Orman v. Cullman

794 A.2d 5 (Del. Ch. 2002)

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Nature of the Case

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Facts

D 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. D'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. The Cullman Group's equity interest gave it approximately 67% of the voting power in the corporation. The Cullmans and Swedish Match agreed on a structure to purchase all the Class A shares of D; 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. The Board created a special committee (the 'Special Committee'), consisting of outside defendant directors Lufkin, Israel, and Vincent, to determine the advisability of entering into the proposed transaction. The Special Committee retained independent legal and financial advisors--Wachtell, Lipton, Rosen & Katz and Deutsche Bank Securities, Inc., respectively--to assist them in this endeavor. The Committee negotiated substantive changes in the terms of the transaction and increased the consideration for Class A shares to $15.25 and the length of time the Cullman Group would not vote in favor of another business combination if the challenged merger failed to close increased from twelve to eighteen months. On January 19, 2000, the Special Committee unanimously recommended approval of the transaction as modified as a result of their negotiations. That same day, the General Cigar Board unanimously approved the transaction. The Cullman Group would still run the company when the transaction was completed. The transaction was structured in such a way that the Cullman Group could not dictate its approval. Despite the fact that the Cullman Group possessed voting control over the Company both before and after the proposed transaction, approval of the merger required that a majority of the Unaffiliated Shareholders of Class A stock, voting separately as a class, vote in favor of the transaction. P's complaint alleges breaches of fiduciary duty with respect to the Board's approval of (and the fairness of) the proposed merger. P 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 loyalty 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. P contends 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. Ds moved pursuant to Court of Chancery Rule 12(b)(6) to dismiss the complaint on the grounds that 1) P 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) P failed to plead cognizable disclosure claims.