Gries Sports Enterprises, Inc. v. Cleveland Browns Football Co.

Clifford F. Brown, J.,

concurring. The painstaking and thorough analysis of the complicated corporate transactions and activities by the Browns and CSC, and the correct application of Delaware corporate law thereto, compel my concurrence as a member of the majority.

In my view we should focus on the undisputed facts that the Browns’ directors were neither disinterested nor independent. The trial court correctly so determined, based on competent, reliable evidence, with which we should agree. The vote of the Browns’ directors to approve the Browns’ purchase of CSC stock was four to one, Bailey, Berick, Cole and Wallack voting yes, and only Gries voting no. Bailey, Berick, Cole and Wallack all were directors of the Browns at the time of the acquisition of CSC. These four at that time were minority stockholders of CSC and each received $120 dollars per share for his CSC stock, which was far in excess of an earlier option to sell such shares back to the corporation for $32 per share. Each of these four directors was an interested director because he received a financial benefit from the challenged corporate transactions of CSC and the Browns. The March 2, 1982 redemption of CSC stock for $120 per share from the four yes directors of the Browns was part of one structured corporate program whereby the Browns two weeks later on March 16, 1982, purchased the outstanding CSC stock held by Modell. See Pogostin v. Rice (Del. 1984), 480 A. 2d 619, 624 ; Aronson v. Lewis (Del. 1984), 473 A. 2d 805 .

Since the purchase of the CSC stock by the Browns was not approved by a majority of disinterested Browns’ directors, the CSC stock purchase is not protected by the Delaware business judgment rule. That rule provides that a party challenging a board of directors’ decision bears the *29 burden of rebutting the presumption that the decision was a proper exercise of the business judgment of the board.

In view of the foregoing facts that the four Browns’ directors voting yes on the CSC stock purchase were not disinterested directors because they received a special financial benefit as described above from the challenged CSC stock purchase, the following items in several dissenting opinions are irrelevant to the issues. One critic states that Gries failed to show how the business affiliation between Modell and Berick, or Modell and Wallack, prevented them from basing their decisions on the best interests of the corporation. Director Berick’s performance of legal services for the Browns is mentioned, but this is not the basis for the determination that Berick is not a disinterested director. The fact that the record regarding Wallack “shows only he was an employee of the Browns” is not the basis for determining that he is not a disinterested director. Accordingly, it is untrue that “[b]ased on these counsel and employee relationships, the majority has held that Modell dominated the board.” We did not “rush to judgment,” have not “contorted the meaning of ‘domination’ of a director” and have not “classified all ‘inside’ directors and all ‘outside’ directors who serve as attorneys to the corporation as potential defendants.” This alleged classification of all “inside” and “outside” directors as potential defendants is a figment of the dissenter’s imagination.

I wish to emphasize that I reject the idea that a director is automatically “dominated” by the corporation’s chief executive officer merely because that director is outside counsel for the corporation. I say this because a strained construction of Part I B of the majority opinion might raise this unwarranted implication in the minds of some readers.

One dissenting opinion makes the strained assertion that “[t]he majority assumes but does not demonstrate how the Browns’ board of directors are all interested and/or on both sides of the transactions at issue.” This statement flies into the teeth of the undisputed fact that the four Browns’ directors voting yes received a large financial benefit by purchase of their CSC stock at an inflated value and finding of fact No. 33 by the trial judge, amply supported by the record, that “* * * the effect of this transaction was to benefit the majority stockholder of the Browns * * * at the expense of the principal minority shareholders.”

Since the trial judge correctly determined that the Browns’ board of directors’ purchase of the CSC stock was not accomplished by a majority of disinterested and independent directors, there is ample Delaware judicial precedent for holding that the business judgment rule does not protect the transaction and requires application of the intrinsic fairness test. See Unocal Corp. v. Mesa Petroleum Corp. (Del. 1985), 493 A. 2d 946 ; Sterling v. Mayflower Hotel Corp. (1952), 33 Del. Ch. 20 , 89 A. 2d 862 , affirmed (1952), 33 Del. Ch. 293 , 93 A. 2d 107 . In this posture of the case, the burden of proof is on the directors to demonstrate the intrinsic fairness to the minority shareholders of the challenged transaction. *30 Fliegler v. Lawrence (Del. 1976), 361 A. 2d 218 ; Rabkin v. Phillip A. Hunt Chemical Corp. (Del. 1985), 498 A. 2d 1099, 1106 . These and other Delaware judicial precedents support paragraph three of the syllabus in the present case.

Further, one dissenting opinion makes a big fetish of the fact that after oral argument in the present case in this court the appellants obtained a temporary injunction in this court to enjoin a company from purchasing the CSC stock from the Browns for the sum of seven million dollars, a price of one million dollars more than the Browns paid for the CSC stock in the transaction challenged here.

That is irrelevant. In determining validity of the Browns’ purchase of CSC stock by application of the intrinsic fairness test, the transaction must be examined as of the date on which it was accomplished. Fliegler v. Lawrence, supra. That was on a date preceding the trial in common pleas court below. We have no right to consider the effect of post-trial judgment offers of purchase on the validity of the judgment of the common pleas court. The temporary injunction issued by this court was necessary to preserve the status quo of the case and to prevent any action of the parties from making null and unenforceable the final judgment affirming the common pleas court and reversing the court of appeals. 5 The record does not reveal whether the proposed buyer offering seven million dollars is able to perform, in which case the Browns would once again be vested with the CSC stock subject to our judgment herein. Such a flurry of activity and exercise in futility should be prevented. Civ. R. 65 is applicable only to common pleas courts, not to the Ohio Supreme Court, and is irrelevant to the exercise of our inherent judicial power to accomplish justice. Therefore, the discussion in the dissent of Civ. R. 65, Section 16, Article I of the Ohio Constitution regarding an open court and due process of law, as well as Canon 3A(4) of the Code of Judicial Conduct, is just another irrelevant effort to inflame passions.

Fairness of the transaction to all shareholders is the thread running throughout'the cases dealing with corporate governance. Our decision to *31 day, in holding that the business judgment rule does not protect the challenged CSC stock purchase by the Browns, and in requiring application of the intrinsic fairness test is in the finest tradition of judicial insight. It avoids mixing a conglomeration of corporate legal principles and concepts to reach an absurd and unjust result, thereby sidestepping the preordained results desired by the critics of our majority decision.

Our decision harmonizes with the American Law Institute’s Principles of Corporate Governance: Analysis and Recommendations, Tentative Draft No. 5 (April 15, 1986), based largely on Delaware corporate law, where, in reference to an analogous situation, Section 5.02 states:

“Transactions with the Corporation

“(a) General Rule. A director [§ 1.08] or senior executive [§ 1.28] who enters into a transaction with the corporation (other than a transaction involving the payment of compensation) fulfills his duty of loyalty to the corporation with respect to the transaction if:

“(1) disclosure concerning the conflict of interest [§ 1.09(a)] and the transaction [§ 1.09(b)] is made to the corporate decisionmaker [§ 1.07] who authorizes or ratifies the transaction; and

“(2) (A) the transaction is fair to the corporation when entered into; or

“(B) the transaction is authorized, following such disclosure, by disinterested directors [§ 1.10], and could reasonably be believed to be fair to the corporation at the time of such authorization; or

“(C) the transaction is authorized or ratified, following such disclosure, by disinterested shareholders [§ 1.11], and does not constitute a waste of corporate assets [§ 1.34] at the time of the shareholder action.

“(b) Burden of Proof, Ratification of Defective Disclosure. A party who challenges a transaction between a director or senior executive and the corporation has the burden of proof, except that the director or the senior executive has the burden of proving that the transaction is fair to the corporation if the transaction was not authorized by disinterested directors, or authorized or ratified by disinterested shareholders, following disclosure concerning the conflict of interest and the transaction. The disclosure requirements of § 5.02(a)(1) will be deemed to be satisfied if at any time (but no later than a reasonable time after suit is filed challenging the transaction) the transaction is ratified, following such disclosure, by the board, the shareholders, or the corporate decisionmaker who initially approved the transaction or his successor.” Id. at 25-26. See Lewis v. Fuqua (Del. Ch. 1985), 502 A. 2d 962 . 6

Wagner v. Railway Co. (1882), 38 Ohio St. 32 , at paragraph two of the syllabus, held:

“It is within the appellate jurisdiction of the supreme court to allow a temporary injunction where it appears that defendant is doing or threatens to do acts respecting the subject of an action pending, tending to render the judgment ineffectual. Yeoman v. Lasley, 36 Ohio St. 415 , followed and approved.”

This is still the law of Ohio. R.C. 2727.05 in pertinent part provides as follows:

“* * * [A]n injunction may be granted before judgment or final order in the action, by the court of appeals in which it is pending or by a judge thereof, when it appears satisfactorily to such court or judge, by affidavit of the party seeking the injunction or his agent, that such party is entitled thereto. Upon like proof, an injunction also may be allowed by the supreme court or court of appeals, or by a judge of either, as a temporary remedy, during the pendency of a case on appeal in such courts.”

Wagner, supra, and this statute suggest immediate action without response briefs or oral hearing.

In Tentative Draft No. 5, supra, at 67-68, Section 5.04 provides:

“Use of Corporate Position, Non-public Information Concerning the Corporation, or Corporate Property

“(a) General Rule. A director [§ 1.08] or senior executive [Section 1.28] may not advance his pecuniary interest by using his corporate position, material non-public information concerning the corporation, or corporate property in a manner that:

*32 “(1) causes reasonably foreseeable harm to the corporation or any of its shareholders in their capacity as shareholders; or

“(2) allows him to secure a pecuniary benefit, including a pecuniary benefit received as a shareholder that is not made proportionately available to other shareholders similarly situated, except as permitted by Part VI (‘Transactions in Control’) unless his conduct is authorized or ratified in accordance with the standards of § 5.02 (Transactions with the Corporation) or § 5.03 (Compensation of Directors and Senior Executives), as the case may be, or, in case of use of corporate property or services, he gives fair value for any benefit received.

“(b) Burden of Proof; Ratification of Defective Disclosure. A party who challenges the conduct of a director or senior executive under the standards set forth in subsection (a) has the burden of proof, except that if the conduct was not authorized by disinterested directors [§ 1.10] or authorized or ratified by disinterested shareholders [§ 1.11], in a manner that satisfies the standards of § 5.02 or § 5.03 governing authorization and ratification, the burden is on the director or the senior executive to prove that such conduct was fair to the corporation and its shareholders. The disclosure requirements of §§ 5.02(a)(1) and 5.03(a)(2) will be deemed to be satisfied if at any time (but no later than a reasonable time after suit is filed challenging the director’s or senior executive’s conduct) the conduct is ratified, following such disclosure, by the board, the shareholders, or the corporate decisionmaker who initially approved the conduct or his successor.”

Also, Section 5.10 at 155 provides:

“Transactions with the Corporation

“(a) General Rule. A dominating shareholder [§ 1.12] who enters into a transaction with the corporation fulfills his duty of loyalty to the corporation concerning the transaction if:

“(1) the transaction is fair to the corporation when entered into; or

“(2) the transaction is authorized or ratified by disinterested shareholders [§ 1.11], following disclosure concerning the conflict of interest [§ 1.09(a)] and the transaction [§ 1.09(b)], and does not constitute a waste of corporate assets at the time of the shareholder action [§ 1.34],

“(b) Burden of Proof. A party who challenges a transaction between a dominating shareholder and the corporation has the burden of proof, except that if the transaction was not authorized or ratified by disinterested shareholders, following such disclosure, the dominating shareholder has the burden of proving that the transaction is fair to the corporation.”