Van Gorkom and the Corporate Board: Problem, Solution, or Placebo?

Northwestern University Law Review, Winter 2002 | Go to article overview

Van Gorkom and the Corporate Board: Problem, Solution, or Placebo?


Symposium

EDITOR'S NOTE

More than sixteen years after the Delaware Supreme Court issued its watershed opinion in Smith v. Van Gorkom, scholars and business leaders continue to debate the wisdom of the decision, to analyze its real and perceived effects on corporate board decision-making, and to consider whether and how the requirements it imposed on boards can be viewed as strengthening board accountability and protecting shareholders' interests. With the recent collapse of the Enron Corporation, along with bankruptcy filings by such corporate giants as K-Mart and Global Crossing (which occurred after most of the Articles for this Symposium were written), concerns about board accountability and shareholder protection are now squarely in the national spotlight. The Editors of the Northwestern University Law Review are pleased to provide this forum for leading scholars and corporate attorneys to continue this timely and valuable discussion.

The Van Gorkom decision continues to generate debate about what the Delaware Supreme Court did-or was attempting to do-when it imposed new duties on boards of directors. Professors Rock and Wachter view the decision as an attempt to transplant the negligence-based duty of care standard from trusts and agency law to the corporate context, and present Van Gorkom as a cautionary tale of the hazards of such interdoctrinal transplantation. While Professor Hamermesh criticizes Van Gorkom as a duty of care decision, he takes a kinder view of the opinion's rejection of board passivity, its extension of the board's fiduciary disclosure duty, and its renewed focus on contract law and share valuation in the context of corporate mergers and acquisitions. Analyzing the board of directors as a social institution, Professor Stout praises the procedural requirements established in Van Gorkom for encouraging director altruism by lowering the marginal costs of information gathering and of confrontations with management. Professors Elson and Thompson argue that, although subsequent legislation essentially rendered the holding of the decision irrelevant, Van Gorkom nevertheless acted as a catalyst for the development of important nonlegal constraints on board action. Mr. Balotti and Mr. Sparks focus on Van Gorkom's affirmation of the primacy of contractual deal-protection measures over potentially conflicting fiduciary obligations, and offer practical approaches to addressing this issue in the language of merger agreements.

Several contributors to this Symposium fault Van Gorkom for imposing liability on the Trans Union board without requiring the plaintiffs to prove actual damages: Professor Allen and Vice Chancellors Jacobs and Strine argue that, without this requirement, the decision contradicts Delaware public policies, and they urge a return to a true gross negligence standard, complete with its requirement of proven, quantifiable damages. …

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