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Orman v. Cullman - 794 A.2d 5 (Del. Ch. 2002)

Rule:

As a general matter, the business judgment rule presumption that a corporate board acted loyally can be rebutted by alleging facts which, if accepted as true, establish that the board was either interested in the outcome of the transaction or lacked the independence to consider objectively whether the transaction was in the best interest of its company and all of its shareholders. To establish that a board was interested or lacked independence, a plaintiff must allege facts as to the interest and lack of independence of the individual members of that board. To rebut successfully business judgment presumptions in this manner, thereby leading to the application of the entire fairness standard, a plaintiff must normally plead facts demonstrating that a majority of the director defendants have a financial interest in the transaction or were dominated or controlled by a materially interested director.

Facts:

On January 19, 2000, the Board of Directors of General Cigar Holdings, Inc. approved a merger agreement to which a subsidiary of an unaffiliated third party, Swedish Match AB would purchase the shares owned by the Unaffiliated Shareholders of General Cigar. On April 10, 2000 the Company filed with the Securities and Exchange Commission an amended proxy statement (Proxy Statement) relating to the proposed merger. Plaintiff Joseph Orman, the owner of General Cigar Class A common stock, brought a purported class action involving alleged breaches of fiduciary duty in connection with the proposed merger. Orman alleged 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 alleged 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. Orman also contended 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 to dismiss the complaint on the grounds that 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; that the merger was ratified by a fully informed majority vote of the Public Shareholders of General Cigar; and that Orman failed to plead cognizable disclosure claims pursuant to Court of Chancery Rule 12(b)(6).

Issue:

Should the defendants’ motion to dismiss the class action be granted?

Answer:

Yes, in part.

Conclusion:

The court denied the motion to dismiss asserting fiduciary duty claims but granted the motion to dismiss with respect to all disclosure claims, except for the claimed omission of the fair market value of the corporation's corporate headquarters building. The court found that since a proxy statement disclosure claim, regarding the corporate headquarters' fair market value, survived the motion to dismiss as a matter of law, it could not yet conclude that any possible breaches of fiduciary duty in connection with the challenged merger were ratified by a fully informed vote of a majority of the corporation's disinterested shareholders. The shareholder pled facts from which it was reasonable to question the independence and disinterest, to overcome initially the business judgment rule presumption, of a majority, 6, of the 11-member corporate board (4 members of a control group, a consultant whose disclosed contract could be extended, and an owner of a company that could earn disclosed fees from the transaction). The entire fairness rule did not apply initially since the control group did not stand on both sides of the transaction. The group was to continue to control the corporation. The certificate of incorporation's Del. Code Ann. tit. 8, § 102(b)(7) shield for care breaches was not yet invoked since there could be loyalty breaches.

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