The Influence of Smith V. Van Gorkom on Director's and Officer's Liability

TLDR: Smith v. Van Gorkom was decided in the Supreme Court of Delaware in 1985 and shortly thereafter began to receive considerable attention in legal and business communities and in journals of scholarship as mentioned in this paper.

Abstract: Smith v. Van Gorkom was decided in the Supreme Court of Delaware in 1985 and shortly thereafter began to receive considerable attention in legal and business communities and in journals of scholarship. The claim has been made that the case was a landmark decision which will cause nominees to refuse to serve on corporate boards, increase the difficulty of obtaining Director's and Officer's Liability (D&O) insurance, and provide a boon for investment bankers and outside consultants. This article provides a brief overview of the facts in the case and discusses the Court of Chancery and Delaware Supreme Court decisions, and the theory of liability which is central to the case. The effects which some commentators predicted would result from the decision are analyzed, and some of these conjectures are disputed. A positive result of the Van Gorkomn case - the enactment of Section 102(b)(7) of the Delaware Code and similar state statutes - is identified. The Van Gorkom decision will have an impact primarily because it inspired the enactment of state statutes which limit director's liability.