Smith v. VanGorkum - Forming Businesses & Governing Corporations

Question 1

Facts

Answer 1

Chairman/CEO of TransUnion (VG) advocates for LBO merger with potential buyer. CEO asks CFO to work out price per share at which sale could be done. Based on current cash flow (but not considering intrinsic value of TU or hiring an I-Bank to perform independent valuation), CFO says $55 per share would be feasible, when stock was trading at $38. Without any advanced notice of the merger negotiations or docs, CEO quickly convened the BoD, consisting of inside and outside experienced directors, on 1-day notice for 2 hours. BoD approved merger at $55 based mainly on CEO’s oral reps, though he hadn’t even read the agrmt. SH sued to rescind.

Question 2

Issue

Answer 2

Were Directors protected from liability by Business Judgment Rule?

Question 3

Holding

Answer 3

BOD not Protected by BJR. BoD was “grossly negligent.” BoD members could be liable personally for intrinsic value per share minus the $55/share price.

Question 4

Reasoning

Answer 4

Even though no alleged bad faith or fraud or conflict of interest, BoD was not reasonably informed as to (1) role of Chair/CEO in initiating transaction, (2) basis for $55/share price, or (3) intrinsic value of company.

Conclusion:
	• No additional documents were shown
	• No proper evaluation
	• Market test period was not sufficient
If board of directors were informed, they would have said the merger would have caused a law suit

Question 5

Business Lesson

Answer 5

• Where are all the supporting documents?
• Be transparent
• The board members: slow the process down, a simple two hour meeting is too brief
• Don’t just rely on CFO ve
• Intrinsic value feasibility of the value of the share- hire an investment
CEO VanGorkum did not know all the details and also had the shareholder agree- there was not proper information to inform the shareholders