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Supreme Court of Delaware.Alden SMITH and John W. Gosselin,Plaintiffs Below, Appellants,v.Jerome W. VAN GORKOM, Bruce S.Chelberg, William B. Johnson, Joseph B.Lanterman, Graham J. Morgan, Thomas P.O'Boyle, W. Allen Wallis, Sidney H. Bonser,

William D. Browder, Trans UnionCorporation, a Delaware corporation,Marmon Group, Inc., a Delawarecorporation, GL Corporation, a Delawarecorporation, and New T. Co., a Delawarecorporation, Defendants Below, Appellees.

Submitted: June 11, 1984.Decided: Jan. 29, 1985.

Class action was brought byshareholders of corporation, originallyseeking rescission of cash-out merger ofcorporation into new corporation. Alternaterelief in form of damages was soughtagainst members of board of directors,new corporation, and owners of parent ofnew corporation. Following trial, the Courtof Chancery, granted judgment fordirectors by unreported letter opinion, andshareholders appealed. The SupremeCourt, Horsey, J., held that: (1) board'sdecision to approve proposed cash-out

merger was not product of informedbusiness judgment; (2) board acted ingrossly negligent manner in approvingamendments to merger proposal; and (3)board failed to disclose all material factswhich they knew or should have knownbefore securing stockholders' approval ofmerger. On motions for reargument, theCourt held that one director's absencefrom meetings of directors at which mergeragreement and amendments to merger

agreement were approved did not relievethat director from personal liability.

Reversed and Remanded.

McNeilly and Christie, JJ., filed dissentingopinions and dissented in part from denialof motions for reargument.

In carrying out their managerial roles,directors of corporation are charged withunderlying fiduciary duty to corporation

and its shareholders.

Business judgment rule exists to protectand promote full and free exercise ofmanagerial power granted to directors ofcorporations.

Party attacking board of directors'decision as uninformed must rebutpresumption that board's businessjudgment was informed one.

Determination of whether businessjudgment of board of directors is informedone turns on whether directors have

informed themselves, prior to making businessdecision, of all material information reasonablyavailable to them.

Under business judgment rule there is noprotection for directors who have madeunintelligent or unadvised judgment.

Director's duty to inform himself inpreparation for decision derives from fiduciarycapacity in which he serves corporation and itsstockholders.

Since director is vested with responsibilityfor management of affairs of corporation, hemust execute that duty with recognition thathe acts on behalf of others, and suchobligation does not tolerate faithlessness orself-dealing.

Fulfillment of fiduciary function of directorof corporation requires more than mereabsence of bad faith or fraud, but rather,representation of financial interests of othersimposes on director affirmative duty to protectthose interests and to proceed with critical eyein assessing information.

Director's duty to exercise informedbusiness judgment is in nature of duty of care,as distinguished from duty of loyalty.

Where there were no allegations of fraud,bad faith, or self-dealing, or proof thereof,presumption arose that directors reached theirbusiness judgment in good faith, andconsiderations of motive were not relevant indetermination of whether actions wereprotected under business judgment rule.

Under business judgment rule directorliability is predicated upon concepts of gross

negligence, and concept of gross negligence isalso proper standard for determining whetherbusiness judgment reached by board ofdirectors was informed one.

In specific context of proposed merger ofdomestic corporations, director has duty, alongwith his fellow directors, to act in informed anddeliberate manner in determining whether toapprove agreement of merger beforesubmitting proposal to stockholders.

In merger context, director may notabdicate duty to act in informed and deliberatemanner by leaving to shareholders alonedecision to approve or disapprove agreement.

Only agreement of merger satisfyingstatutory requirements may be submitted toshareholders. 8 Del.C. 251(b, c).

Issue of whether board of directors reachedinformed decision to sell company on first day

proposal was presented to them could only bedetermined upon basis of information thenreasonably available to directors and relevantto their decision to accept proposal and not

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upon basis of information received bydirectors in following four months beforeproposal was submitted to shareholders.

Board of directors did not reachinformed business judgment in voting tosell company for $55 per share pursuant tocash-out merger proposal, but rather, were

grossly negligent in approving sale ofcompany upon two hours' consideration,without prior notice, and without exigencyof crisis or emergency, where directors didnot adequately inform themselves as torole of chairman and chief executive officerof corporation in forcing sale of companyand in establishing per share purchaseprice, and directors were uninformed as tointrinsic value of corporation.

Where no one referred to eithercorporate study or five-year forecast atmeeting in which directors approved cash-out merger of corporation, and neitherreport represented valuation studies,documents did not constitute evidence asto whether directors reached informedjudgment that $55 per share was fair valuefor sale of company.

Corporation chairman and chiefexecutive officer's oral presentation of his

understanding of terms of proposedmerger agreement, which he had not seen,and chief financial officer's brief oralstatement of his preliminary studyregarding feasibility of leveraged buy-outof corporation did not qualify as reportswithin meaning of statute providingdirectors are fully protected in relying ingood faith on reports made by officers,where chairman was basically uninformedas to essential provisions of very document

about which he was talking, andpreliminary study did not purport to bevaluation study.

At minimum, for report to enjoy statusconferred by statute protecting fromliability directors who rely in good faith onreports made by officers, report must bepertinent to subject matter upon whichboard of directors is called to act, andotherwise be entitled to good faith, notblind, reliance.

Considering hastily called meetingwithout prior notice of its subject matter,proposed sale of company without anyprior consideration of issue or necessitytherefor, urgent time constraints imposedby purchaser, and total absence of anydocumentation whatsoever, corporatedirectors were duty bound prior toapproving sale to make reasonable inquiryof chairman and chief executive officer

who proposed sale and of chief financialofficer who prepared preliminary studyregarding feasibility of leveraged buy-outof company.

Substantial premium may provide onereason to recommend merger, but in absenceof other sound valuation information, fact ofpremium or spread between offering price andcurrent market value of shares does notprovide adequate basis upon which to assessfairness of offering price.

Board of directors lacked valuationinformation adequate to reach informedbusiness judgment as to fairness of $55 pershare for sale of company, notwithstandingmagnitude of premium or spread betweenoffering price and company's current marketprice of $38 per share, where market hadconsistently undervalued worth of stock,publicly traded stock price represents onlyvalue of single share and not value of wholecompany, board made no evaluation ofcompany that was designed to value entireenterprise, board accepted without scrutinychairman's representation as to fairness of $55price per share for sale of company andthereby failed to discover that chairman hadsuggested $55 price and had arrived at thatfigure based on calculations designed solely todetermine feasibility of leveraged buy-out.

Board of director's unexplained failure toproduce and identify original merger

agreement permitted logical inference thatinstrument would not support their assertionsthat merger agreement was effectivelyamended to give board freedom to putcorporation up for auction sale to highestbidder.

Production of weak evidence when strongis, or should have been, available can leadonly to conclusion that strong would havebeen adverse.

Acknowledgment in merger agreement thatdirectors of corporation, which was subject ofcash-out merger may have competingfiduciary obligation to shareholders undercertain circumstances could not be construedas incorporating conditions that corporationhad right to accept better offer and todistribute proprietary information to thirdparties.

Board of directors has no rational basis to

conclude on day they voted to accept mergeror in days immediately following that board'sacceptance of offer was conditioned on markettest of offer and on board's right to withdrawfrom agreement and accept any higher offerreceived before shareholder meeting, wheredirectors did not seek to amend agreement topermit corporation to solicit competing offers,press release issued with authorization ofboard stated that corporation had entered intoa tentative agreement with purchasers, press

release did not disclose corporation's limitedright to receive and accept higher offers, andadditional public announcement stated thatpurchasers had been granted option to

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purchase one million shares ofcorporation's capital stock at 75 centsabove then current market price for share.

Board of directors' collective experienceand sophistication was insufficient basis forfinding that it reached its decision toapprove proposed merger with informed,

reasonable deliberation, where directors'reliance on both premium over marketprice for shares and market test of fairnessof offer were unfounded, and board lackedany advance notice of its proposal,deliberations were short, and directors didnot consult with their investment banker orobtained fairness opinion prior toapproving merger.

Although law did not require fairnessopinion or outside valuation of companybefore board of directors could act onmerger proposal, where directors did nothave before them adequate informationregarding intrinsic value of company, uponwhich proper exercise of businessjudgment could be made, reliance of boardof directors on legal advice that law did notrequire fairness opinion was no defense tolawsuit based on approval of merger.

Counsel's mere acknowledgment that

board of directors might be subject tolawsuit if it rejected $55 per share offer didnot constitute justification for boardpermitting itself to be stampeded intopatently unadvised act.

While suit might result from rejection ofmerger or tender offer, board of directorsacting within ambit of business judgmentrule faces no ultimate liability.

Although board of directors ofcorporation need not read in haec verbaevery contract or legal document which itapproves, if it is to successfully absolveitself from charges of gross negligence,there must be some credible contemporaryevidence demonstrating that directorsknew what they were doing, and ensuredthat their purported action was giveneffect.

Board of directors acted in grossly

negligent manner when it voted to amendmerger agreement, where directorsapproved oral presentation of substance ofproposed amendments, terms of whichwere not reduced to writing until two dayslater, rather than waiting to reviewamendments, again approved them sightunseen and adjourned, and even thoughamendments allowed corporation to solicitcompeting offers, corporation waspermitted to terminate merger agreement

and abandon merger only if, prior toshareholders' meeting, corporation hadeither consummated merger or sale ofassets to third party or had entered into

definitive merger agreement more favorablethan original and for greater consideration,and market test period for determiningfairness of purchase price was effectivelyreduced by amendments.

Corporation's chairman's representationson which board of directors based its actions in

amending merger agreement did notconstitute reports within meaning of statutewhich protects directors who rely in good faithon reports made by officers, where terms ofamendments were not reduced to writing untiltwo days later and substance of amendmentswhen drafted were different from thosepresented to board of directors.

Under statute governing merger orconsolidation of domestic corporations, boardof directors could not remain committed tomerger and yet recommended that itsstockholders vote it down, nor could boardtake neutral position and delegate tostockholders unadvised decision as to whetherto accept merger, but rather, board had eitherto proceed with merger in stockholdermeeting, with board's recommendation ofapproval of merger, or had to rescindagreement, withdraw its approval of merger,and notify its stockholders that proposedshareholder meeting was cancelled

Where under terms of merger amendments,board of directors' only ground for releasefrom agreement with purchaser was its entryinto more favorable definitive agreement tosell company to third party, and short ofnegotiating better agreement with third party,board's only basis for release from mergeragreement without liability would have been toestablish fundamental wrongdoing bypurchaser, board was not free to withdraw

from its agreement by simply relying on itsself-induced failure to have reached informedbusiness judgment at time of its originalagreement.

Where board of directors would have beenfaced with lawsuit by purchaser if it haddecided to rescind its agreement to sellcorporation, board's decision to recommendmerger to shareholders did not constituteinformed business judgment.

Where all directors of corporation, outsideas well as inside, took unified position, allwould be treated as one in determination ofwhether they were entitled to protection ofbusiness judgment rule in their approval ofcash-out merger of corporation.

Where shareholders challenging cash-outmerger of corporation did not claim, nor didtrial court decide, that $55 was grosslyinadequate price per share for sale of

company, presumption that board of directors'judgment as to adequacy of price representedhonest exercise of business judgment, absentproof that sale price was grossly inadequate,

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was irrelevant to threshold question ofwhether informed judgment was reachedby directors in approving merger.

Discovered failure of board of directorsto reach informed business judgment inapproving merger constitutes voidable,rather than void, act; hence, merger can

be sustained, notwithstanding infirmity ofboard's action, if its approval by majorityvote of shareholders is found to have beenbased on informed electorate.

Question of whether shareholders havebeen fully informed such that their votecan be said to ratify director action turnson fairness and completeness of proxymaterials submitted by management toshareholders.

Germane facts which corporatedirectors, pursuant to their fiduciary duty,must disclose to shareholders inconnection with transactions requiringshareholder approval mean material facts.

Corporation's stockholders were notfully informed of all facts material to theirvote on merger, where directors not onlyfailed to disclose lack of valuation butcloaked absence of such information in

both proxy statement and supplementalproxy statement, board failed to disclose toits stockholders that board had made nostudy of intrinsic or inherent worth ofcompany, did not disclose its failure toassess premium offered in terms of otherrelevant valuation techniques, and failed todisclose that chairman of corporation notonly suggested $55 price, but also that hechose that figure because it made feasibleleveraged buy-out.

Burden falls on board of directors whoclaim ratification based on shareholdervote to establish that shareholder approvalresulted from fully informed electorate.

Individual director's absence due toillness from board of directors meeting atwhich merger was originally approved andmeeting where amendments to mergerproposal were approved did not entitle himto be relieved from personal liability for

failure to exercise due care in approvingmerger, where special opportunity wasafforded all directors, to present anyfactual or legal reasons why each or any ofthem should be individually treated, andnone was advanced, director had originallytaken position that board's action taken atmeeting he did attend was determinativeof virtually all issues in action broughtagainst directors for damages resultingfrom cash-out merger approved by

directors, and director had given otherdirectors before meeting in whichamendments to merger were approved hisconsent to transaction of such business as

may come before meeting.

*863 Upon appeal from the Court of Chancery.Reversed and Remanded.William Prickett(argued) and James P. Dalle Pazze, of Prickett,Jones, Elliott, Kristol & Schnee, Wilmington,and Ivan Irwin, Jr. and Brett A. Ringle, ofShank, Irwin, Conant & Williamson, Dallas,

Tex., of counsel, for plaintiffs below,appellants.

Robert K. Payson (argued) and Peter M.Sieglaff of Potter, Anderson & Corroon,Wilmington, for individual defendants below,appellees.

Lewis S. Black, Jr., A. Gilchrist Sparks, III(argued) and Richard D. Allen, of Morris,Nichols, Arsht & Tunnell, Wilmington, for TransUnion Corp., Marmon Group, Inc., GL Corp. andNew T. Co., defendants below, appellees.

Before HERRMANN, C.J., and McNEILLY,HORSEY, MOORE and CHRISTIE, JJ., constitutingthe Court en banc.

HORSEY, Justice (for the majority):This appeal from the Court of Chancery

involves a class action brought byshareholders of the defendant Trans UnionCorporation (Trans Union or the Company),

originally seeking rescission of a cash-outmerger of Trans Union into the defendant NewT Company (New T), a wholly-ownedsubsidiary of the defendant, Marmon Group,Inc. (Marmon). Alternate relief in the form ofdamages is sought against the defendantmembers of the Board of Directors of TransUnion, *864 New T, and Jay A. Pritzker andRobert A. Pritzker, owners of Marmon.FN1

FN1. The plaintiff, Alden Smith, originally

sought to enjoin the merger; but,following extensive discovery, the TrialCourt denied the plaintiff's motion forpreliminary injunction by unreportedletter opinion dated February 3, 1981.On February 10, 1981, the proposedmerger was approved by Trans Union'sstockholders at a special meeting andthe merger became effective on thatdate. Thereafter, John W. Gosselin waspermitted to intervene as an additionalplaintiff; and Smith and Gosselin were

certified as representing a classconsisting of all persons, other thandefendants, who held shares of TransUnion common stock on all relevantdates. At the time of the merger, Smithowned 54,000 shares of Trans Unionstock, Gosselin owned 23,600 shares,and members of Gosselin's family owned20,000 shares.

Following trial, the former Chancellor

granted judgment for the defendant directorsby unreported letter opinion dated July 6,1982.FN2 Judgment was based on two findings:(1) that the Board of Directors had acted in an

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informed manner so as to be entitled toprotection of the business judgment rule inapproving the cash-out merger; and (2)that the shareholder vote approving themerger should not be set aside becausethe stockholders had been fairlyinformed by the Board of Directors beforevoting thereon. The plaintiffs appeal.

FN2. Following trial, and beforedecision by the Trial Court, theparties stipulated to the dismissal,with prejudice, of the Messrs.Pritzker as parties defendant.However, all references todefendants hereinafter are to thedefendant directors of Trans Union,unless otherwise noted.

Speaking for the majority of the Court,we conclude that both rulings of the Courtof Chancery are clearly erroneous.Therefore, we reverse and direct thatjudgment be entered in favor of theplaintiffs and against the defendantdirectors for the fair value of the plaintiffs'stockholdings in Trans Union, inaccordance with Weinberger v. UOP, Inc.,Del.Supr., 457 A.2d 701 (1983). FN3

FN3. It has been stipulated that

plaintiffs sue on behalf of a classconsisting of 10,537 shareholders(out of a total of 12,844) and thatthe class owned 12,734,404 out of13,357,758 shares of Trans Unionoutstanding.

We hold: (1) that the Board's decision,reached September 20, 1980, to approvethe proposed cash-out merger was not theproduct of an informed business judgment;

(2) that the Board's subsequent efforts toamend the Merger Agreement and takeother curative action were ineffectual, bothlegally and factually; and (3) that theBoard did not deal with complete candorwith the stockholders by failing to discloseall material facts, which they knew orshould have known, before securing thestockholders' approval of the merger.I.

The nature of this case requires adetailed factual statement. The following

facts are essentially uncontradicted: FN4

FN4. More detailed statements offacts, consistent with this factualoutline, appear in related portions ofthis Opinion.

-A-Trans Union was a publicly-traded,

diversified holding company, the principalearnings of which were generated by its

railcar leasing business. During the periodhere involved, the Company had a cashflow of hundreds of millions of dollarsannually. However, the Company had

difficulty in generating sufficient taxableincome to offset increasingly large investmenttax credits (ITCs). Accelerated depreciationdeductions had decreased available taxableincome against which to offset accumulatingITCs. The Company took these deductions,despite their effect on usable ITCs, becausethe rental price in the railcar leasing market

had already impounded the purported taxsavings.

In the late 1970's, together with othercapital-intensive firms, Trans Union lobbied inCongress to have ITCs refundable in cash tofirms which could not fully utilize the credit.During the summer of 1980, defendant JeromeW. Van Gorkom, Trans Union's Chairman andChief Executive Officer,*865 testified andlobbied in Congress for refundability of ITCsand against further accelerated depreciation.By the end of August, Van Gorkom wasconvinced that Congress would neither acceptthe refundability concept nor curtail furtheraccelerated depreciation.

Beginning in the late 1960's, and continuingthrough the 1970's, Trans Union pursued aprogram of acquiring small companies in orderto increase available taxable income. In July1980, Trans Union Management prepared theannual revision of the Company's Five Year

Forecast. This report was presented to theBoard of Directors at its July, 1980 meeting.The report projected an annual income growthof about 20%. The report also concluded thatTrans Union would have about $195 million inspare cash between 1980 and 1985, with thesurplus growing rapidly from 1982 onward.The report referred to the ITC situation as anagging problem and, given that problem,the leasing company would still appear to beconstrained to a tax breakeven. The report

then listed four alternative uses of theprojected 1982-1985 equity surplus: (1) stockrepurchase; (2) dividend increases; (3) a majoracquisition program; and (4) combinations ofthe above. The sale of Trans Union was notamong the alternatives. The reportemphasized that, despite the overall surplus,the operation of the Company would consumeall available equity for the next several years,and concluded: As a result, we have sufficienttime to fully develop our course of action.-B-

On August 27, 1980, Van Gorkom met withSenior Management of Trans Union. VanGorkom reported on his lobbying efforts inWashington and his desire to find a solution tothe tax credit problem more permanent than acontinued program of acquisitions. Variousalternatives were suggested and discussedpreliminarily, including the sale of Trans Unionto a company with a large amount of taxableincome.

Donald Romans, Chief Financial Officer ofTrans Union, stated that his department haddone a very brief bit of work on the possibilityof a leveraged buy-out. This work had been

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prompted by a media article which Romanshad seen regarding a leveraged buy-out bymanagement. The work consisted of apreliminary study of the cash whichcould be generated by the Company if itparticipated in a leveraged buy-out. AsRomans stated, this analysis was veryfirst and rough cut at seeing whether a

cash flow would support what might beconsidered a high price for this type oftransaction.

On September 5, at another SeniorManagement meeting which Van Gorkomattended, Romans again brought up theidea of a leveraged buy-out as a possiblestrategic alternative to the Company'sacquisition program. Romans and Bruce S.Chelberg, President and Chief OperatingOfficer of Trans Union, had been workingon the matter in preparation for themeeting. According to Romans: They didnot come up with a price for theCompany. They merely ran the numbersat $50 a share and at $60 a share with therough form of their cash figures at thetime. Their figures indicated that $50would be very easy to do but $60 would bevery difficult to do under those figures.This work did not purport to establish a fairprice for either the Company or 100% of

the stock. It was intended to determine thecash flow needed to service the debt thatwould probably be incurred in aleveraged buy-out, based on roughcalculations without any benefit ofexperts to identify what the limits were tothat, and so forth. These computationswere not considered extensive and noconclusion was reached.

At this meeting, Van Gorkom stated

that he would be willing to take $55 pershare for his own 75,000 shares. He vetoedthe suggestion of a leveraged buy-out byManagement, however, as involving apotential conflict of interest forManagement. Van Gorkom, a certifiedpublic accountant and lawyer, had been anofficer of Trans Union *866 for 24 years, itsChief Executive Officer for more than 17years, and Chairman of its Board for 2years. It is noteworthy in this connectionthat he was then approaching 65 years of

age and mandatory retirement.

For several days following theSeptember 5 meeting, Van Gorkompondered the idea of a sale. He hadparticipated in many acquisitions as amanager and director of Trans Union andas a director of other companies. He wasfamiliar with acquisition procedures,valuation methods, and negotiations; andhe privately considered the pros and cons

of whether Trans Union should seek aprivately or publicly-held purchaser.

Van Gorkom decided to meet with Jay A.

Pritzker, a well-known corporate takeoverspecialist and a social acquaintance. However,rather than approaching Pritzker simply todetermine his interest in acquiring TransUnion, Van Gorkom assembled a proposed pershare price for sale of the Company and afinancing structure by which to accomplish thesale. Van Gorkom did so without consulting

either his Board or any members of SeniorManagement except one: Carl Peterson, TransUnion's Controller. Telling Peterson that hewanted no other person on his staff to knowwhat he was doing, but without telling himwhy, Van Gorkom directed Peterson tocalculate the feasibility of a leveraged buy-outat an assumed price per share of $55. Apartfrom the Company's historic stock marketprice,FN5 and Van Gorkom's long associationwith Trans Union, the record is devoid of anycompetent evidence that $55 represented theper share intrinsic value of the Company.

FN5. The common stock of Trans Unionwas traded on the New York StockExchange. Over the five year periodfrom 1975 through 1979, Trans Union'sstock had traded within a range of ahigh of $39 1/2 and a low of $24 1/4 . Itshigh and low range for 1980 throughSeptember 19 (the last trading daybefore announcement of the merger)

was $38 1/4 -$29 1/2 .

Having thus chosen the $55 figure, basedsolely on the availability of a leveraged buy-out, Van Gorkom multiplied the price per shareby the number of shares outstanding to reacha total value of the Company of $690 million.Van Gorkom told Peterson to use this $690million figure and to assume a $200 millionequity contribution by the buyer. Based onthese assumptions, Van Gorkom directed

Peterson to determine whether the debtportion of the purchase price could be paid offin five years or less if financed by TransUnion's cash flow as projected in the Five YearForecast, and by the sale of certain weakerdivisions identified in a study done for TransUnion by the Boston Consulting Group (BCGstudy). Peterson reported that, of thepurchase price, approximately $50-80 millionwould remain outstanding after five years. VanGorkom was disappointed, but decided tomeet with Pritzker nevertheless.

Van Gorkom arranged a meeting withPritzker at the latter's home on Saturday,September 13, 1980. Van Gorkom prefaced hispresentation by stating to Pritzker: Now as faras you are concerned, I can, I think, show howyou can pay a substantial premium over thepresent stock price and pay off most of theloan in the first five years. * * * If you couldpay $55 for this Company, here is a way inwhich I think it can be financed.

Van Gorkom then reviewed with Pritzker hiscalculations based upon his proposed price of$55 per share. Although Pritzker mentioned

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$50 as a more attractive figure, no otherprice was mentioned. However, VanGorkom stated that to be sure that $55was the best price obtainable, Trans Unionshould be free to accept any better offer.Pritzker demurred, stating that hisorganization would serve as a stalkinghorse for an auction contest only if

Trans Union would permit Pritzker to buy1,750,000 shares of Trans Union stock atmarket price which Pritzker could then sellto any higher bidder. After furtherdiscussion on this point, Pritzker told VanGorkom that he would give him a moredefinite reaction soon.

*867 On Monday, September 15,Pritzker advised Van Gorkom that he wasinterested in the $55 cash-out mergerproposal and requested more informationon Trans Union. Van Gorkom agreed tomeet privately with Pritzker, accompaniedby Peterson, Chelberg, and MichaelCarpenter, Trans Union's consultant fromthe Boston Consulting Group. The meetingstook place on September 16 and 17. VanGorkom was astounded that events weremoving with such amazing rapidity.

On Thursday, September 18, VanGorkom met again with Pritzker. At that

time, Van Gorkom knew that Pritzkerintended to make a cash-out merger offerat Van Gorkom's proposed $55 per share.Pritzker instructed his attorney, a mergerand acquisition specialist, to begin draftingmerger documents. There was no furtherdiscussion of the $55 price. However, thenumber of shares of Trans Union's treasurystock to be offered to Pritzker wasnegotiated down to one million shares; theprice was set at $38-75 cents above the

per share price at the close of the marketon September 19. At this point, Pritzkerinsisted that the Trans Union Board act onhis merger proposal within the next threedays, stating to Van Gorkom: We have tohave a decision by no later than Sunday[evening, September 21] before theopening of the English stock exchange onMonday morning. Pritzker's lawyer wasthen instructed to draft the mergerdocuments, to be reviewed by VanGorkom's lawyer, sometimes with

discussion and sometimes not, in the hasteto get it finished.

On Friday, September 19, Van Gorkom,Chelberg, and Pritzker consulted with TransUnion's lead bank regarding the financingof Pritzker's purchase of Trans Union. Thebank indicated that it could form asyndicate of banks that would finance thetransaction. On the same day, Van Gorkomretained James Brennan, Esquire, to advise

Trans Union on the legal aspects of themerger. Van Gorkom did not consult withWilliam Browder, a Vice-President anddirector of Trans Union and former head of

its legal department, or with William Moore,then the head of Trans Union's legal staff.

On Friday, September 19, Van Gorkomcalled a special meeting of the Trans UnionBoard for noon the following day. He alsocalled a meeting of the Company's SeniorManagement to convene at 11:00 a.m., prior

to the meeting of the Board. No one, exceptChelberg and Peterson, was told the purposeof the meetings. Van Gorkom did not inviteTrans Union's investment banker, SalomonBrothers or its Chicago-based partner, toattend.

Of those present at the Senior Managementmeeting on September 20, only Chelberg andPeterson had prior knowledge of Pritzker'soffer. Van Gorkom disclosed the offer anddescribed its terms, but he furnished no copiesof the proposed Merger Agreement. Romansannounced that his department had done asecond study which showed that, for aleveraged buy-out, the price range for TransUnion stock was between $55 and $65 pershare. Van Gorkom neither saw the study norasked Romans to make it available for theBoard meeting.

Senior Management's reaction to thePritzker proposal was completely negative. No

member of Management, except Chelberg andPeterson, supported the proposal. Romansobjected to the price as being too low; FN6 hewas critical of the timing and suggested thatconsideration should be given to the adversetax consequences of an all-cash deal for low-basis shareholders; and he took the positionthat the agreement to sell Pritzker one millionnewly-issued shares at market price wouldinhibit other offers, as would the prohibitionsagainst soliciting bids and furnishing inside

information*868

to other bidders. Romansargued that the Pritzker proposal was a lockup and amounted to an agreed merger asopposed to an offer. Nevertheless, VanGorkom proceeded to the Board meeting asscheduled without further delay.

FN6. Van Gorkom asked Romans toexpress his opinion as to the $55 price.Romans stated that he thought theprice was too low in relation to what hecould derive for the company in a cash

sale, particularly one which enabled usto realize the values of certainsubsidiaries and independent entities.

Ten directors served on the Trans UnionBoard, five inside (defendants Bonser, O'Boyle,Browder, Chelberg, and Van Gorkom) and fiveoutside (defendants Wallis, Johnson,Lanterman, Morgan and Reneker). All directorswere present at the meeting, except O'Boylewho was ill. Of the outside directors, four were

corporate chief executive officers and one wasthe former Dean of the University of ChicagoBusiness School. None was an investmentbanker or trained financial analyst. All

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members of the Board were well informedabout the Company and its operations as agoing concern. They were familiar with thecurrent financial condition of the Company,as well as operating and earningsprojections reported in the recent Five YearForecast. The Board generally receivedregular and detailed reports and was kept

abreast of the accumulated investment taxcredit and accelerated depreciationproblem.

Van Gorkom began the Special Meetingof the Board with a twenty-minute oralpresentation. Copies of the proposedMerger Agreement were delivered too latefor study before or during the meeting.FN7

He reviewed the Company's ITC anddepreciation problems and the effortstheretofore made to solve them. Hediscussed his initial meeting with Pritzkerand his motivation in arranging thatmeeting. Van Gorkom did not disclose tothe Board, however, the methodology bywhich he alone had arrived at the $55figure, or the fact that he first proposed the$55 price in his negotiations with Pritzker.

FN7. The record is not clear as to theterms of the Merger Agreement. TheAgreement, as originally presented

to the Board on September 20, wasnever produced by defendantsdespite demands by the plaintiffs.Nor is it clear that the directors weregiven an opportunity to study theMerger Agreement before voting onit. All that can be said is thatBrennan had the Agreement beforehim during the meeting.

Van Gorkom outlined the terms of the

Pritzker offer as follows: Pritzker would pay$55 in cash for all outstanding shares ofTrans Union stock upon completion ofwhich Trans Union would be merged intoNew T Company, a subsidiary wholly-owned by Pritzker and formed toimplement the merger; for a period of 90days, Trans Union could receive, but couldnot actively solicit, competing offers; theoffer had to be acted on by the nextevening, Sunday, September 21; TransUnion could only furnish to competing

bidders published information, and notproprietary information; the offer wassubject to Pritzker obtaining the necessaryfinancing by October 10, 1980; if thefinancing contingency were met or waivedby Pritzker, Trans Union was required tosell to Pritzker one million newly-issuedshares of Trans Union at $38 per share.

Van Gorkom took the position thatputting Trans Union up for auction

through a 90-day market test wouldvalidate a decision by the Board that $55was a fair price. He told the Board that thefree market will have an opportunity to

judge whether $55 is a fair price. Van Gorkomframed the decision before the Board not aswhether $55 per share was the highest pricethat could be obtained, but as whether the $55price was a fair price that the stockholdersshould be given the opportunity to accept orreject.FN8

FN8. In Van Gorkom's words: The realdecision is whether to let thestockholders decide it which is all youare being asked to decide today.

Attorney Brennan advised the members ofthe Board that they might be sued if theyfailed to accept the offer and that a fairnessopinion was not required as a matter of law.

Romans attended the meeting as chieffinancial officer of the Company. He told theBoard that he had not been involved in thenegotiations with Pritzker and knew nothingabout the merger proposal until *869 themorning of the meeting; that his studies didnot indicate either a fair price for the stock ora valuation of the Company; that he did notsee his role as directly addressing the fairnessissue; and that he and his people were tryingto search for ways to justify a price inconnection with such a [leveraged buy-out]transaction, rather than to say what the shares

are worth. Romans testified:

I told the Board that the study ran thenumbers at 50 and 60, and then thesubsequent study at 55 and 65, and that wasnot the same thing as saying that I have avaluation of the company at X dollars. But itwas a way-a first step towards reaching thatconclusion.

Romans told the Board that, in his opinion,

$55 was in the range of a fair price, but atthe beginning of the range.

Chelberg, Trans Union's President,supported Van Gorkom's presentation andrepresentations. He testified that heparticipated to make sure that the Boardmembers collectively were clear on the detailsof the agreement or offer from Pritzker; thathe participated in the discussion with Mr.Brennan, inquiring of him about the necessityfor valuation opinions in spite of the way in

which this particular offer was couched; andthat he was otherwise actively involved insupporting the positions being taken by VanGorkom before the Board about the necessityto act immediately on this offer, and aboutthe adequacy of the $55 and the question ofhow that would be tested.

The Board meeting of September 20 lastedabout two hours. Based solely upon VanGorkom's oral presentation, Chelberg's

supporting representations, Romans' oralstatement, Brennan's legal advice, and theirknowledge of the market history of theCompany's stock,FN9 the directors approved the

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proposed Merger Agreement. However, theBoard later claimed to have attached twoconditions to its acceptance: (1) that TransUnion reserved the right to accept anybetter offer that was made during themarket test period; and (2) that TransUnion could share its proprietaryinformation with any other potential

bidders. While the Board now claims tohave reserved the right to accept anybetter offer received after theannouncement of the Pritzker agreement(even though the minutes of the meetingdo not reflect this), it is undisputed thatthe Board did not reserve the right toactively solicit alternate offers.

FN9. The Trial Court stated thepremium relationship of the $55price to the market history of theCompany's stock as follows:

* * * the merger price offered tothe stockholders of Trans Unionrepresented a premium of 62%over the average of the high andlow prices at which Trans Unionstock had traded in 1980, apremium of 48% over the lastclosing price, and a premium of39% over the highest price at

which the stock of Trans Union hadtraded any time during the prior sixyears.

The Merger Agreement was executedby Van Gorkom during the evening ofSeptember 20 at a formal social event thathe hosted for the opening of the ChicagoLyric Opera. Neither he nor any otherdirector read the agreement prior to itssigning and delivery to Pritzker.

3

On Monday, September 22, theCompany issued a press releaseannouncing that Trans Union had enteredinto a definitive Merger Agreement withan affiliate of the Marmon Group, Inc., aPritzker holding company. Within 10 daysof the public announcement, dissentamong Senior Management over themerger had become widespread. Faced

with threatened resignations of keyofficers, Van Gorkom met with Pritzker whoagreed to several modifications of theAgreement. Pritzker was willing to do soprovided that Van Gorkom could persuadethe dissidents to remain on the Companypayroll for at least six months afterconsummation of the merger.

Van Gorkom reconvened the Board onOctober 8 and secured the directors'

approval of the proposed amendments-sight unseen. The Board also authorizedthe employment of Salomon Brothers, itsinvestment*870 banker, to solicit other

offers for Trans Union during the proposedmarket test period.

The next day, October 9, Trans Unionissued a press release announcing: (1) thatPritzker had obtained the financingcommitments necessary to consummate themerger with Trans Union; (2) that Pritzker had

acquired one million shares of Trans Unioncommon stock at $38 per share; (3) that TransUnion was now permitted to actively seekother offers and had retained SalomonBrothers for that purpose; and (4) that if amore favorable offer were not received beforeFebruary 1, 1981, Trans Union's shareholderswould thereafter meet to vote on the Pritzkerproposal.

It was not until the following day, October10, that the actual amendments to the MergerAgreement were prepared by Pritzker anddelivered to Van Gorkom for execution. As willbe seen, the amendments were considerablyat variance with Van Gorkom's representationsof the amendments to the Board on October 8;and the amendments placed seriousconstraints on Trans Union's ability tonegotiate a better deal and withdraw from thePritzker agreement. Nevertheless, Van Gorkomproceeded to execute what became theOctober 10 amendments to the Merger

Agreement without conferring further with theBoard members and apparently withoutcomprehending the actual implications of theamendments.

3

Salomon Brothers' efforts over a three-month period from October 21 to January 21produced only one serious suitor for TransUnion-General Electric Credit Corporation (GE

Credit), a subsidiary of the General ElectricCompany. However, GE Credit was unwilling tomake an offer for Trans Union unless TransUnion first rescinded its Merger Agreementwith Pritzker. When Pritzker refused, GE Creditterminated further discussions with TransUnion in early January.

In the meantime, in early December, theinvestment firm of Kohlberg, Kravis, Roberts &Co. (KKR), the only other concern to make afirm offer for Trans Union, withdrew its offer

under circumstances hereinafter detailed.

On December 19, this litigation wascommenced and, within four weeks, theplaintiffs had deposed eight of the tendirectors of Trans Union, including VanGorkom, Chelberg and Romans, its ChiefFinancial Officer. On January 21,Management's Proxy Statement for theFebruary 10 shareholder meeting was mailedto Trans Union's stockholders. On January 26,

Trans Union's Board met and, after a lengthymeeting, voted to proceed with the Pritzkermerger. The Board also approved for mailing,on or about January 27, a Supplement to its

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Proxy Statement. The Supplementpurportedly set forth all informationrelevant to the Pritzker Merger Agreement,which had not been divulged in the firstProxy Statement.

3

On February 10, the stockholders ofTrans Union approved the Pritzker mergerproposal. Of the outstanding shares, 69.9%were voted in favor of the merger; 7.25%were voted against the merger; and22.85% were not voted.

II.We turn to the issue of the application

of the business judgment rule to theSeptember 20 meeting of the Board.

The Court of Chancery concluded fromthe evidence that the Board of Directors'approval of the Pritzker merger proposalfell within the protection of the businessjudgment rule. The Court found that theBoard had given sufficient time andattention to the transaction, since thedirectors had considered the Pritzkerproposal on three different occasions, onSeptember 20, and on October 8, 1980 andfinally on January 26, 1981. On that basis,

the Court reasoned that the Board hadacquired, over the four-month period,sufficient information to reach an informedbusiness judgment*871 on the cash-outmerger proposal. The Court ruled:

... that given the market value of TransUnion's stock, the business acumen ofthe members of the board of Trans Union,the substantial premium over marketoffered by the Pritzkers and the ultimate

effect on the merger price provided bythe prospect of other bids for the stock inquestion, that the board of directors ofTrans Union did not act recklessly orimprovidently in determining on a courseof action which they believed to be in thebest interest of the stockholders of TransUnion.

The Court of Chancery made but onefinding; i.e., that the Board's conduct overthe entire period from September 20

through January 26, 1981 was not recklessor improvident, but informed. This ultimateconclusion was premised upon threesubordinate findings, one explicit and twoimplied. The Court's explicit finding wasthat Trans Union's Board was free to turndown the Pritzker proposal not only onSeptember 20 but also on October 8, 1980and on January 26, 1981. The Court'simplied, subordinate findings were: (1) thatno legally binding agreement was reached

by the parties until January 26; and (2) thatif a higher offer were to be forthcoming,the market test would have produced it,FN10

and Trans Union would have been

contractually free to accept such higher offer.However, the Court offered no factual basis orlegal support for any of these findings; and therecord compels contrary conclusions.

FN10. We refer to the underlined portionof the Court's ultimate conclusion(previously stated): that given the

market value of Trans Union's stock, thebusiness acumen of the members of theboard of Trans Union, the substantialpremium over market offered by thePritzkers and the ultimate effect on themerger price provided by the prospectof other bids for the stock in question,that the board of directors of TransUnion did not act recklessly orimprovidently....

This Court's standard of review of thefindings of fact reached by the Trial Courtfollowing full evidentiary hearing is as stated inLevitt v. Bouvier, Del.Supr., 287 A.2d 671, 673(1972):

[In an appeal of this nature] this court hasthe authority to review the entire record andto make its own findings of fact in a propercase. In exercising our power of review, wehave the duty to review the sufficiency of theevidence and to test the propriety of the

findings below. We do not, however, ignorethe findings made by the trial judge. If theyare sufficiently supported by the record andare the product of an orderly and logicaldeductive process, in the exercise of judicialrestraint we accept them, even thoughindependently we might have reachedopposite conclusions. It is only when thefindings below are clearly wrong and thedoing of justice requires their overturn thatwe are free to make contradictory findings of

fact.

Applying that standard and governingprinciples of law to the record and the decisionof the Trial Court, we conclude that the Court'sultimate finding that the Board's conduct wasnot reckless or imprudent is contrary to therecord and not the product of a logical anddeductive reasoning process.

The plaintiffs contend that the Court ofChancery erred as a matter of law by

exonerating the defendant directors under thebusiness judgment rule without firstdetermining whether the rule's thresholdcondition of due care and prudence wassatisfied. The plaintiffs assert that the TrialCourt found the defendant directors to havereached an informed business judgment on thebasis of extraneous considerations andevents that occurred after September 20,1980. The defendants deny that the TrialCourt committed legal error in relying upon

post-September 20, 1980 events and thedirectors' later acquired knowledge. Thedefendants further submit that their decisionto accept $55 per share was informed

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because: (1) they were highly qualified;(2) they were well-informed; and (3) theydeliberated over the proposal not oncebut three times. On *872 essentially thisevidence and under our standard ofreview, the defendants assert thataffirmance is required. We must disagree.

[1][2][3] Under Delaware law, thebusiness judgment rule is the offspring ofthe fundamental principle, codified in 8Del.C. 141(a) , that the business andaffairs of a Delaware corporation aremanaged by or under its board ofdirectors.FN11Pogostin v. Rice, Del.Supr.,480 A.2d 619, 624 (1984); Aronson v.Lewis, Del.Supr., 473 A.2d 805, 811(1984); Zapata Corp. v. Maldonado,Del.Supr., 430 A.2d 779, 782 (1981). Incarrying out their managerial roles,directors are charged with an unyieldingfiduciary duty to the corporation and itsshareholders. Loft, Inc. v. Guth, Del.Ch., 2A.2d 225 (1938), aff'd,Del.Supr., 5 A.2d503 (1939). The business judgment ruleexists to protect and promote the full andfree exercise of the managerial powergranted to Delaware directors. ZapataCorp. v. Maldonado, supra at 782. The ruleitself is a presumption that in making abusiness decision, the directors of a

corporation acted on an informed basis, ingood faith and in the honest belief that theaction taken was in the best interests ofthe company. Aronson, supra at 812.Thus, the party attacking a board decisionas uninformed must rebut the presumptionthat its business judgment was aninformed one. Id.

FN11.8 Del.C. 141 provides, inpertinent part:

(a) The business and affairs ofevery corporation organized underthis chapter shall be managed byor under the direction of a board ofdirectors, except as may beotherwise provided in this chapteror in its certificate of incorporation.If any such provision is made in thecertificate of incorporation, thepowers and duties conferred orimposed upon the board of

directors by this chapter shall beexercised or performed to suchextent and by such person orpersons as shall be provided in thecertificate of incorporation.

[4] The determination of whether abusiness judgment is an informed oneturns on whether the directors haveinformed themselves prior to making abusiness decision, of all material

information reasonably available to them.Id.FN12

FN12.See Kaplan v. Centex

Corporation, Del.Ch., 284 A.2d 119, 124(1971), where the Court stated:

Application of the [business judgment]rule of necessity depends upon ashowing that informed directors did infact make a business judgmentauthorizing the transaction under

review. And, as the plaintiff argues, thedifficulty here is that the evidencedoes not show that this was done.There were director-committee-officerreferences to the realignment but noneof these singly or cumulative showedthat the director judgment was broughtto bear with specificity on thetransactions.

[5][6][7][8] Under the business judgmentrule there is no protection for directors whohave made an unintelligent or unadvisedjudgment. Mitchell v. Highland-WesternGlass, Del.Ch., 167 A. 831, 833 (1933) . Adirector's duty to inform himself in preparationfor a decision derives from the fiduciarycapacity in which he serves the corporationand its stockholders. Lutz v. Boas, Del.Ch., 171A.2d 381 (1961). See Weinberger v. UOP, Inc.,supra; Guth v. Loft, supra. Since a director isvested with the responsibility for themanagement of the affairs of the corporation,

he must execute that duty with the recognitionthat he acts on behalf of others. Suchobligation does not tolerate faithlessness orself-dealing. But fulfillment of the fiduciaryfunction requires more than the mere absenceof bad faith or fraud. Representation of thefinancial interests of others imposes on adirector an affirmative duty to protect thoseinterests and to proceed with a critical eye inassessing information of the type and underthe circumstances present here. See Lutz v.

Boas, supra; Guth v. Loft, supra at 510.Compare Donovan v. Cunningham, 5th Cir.,716 F.2d 1455, 1467 (1983); Doyle v. UnionInsurance Company, Neb.Supr., 277 N.W.2d 36(1979); Continental Securities Co. v. Belmont,N.Y.App., 99 N.E. 138, 141 (1912).

[9][10] Thus, a director's duty to exercisean informed business judgment is in *873 thenature of a duty of care, as distinguished froma duty of loyalty. Here, there were noallegations of fraud, bad faith, or self-dealing,

or proof thereof. Hence, it is presumed thatthe directors reached their business judgmentin good faith, Allaun v. Consolidated Oil Co.,Del.Ch., 147 A. 257 (1929), and considerationsof motive are irrelevant to the issue before us.

[11] The standard of care applicable to adirector's duty of care has also been recentlyrestated by this Court. In Aronson, supra, westated:

While the Delaware cases use a variety ofterms to describe the applicable standard ofcare, our analysis satisfies us that under thebusiness judgment rule director liability is

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8/7/2019 smith vs. gorkom

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predicated upon concepts of grossnegligence. (footnote omitted)

473 A.2d at 812.

We again confirm that view. We thinkthe concept of gross negligence is also theproper standard for determining whether a

business judgment reached by a board ofdirectors was an informed one.FN13

FN13. Compare Mitchell v. Highland-Western Glass, supra, where theCourt posed the question as whetherthe board acted so far withoutinformation that they can be said tohave passed an unintelligent andunadvised judgment. 167 A. at 833.Compare also Gimbel v. SignalCompanies, Inc., 316 A.2d 599, aff'dper curiamDel.Supr., 316 A.2d 619(1974), where the Chancellor, afterexpressly reiterating the Highland-Western Glass standard, framed thequestion, Or to put the question inits legal context, did the Signaldirectors act without the bounds ofreason and recklessly in approvingthe price offer of Burmah? Id.

[12][13][14] In the specific context of a

proposed merger of domestic corporations,a director has a duty under 8 Del.C. 251(b),FN14 along with his fellow directors,to act in an informed and deliberatemanner in determining whether to approvean agreement of merger before submittingthe proposal to the stockholders. Certainlyin the merger context, a director may notabdicate that duty by leaving to theshareholders alone the decision to approveor disapprove the agreement. See Beard v.

Elster, Del.Supr., 160 A.2d 731, 737(1960). Only an agreement of mergersatisfying the requirements of8 Del.C. 251(b) may be submitted to theshareholders under 251(c). See generallyAronson v. Lewis, supra at 811-13; seealso Pogostin v. Rice, supra.

FN14.8 Del.C. 251(b) provides inpertinent part:

(b) The board of directors of each

corporation which desires to mergeor consolidate shall adopt aresolution approving an agreementof mergeror consolidation. Theagreement shall state: (1) theterms and conditions of the mergeror consolidation; (2) the mode ofcarrying the same into effect; (3)such amendments or changes inthe certificate of incorporation ofthe surviving corporation as are

desired to be effected by themerger or consolidation, or, if nosuch amendments or changes aredesired, a statement that the

certificate of incorporation of one ofthe constituent corporations shall bethe certificate of incorporation of thesurviving or resulting corporation; (4)the manner of converting the shares ofeach of the constituent corporations ...and (5) such other details or provisionsas are deemed desirable.... The

agreement so adopted shall beexecuted in accordance with section103 of this title. Any of the terms of theagreement of merger or consolidationmay be made dependent upon factsascertainable outside of suchagreement, provided that the mannerin which such facts shall operate uponthe terms of the agreement is clearlyand expressly set forth in theagreement of merger or consolidation.(underlining added for emphasis)

It is against those standards that theconduct of the directors of Trans Union mustbe tested, as a matter of law and as a matterof fact, regarding their exercise of an informedbusiness judgment in voting to approve thePritzker merger proposal.

III.The defendants argue that the

determination of whether their decision to

accept $55 per share for Trans Unionrepresented an informed business judgmentrequires consideration, not only of that whichthey knew and learned on September 20, butalso of that which they subsequently learnedand did over the following four-*874 monthperiod before the shareholders met to vote onthe proposal in February, 1981. Thedefendants thereby seek to reduce thesignificance of their action on September 20and to widen the time frame for determining

whether their decision to accept the Pritzkerproposal was an informed one. Thus, thedefendants contend that what the directors didand learned subsequent to September 20 andthrough January 26, 1981, was properly takeninto account by the Trial Court in determiningwhether the Board's judgment was aninformed one. We disagree with this post hocapproach.

[15] The issue of whether the directorsreached an informed decision to sell the

Company on September 20, 1980 must bedetermined only upon the basis of theinformation then reasonably available to thedirectors and relevant to their decision toaccept the Pritzker merger proposal. This isnot to say that the directors were precludedfrom altering their original plan of action, hadthey done so in an informed manner. What wedo say is that the question of whether thedirectors reached an informed businessjudgment in agreeing to sell the Company,

pursuant to the terms of the September 20Agreement presents, in reality, two questions:(A) whether the directors reached an informedbusiness judgment on September 20, 1980;

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8/7/2019 smith vs. gorkom

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and (B) if they did not, whether thedirectors' actions taken subsequent toSeptember 20 were adequate to cure anyinfirmity in their action taken onSeptember 20. We first consider thedirectors' September 20 action in terms oftheir reaching an informed businessjudgment.

-A-[16] On the record before us, we must

conclude that the Board of Directors didnot reach an informed business judgmenton September 20, 1980 in voting to sellthe Company for $55 per share pursuant tothe Pritzker cash-out merger proposal. Ourreasons, in summary, are as follows:

The directors (1) did not adequatelyinform themselves as to Van Gorkom's rolein forcing the sale of the Company and inestablishing the per share purchase price;(2) were uninformed as to the intrinsicvalue of the Company; and (3) given thesecircumstances, at a minimum, were grosslynegligent in approving the sale of theCompany upon two hours' consideration,without prior notice, and without theexigency of a crisis or emergency.

As has been noted, the Board based its

September 20 decision to approve thecash-out merger primarily on VanGorkom's representations. None of thedirectors, other than Van Gorkom andChelberg, had any prior knowledge that thepurpose of the meeting was to propose acash-out merger of Trans Union. Nomembers of Senior Management werepresent, other than Chelberg, Romans andPeterson; and the latter two had onlylearned of the proposed sale an hour

earlier. Both general counsel Moore andformer general counsel Browder attendedthe meeting, but were equally uninformedas to the purpose of the meeting and thedocuments to be acted upon.

Without any documents before themconcerning the proposed transaction, themembers of the Board were required torely entirely upon Van Gorkom's 20-minuteoral presentation of the proposal. Nowritten summary of the terms of the

merger was presented; the directors weregiven no documentation to support theadequacy of $55 price per share for sale ofthe Company; and the Board had before itnothing more than Van Gorkom'sstatement of his understanding of thesubstance of an agreement which headmittedly had never read, nor which anymember of the Board had ever seen.

[17][18][19][20] Under 8 Del.C.

141(e),FN15

directors are fully protected inrelying in *875 good faith on reports madeby officers. Michelson v. Duncan, Del.Ch.,386 A.2d 1144, 1156 (1978); aff'd in part

and rev'd in part on other grounds,Del.Supr.,407 A.2d 211 (1979). See also Graham v. Allis-Chalmers Mfg. Co., Del.Supr., 188 A.2d 125,130 (1963); Prince v. Bensinger, Del.Ch., 244A.2d 89, 94 (1968). The term report hasbeen liberally construed to include reports ofinformal personal investigations by corporateofficers, Cheff v. Mathes, Del.Supr., 199 A.2d

548, 556 (1964). However, there is noevidence that any report, as defined under 141(e), concerning the Pritzker proposal, waspresented to the Board on September 20.FN16

Van Gorkom's oral presentation of hisunderstanding of the terms of the proposedMerger Agreement, which he had not seen,and Romans' brief oral statement of hispreliminary study regarding the feasibility of aleveraged buy-out of Trans Union do notqualify as 141(e) reports for these reasons:The former lacked substance because VanGorkom was basically uninformed as to theessential provisions of the very documentabout which he was talking. Romans'statement was irrelevant to the issues beforethe Board since it did not purport to be avaluation study. At a minimum for a report toenjoy the status conferred by 141(e), it mustbe pertinent to the subject matter upon whicha board is called to act, and otherwise beentitled to good faith, not blind, reliance.Considering all of the surrounding

circumstances-hastily calling the meetingwithout prior notice of its subject matter, theproposed sale of the Company without anyprior consideration of the issue or necessitytherefor, the urgent time constraints imposedby Pritzker, and the total absence of anydocumentation whatsoever-the directors wereduty bound to make reasonable inquiry of VanGorkom and Romans, and if they had done so,the inadequacy