William & Mary Business Law Review


Although it is dangerous to attempt to say anything new about Smith v. Van Gorkom, the most controversial decision in the history of Delaware corporate law, this Article tries to do so by arguing that the extensive development of Delaware law since the time of the case allows us a perspective on Van Gorkom not available when the case was decided in 1985 or, indeed, for a long time thereafter. In particular, Van Gorkom had as important a role in the evolution of Delaware law as the three other outstanding cases decided by the Delaware Supreme Court in the miracle year of 1985: Unocal v. Mesa Petroleum, Revlon v. MacAndrews & Forbes, and Moran v. Household International.

This Article argues, first and foremost, that Van Gorkom was an attempt by the Delaware Supreme Court to respond to widespread concern about the vast increase in merger-and-acquisition activity in the early 1980s. In particular, the case was the court’s first attempt to devise a regime of directorial fiduciary duties to regulate negotiated transactions. Van Gorkom should have been Revlon, and what the Delaware Supreme Court got wrong in Van Gorkom in January of 1985—the creation of a new duty of care based on dicta from the 1984 case of Aronson v. Lewis—it got right in Revlon in November of 1985 by creating what we now call Revlon duties. Nevertheless, Van Gorkom was not simply a botched first attempt at articulating duties for directors selling their company. The reasoning in Van Gorkom was in many ways inadequate, but its essential holding—that the directors breached their duties—would certainly have been the same under the reasoning in Revlon. In other words, the basic holding in Van Gorkom—that the Trans Union directors breached their fiduciary duties in selling the company—is correct, albeit for not quite the reasons the Van Gorkom court gave for this holding. What was truly disastrous about Van Gorkom was not the holding that the Trans Union directors breached their duties, but rather the remedy the court imposed on the breaching directors—enormous monetary damages.

Since Revlon was a pre-closing action, when the court found in that case that the directors breached their duties in agreeing to sell the company, the court could order relief by means of a preliminary injunction. By contrast, Van Gorkom was a post-closing action decided long after the merger was completed, and so that option was not available. Rather, when the Van Gorkom court found that the directors breached their duties, the axiom of the common law that every right has a remedy required imposing enormous liability on the directors. We now know that such a system was untenable, for it made the expected costs of serving as a director greatly exceed the expected benefits. Neither the justices of the Delaware Supreme Court nor anyone else could have known it in 1985, but in fact there was no right answer the court could have reached in Van Gorkom. If the court got the holding on the merits right (the directors breached their duties), it had to get the holding on remedies wrong (enormous monetary damages). Smith v. Van Gorkom was the Kobayashi Maru of Delaware corporate law—a problem in which all the possible solutions prove disastrous.