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").

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. 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 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 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) 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. Conclusory allegations unsupported by facts contained in a complaint, however, will not be accepted as true.

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. 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." 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. 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 HISTORY

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.

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. 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 Match 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. 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. 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. 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.

Once the negotiations reached agreement on the above points, 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. In early January 2000 the Special Committee received copies of the proposed agreements previously reached between the Cullmans and Swedish Match. After a review of these proposals by the Special Committee and its legal and financial advisors, the Special Committee directly negotiated with Swedish Match over the terms of the agreement. The substantive changes in the terms of the transaction resulting from negotiations by the Special Committee appear to be that the amount of consideration to be received by the Unaffiliated Shareholders for each of their Class A shares increased from $15.00 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 relevant terms of the final transaction recommended to the Company's shareholders, and subject to approval of the Unaffiliated Shareholders, included an initial private sale by the Cullman Group of 3.5 million shares of its Class B stock, representing about one-third of its General Cigar equity interest, to Swedish Match for $15.00 per share. The Cullman Group was to retain its remaining equity interest, which would then consist of approximately 162 Class A shares and 6.4 million Class B shares. Following the merger, that remaining interest would aggregate to approximately 36% of the total outstanding equity interest in the Company. Immediately following this private sale, a merger would take place in which all publicly owned Class A and Class B shares (those not owned by the Cullman Group) would be purchased for $15.25 per share.

In addition to the Cullman Group's continuing equity position and voting control in the surviving company, several provisions of the proposed transaction assured ongoing participation of the Cullman Group in the day-to-day operations of that company. Cullman Sr. would retain his position as Chairman of the Board of the surviving company and Cullman Jr. would continue to serve as President and CEO of the surviving company. The Cullman Group would have the power to appoint a majority of the board of the surviving company after the merger.

Additionally, beginning three years from the date of the merger, the Cullman Group would have the option to put some or all of its remaining equity interest to the surviving company and the surviving company would have a reciprocal right to call some or all of the company's stock retained by the Cullman Group. The Cullman Group also agreed to vote against any proposed merger transaction for eighteen months should the transaction with Swedish Match not be consummated.

Finally, 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.

III. ANALYSIS

Orman alleges that the Board's approval of the Company's merger with Swedish Match was ineffective and improper because a majority of the Board was not disinterested and independent and that the directors breached their duty of loyalty by approving a transaction that was unfair to the public shareholders. Orman asserts that he has pled facts sufficient to rebut the presumption of the business judgment rule and that this Court should employ an "entire fairness" analysis. He contends that a determination that entire fairness is the appropriate standard would preclude dismissal at this stage of the litigation regardless of upon whom the Court ultimately were to place the burden of proving, or disproving, the transaction's entire fairness. The defendants contend that these claims must be dismissed because Orman has not pled facts sufficient to overcome the business judgment rule presumption and in such a case the actions of a board should be respected.

"A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation." The business judgment rule is a recognition of that statutory precept. The rule "is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Therefore, the judgment of a properly functioning board will not be second-guessed and "[a]bsent an abuse of discretion, that judgment will be respected by the courts." Because a board is presumed to have acted properly, "[t]he burden is on the party challenging the decision to establish facts rebutting the presumption."

One way for a plaintiff to overcome this burden, for example, is to allege facts demonstrating a squeeze out merger or a merger between two corporations under the control of a controlling shareholder. If facts of that nature are sufficiently alleged, the business judgment presumption is rebutted and entire fairness is the standard of review. "A controlling or dominating shareholder standing on both sides of a transaction . . . bears the burden of proving its entire fairness." Although procedural safeguards may be put in place that shift the burden to the plaintiff to prove the unfairness of the merger ( i.e., the negotiation and approval of the transaction by a special committee of independent and disinterested directors or the requirement of approval by a majority of the company's minority shareholders), "[e]ntire fairness remains the proper focus of judicial analysis in examining an interested merger, irrespective of whether the burden of proof remains upon or is shifted away from the controlling or dominating shareholder." Regardless of whether the burden of proof is shifted to the plaintiff, however, "[t]he initial burden" under entire fairness is borne by the controlling party "who stands on both sides of the transaction."

Here, however, although the Cullman Group was the controlling shareholder of the target company both before and after the merger, the Cullman Group did not stand on both sides of the challenged merger. Instead it was approached by, and began initial negotiations with, an unaffiliated third party, Swedish Match. A Special Committee of independent directors then completed those negotiations. Therefore, the burden remains on Orman to allege other facts sufficient to overcome the business judgment presumption. Specifically, Orman must allege facts that raise a reasonable doubt as to whether the Board breached either its duty of care or its duty of loyalty to the corporation. In his complaint, Orman alleges that the Board breached its duty of loyalty.

As a general matter, the business judgment rule presumption that a 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." I recognize situations can exist when the material interest of a number of directors less than a majority may rebut the business judgment presumption and lead to an entire fairness review. That is when an "`interested director fail[ed] to disclose his interest in the transaction to the board and a reasonable board member would have regarded the existence of the material interest as a significant fact in the evaluation of the proposed transaction.'" Nevertheless, in this case the interest that may be attributed to the Cullman Group or other Board members was disclosed to the Board and, therefore, Orman still must establish that a majority of the Board was interested and/or lacked independence.

If a plaintiff alleging a duty of loyalty breach is unable to plead facts demonstrating that a majority of a board that approved the transaction in dispute was interested and/or lacked independence, the entire fairness standard of review is not applied and the Court respects the business judgment of the board. Whether a particular director is disinterested or independent is a recurring theme in Delaware's corporate jurisprudence. We reach conclusions as to the sufficiency of allegations regarding interest and independence only after considering all the facts alleged on a case-by-case basis.

The Aronson Court set forth the meaning of "interest" and "independence" in this context. It defined interest as "mean[ing] that directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally." This definition was further refined in Rales v. Blasband when our Supreme Court recognized that "[d]irectoral interest also exists where a corporate decision will have a materially detrimental impact on a director, but not on the corporation and the stockholders." It should be noted, however, that in the absence of self-dealing, it is not enough to establish the interest of a director by alleging that he received any benefit not equally shared by the stockholders. Such benefit must be alleged to be material to that director. Materiality means that the alleged benefit was significant enough " in the context of the director's economic circumstances, as to have made it improbable that the director could perform her fiduciary duties to the . . . shareholders without being influenced by her overriding personal interest."

On the separate question of independence, the Aronson Court stated that "[i]ndependence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences." Such extraneous considerations or influences may exist when the challenged director is controlled by another. To raise a question concerning the independence of a particular board member, a plaintiff asserting the "control of one or more directors must allege particularized facts manifesting `a direction of corporate conduct in such a way as to comport with the wishes or interests of the corporation (or persons) doing the controlling.' The shorthand shibboleth of `dominated and controlled directors' is insufficient." This lack of independence can be shown when a plaintiff pleads facts that establish "that the directors are `beholden' to [the controlling person] or so under their influence that their discretion would be sterilized."

In determining the sufficiency of factual allegations made by a plaintiff as to either a director's interest or lack of independence, the Delaware Supreme Court has rejected an objective "reasonable director" test and instead requires the application of a subjective "actual person" standard to determine whether a particular director's interest is material and debilitating or that he lacks independence because he is controlled by another.

General Cigar had an eleven-member board. In order to rebut the presumptions of the business judgment rule, Orman must allege facts that would support a finding of interest or lack of independence for a majority, or at least six, of the Board members. Orman asserts, and defendants appear to concede, that the four members of the Cullman Group were interested because they received benefits from the transaction that were not shared with the rest of the shareholders. Orman, therefore, would have to plead facts making it reasonable to question the interest or independence of two of the remaining seven Board members to avoid dismissal based on the business judgment rule presumption. With varying levels of confidence, Orman's complaint alleges that each of the seven remaining Board members — Israel, Vincent, Lufkin, Barnet, Sherren, Bernbach, and Solomon — were interested and/or lacked independence.

1. Directors Israel and Vincent

Perhaps the weakest allegations of interest and/or lack of independence are aimed at directors Israel and Vincent, who were both members of the Special Committee that investigated the advisability of the merger and negotiated with Swedish Match. The complaint states that these two defendants "had longstanding business relations with members of the Cullman Group which impeded and impaired their ability to function independently and outside the influence of the Cullman Group." The only fact pled in support of this assertion is the mere recitation that Israel and Vincent had served as directors of General Cigar since 1989 and 1992, respectively. In his brief opposing defendants' motion to dismiss, Orman apparently concedes that Israel and Vincent are independent by omitting these two directors from his contention that, in addition to the Cullman Group, "[p]laintiff has sufficiently pled that Sherren, Bernbach, Solomon and Lufkin also suffer disabling conflicts of interest and lack of independence in connection with the transaction."

At this stage of the litigation, however, the Court must address itself to the allegations contained in the complaint. To make clear my opinion as to the independence of directors Israel and Vincent, therefore, I conclude that the allegations in the complaint with regard to the lack of independence of these two directors fail as a matter of law. The naked assertion of a previous business relationship is not enough to overcome the presumption of a director's independence. The law in Delaware is well-settled on this point. For instance, in Crescent/Mach I Partners, L.P. this Court held that allegations of a "long-standing 15-year professional and personal relationship" between a director and the CEO and Chairman of the Board of his company were insufficient to support a finding of control. The Court stated that such allegations, without more, "fail[ed] to raise a reasonable doubt that [the director] could not exercise his independent business judgment in approving the transaction. Therefore, these allegations lack the specific factual predicate" necessary to survive a motion to dismiss. Here too, allegations concerning longstanding business relations fail as a matter of law to place in issue the independence of directors Israel and Vincent.

2. Director Lufkin

Orman asserts that director Lufkin, who was the third member of the Special Committee, lacked independence and was also interested in the merger transaction. With regard to Lufkin's purported lack of independence, Orman makes the same allegations as were directed at Israel and Vincent, namely, Lufkin "had longstanding business relations with members of the Cullman Group which impeded and impaired [his] ability to function independently and outside the influence of the Cullman Group. Defendant Lufkin had been a Board member of General Cigar or its predecessor since 1976." For the reasons stated above (and with the caveat expressed in footnote 55), such bare allegation fails as a matter of law to assert a lack of independence on the part of director Lufkin.

Lufkin's supposedly disabling interest results from the fact that he was "a founder of Donaldson, Lufkin Jenrette ("DLJ") [and that] DLJ, or a successor or affiliate thereof, was one of two lead underwriters in the Company's IPO and obtained a substantial fee as a result thereof." This bare statement of fact does not suggest, or even lead to a reasonable inference of, a disabling interest on the part of Lufkin as that statement does not show that he "`will receive a personal financial benefit from [the] transaction that is not equally shared by the stockholders.'" inadequate pleadings in support of separate allegations of interest and lack of independence cannot be combined to create an inference that a director's conduct was improper. Here, the complaint fails, as a matter of law, to set forth facts that would lead this Court to question the presumed objectivity of director Lufkin in making his decision to vote in favor of the merger with Swedish Match.

3. Director Barnet

The only fact alleged in support of Orman's allegation of director Barnet's interest is that he "has an interest in the transaction since he will become a director of the surviving company." No case has been cited to me, and I have found none, in which a director was found to have a financial interest solely because he will be a director in the surviving corporation. To the contrary, our case law has held that such an interest is not a disqualifying interest. Even if I were to infer that Orman was alleging that the fees Barnet was to receive as a director with the surviving company created a disabling interest, without more, that assertion would also fail. Because Orman alleges no facts in addition to the assertion of continued board membership on the part of Barnett, his assertion of interest fails as a matter of law.

4. Director Bernbach

Orman alleges that director Bernbach was both interested in the merger and lacked the independence to make an impartial decision regarding that transaction because he has "a written agreement with the Company to provide consulting services [and that] [i]n 1998 . . . Bernbach was paid $75,000 for such services . . . and additional funds since that date." Orman further asserts that the Proxy Statement did not reveal the existence of the consulting contract, which was executed in 1997, or "that that the surviving company inherits the Company's contractual obligations to Defendant Bernbach." Contrary to defendants' assertion that Orman has failed to plead any continuing obligation on the part of General Cigar to Bernbach, his complaint clearly states such a continuing obligation.

Orman asserts that Bernbach has a written consulting contract with General Cigar, and that he had received, and continued to receive, payments under this contract. He further alleges that the surviving company will be obligated to uphold the contracts of the existing company. Such well-pleaded facts, accepted as true on a motion to dismiss, plainly allege a continuing obligation. Unfortunately for Orman, however, this clearly stated allegation is fatal to his assertion that Bernbach was interested in the transaction. As this Court has stated previously, "a director is considered interested when he will receive a personal financial benefit from a transaction that is not equally shared by the stockholders." Accepting Orman's allegations as true reveals that Bernbach does not meet this definition of "interest." Bernbach had a contract with General Cigar. If the merger were consummated, he would have a contract that the surviving company would be obligated to honor. If the merger were not consummated he would still have his contract with the existing General Cigar that it would be obligated to honor. Therefore, director Bernbach would have received no benefit from the transaction being challenged that was not shared by the other General Cigar shareholders. As a result of the merger, shareholder Bernbach would be cashed out and receive the same consideration for his General Cigar stock as the rest of the Unaffiliated Shareholders. Since he was to receive the same benefit as the Company's other shareholders, his interest in getting as high a price as possible for the Company's stock from the merger transaction was aligned with the Unaffiliated Shareholders. Orman's complaint, therefore, fails to plead adequately that director Bernbach was interested in the merger. This conclusion obviates the need to examine, for the purpose of determining whether a disabling interest existed, the defendants' further assertion that even if some interest were sufficiently alleged, Orman failed to plead the materiality of that contract to Bernbach.

Orman also argues that Bernbach's consulting agreement suggests a lack of independence. At this stage of the litigation, the facts supporting this allegation are sufficient to raise a reasonable inference that director Bernbach was controlled by the Cullman Group because he was beholden to the controlling shareholders for future renewals of his consulting contract. In addition to the facts specifically set forth in the complaint, the Proxy Statement reveals that, at the time of the challenged transaction, Bernbach's principal occupation was "Chairman and Chief Executive officer of the Bernbach Group, Inc." Accepting as true all the well-pled allegations and the inferences reasonably drawn therefrom in this case, I believe it is reasonable to question the objectivity of a director who has a consulting contract with his company and will continue to have a consulting contract with the surviving company. This is particularly true when, regardless of whether the merger is approved or not, the challenged director is beholden to the identical group of controlling shareholders favoring the challenged transaction. The Cullman Group would continue to be in a position to determine whether particular contracts are to be renewed as well as the extent to which the company will make use of the consulting services already under contract. Even though there is no bright-line dollar amount at which consulting fees received by a director become material, at the motion to dismiss stage and on the facts before me, I think it is reasonable to infer that $75,000 would be material to director Bernbach and that he is beholden to the Cullman Group for continued receipt of such fees. Although not determinative, the inference of materiality is strengthened when the allegedly disabling fee is paid for the precise services that comprise the principal occupation of the challenged director.

5. Director Solomon

Orman alleges that "Defendant Solomon has an interest in the transaction since his company, PJSC, stands to reap fees of $3.3 million if the transaction is effectuated." The reasonable inference that can be drawn from this contention is that if the merger is consummated PJSC will receive $3.3 million. If the merger is not consummated PJSC will not receive $3.3 million. PJSC, therefore, has an interest in the transaction. Because director Solomon's principal occupation is that of "Chairman of Peter J. Solomon Company Limited and Peter J. Solomon Securities Company Limited," it is reasonable to assume that director Solomon would personally benefit from the $3.3 million his company would receive if the challenged transaction closed. I think it would be naïve to say, as a matter of law, that $3.3 million is immaterial. In my opinion, therefore, it is reasonable to infer that director Solomon suffered a disabling interest when considering how to cast his vote in connection with the challenged merger when the Board's decision on that matter could determine whether or not his firm would receive $3.3 million.

Directors Bernbach and Solomon, at this stage, cannot be considered independent and disinterested. Orman has thus pled facts that make it reasonable to question, the independence and/or disinterest of a majority of the General Cigar Board — the four Cullman Group directors, plus Bernbach and Solomon, or six out of the eleven directors. Accordingly, I cannot say, as a matter of law, that the General Cigar Board's actions are protected by the business judgment rule presumption. Defendants' motion to dismiss the fiduciary duty claims — based as it is on a conclusion that the challenged transaction was approved by a disinterested and independent board — must be denied.

Reaching this decision with regard to the loyalty of the Board that approved the merger, however, does not rebut the business judgment presumption at this stage of the litigation. It merely means that the business judgment presumption may not be used as the basis to dismiss Orman's fiduciary duty claims for failure to state a cognizable claim. Further discovery is necessary to determine whether the facts — as they truly existed at the time of the challenged transaction, rather than those accepted as necessarily true as alleged — are sufficient to rebut the business judgment rule presumption and to trigger an entire fairness review. Thus it is unnecessary for me presently to consider Orman's allegations concerning the purported unfairness of the price and process of the merger. Such allegations will become relevant only if the business judgment presumption is finally determined to have been successfully rebutted.

B. Disclosure Allegations

Orman next alleges that the Proxy Statement contained material omissions and misstatements. In order for a plaintiff to state properly a claim for breach of a disclosure duty by omission, he must "plead facts identifying (1) material, (2) reasonably available (3) information that (4) was omitted from the proxy materials." In order for alleged misrepresentations to be material, there must be a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available" to the shareholders.

Contrary to Orman's contention that a determination of the materiality of disclosure allegations is not appropriate on a motion to dismiss, this Court has, on several occasions in the context of a motion to dismiss, found it appropriate to dismiss disclosure claims on the basis that the complained of omission was not material. Orman's reliance on Crescent/Mach I Partners, L.P. v. Turner to support his contention is misplaced. In that case the Court refused to dismiss the complaint not because a determination of materiality was inappropriate on a motion to dismiss, but precisely because the plaintiff was able to plead sufficiently "all of the elements necessary to survive a motion to dismiss for breach of the fiduciary duty of disclosure." In fact, the Court there stated that materiality "is a matter for the Court to determine from the record at that particular stage of a case when the issue arises." It is proper, therefore, for this Court to address the question of the materiality of the plaintiff's alleged omissions in the context of a Rule 12 (b)(6) motion to dismiss.

Orman lists seven omissions from the Proxy Statement that he asserts would have affected the voting of the Unaffiliated Shareholders had that information been included. First, he alleges the Proxy Statement omitted the fact that defendant Barnet was subject to a conflict of interest and/or lacked independence because he was designated as a director of the surviving corporation and would benefit from the transaction through fees, stock options and other benefits of a directorship. Second, the Proxy Statement omitted the fact that defendant Solomon was subject to a conflict of interest and/or lacked independence because his company, Peter J. Solomon Co. ("PJSC"), stood to make a fee of $3.3 million if the transaction was consummated. Third, the Proxy Statement did not disclose that in 1997 General Cigar entered into a consulting contract with defendant Bernbach, the amount Bernbach received under that contract, and that the surviving company would inherit General Cigar's contractual obligations to Bernbach. Fourth, the Proxy Statement did not disclose that defendant Cullman Sr. had been the Chairman of the Compensation Committee of the Board of Directors of Centaur Communications Ltd., ("Centaur") and that that committee sets or recommends the annual compensation to be paid to defendant Sherren as Centaur's CEO. Fifth, the Proxy Statement failed to disclose that defendant Lufkin was a co-founder of DLJ and that DLJ received a substantial fee as an underwriter for General Cigar's 1997 initial public offering. Sixth, the Proxy Statement failed to disclose that General Cigar's headquarters building in New York City was only partially occupied and listed its value only as its carrying value (cost less depreciation) rather than giving the building's market value. Seventh, and finally, the Proxy Statement failed to disclose the "huge financial benefits" that the Company would reap when the United States' embargo of Cuban products is ultimately removed. As General Cigar owns the trademark rights to seven of the top ten Cuban cigar brands, relaxation of the embargo would likely provide an economic "shot in the arm" for General Cigar.

Orman claims that these omitted facts resulted in the shareholders' vote not being fully informed. The first five disclosure allegations concerning certain defendant directors would, purportedly, have demonstrated to the Unaffiliated Shareholders that "the Board's vote in favor of the merger was tainted by self-interest and self-dealing." The sixth and seventh disclosure allegations would have made the Unaffiliated Shareholders aware that "the Company had significant assets which were not properly considered in establishing the fair value of the stock [they held]."

1. Director Barnet

Orman alleges it was a material omission that the Proxy Statement did not disclose that Barnet was interested and/or lacked independence "since he is designated to be a director of the surviving corporation and will therefore benefit from the transaction through fees, stock options and other emoluments typically provided to directors of a corporation." As discussed above, Orman has not pled particularized facts that would support a finding that defendant director Barnet either suffered a disabling interest or lacked independence when he voted to approve the merger transaction on January 19, 2000. As a result, there can be no material omission in the failure of the Proxy Statement to mention such nonexistent interest or lack of independence on the part of director Barnet. In addition to Orman's failure to plead facts from which it is reasonable to question Barnet's disinterest and independence, the underlying information that purportedly supported those assertions was, in fact, included in the Proxy Statement.

The fact that director Barnet is designated to be a director of the surviving corporation is clearly presented in the Proxy Statement. Under the heading "Directors and Management of the Surviving Corporation," that document recites that "The Merger Agreement provides that the initial board of directors will consist of seven members [including] Bruce Barnet." No purpose would be served by an additional requirement that the Proxy Statement include a statement that as a result of being a director Barnet would "benefit from the transaction through fees, stock options and other emoluments typically provided to directors of a corporation." Since Orman is alleging only that Barnet would receive benefits "typically" received by a director, disclosing that Barnet was to be a director of the surviving company would inform the Unaffiliated Shareholders that he was to receive the benefits typically associated with such a position. Orman's disclosure allegations with regard to director Barnet are, therefore, dismissed.

2. Director Solomon

Orman alleges that "Defendant Solomon is also subject to a conflict of interest and/or lacks independence and disinterest since his company, PJSC, stands to make a fee of $3.3 million if the transaction is effectuated." Under the heading "Interest of Certain Persons in the Merger; Certain Relationships," the Proxy Statement expressly states "Peter J. Solomon, whose firm PJSC served as the Company's financial advisor, sits on the Company's board of directors." The Proxy Statement goes on to set plainly forth the fact that PJSC was to receive an estimated $3,300,000 "in connection with the merger." The fact that the Proxy Statement did not also include a statement that the disclosed facts meant that Solomon was in fact "subject to a conflict of interest and/or lacked independence and disinterest" was not a material omission. A board's duty of disclosure does not require it to "`engage in `self-flagellation' and draw legal conclusions implicating itself in a breach of fiduciary duty." Therefore, although "material facts must be disclosed" (and they were with respect to PJSC's fee and Solomon's relationship to that firm), "negative inferences or characterizations of misconduct or breach of fiduciary duty need not be articulated." As a result, the failure to characterize facts concerning Solomon and PJSC's fee as a conflict of interest was not a violation of the Board's duty of disclosure. Orman's disclosure allegations with regard to director Solomon are dismissed.

3. Director Bernbach

Orman asserts that the Proxy Statement did not reveal that since 1997 director Bernbach had a consulting contract with General Cigar from which he had been paid $75,000 in 1998 and "additional funds since that date," and that the surviving company would be bound by this contract. General Cigar's Form 10-K and 10-K/A are incorporated into the Proxy Statement by reference and do disclose that contract. The 10-K/A states that "[t]he Company entered into an agreement with John L. Bernbach in 1997 pursuant it [sic] which, Mr. Bernbach provides consulting services to the Company with respect to its international operations. During the Company's 1999 fiscal year, Mr. Bernbach received advisory fees of $56,250 pursuant to such agreement." The Proxy Statement also includes the statement that "[e]mployment and other agreements currently in effect will become obligations of the Surviving Corporation following the merger." Therefore, Bernbach's consulting contract and the continuing obligation of the surviving company under that contract are sufficiently disclosed by the Proxy Statement and Orman's disclosure allegations with regard to director Bernbach are dismissed.

4. Director Sherren

Orman next alleges "[t]he Proxy Statement fails to disclose that Defendant Cullman Sr. has been the Chairman of the Compensation Committee of the Board of Directors of Centaur Communications Ltd., the body that sets or recommends the annual compensation to be paid to Defendant Sherren in his role as Chief Executive Officer of Centaur." Although I did not reach a conclusion as to whether these facts support an unfavorable inference regarding Sherren's interest and/or independence, all of this information was disclosed in the Proxy Statement or documents incorporated by reference into the Proxy Statement. Sherren's principal occupation during the five years preceding the Proxy Statement was listed as "Chairman and Chief Executive Officer of Centaur Communications Limited." It was disclosed that Cullman Sr. served as a director of Centaur and that "Mr. Cullman [Sr.] is Chairman of the Compensation Committee of Centaur Communications Limited, of which Mr. Sherren is chief executive officer." Because this information was disclosed, there is no material omission concerning Sherren. Orman's disclosure allegations with regard to director Sherren are dismissed.

5. Director Lufkin

Orman alleges "[t]he Proxy Statement fails to disclose that Defendant Lufkin was a co-founder of Donaldson, Lufkin and Jenrette ("DLJ") and that DLJ received a substantial fee as underwriter for the Company's IPO." In fact, the Proxy Statement informs the shareholders that "Dan W. Lufkin, Chairman [of the Special Committee], was a co-founder of Donaldson, Lufkin Jenrette." The Proxy Statement also makes clear that although Lufkin "was" a founder of DLJ, he is no longer a member of that investment bank. The Proxy Statement records that Lufkin's "Principal Occupation and Business Experience During the Past Five Years" was that of "Private investor" and that "[e]xcept as otherwise indicated each director has had the same principal occupation during the past five years." The fact that a company Lufkin helped to found, by which he is no longer employed, was an underwriter for General Cigar's 1997 IPO cannot, in my opinion, be considered a material fact that would have altered the total mix of information presented to the Company's shareholders. Orman's disclosure allegations with regard to director Lufkin are dismissed.

Because the facts Orman complains of as being omitted with regard to the individual defendant directors either did not require disclosure or were in fact disclosed, all disclosure allegations concerning the individual director defendants are dismissed. All that remains of Orman's disclosure allegations, therefore, are the omission of the benefit that would redound to the Company when the Cuban embargo is lifted and the omission of the market value of the Company's headquarters building in New York City. These two omissions must be seen to alter the "total mix" of information available to the shareholders in order to meet the materiality standard and to avoid an entire dismissal of Orman's disclosure claims.

6. Cuban Embargo

The allegation that it was a material disclosure violation that "[t]he Proxy Statement fail[ed] to disclose the huge financial benefits which the Company would reap when the trade embargo with Cuba is lifted [due to the Company's] exclusive trademark rights to seven of the top ten Cuban cigar brands" is almost laughable. Such an allegation barely rises to the level of unsupported speculation that the Courts of this state have never held must be included in proxy materials. Perhaps in recognition of the baselessness of this particular allegation, Orman did not attempt to defend it either in his briefs or at oral argument. This disclosure claim fails as a matter of law and the defendants' motion to dismiss with respect to this alleged omission is, therefore, granted.

7. Headquarters Building

With respect to the disclosures provided in connection with the Company's headquarters building, Orman acknowledges that the Proxy Statement discloses the carrying value (cost less depreciation) of that asset. He asserts, however, that it was a material omission that the Proxy Statement did not "disclose that the Company's headquarters building at 387 Park Avenue South, which is owned by the Company, consists of 210,000 square feet of office space of which only 25,000 square feet is used by the Company and also fails to disclose the fair market value of such property." The defendants counter that when an asset is fundamental to a company's operations, as opposed to a surplus asset that could readily be sold for market value, the fair market value of such asset need not be included in a company's proxy materials. They maintain that the Company's headquarters building is fundamental to the Company's operations and, as a result, there was no requirement that the Proxy Statement contain fair market value information about that asset.

The defendants correctly point out that in Citron v. E.I. du Pont de Nemours Co., this Court held that under the facts of that case it was not a material omission when only the book value and not the fair market value of a particular asset was disclosed. This finding was made after the Court determined that the asset was not a surplus asset that could have been sold for cash at fair market value, but was integral to the company in question. Citron, however, is readily distinguishable both on its facts and procedural posture from this case.

The decision in Citron was reached after a full trial on the merits that was followed by post-trial briefing and further oral argument. Here, the Court does not have the benefit of a fully developed record to assist it in making a determination of whether General Cigar's headquarters building is fundamental to the Company or a surplus asset that could be sold without significantly impairing the Company's ongoing business. The asset in question in Citron is also factually distinguishable from the building at issue in this case. The asset at issue in Citron was a facility that the Court determined was "not a surplus asset, but was an integral part of the educational and public relations side of [the company's] business." This facility was equated with other operating assets such as factories and major equipment. Additionally, the Citron Court knew the appraised value of that facility. This enabled it to calculate that the appraised value was only 1.7% of the fully disclosed book value of the company. These facts led the Citron Court to conclude that "[i]n these circumstances, the $4.4 million difference between appraised and book value would have been quantitatively insignificant to a shareholder considering whether to approve the merger." Based on the facts presented to me at this stage of the litigation, I cannot say, as a matter of law, that the building housing the Company's corporate offices is integral to General Cigar's business in the sense that it could be equated to an operating asset. It seems reasonable, at this stage of the litigation, to believe that General Cigar could obtain another location to house its corporate headquarters without adversely affecting the operation of the manufacturing and marketing of the Company's cigars. It is possible, therefore, that the fair market value of that building might be considered material information.

At oral argument the defendants suggested, for the first time, that the Proxy Statement did, in a way, disclose the value of the Park Avenue building to the shareholders. They based this assertion on the fact that the projections of income on which the Special Committee's financial advisor, Deutsche Bank, based its valuation of the Company were included in the Proxy Statement. According to the defendants, this is significant because projections of income included lease payments from other non-Company tenants in the Park Avenue building. The defendants reason that since the lease payments from other tenants were included in the income projections and those income projections were used by Deutsche Bank in their valuation of the Company, the "value" of the building was disclosed to the shareholders. Were it determined that the fair market value of the headquarters building was material information that should have been disclosed to the shareholders, I cannot agree with the defendants that this information was disclosed to the shareholders in the manner they propose.

The Proxy Statement does say that the projections of income which were provided by the Company to Deutsche Bank and were used by Deutsche Bank in connection with its January 19, 2000 fairness opinion "[i]nclude[d] income from the Company's headquarters office building." No figures were given, however, either in terms of real dollars or a percentage of income, that showed the significance of these lease payments to that projected income from which a shareholder could have even attempted to determine the "value" of the headquarters building as suggested by the defendants. Additionally, those financial projections "were not prepared by the Company with a view to public disclosure or compliance with presentation and disclosure guidelines established by the SEC or the American Institute of Certified Public Accountants regarding prospective financial information." The Proxy Statement did include audited financial statements, however, and the "Notes to Consolidated Financial Statements" associated with those audited financial statements declared that "[t]he operations of . . . 387 PAS, which owns and operates the Company's headquarters building, were not material to the Company's results of operations in any of the periods presented." This statement seems to imply both that the building was not, in and of itself, integral to the business of General Cigar nor a significant income-producing asset of the Company. Although upon examination of additional facts at a later stage of litigation it might well be determined that failure to include the fair market value of this asset was not a material omission, based on the specific facts before the Court now it is impossible for me to reach such a conclusion at this time. Therefore, defendants' motion to dismiss as it pertains to this one disclosure allegation cannot be granted on the basis of a determination that information regarding the fair market value of the headquarters building was immaterial. C. Section 102 (b)(7)

The defendants argue that even if I find that Orman has stated a cognizable disclosure claim, the complaint must still be dismissed because all that it alleges is a breach of the duty of care and the Company's certificate of incorporation includes an exculpatory provision adopted pursuant to 8 Del. C. § 102 (b)(7) that shields General Cigar's directors from personal liability for breaches of the duty of care. Orman responds that he has alleged breaches of the duty of loyalty, liability for which cannot be avoided by the Company's exculpation clause.

Before I can address the parties' contentions as to whether General Cigar's exculpatory provision shields the defendant directors from liability, thereby permitting complete dismissal of the disclosure claims, I must first determine whether the Court's consideration of such a defense is premature in light of the facts and procedural posture of this case. Two recent Delaware Supreme Court decisions specifically addressed the proper timing of this Court's consideration of a defense based on a § 102 (b)(7) charter provision. In Malpiede v. Townson, the Supreme Court affirmed a Rule 12 (b)(6) dismissal of the plaintiffs' due care claim based on a § 102 (b)(7) exculpatory provision contained in the defendant corporation's charter. In Emerald Partners v. Berlin, the Supreme Court vacated a decision for premature consideration of a § 102 (b)(7) provision in a post trial final judgment. According to the Emerald III Court, the trial court improperly found for the defendants based on the existence of a § 102 (b)(7) exculpatory provision because it failed first to set out explicitly the Court's findings as to the entire fairness of the challenged transaction. Consideration of the exculpatory provision was held to be premature even though the trial court explicitly determined, after a complete trial on the merits during which both sides were fully able to present all the evidence at their disposal, that even if the transaction was unfair, there was no evidence that in any way showed such unfairness resulted from a breach of the duty of loyalty and that any unfairness could only have been due to a breach of the duty of care. Nevertheless, the Emerald III Court reiterated Malpiede's holding that "if a shareholder complaint unambiguously asserts only a due care claim, the complaint is dismissable once the corporation's Section 102 (b)(7) provision is properly invoked." The Malpiede Court stated, however, that:

[i]n the case of a Rule 12 (b)(6) motion, . . . if the Section 102 (b)(7) charter provision is raised for the first time in the motion or brief in support of the motion, it is a matter outside the pleading. If not excluded by the court, the existence of such matter means that the motion will be converted, by clear force of the pleading rules, into a motion for summary judgment under [Court of Chancery] Rule 56.

Although the Court must permit discovery when considering a Rule 56 motion for summary judgment, any discovery associated with a matter outside the pleadings considered by the Court may, within the Court's discretion, be limited so as to focus any permitted discovery on the narrow issue presented by that matter.

The defendants in this case first raised the issue of an exculpatory provision, purportedly contained in General Cigar's Certificate of Incorporation at Article Fifth (d), in their brief in support of their motion to dismiss. This being a matter outside the pleadings I have, as instructed by Malpiede, converted my consideration of it from a Rule 12 (b)(6) standard to a Rule 56 standard. The only discovery relevant to that matter was the very narrow one concerning the existence or authenticity of the Company's exculpation provision. Orman was given the opportunity to conduct limited discovery, but he declined to challenge either the existence or authenticity of General Cigar's exculpatory provision. That provision is, therefore, an undisputed fact that may be considered by the Court. It reads:

No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit.

This provision shields the members of the General Cigar Board from personal monetary liability for a breach of their duty of care to the Company.

Contrary to Orman's suggestion, disclosure claims do not always involve a breach of the duty of loyalty. He incorrectly cites two decisions of this Court, O'Reilly v. Transworld Healthcare, Inc. and Chaffin v. GNI Group, Inc. as supporting his argument that "[s]o long as the complaint pleads a violation of other aspects of the fiduciary duty, such as bad faith or breach of the duty of loyalty, it cannot be dismissed pursuant to § 102 (b)(7)." Orman's argument is that merely alleging a violation of the duty of loyalty — whether conclusory in nature or otherwise inadequately pleaded — would preclude dismissal based on an exculpatory charter provision. Neither O'Reilly nor Chaffin support anything close to Orman's sweeping interpretation of these cases. O'Reilly stated that exculpatory provisions adopted pursuant to § 102 (b)(7) cannot be the basis for dismissal "where a complaint alleges or pleads facts sufficient to support the inference that the disclosure violation . . . implicates the duty of loyalty." Chaffin found that dismissal based on an exculpatory provision was not possible there because "the Court has previously determined that the Complaint does state cognizable claims for breach of the duty of loyalty." Put simply, if a complaint properly pleads a non-exculpated claim, that claim at least survives a motion to dismiss.

The fiduciary duty to disclose material facts does not solely implicate the duty of loyalty, a breach of which results in liability that cannot be avoided by an exculpatory provision. Rather, "[t]he duty of directors to observe proper disclosure requirements derives from the combination of the fiduciary duties of care, loyalty and good faith." The Malpiede Court recently observed that a "board's fiduciary duty of disclosure . . . [is] not [an] independent dut[y] but the application in a specific context of the board's fiduciary duties of care, good faith, and loyalty." A claim for breach of the duty of disclosure may implicate only the duty of care "when the misstatement or omission was made as a result of the directors' good faith, but `erroneous judgment' concerning the proper scope and content of the disclosure." Furthermore, in Arnold v. Society for Savings Bancorp, Inc., our Supreme Court held that a disclosure claim could be dismissed pursuant to a § 102 (b)(7) exculpatory provision when the Court determined that there was no breach of the duty of loyalty and that the disclosure violation there was consistent with a good faith omission.

Unfortunately for the defendants, however, because Orman has pled facts which make it reasonable to question the independence and disinterest of a majority of the Board that decided what information to include in the Proxy Statement, I cannot say, as a matter of law, that the complaint unambiguously states only a duty of care claim. Therefore, consideration of the effect of General Cigar's exculpatory provision on Orman's ability to recover damages, at this point, is premature.

In addition, because I conclude that it is impossible to say, as a matter of law, that information concerning the fair market value of the Company's headquarters building is immaterial, I cannot currently accept defendants' contention that a fully informed vote of a majority of the Company's Unaffiliated Shareholders ratified any possible breaches of fiduciary duties in connection with the Board's consideration of the challenged merger. If it were later determined that this omission was not material, however, shareholder ratification might become an important issue.

Finally, the pleadings (and reasonable inferences drawn therefrom) are insufficient for me to make a determination with respect to the possible cleansing effect resulting from the actions of General Cigar's Special Committee. The complaint provides no bases upon which I can draw conclusions confidently as to whether or not the Special Committee's negotiations with Swedish Match were indeed arms-length and indicative of a properly functioning and properly motivated committee. It is also unclear to me at the moment what legal effect, if any, the Company's exculpatory provision would have on the liability of particular defendant directors, if I were to find (at a later stage of this lawsuit) that the Special Committee did, in fact, operate as an independent and properly motivated negotiating body such that any breaches of fiduciary duty by it implicated only the duty of care. These issues must await another day.

IV. CONCLUSION

An Order accompanies this Opinion.

ORDER

For the reasons assigned in this Court's Opinion entered in this case on this date, it is

ORDERED:

(1) Defendants' motion to dismiss the fiduciary duty claims asserted in plaintiff's complaint is DENIED; and

(2) Defendants' motion to dismiss the disclosure claims asserted in plaintiff's complaint is GRANTED with respect to all such disclosure claims EXCEPT the claimed omission of the fair market value of defendant General Cigar Holdings, Inc.'s corporate headquarters building in New York City, NY.