In re-reading the lower court’s opinion this morning in light of the many interesting posts on the oral arguments, I began to think about whether the lower court was effectively trying to limit Van Gorkom to its facts, and if so, if that demonstrated a fundamental flaw in Van Gorkom’s reasoning.

Larry Ribstein and Steve Bainbridge are certainly correct when they write that Van Gorkom led to more expensive formalisms, rather than meaningful changes in corporate governance. Part of the reason for this result, it seems to me, is that the Court went one step too far in its focus on process. In Van Gorkom, the Court seemed to care more about the methods the board used to acquire information than the amount of knowledge actually obtained. As a result, boards responded with formalisms such as longer and more frequent meetings and greater reliance on outside expertise.

This approach also left the door open to the argument made by the Chancellor in Disney. According to the Chancellor’s opinion, the compensation committee spent one hour discussing a whole host of issues, only one of which was Ovitz’s proposed deal. In examining the proposal, the committee did not have a draft of the contract, but only a term sheet. Moreover, the primary compensation expert retained to advise the company, Graef Crystal, did not attend the meeting. (He was apparently available by phone but not called.)

In discussing the potential liability of the compensation committee, especially that of the two members least involved in the process, Poitier and Lozano, Chancellor Chandler distinguished Van Gorkom by arguing that (1) this transaction was less significant than a sale of the company; (2) the directors were aware of the subject to be discussed; (3) the directors had a term sheet to look at, and heard a presentation by someone with personal knowledge of the terms of the transaction; and (4) Disney management was in favor of hiring Ovitz, while Trans Union’s management was opposed to selling the company. (pp. 44-46, 2005 WL 2056651).

            Reasonable people could differ as to whether the compensation committee’s conduct was a bit better or a bit worse than the Trans Union’s board’s. But that shouldn’t be the point. The fundamental issue should be what information the directors understood at the time they made the decision. Rather than micromanage the information-gathering process, as the Van Gorkom court arguably did, perhaps the Delaware Supreme Court should hold that directors are free to use any process they like, so long as at the end of the day they have a sufficient understanding to make a reasonable decision. Since the board members here apparently did not understand the full consequences of the deal’s terms, they might well flunk such a standard, even if they might (barely) pass a pure process test.

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