Smith v. Van Gorkom addresses the business judgment rule. If a company’s directors approve a merger after a two-hour meeting without reviewing the merger documents or informing themselves, have they violated the business judgment rule?

• A. Yes, because directors must make informed decisions based on information reasonably available.
• B. No, because speed in negotiations is valued.
• C. It depends on whether a fairness opinion was obtained.
• D. The rule applies only to a subset of transactions.

Answer: (A)

Directors must make informed decisions based on information reasonably available. The business judgment rule protects directors when they act with due care, in good faith, and with rational business purposes, but the protection vanishes if they fail to inform themselves before approving a major corporate action. In Smith v. Van Gorkom, the court found that approving a merger after a two‑hour meeting, without the directors reviewing the merger documents or informing themselves, did not constitute an informed decision. Because the directors did not obtain or review information reasonably available to them, their action is not shielded by the business judgment rule, and they can be liable for breach of the duty of care. Speed in negotiations cannot substitute for informed decision‑making, and while a fairness opinion might be helpful, it cannot cure a lack of informed decision making. The rule applies broadly to director decisions, not only to a narrow subset of transactions.