Orman v. Cullman

• Decision Date: 26 February 2002
• Docket Number: Civil Action No. 18039.
• Citation: 794 A.2d 5
• Parties: Joseph ORMAN, Plaintiff, v. Edgar M. CULLMAN, Sr., Edgar M. Cullman, Jr., Susan R. Cullman, John L. Ernst, Peter J. Solomon, Bruce A. Barnet, John L. Bernbach, Thomas C. Israel, Dan W. Lufkin, Graham V. Sherren, Frances T. Vincent, Jr. and General Cigar Holdings, Inc., Defendants.
• Court: Court of Chancery of Delaware

794 A.2d 5

Joseph ORMAN, Plaintiff, v. Edgar M. CULLMAN, Sr., Edgar M. Cullman, Jr., Susan R. Cullman, John L. Ernst, Peter J. Solomon, Bruce A. Barnet, John L. Bernbach, Thomas C. Israel, Dan W. Lufkin, Graham V. Sherren, Frances T. Vincent, Jr. and General Cigar Holdings, Inc., Defendants.

Civil Action No. 18039.

Court of Chancery of Delaware.

Submitted: December 21, 2001.

Decided: February 26, 2002.

Revised: March 1, 2002.

Joseph A. Rosenthal, Carmella P. Keener, of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware, of counsel, Stephen A. Whinston, of Berger & Montague, P.C., Philadelphia, Pennsylvania, for plaintiff.

Robert J. Stearn, Jr., of Richards, Layton & Finger, Wilmington, Delaware, of counsel, Curtis P. Lu, Michael J. Golden, Mary E. Britton, of Latham & Watkins, Washington, D.C., Marc Wolinsky, Elaine P. Golin, of Wachtell, Lipton, Rosen & Katz, New York City, for defendants.

OPINION

CHANDLER, Chancellor.

This purported class action involves alleged breaches of fiduciary duty in connection with the cash-out merger of the public shareholders ("Unaffiliated Shareholders" or "Public Shareholders") of General Cigar Holdings, Inc. ("General Cigar" or the "Company"). According to the complaint, plaintiff Joseph Orman ("Orman") is and was the owner of General Cigar Class A common stock at all times relevant to this litigation. Orman brings this suit on behalf of himself and the Public Shareholders of General Cigar Class A common stock against General Cigar and its eleven-member board of directors (collectively the "Board").¹ On January 19, 2000 the Board unanimously approved a merger agreement pursuant to which a subsidiary of an unaffiliated third party, Swedish Match AB ("Swedish Match"), would purchase the shares owned by the Unaffiliated Shareholders of General Cigar.² On April 10, 2000 the Company filed with the Securities and Exchange Commission an amended proxy statement ("Proxy Statement") relating to this proposed merger.

The complaint first alleges breaches of fiduciary duty with respect to the Board's approval of (and the fairness of) the proposed merger. Orman contends that Board approval of the merger was ineffective and improper because a majority of the defendant directors was not independent and/or disinterested. He further alleges that the defendant directors violated their fiduciary duty of loyalty³ by entering into a transaction that was unfair to the Public Shareholders of General Cigar and usurped for themselves corporate opportunities rightfully belonging to all General Cigar shareholders.

Orman also asserts that the Board breached its duty of disclosure. Specifically, he alleges that the Proxy Statement soliciting shareholder approval of the proposed merger omitted material facts necessary for the Public Shareholders to make a fully informed decision with regard to their vote for or against the merger.

The defendants moved pursuant to Court of Chancery Rule 12(b)(6) to dismiss the complaint on the grounds that: 1) Orman failed to plead facts sufficient to overcome the presumption of the business judgment rule with respect to the Board's approval of the merger transaction; 2) the merger was ratified by a fully informed majority vote of the Public Shareholders of General Cigar; and 3) Orman failed to plead cognizable disclosure claims. Moreover, even if Orman had successfully pled cognizable disclosure claims (defendants argue), any possible liability arising from those claims is barred by an exculpatory provision in the Company's certificate of incorporation, adopted pursuant to § 102(b)(7)⁴ of the Delaware General Corporation Law, because only a duty of care violation is implicated by those disclosure claims.

I conclude that the defendants' motion to dismiss must be granted in part and denied in part. The motion to dismiss the duty of loyalty claims must be denied, as Orman has pled facts from which is it reasonable to question the independence and disinterest of a majority of the General Cigar Board. The motion to dismiss Orman's disclosure claims is granted as to all but one claim which, at this stage of the litigation, I cannot say is immaterial as a matter of law. Because I conclude that one of Orman's disclosure claims must survive as a matter of law, I am unable to find that any possible breaches of fiduciary duty in connection with the challenged transaction were ratified by a fully informed vote of a majority of the Company's disinterested shareholders. Finally, as I conclude that the complaint does not unambiguously state only a duty of care claim, it would be premature for me to consider the effect of the Company's exculpatory charter provision.

I. STANDARD OF REVIEW

In considering a Rule 12(b)(6) motion to dismiss, the Court must assume the truthfulness of all well-pleaded facts contained in the complaint, view those facts and all reasonable inferences drawn therefrom in the light most favorable to the plaintiff, and determine with "reasonable certainty" whether the plaintiff would be entitled to relief under any set of facts that could be proven.⁵ Conclusory allegations unsupported by facts contained in a complaint, however, will not be accepted as true.⁶

As a general rule, when deciding a Rule 12(b)(6) motion, the Court is limited to considering only the facts alleged in the complaint and normally may not consider documents extrinsic to it.⁷ There are two exceptions, however, to this general rule. "The first exception is when the document is integral to a plaintiff's claim and incorporated into the complaint. The second exception is when the document is not being relied upon to prove the truth of its contents."⁸ Consideration of the Proxy Statement in this case is appropriate as it falls under both of these exceptions.

First, the Proxy Statement is the basis for Orman's disclosure claims. Second, it is also integral to his complaint as it is the source for the merger-related facts as pled in the complaint.⁹ Therefore, the Proxy Statement, and any other documents incorporated into it, are incorporated by reference into the complaint and will be considered on this motion.

II. FACTUAL HISTORY¹⁰

General Cigar, a Delaware Corporation with its principal executive offices located in New York, New York, is a leading manufacturer and marketer of premium cigars. The Company has exclusive trademark rights to many well-known brands of cigars, including seven of the top ten brands that were previously manufactured in Cuba.¹¹

The Company went public in an initial public offering ("IPO") of 6.9 million shares of Class A stock at $18.00 per share on February 28, 1997. As of March 30, 2000, the Company had approximately 13.6 million shares of Class A and 13.4 million shares of Class B common stock outstanding. Class A stock was publicly traded and Class B stock was not publicly traded. Class A stock had one vote per share and Class B had ten votes per share. Even though Class B shares had ten times — the voting power of Class A shares, the Company's Certificate of Incorporation required equal consideration in exchange for Class A and Class B shares in the event of a sale or merger. At the time of the proposed merger, the Cullman Group owned approximately 162 shares of Class A and 9.9 million shares of Class B. Although this aggregated to approximately 37% of the Company's total outstanding stock, the Cullman Group had voting control over the Company because the 9.9 million Class B shares it owned represented approximately 74% of that class, which enjoyed a 10:1 voting advantage over Class A shares.¹² The Cullman Group's equity interest, therefore, gave it approximately 67% of the voting power in the corporation.

On April 30, 1999, in a transaction unrelated to the present controversy, the Company sold its cigar mass-marketing business to Swedish Match¹³ for $200 million in order to focus solely on the Company's premium cigar market. In the early fall of 1999, Swedish Match approached certain members of the Cullman Group (the "Cullmans") about purchasing the interest in General Cigar owned by its Public Shareholders.¹⁴ This was seen to be a logical business combination because General Cigar had a strong presence in the United States premium cigar market and Swedish Match had strength in the international cigar and smokeless tobacco markets through its established network of international contacts and resources.¹⁵ At a November 4, 1999 General Cigar board meeting, the Cullmans informed the Board of Swedish Match's interest. The Board then authorized the Cullmans to pursue discussions with Swedish Match assisted by defendant director Solomon's financial advising firm, Peter J. Solomon & Company ("PJSC").

Negotiations between the Cullmans and Swedish Match continued during November and December 1999. By the end of December 1999 the structure for a proposed transaction had been determined.¹⁶ That structure included: 1) a sale by the Cullman Group of approximately one-third of its equity interest in the Company to Swedish Match at $15.00 per share; 2) immediately following the Cullman Group's private sale, a merger in which all shares in the Company held by the Unaffiliated Shareholders would be purchased for $15.00 per share; 3) Cullman Sr. and Cullman Jr. maintaining their respective positions as Chairman and President/Chief Executive Officer of the surviving company and having the power to appoint a majority of the board; 4) three years after the merger, the Cullman Group having the power to put its remaining equity interest to the Company and the Company having the power to call such interest; and 5) an agreement by the Cullman Group that should the proposed transaction with Swedish Match not close, it would vote against any other business combination for a period of one year following the termination of the proposed transaction.¹⁷

Once the negotiations reached agreement on the above points, the Board created a special committee (the "Special...