the evening of September 20 at a formal social event that he hosted for the opening of the Chicago Lyric Opera. Neither he nor any other director read the agreement prior to its signing and delivery to Pritzker. On September 22, the Company issued a press release announcing that D1 had entered into a 'definitive' Merger Agreement with an affiliate of the Marmon Group, Inc, a Pritzker holding company. Within 10 days of the public announcement, dissent among Senior Management over the merger had become widespread. Van Gorkom then met with Pritzker who agreed to several modifications of the Agreement. He was willing to do so provided that dissenters will remain on the payroll for at least six months after consummation of the merger. Van Gorkom reconvened the Board on October 8 and secured the directors' approval of the proposed amendments. The Board also authorized the employment of Salomon Brothers, its investment banker, to solicit other offers for D1 during the proposed market test period. Next day, D1 issued a press release announcing that they have the necessary financing commitment to consummate the offer; that Pritzker had acquired one million shares at $38 per share; that D1 is now seeking other offers; that if no favorable offers will come forth before February 1, 1981, stockholders will meet to vote on Pritzker's offer. Salomon Brothers found one suitor for the company, but they insisted that before negotiations D1 should rescind its Merger Agreement. This litigation was commenced on December 19. On January 21, Management's Proxy Statement for the February 10 shareholder meeting was mailed to D1's shareholders. On January 26, D1's Board met and after a lengthy meeting, voted to proceed with the Pritzker merger. The Board also approved for mailing on or about January 27, a Supplement to its Proxy Statement. The Supplement purportedly set forth all information divulged in the first Proxy Statement. On February 19, the stockholders of D1 approved the merger proposal. Of the outstanding shares: 69.9% were in favor of the merger, 7.25% were voted against that merger, and 22.85% were not voted.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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