Topics Covered in this article
Under the business judgment rule, a business judgment is presumed to be an informed judgment, but the judgment will not be shielded under the rule if the decision was unadvised.
Facts of the Case
Basically, this case is an This appeal from the Court of Chancery involves a class action brought by shareholders of the defendant Trans Union Corporation originally seeking rescission of a cash-out merger of Trans Union into the defendant New T Company a wholly-owned subsidiary of the defendant, Marmon Group, Inc. Alternate relief in the form of damages is sought against the defendant members of the Board of Directors of Trans Union,
Trans Union was a publicly-traded, diversified holding company, the principal earnings of which were generated by its railcar leasing business. During the period here involved, the Company had a cash flow of hundreds of millions of dollars annually. However, the Company had difficulty in generating sufficient taxable income to offset increasingly large investment tax credits (ITCs). Accelerated depreciation deductions had decreased available taxable income against which to offset accumulating ITCs. The Company took these deductions, despite their effect on usable ITCs, because the rental price in the railcar leasing market had already impounded the purported tax savings.
In the late 1970’s, together with other capital-intensive firms, Trans Union lobbied in Congress to have ITCs refundable in cash to firms which could not fully utilize the credit. During the summer of 1980, defendant Jerome W. Van Gorkom, Trans Union’s Chairman and Chief Executive Officer, testified and lobbied in Congress for refundability of ITCs and against further accelerated depreciation. By the end of August, Van Gorkom was convinced that Congress would neither accept the refundability concept nor curtail further accelerated depreciation.
Beginning in the late 1960’s, and continuing through the 1970’s, Trans Union pursued a program of acquiring small companies in order to increase available taxable income. In July 1980, Trans Union Management prepared the annual revision of the Company’s Five Year Forecast. This report was presented to the Board of Directors at its July, 1980 meeting. The report projected an annual income growth of about 20%. The report also concluded that Trans Union would have about $195 million in spare cash between 1980 and 1985, “with the surplus growing rapidly from 1982 onward.”
The report referred to the ITC situation as a “nagging problem” and, given that problem, the leasing company “would still appear to be constrained to a tax breakeven.” The report then listed four alternative uses of the projected 1982-1985 equity surplus: (1) stock repurchase; (2) dividend increases; (3) a major acquisition program; and (4) combinations of the above. The sale of Trans Union was not among the alternatives. The report emphasized that, despite the overall surplus, the operation of the Company would consume all available equity for the next several years.
It was a necessity for Trans Union should undergo a leveraged buyout to an entity that could offset the ITCs. The suggestion came without any substantial research, but Romans thought that a $50-60 share price (on stock currently valued at a high of $39½) would be acceptable.
Donald Romans, Chief Financial Officer of Trans Union, stated that his department had done a “very brief bit of work on the possibility of a leveraged buy-out.” This work had been prompted by a media article which Romans had seen regarding a leveraged buy-out by management. The work consisted of a “preliminary study” of the cash which could be generated by the Company if it participated in a leveraged buyout. As Romans stated, this analysis “was very first and rough cut at seeing whether a cash flow would support what might be considered a high price for this type of transaction.”
On September 5, at another Senior Management meeting which Van Gorkom attended, Romans again brought up the idea of a leveraged buy-out as a “possible strategic alternative” to the Company’s acquisition program.
Romans and Bruce S. Chelberg, President and Chief Operating Officer of Trans Union, had been working on the matter in preparation for the meeting. According to Romans: They did not “come up” with a price for the Company. They merely “ran the numbers” at $50 a share and at $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 difficult to do under those figures.”
This work did not purport to establish a fair price for either the Company or 100% of the stock. It was intended to determine the cash flow needed to service the debt that would “probably” be incurred in a leveraged buyout, based on “rough calculations” without “any benefit of experts to identify what the limits were to that, and so forth.” These computations were not considered extensive and no conclusion was reached.
At this meeting, Van Gorkom stated that he would be willing to take $55 per share for his own 75,000 shares. He vetoed the suggestion of a leveraged buy-out by Management, however, as involving a potential conflict of interest for Management. Van Gorkom, a certified public accountant and lawyer, had been an officer of Trans Union for 24 years, its Chief Executive Officer for more than 17 years, and Chairman of its Board for 2 years. It is noteworthy in this connection that he was then approaching 65 years of age and mandatory retirement.
For several days following the September 5 meeting, Van Gorkom pondered the idea of a sale. He had participated in many acquisitions as a manager and director of Trans Union and as a director of other companies. He was familiar with acquisition procedures, valuation methods, and negotiations; and he privately considered the pros and cons of whether Trans Union should seek a privately or publicly-held purchaser.
The Board meeting of September 20 lasted about two hours. Based solely upon Van Gorkom’s oral presentation, Chelberg’s supporting representations, Romans’ oral statement, Brennan’s legal advice, and their knowledge of the market history of the Company’s stock, the directors approved the proposed Merger Agreement.
However, the Board later claimed to have attached two conditions to its acceptance: (1) that Trans Union reserved the right to accept any better offer that was made during the market test period; and (2) that Trans Union could share its proprietary information with any other potential bidders. While the Board now claims to have reserved the right to accept any better offer received after the announcement of the Pritzker agreement (even though the minutes of the meeting do not reflect this), it is undisputed that the Board did not reserve the right to actively solicit alternate 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.
The issue that has arise for the consideration before this court was that;
whether the business judgment by the Board to approve the merger was an informed decision.
Decision of the Court
The Present Hon’ble Court reasoned that the two decisions of the Court of Chancery are plainly incorrect.
The Board’s choice to affirm the proposed cash-out consolidation was not the result of an informed business judgment since they put together their choice with respect to one Van Gorkom’s representations, which didn’t comprise a report on which they could sensibly depend and that they didn’t look for documentation of either the consolidation terms or the sufficiency of the proposed cost per share. The court likewise discovered defendant directors were terribly careless in allowing the agreement to be changed in a manner they had not approved.
At long last, the directors of Trans Union breached their fiduciary obligation to their investors (1) by their inability to advise themselves regarding all data sensibly accessible to them and applicable to their choice to suggest the money out consolidation; and (2) by their inability to unveil all material data, for example, a sensible investor would consider significant in concluding whether to endorse the Pritzker offer. the court found that the investors’ vote didn’t approve the activity, in light of the fact that the investors didn’t know about the absence of valuation data, and in light of the fact that defendant directors’ assertions were deluding.
The significant part of understanding this case is that the business judgment decide is a presumption that in making a business decision, the overseers of an endeavor circled back to an educated reason, in consistence with great confidence and in the certified conviction that the movement taken was to the best benefit of the organization. Thusly, the social affair attacking a board decision as oblivious ought to discredit the presumption that its business judgment was an informed one. The court saw that a chief’s commitment to rehearse an educated business judgment is a commitment of care rather than a commitment of devotion. As such, the reasoning of the chief can be irrelevant, so there is no convincing motivation to show blackmail, irreconcilable situation or untruthfulness.
The Court of Chancery conlcuded up from the proof that the Board of Directors’ endorsement of the Pritzker consolidation proposition fell inside the assurance of the business judgment rule. The Court tracked down that the Board had focused on the exchange, since the chiefs had considered the Pritzker proposition on three unique events, on September 20, and on October 8, 1980 lastly on January 26, 1981. On that premise, the Court contemplated that the Board had gained, over the four-month time span, adequate data to arrive at an educated business judgment on the money out consolidation proposition.
In addition, given the market worth of Trans Union’s stock, the business instinct of the people from the main assortment of Trans Union, the impressive premium over market offered by the Pritzkers and a complete effect on the combination cost given by the chance of various proposals for the stock being alluded to, that the directorate of Trans Union didn’t act thoughtlessly or improvidently in settling on a methodology which they acknowledged to be to the best benefit of the financial backers of Trans Union.
Applying that norm and governing standards of law to the record and the choice of the Trial Court, the Hon’ble court rightly concluded that the Board’s direct was not ” reckless or imprudent ” is in opposition to the record and not the result of an logical and deductive thinking measure.
Further, under the business judgment rule there is no insurance for Director’s who have made “a unintelligent or unadvised judgment.” Since a director is vested with the obligation regarding the administration of the undertakings of the company, he should execute that obligation with the acknowledgment that he follows up for the benefit of others.
Such commitment doesn’t endure progressor self-managing. Yet, satisfaction of the fiduciary work requires more than the simple shortfall of dishonesty or misrepresentation. representation of the financial interests of others forces on a directors an agreed obligation to ensure those interests and to continue with a basic eye in surveying data of the sort.
In conclusion, it can be understood that a Directors obligation to practice an informed business judgment is in the idea of an obligation of care, as recognized from an obligation of dedication. Here, were no charges of misrepresentation, dishonesty, or self-managing, or verification thereof. Henceforth, it is assumed that the Directors arrived at their business judgment in accordance with some good faith.
The obligation of care requires directors and officials to act in as equipped a way as would sensibly judicious individuals in their positions. Officers and chiefs should settle on choices that they accept, in compliance with common decency, to be to the greatest advantage of their organizations and should settle on choices after suitable exploration and due ingenuity requests. The choices should be the results of proper consideration and thought.
Official and chiefs who neglect to maintain their obligations of care can be dependent upon investor claims, including investor subsidiary activities, for any harms brought about by these disappointments. These claims, which can expose officials and chiefs to weighty money related responsibility, are extremely useful assets to punish neglected directors.