In CASE 20.1Smith v.Van Gorkom (1985)discussed in the text,plaintiff-shareholders alleged the directors were grossly negligent in failing to inform themselves adequately before making a decision about a merger.How did the court rule and why?
A) For plaintiff-shareholders, because the board failed to obtain adequate information on merger terms and therefore was not protected by the business judgment rule.
B) For directors, because the board was protected by the business judgment rule since there was no conflict of interest.
C) For the directors, but the board was not protected by the business judgment rule but rather by the business merger rule.
D) For the directors, because the board was protected by the business judgment rule since fraud could not be established.

Question

Quizplus · Accepted Answer

The court ruled in favor of the plaintiff-shareholders because the directors were found to be grossly negligent in failing to obtain adequate information before making the decision about the merger. The court held that the directors' actions were not protected by the business judgment rule, which requires that directors act with due care and in good faith in making decisions on behalf of the corporation. In this case, the directors' failure to adequately inform themselves before making the decision was a breach of their duty of care, and thus they were liable for damages to the shareholders.