Case Name: Gries Sports Enterprises, Inc. et al., Appellants, v. Cleveland Browns Football Co., Inc. et al., Appellees
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1986-08-20
Citations: 26 Ohio St. 3d 15
Docket Number: No. 85-704
Parties: Gries Sports Enterprises, Inc. et al., Appellants, v. Cleveland Browns Football Co., Inc. et al., Appellees.
Judges: Celebrezze, C.J., Sweeney and C. Brown, JJ., concur.
Reporter: Ohio State Reports, Third Service
Volume: 26
Pages: 15–46

Head Matter:
Gries Sports Enterprises, Inc. et al., Appellants, v. Cleveland Browns Football Co., Inc. et al., Appellees.
[Cite as Gries Sports Enterprises, Inc. v. Cleveland Browns Football Co. (1986), 26 Ohio St. 3d 15.]
(No. 85-704
Decided August 20, 1986.)
Ulmer, Berne, Laronge, Glickman & Curtis and Marvin L. Karp, for appellants.
McNeal, Schick, Archibald & Biro and Robert D. Archibald, for appellee Cleveland Browns Football Co., Inc.
Jones, Day, Reavis & Pogue, Patrick F. McCartan, Robert C. Weber and Katherine B. Jenks, for appellees Bailey, Berick, Cole and Modell et al.

Opinion:
Wise, J.
The issue to be decided by this court is whether or not the record contains any competent, credible evidence which supports the findings of the trial court that the board of directors of the Browns could not successfully claim the protection of the business judgment rule and, therefore, with the presumption stripped away, whether the evidence supports the finding of the trial court that the acquisition of CSC was not intrinsically fair to the corporation and its minority shareholders.
The other issue to be considered is whether or not the trial court erred in not compelling GSE's and Gries' law firm to provide Cole access to the papers he was seeking.
I
The appellees-directors herein claim that they are protected by the presumption of good faith and fair dealing that arises from the business judgment rule and, therefore, they do not have the burden of proving that their decision to purchase CSC was intrinsically fair to the Browns' minority shareholders.
The issue before us, then, centers on the applicability of the business judgment rule. The business judgment rule is a principle of corporate governance that has been part of the common law for at least one hundred fifty years. It has traditionally operated as a shield to protect directors from liability for their decisions. If the directors are entitled to the protection of the rule, then the courts should not interfere with or second-guess their decisions. If the directors are not entitled to the protection of the rule, then the courts scrutinize the decision as to its intrinsic fairness to the corporation and the corporation's minority shareholders. The rule is a rebuttable presumption that directors are better equipped than the courts to make business judgments and that the directors acted without self-dealing or personal interest and exercised reasonable diligence and acted with good faith. A party challenging a board of directors' decision bears the burden of rebutting the presumption that the decision was a proper exercise of the business judgment of the board.
The parties have agreed that Delaware law is applicable to this dispute and they both focus on the recent case of Aronson v. Lewis (Del. 1984), 473 A.2d 805. In Aronson, the Delaware Supreme Court set forth the rule at 812:
" The business judgment rule is an acknowledgement of the managerial prerogatives of Delaware directors under Section 141(a). See Zapata Corp. v. Maldonado, 430 A.2d at 782. It 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. Kaplan v. Centex Corp., Del. Ch., 284 A.2d 119, 124 (1971); Robinson v. Pittsburgh Oil Refinery Corp., Del. Ch., 126 A. 46 (1924). Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption. See Puma v. Marriott, Del. Ch., 283 A.2d 693, 695 (1971)."
The Aronson court also set forth the elements of the rule which must be satisfied in order for the rule to be invoked:
"First, its protections can only be claimed by disinterested directors whose conduct otherwise meets the tests of business judgment. From the standpoint of interest, this means 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. Sinclair Oil Corp. v. Levien, Del. Supr., 280 A.2d 717, 720 (1971); Cheff v. Mathes, Del. Supr., 199 A.2d 548, 554 (1964); David J. Greene & Co. v. Dunhill International, Inc., Del. Ch., 249 A.2d 427, 430 (1968). See also 8 Del. C. § 144.
"Second, to invoke the rule's protection directors have a duty to inform themselves, prior to making a business decision, of all material infor mation reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties. " Id. at 812.
While the business judgment rule protects directors from personal liability in damages, it also applies to cases of "transactional justification," where an injunction is sought against board action, or against a decision itself, in which case the focus is on the decision as contrasted with the liability of the decision maker. There is a distinction between a "transactional justification" case involving or affecting the decision itself and the protection from personal liability of the decision maker. The former is sometimes referred to as involving the business judgment "doctrine," and the latter the business judgment "rule."
The business judgment rule is a tool of judicial review, not a standard of conduct. When the director's personal liability in damages is at issue, the Delaware Supreme Court has stated:
" While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence. " Aronson, supra, at 812.
However, when the justification of a particular transaction is at issue, such as in the case at bar, the language of the cases suggests a standard of judicial review whereby the court must weigh the objective reasonableness of the business decision. See Unocal Corp. v. Mesa Petroleum Co. (Del. 1985), 493 A.2d 946. Further, the Delaware Supreme Court has held, where the elements of the rule are satisfied in a "transactional justification" case, that decisions of disinterested directors "will not be disturbed if they can be attributed to any rational business purpose." Sinclair Oil Corp. v. Levien (Del. 1971), 280 A.2d 717, at 720.
We conclude that the lengthy record, consisting of documents filling nine boxes, 15" x 12" x 10" each, including a transcript of proceedings 3,309 pages long, contains substantial, competent and credible evidence to support the trial court's findings.
We now examine the record in accordance with Delaware law to determine whether the Browns' directors can claim the protection of the business judgment rule (or doctrine). In a stockholders' derivative action challenging the fairness of a transaction approved by a majority of directors of a corporation, a director must be (1) disinterested, (2) independent and (3) informed in order to claim the benefit of the business judgment rule. If a director fails to pass muster as to any one of these three, he is not entitled to the business judgment presumption. This does not mean that the director's decision is necessarily wrong; it only removes the protection provided by the business judgment presumption. Once this presumption is removed, the court must then inquire into the fairness of the director's decision. The loss of the protection of the presumption does not result in a director becoming personally liable. In a case where the focus is upon the liability of the director for a decision, rather than on the decision itself, as in the case at bar, the director cannot be found personally liable unless the court, after finding the decision to be unfair, finds the director was grossly negligent. See Aronson, supra.
Under Delaware law, (A) a director is interested if (1) he appears on both sides of a transaction or (2) he has or expects to derive personal financial benefit not equally received by the stockholders; (B) a director is independent if his decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences; a director is not independent when he is dominated by or beholden to another person through personal or other relationships; and (C) a director is informed if he makes a reasonable effort to become familiar with the relevant and reasonably available facts prior to making a business judgment.
I
A1
Browns' directors, Modell, Gries, Bailey, Berick, Cole and Wallack, all were stockholders in CSC. Modell, Gries, and Berick were also stockholders in the Browns as well. Modell was the fifty-three percent majority stockholder in the Browns and the eighty percent majority stockholder in CSC (one hundred percent after March 2, 1982).
The Delaware law is that when the transaction " involves insiders dealing with their corporation the test of validity of the transaction is fairness. That our courts have frequently so held is without question. Thus in Sterling v. Mayflower Hotel Corp., 33 Del. Ch. 20, 93 A.2d 107, the Supreme Court said: 'Since they stand on both sides of the transaction, they bear the burden of establishing its entire fairness.' And in David J. Greene & Co. v. Dunhill International, Del. Ch., 249 A.2d 427, the Chancellor stated that it is unquestionably the substance of our decisions that 'when the persons, be they stockholders or directors, who control the making of a transaction and the fixing of its terms, are on both sides, then the presumption and deference to sound business judgment are no longer present.' " (Emphasis added.) Puma v. Marriott (Del. Ch. 1971), 283 A.2d 693, 695.
We note that in Puma, supra, at 695, the Delaware court found that:
" There is no testimony which even tends to show that the terms of the transaction were dictated by the Marriott Group or any member thereof. On the contrary, the valuations of the property companies and the Marriott stock were made by a majority of Marriott directors, whose independence is unchallenged, based upon appraisals, analysis, information and opinions provided by independent experts, whose qualifications are not questioned. In these circumstances it cannot be said that the Marriott Group stood 'on both sides of the transaction' within the meaning of the rule followed in the case above cited. " (Emphasis added.)
How different the facts are in the case at bar! The trial court concluded:
" In the instant case, no arms length negotiations as to price, terms, the elements to be included (or not to be included), or any other aspect of the proposed acquisition ever took place between the Browns and CSC. The $6,000,000 price was arrived at by Messrs. AMA [Modell], Bailey and Poplar in the Fall of 1981, prior to any disclosure to plaintiffs of the possibility of such an acquisition, and never changed despite plaintiff's objections and despite the valuations furnished the defendants by plaintiffs. The manner in which the subject transaction was initiated, structured, negotiated and disclosed to plaintiffs therefore did not satisfy any reasonable concept of fair dealing."
In Fliegler v. Lawrence (Del. 1976), 361 A.2d 218, the Delaware Supreme Court held that where a number of persons owned stock and held positions in both corporations, "it is clear that the individual defendants stood on both sides of the transaction in implementing and fixing the terms of the option agreement" by which one corporation acquired the other. "Accordingly, the burden is upon them to demonstrate its intrinsic fairness." Id. at 221. See, also, Rabkin v. Phillip A. Hunt Chemical Corp. (Del. 1985), 498 A.2d 1099, 1106: "When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain."
The court of appeals' majority acknowledges t-hat Cole was an interested director and that an "effective argument can be made that, under Delaware statutory law, Bailey's dual positions with the Browns and CSC established that he was an interested director when he voted in favor of the CSC acquisition." Bailey was an officer and general counsel for both the Browns and CSC as well as being a director for the Browns at the time of the acquisition. The record is replete with evidence that supports the trial court's finding that - Bailey and Modell "initiated, structured, negotiated and set the price for the sale of the CSC" and, under Delaware law, Bailey was clearly "an interested director."
The Delaware Supreme Court in Weinberger v. UOP, Inc. (Del. 1983), 457 A.2d 701, at 711, defined "fair dealing" as embracing " questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the director and the stockholders were obtained. " This definition was also cited in Rabkin v. Phillip A. Hunt Chemical Corp., supra, at 1104.
We conclude, and so hold, that the evidence supports the finding that the Browns' directors, Bailey and Cole, "stood on both sides of the transaction" as a result of their holding stock and/or positions in both corporations and that Bailey and Berick's law firm structured and negotiated the sale of CSC to the Browns, along with Modell.
I
A2
We also conclude and hold that the evidence supports the trial court's finding that Browns' directors, Bailey, Berick, Cole and Wallack, were "interested" because they had received a personal financial benefit from the challenged transaction. Mindful of Justice Frankfurter's admonition that we must not be ignorant as judges of what we know as men, Watts v. Indiana (1949), 338 U.S. 49, 52, we hold that the evidence establishes that the redemption of the CSC minority stock was part and parcel of the sale of CSC to the Browns. "Directorial interest exists whenever a director has received a personal financial benefit from the challenged transaction which is not equally shared by the stockholders." (Emphasis added.) Pogostin v. Rice (Del. 1984), 480 A.2d 619, 624.
While Gries and GSE received the same $120 a share for their CSC stock as did the other CSC minority stockholders, as a result of Gries and GSE owning forty-three percent of the Browns' stock, the Browns' acquisition of CSC resulted in Gries' and GSE's acquiring forty-three percent of a $14,000,000 increased debt.
I
B
Judge Corrigan, writing for the appellate court majority, while admitting that " [a]s outside counsel for the Browns, it was Berick's job to do what Modell requested" (emphasis added), went on to say:
"The trial court based its finding that Berick was beholden to Modell solely on the fact that Berick was the Browns' outside legal counsel. Such a finding was clear error."
The judge cites Piccard v. Sperry Corp. (S.D.N.Y. 1943), 48 F.Supp. 465, as authority. Piccard is inapposite to the case at bar. In that case, a federal judge was deciding Delaware law of 1936, and the law of Delaware then was quite different than the present Delaware "safe harbor" statute, 8 Del. Code Ann. Section 144.
In Piccard, the minority stockholder brought suit, alleging that certain directors were "interested directors" and could not be counted so as to constitute a quorum and, therefore, no vote could be taken on the proposed transaction whether it was fair or not. The question of whether or not the business judgment rule presumption did or did not apply to the attorney-director was never considered. The federal court held that under Delaware law, an attorney, working for the corporation of which he was also a director, was not an "interested director" so as to be disqualified for quorum purposes from voting. The court then concluded the action taken by the board was fair. The present Delaware statute provides that a transaction may be approved by a board of directors by the affirmative votes of the majority of the disinterested directors, even though the disinterested directors be less than a quorum. 8 Del. Code Ann. Section 144(a)(1). See, also, 8 Del. Code Ann. Section 144(b):
"Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction."
Section 144 was passed by the Delaware Legislature following the rendering of the decision in Piccard.
In Johnston v. Greene (Del. 1956), 121 A.2d 919, a case we think more applicable to the facts of the case at bar, the Delaware Supreme Court held that a transaction between a dominating director and his corporation is subject to strict scrutiny, and the director has the burden of showing the transaction was fair. In Johnston, the transaction was the rejection by the board of directors of Airfleets, Inc. of an opportunity to buy certain patents which the president of Airfleets purchased in his own right after the rejection by the board. Members of the board of directors present in authorizing the transaction were Floyd Odium, Oswald Johnston, and W.C. Rockefeller. Odium was president and director of Airfleets; also, he was director and substantial stockholder of Atlas Corporation which was the largest single shareholder of Airfleets. Johnston was a director and vice-president of Airfleets and a partner in the New York law firm of Simpson, Thatcher & Bartlett, which firm was the attorney for Atlas Corp., Airfleets and Odium. Rockefeller was a vice-president and director and was formerly Odium's assistant and, at the time of the transaction, a salaried employee of Atlas Corp. Only Johnston and Rockefeller voted on the transaction. The Delaware trial court found that those circumstances resulted in a "dominated and controlled" board of directors and, therefore, the transaction was subject to strict scrutiny by the courts and that the directors had the burden of showing that the transaction was fair. Greene v. Allen (Del. Ch. 1955), 114 A.2d 916. The trial court stated at 920:
" I use 'dominate and control' in the sense that, criminality aside, his wishes were their commands. "
On appeal, the Delaware Supreme Court, in Johnston v. Greene, supra, stated at 922:
" The Chancellor found that Odium dominated the other directors and that the decision not to acquire the patents was his. This finding we accept." (Emphasis added.)
We find in the case at bar, since it was Berick's job to do what Modell requested, then, under Delaware case law, he was "dominated and controlled" and the decision was that of Modell and not his. Thus, Berick was dominated and not independent.
I
C
Having concluded that the evidence abundantly supports the trial court's finding that the directors were neither disinterested nor independent, we need not belabor the third requirement that the directors must be informed. However, our reading of the record does not convince us that the directors were adequately informed under Delaware law. But it is not necessary for the resolution of this case that this court expound upon the standard of care to be utilized when determining whether or not the directors had "informed" themselves. We leave that intriguing issue for resolution by the proper forum at the proper time.
II
We have concluded that all of the Browns' directors voting in favor of the CSC acquisition were "interested" by virtue of their having received a personal financial benefit from the sale of their CSC stock. However, assuming arguendo that the two-step sale of CSC to the Browns was not a single, necessarily related transaction, we nevertheless must conclude that, of the four directors voting in favor of the acquisition, three were clearly "interested" and/or dominated. Cole, Bailey and Berick were not disinterested, independent directors so as to be protected by the business judgment presumption. Both the trial court and the court of appeals agreed that Cole was interested and dominated. Similarly, the appellate court recognized that Bailey's dual positions as an officer and general counsel for both corporations made him an "interested" director. See Fliegler, supra. Furthermore, it was Bailey and Berick's law firm that, along with Modell, structured and negotiated the sale of CSC to the Browns. See Rabkin, supra; and Weinberger, supra. Berick was outside counsel for the Browns and was, as the trial court found, a dominated director who did not act independently. Since "it was Berick's job to do what Modell requested," it is obvious that he was dominated and controlled by Modell. See Johnston v. Greene, supra.
Having determined that the evidence clearly supports the conclusion that the transaction was not approved by a majority of disinterested and independent directors, we must look to see if the evidence supports the trial court's conclusion that the transaction was intrinsically unfair to the minority shareholders, Gries and GSE. A transaction not given protection by the business judgment rule is subject to strict scrutiny, and the directors have the burden of showing the transaction was fair. Johnston v. Greene, supra, at 925.
In determining intrinsic fairness, the transaction will be examined as of the date on which it was accomplished. See Fliegler v. Lawrence, supra, at 221, fn. 2. The burden was on the directors-defendants to demonstrate that the $6,000,000 was a fair price. The trial court found, and the evidence supports the trial court's finding, that:
"26. As a direct result of the acquisition — wherein the Browns borrowed $6,000,000 in order to purchase the stock of CSC and thereby acquire 100% ownership of a corporation which had outstanding indebtedness of $8,000,000 — the total indebtedness of the Browns was, in effect, increased $14,000,000.
"33. Rather than serving the best interests of the Browns and all of the Browns' stockholders, the effect of this transaction was to benefit the majority stockholder of the Browns (who thereby reduced his own ownership interest in the assets and liabilities of CSC from 80% to 53%) at the expense of the principal minority shareholders (who, as a consequence, saw their interest in such assets and liabilities increase from 7% to 43%)."
We hold that the evidence supports the trial court's conclusion of law No. 7 that:
"Defendants failed to sustain their burden of proving that the transaction was intrinsically fair to the corporation and to the minority shareholders."
Ill
The appellate court majority concluded that "[t]he trial court erred in not compelling [CSC's and Gries'] law firm to provide Cole access to the papers he was seeking." We disagree. The evidence fails to disclose any relevant relationship between the files requested and the issues involved in this litigation. The trial court did not commit reversible error in refusing to order the law firm representing GSE and Gries to disgorge its files and materials arising out of the representation of Cole and others, including plaintiffs, during the period 1975-1982. Cole never stated, with any degree of specificity, what documents he wanted, or why he wanted them; he simply asserted he needed to review all of the documents relating to Ulmer, Berne, Laronge, Glickman & Curtis' representation of GSE, Gries and others, in order to defend his interest in the pending litigation. Cole was never called to testify at trial nor was there ever any showing of relevancy. Therefore, assuming, arguendo, that there was error commit ted by the trial court in overruling the motion to compel, it would certainly constitute harmless error:
"In order to support reversal of a judgment, the record must show affirmatively not only that error intervened but that such error was to the prejudice of the party seeking such reversal." Smith v. Flesher (1967), 12 Ohio St. 2d 107, paragraph one of the syllabus.
The judgment of the court of appeals is reversed, and the judgment of the trial court is reinstated.
Judgment reversed.
Celebrezze, C.J., Sweeney and C. Brown, JJ., concur.
C. Brown, J., concurs separately.
Holmes, Douglas and Wright, JJ., dissent.
Wise, J., of the Fifth Appellate District, sitting for Locher, J.
Arsht, The Business Judgment Rule Revisited (1979), 8 Hofstra L. Rev. 93.
See Hinsey, Business Judgment and the American Law Institute's Corporate Governance Project: the Rule, the Doctrine, and the Reality (1984), 52 Geo. Wash. L. Rev. 609, 611-613:
"Courts and commentators have generally overlooked the distinction between the business judgment rule and the business judgment doctrine (or the 'doctrine'). This has resulted in unfortunate misunderstanding and confusion. The business judgment rule shields individual directors from liability for damages stemming from decisions, whereas the business judgment doctrine protects the decision itself. The doctrine recognizes the legitimacy of the board as a decision maker and the substantial judicial deference to be accorded thereto. Yet, the essential elements of the rule and doctrine are the same. This commonality of attributes has undoubtedly contributed to the widespread tendency to overlook the distinction.
" The need for two separate concepts — and their use with greater precision — becomes clear when one recognizes that in a given case the doctrine may be unavailable, but the rule may shield certain directors from liability." (Emphasis sic.) (Footnotes omitted.)