Orman v. Cullman

The business-judgment rule presumptively protects a board decision made on an informed basis, in good faith, and in the corporation’s best interests. To overcome that presumption through a loyalty theory, a plaintiff ordinarily must plead facts supporting a reasonable inference that a majority of the directors who approved the transaction were interested in it or lacked independence from an interested person.

Entire-fairness review did not apply automatically merely because the Cullman Group controlled General Cigar. Automatic entire-fairness review generally requires a controlling shareholder to stand on both sides of the challenged transaction. Here, Swedish Match was an unaffiliated third party that approached the Cullmans, and the Cullmans were not counterparties to the merger itself in the sense required for automatic review.

The four Cullman-family directors were concededly interested because they retained a substantial equity interest, voting control, management positions, and other benefits not shared by the public shareholders. Orman therefore needed plausible allegations concerning only two of the remaining seven directors to create doubt about a disinterested and independent board majority.

The allegations against Special Committee members Israel and Vincent were insufficient. Their long service on the board and unspecified longstanding business relationships with the Cullmans did not, without concrete facts about a disabling relationship, show that they were dominated or beholden. The same was true of the allegation that Lufkin had served on the board or its predecessor’s board for many years.

Lufkin’s historical connection to Donaldson, Lufkin & Jenrette also did not establish a disabling interest. The complaint did not allege that Lufkin personally would receive a material benefit from the merger, and the proxy indicated that he was then a private investor rather than a DLJ employee. Barnet’s prospective position as a director of the surviving corporation likewise did not, standing alone, establish an interested or nonindependent status.

The court did find a reasonable inference that Bernbach lacked independence. His ongoing consulting agreement with General Cigar, which paid him substantial fees for work in his principal field of business, would continue after the merger. Because the Cullman Group would remain in control whether or not the merger closed, it could affect the renewal and practical value of that relationship, making it reasonable at the pleading stage to infer that Bernbach was beholden to the Cullmans.

The court also found a reasonable inference that Solomon was interested. Solomon’s firm, PJSC, was positioned to receive approximately $3.3 million if the merger closed, and Solomon’s principal occupation was leading that firm. It was reasonable to infer that such a fee could materially affect Solomon’s judgment. The four Cullman directors, Bernbach, and Solomon therefore made six directors whose independence or disinterest was reasonably questioned.

This ruling did not finally establish that the business-judgment presumption had been rebutted or that entire-fairness review would ultimately govern. It held only that the defendants could not obtain dismissal by relying on a supposedly disinterested and independent board. Discovery was needed to determine the actual facts concerning the board, the special committee, and the merger process.

A disclosure claim requires the plaintiff to identify material, reasonably available information omitted from the proxy materials. Information is material if there is a substantial likelihood that a reasonable investor would view it as significantly altering the total mix of information. Materiality may be resolved on a motion to dismiss when the alleged omission is immaterial as a matter of law.

The director-related disclosure claims failed either because the supposed conflict was not adequately alleged or because the underlying facts had already been disclosed. Barnet’s future directorship did not itself create a conflict, and the proxy expressly disclosed that he would be a director of the surviving company. A fiduciary disclosure duty requires disclosure of material facts, not an additional statement characterizing those facts as a breach of duty.

The proxy also expressly disclosed that Solomon served on the board, that his firm served as financial adviser, and that the firm would receive an estimated $3.3 million merger-related fee. The board was not required to add a legal conclusion that those disclosed facts constituted a conflict of interest or lack of independence.

The alleged omissions concerning Bernbach, Sherren, and Lufkin likewise failed because the proxy or documents incorporated by reference disclosed the pertinent facts. The incorporated Form 10-K/A disclosed Bernbach’s consulting agreement and fees; the proxy and incorporated materials disclosed Cullman Sr.’s compensation-committee role at the company where Sherren was chief executive; and the proxy identified Lufkin as a DLJ cofounder and showed that he was then a private investor.

The claim based on potential gains from a future lifting of the Cuban embargo was speculative. A proxy need not disclose unsupported predictions about uncertain future events, and Orman did not defend that theory in briefing or at argument.

The headquarters-building claim could not be dismissed. The proxy disclosed the property’s carrying value, but not its market value or the fact that General Cigar itself used only a small portion of the building’s office space. On the undeveloped record, the court could not determine as a matter of law that the building was an operating asset integral to General Cigar’s business rather than a potentially surplus asset whose market value could materially affect the value of the company and the fairness of the merger price.

The defendants’ contention that projected rental income effectively disclosed the building’s value was unpersuasive. The proxy gave no figures allowing shareholders to assess the importance of rental income, and the audited financial statements stated that the building-owning subsidiary’s operations were not material to General Cigar’s results. Those facts reinforced the conclusion that materiality could not be resolved against Orman at this stage.

A shareholder vote can have a ratifying or cleansing effect only if the shareholders received all material information necessary to cast an informed vote. The defendants’ ratification argument therefore depended on the court finding that the proxy contained no material omission.

Because the court could not determine as a matter of law that the omitted fair market value of the headquarters building was immaterial, it could not hold that the unaffiliated shareholders’ approval of the merger was fully informed. The ratification defense could become significant later if the remaining omission were shown to be immaterial.

General Cigar’s charter eliminated directors’ personal monetary liability for duty-of-care violations to the extent permitted by DGCL § 102(b)(7), but it did not exculpate breaches of loyalty, bad-faith conduct, knowing misconduct, unlawful dividends, or improper personal benefits. The court treated the existence and authenticity of the provision as undisputed after permitting limited discovery on that narrow issue.

The fiduciary duty of disclosure is not an independent duty and may arise from duties of care, loyalty, or good faith. Thus, a disclosure claim may be exculpated when it rests solely on a good-faith but erroneous judgment about what to disclose, but it cannot be dismissed under § 102(b)(7) when properly pleaded facts support a nonexculpated loyalty or bad-faith theory.

Here, the allegations reasonably questioned the independence and disinterest of a majority of the board members who approved the merger and determined the proxy’s contents. The complaint therefore did not unambiguously state only a duty-of-care claim. It was premature to decide whether the charter provision would ultimately protect particular directors or whether a properly functioning special committee could limit any later liability to a care-based claim.