Del. Ch. C.A. No. 18039 (Mar. 1, 2002)
Joseph Orman, a holder of General Cigar Class A common stock, filed a purported class action in the Court of Chancery on behalf of himself and the company's Public Shareholders against General Cigar Holdings, Inc. and its eleven-member board of directors.1
The company is a Delaware corporation headquartered in New York that manufactures and markets premium cigars.2 It went public in a February 28, 1997 IPO of 6.9 million Class A shares at $18 per share.3 As of March 30, 2000, the company had approximately 13.6 million Class A shares and 13.4 million Class B shares outstanding.4 Class B shares carried ten votes each while Class A shares carried one vote each, although the certificate of incorporation required equal consideration for both classes in any sale or merger.5
The Cullman Group, consisting of Edgar M. Cullman Sr., Edgar M. Cullman Jr., Susan R. Cullman, and John L. Ernst, owned approximately 162 Class A shares and 9.9 million Class B shares at the time of the proposed transaction.6 This ownership gave it voting control of roughly 67 percent despite holding only about 37 percent of the total equity.7 On April 30, 1999, General Cigar sold its cigar mass-marketing business to Swedish Match AB for $200 million.8 In the fall of 1999, Swedish Match approached members of the Cullman Group about acquiring the interest held by the Public Shareholders.9
At a November 4, 1999 board meeting, the Cullmans informed the directors of Swedish Match's interest.10 The board authorized them to pursue discussions with assistance from defendant director Peter J. Solomon's firm, Peter J. Solomon & Company.11 Negotiations continued through November and December 1999.12 They produced a proposed structure that included a private sale by the Cullman Group of roughly one-third of its equity to Swedish Match at $15 per share.13 This was followed immediately by a merger in which Unaffiliated Shareholders would receive $15 per share.14 The structure also included retention of management positions and board appointment power by Cullman Sr. and Cullman Jr.15 It featured put and call rights exercisable three years after closing.16 Finally, it included an agreement by the Cullman Group not to support another business combination for one year if the transaction failed.17
In early January 2000 the board formed a Special Committee consisting of outside directors Thomas C. Israel, Dan W. Lufkin, and Frances T. Vincent Jr.18 The committee retained Wachtell, Lipton, Rosen & Katz and Deutsche Bank Securities Inc. as independent advisors.19 It received the proposed agreements and negotiated directly with Swedish Match.20 These negotiations resulted in an increase in the merger consideration to $15.25 per share and an extension of the no-shop period to eighteen months.21 On January 19, 2000 the Special Committee unanimously recommended the revised transaction and the full board approved it the same day.22
On April 10, 2000 the company filed an amended proxy statement with the SEC describing the transaction.23 The transaction required approval by a majority of the Unaffiliated Class A shareholders voting as a separate class.24 Orman filed his complaint alleging breaches of the duty of loyalty in connection with board approval of the merger and breaches of the duty of disclosure arising from omissions in the proxy statement.25 The defendants moved under Court of Chancery Rule 12(b)(6) to dismiss the complaint.26
Whether the complaint pleads facts sufficient to raise a reasonable question about the independence or disinterest of a majority of the eleven-member General Cigar board?27
A plaintiff rebuts the business judgment rule presumption by pleading particularized facts showing that a majority of directors were interested in the transaction or lacked independence from a controlling or interested party.28 Interest arises when a director stands on both sides of the transaction or receives a material personal financial benefit not shared by shareholders generally.29 Independence is lacking when a director is controlled by or beholden to an interested party such that the director's discretion is sterilized.30
Yes. The established facts show that the four Cullman Group directors received benefits including retention of equity, management positions, board appointment power, and put rights not shared by the Unaffiliated Shareholders.31 The facts further establish that director Bernbach held a consulting contract paying $75,000 in 1998 with continuing obligations assumed by the surviving company, creating a reasonable inference that he was beholden to the Cullman Group for renewals.32 Director Solomon's firm stood to receive a $3.3 million fee contingent on consummation of the merger, a benefit material to his principal occupation as chairman of that firm.33
These six directors constitute a majority of the eleven-member board.34
The motion to dismiss the duty of loyalty claims must be denied because the business judgment rule presumption does not protect the board's approval at the pleading stage.35
Whether the Proxy Statement omitted material facts concerning the fair market value of the company's New York headquarters building?36
A proxy statement must disclose all material facts that would significantly alter the total mix of information available to a reasonable shareholder.37 Materiality is determined at the pleading stage by whether the omitted information, if disclosed, would have been viewed by the reasonable investor as having significantly altered the total mix.38
Yes. The established facts show that the Proxy Statement disclosed only the carrying value of the 210,000 square foot headquarters building of which only 25,000 square feet was used by the company.39 The facts further establish that the building could reasonably be viewed as a surplus asset rather than integral to operations because the company could relocate its headquarters without impairing manufacturing and marketing activities.40 At the motion to dismiss stage these facts preclude a determination that the fair market value omission was immaterial as a matter of law.41
The motion to dismiss the disclosure claim regarding the headquarters building is denied.42
Whether the Proxy Statement omitted material facts concerning conflicts or lack of independence of individual directors?43
Directors have no duty to engage in self-flagellation by disclosing legal conclusions that facts constitute conflicts of interest or lack of independence when the underlying facts themselves have been fully disclosed in the proxy statement.44
No. The established facts show that the Proxy Statement disclosed the $3.3 million fee to Solomon's firm, the continuing consulting contract with Bernbach, Barnet's designation as a surviving company director, Lufkin's prior role with DLJ, and Cullman Sr.'s compensation committee role at Centaur.45 These underlying facts were presented to shareholders.46 The omission of characterizations labeling them as conflicts or independence problems does not constitute a material omission.47
The motion to dismiss the disclosure claims concerning director conflicts and independence is granted.48
Whether any possible breaches of fiduciary duty were ratified by a fully informed majority vote of the Unaffiliated Shareholders?49
No. The established facts show that the Proxy Statement omitted the fair market value of the headquarters building.52 This omission cannot be deemed immaterial at the pleading stage because the building could reasonably be viewed as a surplus asset that General Cigar could sell or relocate without impairing its manufacturing and marketing operations.53 The facts further establish that the building's market value might have altered the total mix of information available to the Unaffiliated Shareholders considering the merger price.54 Because one disclosure claim survives, the shareholder vote cannot be treated as fully informed.55
The ratification defense does not support dismissal of the remaining claims at this stage.56
Whether the company's exculpatory charter provision adopted under 8 Del. C. § 102(b)(7) requires dismissal of the disclosure claims at the pleading stage?57
An exculpatory provision shields directors from monetary liability for duty of care violations.58 It does not apply when the complaint pleads facts supporting a reasonable inference that loyalty or bad faith breaches are implicated.59 Consideration of the provision is premature when the complaint does not unambiguously state only a care claim.60
No. The established facts show that the complaint pleads facts raising a reasonable question whether a majority of the board lacked independence and disinterest when deciding what information to include in the Proxy Statement.61 These facts support an inference that any disclosure violation may implicate loyalty rather than solely care.62
Consideration of the exculpatory provision is premature and does not support dismissal of the surviving disclosure claim.63