Smith v. Van Gorkom (1985): what Delaware LLC founders should know

Case at a glance

• Case name: Smith v. Van Gorkom
• Year: 1985
• Court: Delaware Supreme Court
• Citation: 488 A.2d 858 (Del. 1985)
• Category: Fiduciary Duty

The facts

Trans Union Corp directors approved a cash-out merger after a 2-hour board meeting with no written materials, no investment banker valuation, and minimal due diligence. The chairman, Van Gorkom, had negotiated the price with the buyer privately before the meeting.

The holding

The Delaware Supreme Court held the directors grossly negligent in approving the merger without adequate information. Directors must inform themselves of all material information reasonably available before making business decisions. The business judgment rule does not protect uninformed decisions.

Why this case matters

Smith v. Van Gorkom transformed corporate governance practice. Boards now demand written materials, investment banker fairness opinions, and adequate deliberation time before major decisions. The case prompted Delaware to enact § 102(b)(7) of the DGCL allowing charter provisions to limit director liability for duty-of-care breaches.

What this means for Delaware LLC founders

While Smith v. Van Gorkom involved a corporation, the principles apply by analogy to manager-managed LLCs. Operating Agreements can modify fiduciary duties under § 18-1101, but the implied covenant of good faith and fair dealing always applies. Solo single-member LLCs face minimal fiduciary-duty exposure since the member-owner is making decisions for themselves.

How Smith v. Van Gorkom applies to your LLC

For solo single-member Delaware LLC founders, most fiduciary-duty cases have limited direct application: there is no co-member to owe duties to, and creditor-fiduciary-duty exposure arises only after actual insolvency. The cases become more relevant as the LLC grows:

• Adding co-founders or investors: multi-member LLCs face the full range of fiduciary-duty analysis, though Operating Agreements can modify duties under § 18-1101.
• Manager-managed structures: when non-member managers run the LLC, they owe fiduciary duties to members by default (§ 18-1104).
• Sale or merger transactions: Revlon and Unocal duties translate to LLC change-of-control transactions.
• Member disputes: Court of Chancery jurisdiction over Operating Agreement disputes applies the body of Delaware case law as guidance.

Primary source

The full text of Smith v. Van Gorkom is available through Westlaw, LexisNexis, and Google Scholar. The Delaware Court of Chancery publishes opinions at courts.delaware.gov/chancery. The Delaware Supreme Court publishes opinions at courts.delaware.gov/supreme.

Related cases and concepts

For broader Delaware corporate and LLC case law context, see our coverage of the business judgment rule, fiduciary duties, Delaware Court of Chancery, and the Delaware LLC Act. The Delaware Limited Liability Company Act sections (6 Del. C. § 18-101 et seq.) interact with the body of Delaware case law to define LLC governance.

First-party context

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