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Smith v. Van Gorkom
Updated 10/26/2023
In this case, a soon-to-retire CEO/chair negotiates the sale of his company and the board approves the sale without anyone asking how much the company is worth. They analyze whether the deal is doable, but they don't ask if it's the best deal they can get. This is one of only a few cases where the court holds that the directors breached their duty of care.
A few merger terms worth defining:
- A cash-out merger is where the buyer gives shareholders cash in exchange for their shares. If the merger is properly approved by the board and shareholders, an individual shareholder may be forced to sell.
- A leveraged buyout is where the acquirer borrows a bunch of money to pay for the merger. The buyer typically uses the newly purchased company as collateral for the loan, and management is often on the buyer's team.
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