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William & Mary Business Law Review Volume 9 (2017-2018) Issue 1 Article 7 November 2017 Losing the Digital Shirt Off Your Back: Applying the Unlawful Internet Gambling Enforcement Act to Virtual Property Betting Erik Gerstner Follow this and additional works at: https://scholarship.law.wm.edu/wmblr Part of the Gaming Law Commons Repository Citation Erik Gerstner, Losing the Digital Shirt Off Your Back: Applying the Unlawful Internet Gambling Enforcement Act to Virtual Property Betting, 9 Wm. & Mary Bus. L. Rev. 321 (2017), https://scholarship.law.wm.edu/wmblr/vol9/iss1/7 Copyright c 2017 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/wmblr SMITH V. VAN GORKOM AND THE KOBAYASHI MARU: THE PLACE OF THE TRANS UNION CASE IN THE DEVELOPMENT OF DELAWARE CORPORATE LAW ROBERT T. MILLER ABSTRACT Although it is dangerous to attempt to say anything new about Smith v. Van Gorkom, the most controversial decision in the history of Delaware corporate law, this Article tries to do so by arguing that the extensive development of Delaware law since the time of the case allows us a perspective on Van Gorkom not available when the case was decided in 1985 or, indeed, for a long time thereafter. In particular, Van Gorkom had as important a role in the evolution of Delaware law as the three other outstand- ing cases decided by the Delaware Supreme Court in the miracle year of 1985: Unocal v. Mesa Petroleum, Revlon v. MacAndrews & Forbes, and Moran v. Household International. This Article argues, first and foremost, that Van Gorkom was an attempt by the Delaware Supreme Court to respond to widespread Professor of Law and F. Arnold Daum Fellow in Corporate Law at the University of Iowa College of Law and Fellow and Program Affiliated Scholar at the Classical Liberal Institute of New York University School of Law. For helpful comments and discussion, I thank Ronald J. Colombo, Mihailis E. Diamantis, Richard A. Epstein, James A. Fishkin, Christopher M. Foulds, Joel Friedlander, Thomas P. Gallanis, Herbert Hovenkamp, J. Travis Laster, Douglas K. Mayer, Mark A. Sargent, Gregory Shill, David M. Silk, Eric Willensky- Clinger, Harwell Wells, Adam J. White and Joseph W. Yockey. I especially thank William M. Owen for very illuminating discussions of his book Autopsy of a Merger, for providing me with copies of his articles from Crain’s Chicago Business, and for sharing his memories of the Trans Union transaction, Jerome Van Gorkom, Jay Pritzker, and many other of the key individuals involved. I thank Hannah Posen, Deysimara Hubner, and Evan Saunders for their excel- lent work as my research assistants. Most of all, I thank Jennifer L. Miller, whose assistance and comments on all aspects of this Article were indispens- able to its completion. 65 66 WILLIAM & MARY BUSINESS LAW REVIEW [Vol. 9:065 concern about the vast increase in merger-and-acquisition activity in the early 1980s. In particular, the case was the court’s first attempt to devise a regime of directorial fiduciary duties to regu- late negotiated transactions. Van Gorkom should have been Revlon, and what the Delaware Supreme Court got wrong in Van Gorkom in January of 1985—the creation of a new duty of care based on dicta from the 1984 case of Aronson v. Lewis—it got right in Revlon in November of 1985 by creating what we now call Revlon duties. Nevertheless, Van Gorkom was not simply a botched first attempt at articulating duties for directors selling their company. The reasoning in Van Gorkom was in many ways inadequate, but its essential holding—that the directors breached their duties— would certainly have been the same under the reasoning in Revlon. In other words, the basic holding in Van Gorkom—that the Trans Union directors breached their fiduciary duties in selling the company—is correct, albeit for not quite the reasons the Van Gorkom court gave for this holding. What was truly disastrous about Van Gorkom was not the holding that the Trans Union directors breached their duties, but rather the remedy the court imposed on the breaching directors—enormous monetary damages. Since Revlon was a pre-closing action, when the court found in that case that the directors breached their duties in agreeing to sell the company, the court could order relief by means of a preliminary injunction. By contrast, Van Gorkom was a post-closing action decided long after the merger was completed, and so that option was not available. Rather, when the Van Gorkom court found that the directors breached their duties, the axiom of the common law that every right has a remedy required imposing enormous liability on the directors. We now know that such a system was untenable, for it made the expected costs of serving as a director greatly exceed the expected benefits. Neither the justices of the Delaware Supreme Court nor anyone else could have known it in 1985, but in fact there was no right answer the court could have reached in Van Gorkom. If the court got the holding on the merits right (the directors breached their duties), it had to get the holding on remedies wrong (enormous monetary damages). Smith v. Van Gorkom was the Kobayashi Maru of Delaware corporate law—a problem in which all the possible solutions prove disastrous. 2017] SMITH V. VAN GORKOM 67 Moreover, just as in the fictional Kobayashi Maru in Star Trek, a solution to the problem did exist, but it required action from outside the system, action that would violate the fundamen- tal terms of the problem as previously understood. In Van Gorkom, that action was the Delaware General Assembly’s enactment of Section 102(b)(7), allowing corporations to eliminate personal liabil- ity in damages for directors breaching fiduciary duties not involv- ing disloyalty. This extraordinary statute effectively abridges the common law rule that every right has a remedy, and it was nec- essary if the system of Delaware corporate law was to continue. By eliminating the possibility of monetary damages post-closing, the enactment of Section 102(b)(7) created strong incentives for stockholders alleging their directors had breached their fiduciary duties in approving a merger to bring suit before the merger closed, thus creating a pre-clearance system of fiduciary-duty compli- ance similar to the pre-clearance system for antitrust compliance under the Hart-Scott-Rodino Act. The Delaware system of pre- clearance, in which stockholder challenges to mergers virtually always take place at the preliminary injunction stage, has proved tremendously successful. Such a system would have been impos- sible, however, without Van Gorkom. For, without Van Gorkom, there would have been no Section 102(b)(7), and without Section 102(b)(7), there would have been no Revlon-Unocal system of preclearance. Van Gorkom was in many ways a mistake, but it was a mistake that had to be made to produce the current system of Delaware law. In its own way, it was as important a step forward in Delaware law as Revlon, Unocal or Household International. 68 WILLIAM & MARY BUSINESS LAW REVIEW [Vol. 9:065 TABLE OF CONTENTS INTRODUCTION .............................................................................. 70 I. SMITH V. GORKOM AS A REVLON CASE ....................................... 86 A. The Facts in Van Gorkom ................................................. 86 B. The Delaware Supreme Court’s Opinion and the Reaction Thereto ................................................................. 119 1. The Delaware Supreme Court’s Opinion ........................ 119 2. The Furious Reaction ...................................................... 121 C. The Trans Union Board Goes to Revlon-Land Before Revlon-Land Exists ............................................................. 126 1. The Trans Union Board’s Revlon Duties Were Triggered .......................................................................... 126 2. The Van Gorkom Duty of Care vs. Revlon Duties .......... 128 a. The Origin of the Van Gorkom Duty of Care in Aronson v. Lewis .......................................................... 128 b. The Van Gorkom Duty of Care vs. Revlon Duties— Theoretical Justifications ............................................ 141 c. The Van Gorkom Duty of Care v. Revlon Duties— Applications ................................................................. 148 (1) The Original Decision to Approve the Merger with Pritzker ............................................................ 149 (i) The Negotiating History .................................... 150 (ii) The Failure to Obtain a Valuation Study ......... 156 (iii) The Obvious Overarching Revlon Problem ....... 168 (2) The Pritzker Stock Option as a Deal Protection Device ...................................................... 173 (3) The No-Shop Market Test and the Go-Shop Market Test ............................................................... 175 (4) Trans Union’s Dealings with KKR ...................... 181 d. The Case on the Edge of Forever ................................. 187 II. SMITH V. VAN GORKOM AS THE KOBAYASHI MARU OF DELAWARE CORPORATE LAW ................................................... 192 A. Van Gorkom as Necessarily a Mistake ........................... 194 1. What Van Gorkom Got Right .......................................... 195 2. What Van Gorkom Got Wrong ........................................ 196 3. Why Van Gorkom Had to Get Wrong What It Got Wrong ........................................................................ 202 2017] SMITH

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