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I'm afraid I don't agree with Larry Ribstein's claim that "Van Gorkom is finally dead, a stake through its heart." In my view, Van Gorkom rested on the absence of a sufficient record of any deliberative process. Put differently, I understand the case as teaching that, if the decision making process is adequate, the court will continue to defer to the decision that emerges from that process.

The basic thrust of the Van Gorkom opinion then is that the board must provide some credible, contemporary evidence that it knew what it was doing. If such evidence exists, the court will not impose liability—even if the decision proves to have been the wrong one.

The trouble on the facts of Van Gorkom seems to have been two-fold. First, the magnitude of the decision. A merger is the biggest decision the company can ever make: to sell itself to an outsider. A decision of lesser magnitude is likely to get less close scrutiny. It is also a final period transaction. Second, the process was so severely flawed as to suggest that the board had been captured by Van Gorkom.

For the business judgment rule to perform its economic function, of course, it must preclude judicial review of the merits of the board’s decision. This is what Van Gorkom did: it was the process by which the decision was made, not its substance, that is at issue. (Unfortunately, the Delaware Supreme Court subsequently clouded the issue. In the Cede & Co. v. Technicolor case, the court implied that plaintiff could rebut the business judgment rule by showing that the decision itself was grossly negligent. This puts the cart before the horse: it allows the court to review the substance of the director’s decision, instead of simply reviewing the process by which the decision is made.)

In sum, I have always thought Van Gorkom requires two conditions to be met before the court will set aside the business judgment rule. First, we must be dealing with a major transaction having final period consequences. Second, there must be pervasive evidence that the board of directors has abrogated its decisionmaking authority.

Nothing about the Ovitz case changes my mind or suggests to me that Van Gorkom is a dead letter. The $140 million paid to Ovitz was smaller in relation to the total value of Disney than the $200 million was in relation to the value of Trans Union. Moreover, approval of even a large and unusual employment contract is more routine then approval of the sale of the company and the Disney board at least did hire an outside expert.

When a Delaware court allows directors to escape liability in connection with a final period transaction in which the process gives what Larry calls "some pretty strong facts for abdication of the board's supervisory role" then I'll agree that Van Gorkom is dead. But not before.

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I'm afraid I don't agree with Larry Ribstein's claim that "Van Gorkom is finally dead, a stake through its heart." In my view, Van Gorkom rested on the absence of a sufficient record of any deliberative process. Put differently, I understand the case as teaching that, if the decision making process is adequate, the court will continue to defer to the decision that emerges from that process.

The basic thrust of the Van Gorkom opinion then is that the board must provide some credible, contemporary evidence that it knew what it was doing. If such evidence exists, the court will not impose liability—even if the decision proves to have been the wrong one.

The trouble on the facts of Van Gorkom seems to have been two-fold. First, the magnitude of the decision. A merger is the biggest decision the company can ever make: to sell itself to an outsider. A decision of lesser magnitude is likely to get less close scrutiny. It is also a final period transaction. Second, the process was so severely flawed as to suggest that the board had been captured by Van Gorkom.

For the business judgment rule to perform its economic function, of course, it must preclude judicial review of the merits of the board’s decision. This is what Van Gorkom did: it was the process by which the decision was made, not its substance, that is at issue. (Unfortunately, the Delaware Supreme Court subsequently clouded the issue. In the Cede & Co. v. Technicolor case, the court implied that plaintiff could rebut the business judgment rule by showing that the decision itself was grossly negligent. This puts the cart before the horse: it allows the court to review the substance of the director’s decision, instead of simply reviewing the process by which the decision is made.)

In sum, I have always thought Van Gorkom requires two conditions to be met before the court will set aside the business judgment rule. First, we must be dealing with a major transaction having final period consequences. Second, there must be pervasive evidence that the board of directors has abrogated its decisionmaking authority.

Nothing about the Ovitz case changes my mind or suggests to me that Van Gorkom is a dead letter. The $140 million paid to Ovitz was smaller in relation to the total value of Disney than the $200 million was in relation to the value of Trans Union. Moreover, approval of even a large and unusual employment contract is more routine then approval of the sale of the company and the Disney board at least did hire an outside expert.

When a Delaware court allows directors to escape liability in connection with a final period transaction in which the process gives what Larry calls "some pretty strong facts for abdication of the board's supervisory role" then I'll agree that Van Gorkom is dead. But not before.

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