Professor Bainbridge...on law, politics, religion, culture & food

A Strong Smith v Van Gorkom Claim

I’m writing an essay on Smith v. Van Gorkom for one of those law stories books. In the course of doing so, I’ve concluded that Smith v. Van Gorkom was the most important corporate law decision of the 20th century.  The supreme court of a state widely criticized for allegedly leading the race to the bottom held that directors who make an uninformed decision face substantial personal liability exposure.  In so doing, the court breathed new life into once almost moribund fiduciary duty doctrines.

Van Gorkom presaged Unocal’s significant expansion of judicial review of corporate takeovers.  Indeed, a Van Gorkom-based inquiry into whether the board was fully informed remains a key component of the Unocal methodology.  Likewise, Van Gorkom laid the foundation for the subsequent Caremark decision and the resulting expansion of judicial inquiry into whether the board of directors exercised proper oversight of its subordinates. Indeed, most of the modern edifice of corporate fiduciary duties rests in some degree on the Van Gorkom decision.

The perception that the decision had significantly increased director liability exposure drove dramatic changes in the D&O liability insurance market.  In turn, important legislative initiatives soon followed, including the now nearly universal liability limiting charter provisions authorized by Delaware General Corporation Law § 102(b)(7) and comparable laws in virtually all other states.

Not surprisingly, the case generated great controversy and, in fact, continues to do so.  One wag, for example, famously referred to the decision as “The Investment Banker and Lawyer Full Employment Act of 1985.” Whether either the Trans Union board of directors actually deserved the contumely heaped upon it by the Delaware supreme court or the decision actually deserved the contumely heaped upon it by most commentators is debatable, but I believe that the basic gist of the decision is actually sound. My essay will provide the back story to this remarkable decision and situate the opinion in a theory of corporation law - director primacy - under which Van Gorkom can be defended from most of the attacks to which it has been subjected.

At this point, I invite commentary from those who would nominate some other case as the most important corporate law decision of the 20th Century.