Court Opinion

ID: 6759478
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:30:06.378874+00
Date Added: 2024-06-11T16:02:33.295780
License: Public Domain

Holmes, J.,
dissenting. Through its unfounded, conclusory treatment of both facts and applicable law, the majority has improperly established the intrinsic fairness inquiry as the threshold question for application of the business judgment rule. Accordingly, I must dissent.
In the context of the legal issues presented here, relating to corporate business actions in this state, a court must approach the subject with the threshold presumption of regularity being accorded to corporate decisions via the business judgment rule. The correct inquiry is whether the facts proven at trial sufficiently overcome the legal barrier to whimsical or grudge-based lawsuits. The resultant findings are those of law, which every court of appeals is presumably competent to review. Thus, the majority’s use of the “any competent, credible evidence” or the “substantial, competent and credible evidence” (emphasis added) standards are, at best, misleading. The inclusion of such standards, in fact, demonstrates the reluctance of the majority to stand by its less than convincing legal *33analysis, particularly when no analysis is presented which connects the evidence with the legal conclusions drawn therefrom.
Under the applicable Delaware law, the management of corporate affairs is entrusted to the board of directors. Aronson v. Lewis (Del. 1984), 473 A. 2d 805, 811. “A board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose. A court under such circumstances will not substitute its own notions of what is or is not sound business judgment.” Sinclair Oil Corp. v. Levien (Del. 1971), 280 A. 2d 717, 720. The decisions of a board of directors are protected when the majority of voting directors is disinterested, independent, and informed. Aronson, supra, at 812-814.
Paragraph two of the syllabus of the majority opinion illustrates the misconceptions of the majority and its abject ignorance of corporate matters. The business judgment rule is a presumption that the director is disinterested, independent and informed. It is also a presumption that the transaction was intrinsically fair to the stockholders. The burden of proof is upon the one challenging the action to prove that the voting directors were interested, not independent or uninformed. Paragraph two of the syllabus by its language, “* * * a director must be * * *,” sets forth the above standards as burdens of proof to be shouldered by a director. This fallacy is further aggravated by the language in the opinon that: “If a director fails to pass muster as to any of these three, he is not entitled to the business judgment presumption.”
Also contrary to the views expressed by the majority, the “objective reasonableness of the business decision” may not be inquired into merely because the transaction is “at issue.” (Emphasis added.) Only after the business judgment presumption is overcome can the business decision be inquired into at all, and then under an intrinsic fairness analysis. Sinclair Oil Corp., supra, at 720. See, e.g., Unocal Corp. v. Mesa Petroleum Co. (Del. 1985), 493 A. 2d 946, at 954-955; Aronson, supra, at 812. In point of fact, the inquiry into the “objective fairness” of a business decision is expressly included as a part of the intrinsic fairness analysis. See, e.g., Sinclair Oil Corp., supra, at 719-720. In its rather obvious rush to overcome the lawful presumption of a valid decision by the board of directors, the majority has now blurred the distinction between the business judgment presumption and the intrinsic fairness test.
The majority confusedly cites Puma v. Marriott (Del. Ch. 1971), 283 A. 2d 693, 695, as requiring that property valuations must be made by independent directors based upon appraisals, etc. “provided by independent experts, whose qualifications are not questioned.” Otherwise, it is implied that the interested directors stand “on both sides of the transaction.” The analysis in Puma concludes that the directors were protected by the business judgment rule.
How different indeed are the legal conclusions the above factors are *34cited to support — for it is alleged by the trial court below and quoted by the majority herein that the absence of such factors “did not satisfy any reasonable concept of fair dealing,” thus utilizing the factors from Puma for the entirely different intrinsic fairness analysis.
As is readily apparent, the majority misread and misinterpreted Puma, supra, as well as applicable Delaware law, for no suspicion inures to directors or stockholders because they structure a transaction or fix its terms. After all, this is the primary duty of a director. Instead, the recitation of the pristine character of the voting, independent directors and the basis of their decision-making process in Puma was for the mere purpose of pointing to those factors which went unchallenged by the evidence. Since there was presented no other evidence of fraud, the court concluded that the business judgment presumption prevailed. Id. at 695.
Through citation of certain trial court opinion language, analysis is misdirected by the majority so as to ascribe importance to the facts that various directors and Browns’ officers helped to prepare the transaction before it was presented to the full board; that no arm’s-length negotiations as to price, terms, etc., ever took place and,, most ridiculous of all, that the board refused to change the purchase price “despite the valuations furnished” by Gries. These factors have no relevance since they fail to demonstrate fraud, any interest of any voting director, except Gries, any self-gain by any voting director, or how the entire board could be on both sides of either transaction. Notwithstanding the majority’s alchemical transformation of that which is the ordinary and usually present, into the sinister, nothing presented differs in the slightest from any other well-planned corporate transaction.
The 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. The many cases cited do in fact demonstrate that the business judgment presumption is shattered where directors are so situated without justification. In Rabkin v. Phillip A. Hunt Chemical Corp. (Del. 1985), 498 A. 2d 1099, Fliegler v. Lawrence (Del. 1976), 361 A. 2d 218, and Greene & Co. v. Dunhill Internatl., Inc. (Del. Ch. 1968), 249 A. 2d 427, the directors whose actions were challenged sat, at the same time, on the boards of directors of the purchasing corporation and the corporation to be purchased or subsidiary corporation. In all of these cases, the shareholders of the subsidiary objected to the prices agreed upon for sale of their stock, and challenged such directors, alleging that they were disloyal to the subsidiary. The present circumstances are not at all comparable to the above cases.
It is clear that there were no interlocking directors whose loyalty could be challenged. It is apparent from the record that the former shareholders of Cleveland Stadium Corporation (“CSC”) were never directors of CSC. Consequently, cases based on directors “on both sides of a transaction” are wholly inapposite to the case before us.
Nevertheless, it is posited that the directors benefited from “the *35transaction” in that they all received profits from their redemption of CSC stock. Underlying the majority’s conclusions is its finding that, as a matter of law, the transactions which occurred on March 2, 1982 and March 16, 1982 were a single transaction.
On March 2, 1982, for the corporate purpose of obtaining complete control of CSC, eighty-percent shareholder Modell directed that all the other shareholders in CSC might redeem their stock for $120 per share instead of the $32 per share provided in their options. All of the shareholders, including Gries, Bailey, Berick, Cole, and Wallack, took advantage of this offer and redeemed their shares of stock.
On March 16, 1982, the board of directors of the Browns met and discussed the merits of acquiring CSC. The wholly business purpose was to allow the Browns to acquire the property and facilities held by CSC for use by the football team. The record shows that ownership of CSC provided the Browns with present ownership of the lease for the stadium, the entire management of various rentals and concessions, and a large property located in Strongsville potentially useful as a future stadium site. A Browns’ acquisition of CSC would provide scheduling advantages over other stadium users, plus incredible leverage to either renegotiate terms or extend the present lease of the stadium from the city.
Robert Gries spoke for approximately one and one-half hours in opposition to the acquisition. During that time he presented facts, and stated he had valuations and appraisals, two of which he identified, as contradicting those of Modell. When the vote was taken, Modell and his wife, also a director, abstained from the voting. Directors Bailey, Berick, Cole and Wallack voted to acquire CSC, while Gries voted against the acquisition.
The argument that these two were a single, necessarily related transaction surely strains even the most active imagination. Director Gries has not demonstrated any connection whatsoever between these events which would obligate, require, or motivate any of the former shareholders of CSC to act in any particular way as directors of the Browns. However, as Gries himself demonstrated, one could have received the $120 per share of stock redeemed yet still have voted against the acquisition of CSC. The transactions were also apparently separate for purposes of taxation. Any rule broad enough to metamorphose the above two transactions into one would, of necessity, apply with equal force to disqualify director Gries. Effectively, this would render the Browns’ board of directors incapable of considering the acquisition of CSC. Such stance of affairs must then be the point of beginning after the majority decision, since this is an action for rescission of the board’s decision. However so, the conclusion that “Modell, Bailey, Berick, Cole and Wallack,” and impliedly, Gries, stand on both sides of the transaction is a fundamental misstatement of the law of Delaware.
Particularly troublesome is the inclusion of director Modell as one whose presence on both sides of the transaction destroys the protections of the business judgment presumption. Modell’s position is entirely vin*36dicated by the fact that he abstained from voting. However, even if he had voted, the law is clear that if all the other directors were made aware of any advantage he may have gained, then the board’s decision would still not be automatically rescindable. Nor do all benefits of directors rise to the level of a disqualifying interest. See, e.g., Unocal Corp., supra, at 959; and 8 Del. Code Ann. Section 144(A)(1) in the majority opinion at fn. 2.
The majority asserts that those who own stock and/or hold positions in both corporations automatically stand on both sides of the corporation sufficient to remove the business judgment presumption and allow inquiry into the intrinsic fairness of the transaction. They imply support from Fliegler v. Lawrence, supra; Rabkin v. Phillip H. Hunt Chemical Corp., supra; and Weinberger v. UOP, Inc. (Del. 1983), 457 A. 2d 701.
The quoted language from Fliegler, supra, is quite misleading. There, defendants were directors of the acquiring corporation and owned the principal shares of stock in the corporation which they voted to acquire. Because they paid themselves, they were self-interested and consequently stood on both sides of the transaction. In the present case, the directors whose votes are at issue were not directors of the acquired corporation, did not own any part of CSC at the time of the board decision, and did not gain personally from the decision to acquire CSC. In any event, it was not the mere ownership of stock in both corporations that was determinative in Fliegler; rather, that by way of such stock, the directors stood on both sides of the transaction.
Rabkin, supra, also illustrates how directors may be on both sides of a transaction so as to overcome the business judgment presumption. In that case, the decision challenged was the determination to offer minority shareholders of the acquired corporation a lesser amount for their shares than the acquiring corporation had previously paid to obtain majority control. The court there merely determined that dismissal was inappropriately granted because of the existence of several factual issues. The directors who were on both boards of directors may have violated their “undiminished duty of loyalty to” the subsidiary corporation. Id. at 1106. There was, however, no finding that the directors were in fact on both sides of the transaction, only what might occur if they had been. See id. at 1107, fn. 9. The quotation of such language by the majority must therefore be qualified since the case here had neither a takeover nor a derivative suit by minority shareholders for more money.
Also, the majority misuses the statement from Weinberger v. UOP, Inc., supra, that defined fair dealing to include “questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and stockholders were obtained.” This passage is utilized to justify the basis of the trial court holding that because Bailey and Modell initiated, structured, and negotiated the transaction as well as their failure to change the acquisition price in light of valuations furnished by plaintiff, then they *37acted unfairly. The Weinberger standard enunciated above was, first of all, particular to a cash-out merger or cash buy-out of minority shareholders. While in such circumstances the above factors are all crucially related to whether the minority shareholders were taken advantage of, misled or defrauded of a fair price for their shares of stock, they do not have more than a peripheral bearing on the issue before us. Negotiations, for instance, ought to be arm’s length if the shareholders, who are naturally in a more vulnerable position, vis-a-vis the directors, are not to be taken advantage of.
In the present case, negotiations between the directors ultimately devolved into a board vote on the proposed price. Nothing about plaintiffs’ complaint is dependent on their weaker position, other than the quite reasonable and often encountered occurrence of a director who is simply out-voted by the rest of the board. In Weinberger, the issues were the value given, and whether the board of directors defrauded the shareholders by giving a low price per share. Such standards are nearly useless in determining the question before us, i.e., whether the board of directors paid too much. See Weinberger, at 712-713.
Pogostin v. Rice (Del. 1984), 480 A. 2d 619, 624, is incorrectly cited as proof that our sole inquiry is whether “a director * * * has received * * * a personal financial benefit from the * * * transaction which is not equally shared by the stockholders.” Pogostin involved a shareholder derivative suit wherein the shareholders challenged the payment of executive bonuses to four officer-directors. It was alleged that because these directors voted to receive such bonuses, their self-interest made them interested directors. In such cases, the issue invariably is adequacy of consideration, unless there is no consideration and relatedness between “value of benefits passing to the corporation and the value of options granted.” Id. at 625. Rather than being a test of general applicability, the quoted standard is a mere threshold question applicable only to those who are directors who participated in the disputed transaction, and whose vote directly resulted in receipt of a benefit not obtained by all the shareholders.
The majority mistakenly refers to the receipt by Gries of $120 per share of CSC stock redeemed as indicating that all the shareholders benefited equally. Had this factor been relevant, such admission would have been fatal. However, no action of the Browns’ board of directors was at all involved in the CSC stock redemption. The $120 per share redeemed was an action of CSC’s board of directors upon which neither Gries, Cole, Berick, Bailey or Wallack sat. Modell, of course, was the one shareholder who did not receive, and was not permitted to receive, any of the $120 per share. Nor did he vote in the transaction at issue.
The conclusion that directors Bailey, Berick, Cole and Wallack were “interested” because “they had received a personal financial benefit from the challenged transaction” is again pure assumption. It is the demonstra*38tion of a conflict of interest, motivating the directors to vote along the lines of self-interest, which alone will remove the protection of the business judgment rule. See, e.g., Unocal Corp., supra, at 955. There was no demonstration of fraud, misrepresentation, deliberate waste of corporate assets, or gross and palpable overreaching. See Rabkin, supra, at 1104. Since the directors had obtained a prior redemption of their stock without any further obligation, then as a matter of law and common sense they did not receive any benefit therefrom for later voting to acquire CSC.
Also, it cannot be said that the interests of the affirming directors were enough to disqualify the required majority so as to undo the valid act of the directors. Wallack, Berick and Bailey were officers and/or employees of the Browns. It was contended that their employment with the Browns caused them to be dominated and controlled by director and majority shareholder Modell. The law of Delaware, as stated in Aronson, supra, is that the “shorthand shibboleth of ‘dominated and controlled directors’ is insufficient.” Id. at 816. The mere assumption that the relationships of the parties as officers and directors resulted in dominated directors is unfounded in corporate law. To accept it as law would doubtless disqualify a great many directors, generally. There was, of course, no evidence that these directors’ employment status was in any way dependent on their vote. This being the only objection to director Wallack’s vote, he was therefore both disinterested and independent.
In order to prove that Berick was dominated and controlled by Modell, the majority relies on Johnston v. Greene (Del. 1956), 121 A. 2d 919. In that case, the Delaware chancery below found that, by means of dominating the board of directors, the defendant director stole a corporate opportunity. See Greene v. Allen (Del. Ch. 1955), 114 A. 2d 916. Unfortunately, we are not given a clear analysis as to what factors created the situation of domination and control. The court was, however, not basing its decision on the mere fact of the relatedness of the parties, i.e., not “the manner in which the various director relationships were created.” Id. at 920. Instead, the court relied on the cumulative effect of the trial record; i.e., “the manner in which the corporate affairs were handled as among the board members showed that realistically this was a one-man board — an Odium board,” and “from the inter-play of several circumstances; some tangible and others intangible.” Id. Such findings do not, in the slightest, resemble the majority’s simplistic analysis that merely because Berick was an officer in the Browns, and functioned accordingly, that he was not an independent director.
Berick’s disinterest is further attacked by asserting that he, as outside legal counsel through his law firm, planned and prepared both transactions. As a matter of law, the presence of outside directors enhances the presumption of validity attributable to a director’s actions. See, e.g., Puma v. Marriott, supra, and Unocal Corp., supra, at 955. In this case, the fee ultimately paid to Berick’s firm for legal services was approximately twen*39ty to twenty-five thousand dollars, which is asserted by appellants to be a financial interest in the outcome of the transaction. It is also asserted that because Modell offered to buy Berick’s shares of Browns stock, that Berick was dominated by Modell.
However, the fee for services paid to Berick’s firm was not at all dependent on the transactions at issue. Payment was owed and would have been made, despite the outcome of the board’s vote. Nor was the law firm dependent on the Browns, since the Browns constituted less than one percent of that firm’s business. Also, Berick refused to sell his shares of stock to Modell. Although Berick was enthusiastic concerning the acquisition of CSC, nothing about his opinion indicates anything other than a personal viewpoint. The fact that Berick sits as a director on the boards of a number of corporations, public and private, indicates a professional attitude. Thus, there was no dominance or tainting self-interest in his vote.
The majority fully misstates the law of Delaware by its statement that “Bailey’s dual positions as an officer and general counsel for both corporations make him an ‘interested’ director.” There are no Delaware cases which support this view. In fact, the cases utilized by the majority would agree that an interested director is one who is on both sides of the transaction, and who somehow wrongfully receives a benefit.
Bailey, who is in-house counsel to the Browns, is said to be an interested director because he helped to structure the two transactions. It was also alleged that Modell dominated him because he was presented to the board by Modell for the position of director and, at times, Modell sent Bailey to negotiate for him.
The law of Delaware makes it clear that positional relationships, without more, do not rise to disqualification of the director’s vote. In the view of the Delaware Supreme Court, “it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. That is the usual way a person becomes a corporate director. It is the care, attention and sense of individual responsibility to the performance of one’s duties, not the method of election, that generally touches on independence.” Aronson, supra, at 816. “Such contentions do not support any claim under Delaware law that * * * directors lack independence.” Id. at 815. Instead, it must be demonstrated that the directors “through personal or other relationships * * * are beholden to the controlling person. See Mayer v. Adams, Del. Ch., 167 A. 2d 729, 732 * * *." Id.
Of more than passing interest is the use by the majority of the trial court finding that because Bailey “initiated, structured, negotiated and set the price for the sale of CSC,” that he was “an interested director.” The inquiry as to whether or not a director is disinterested is strictly applicable to the business judgment analysis. Aronson, supra, at 814. Yet this also became the basis of the majority’s finding that the transaction was intrinsically unfair, citing Puma, Fliegler, Rabkin and Weinberger, *40supra. Thus, the majority demonstrates that it lacks expertise in corporate matters, let alone the corporate law of Delaware.
Because of Bailey’s position, he would naturally have negotiated for the Browns and, consequently, Modell. He was approved as a director by the entire board, including Gries. At no time was there proof of any self-dealing by Bailey. He personally believed the Browns should acquire CSC so as to control the team’s playing facilities. Mere like-mindedness on issues hardly rises to the level of domination or self-interest. Therefore, the decisions of at least three of the affirming directors were entitled to the protection of the business judgment rule.
On the other hand, the vote of director Cole is open to attack. He could have been dominated by Modell through intense financial dependence. Modell had made transactions, promises and guarantees for his benefit.
The majority in effect bases a great number of its conclusions of law on its beliefs that: “[N]o arms’-length negotiations as to price, terms, the elements to be included * * * ever took place between the Browns and CSC” and that Modell did not inform Gries and Cole of his particular plans concerning the two transactions until November 24, 1981. It is, of course, absolutely irrelevant, signifying nothing, whether or not the price ultimately paid was the subject of negotiations. It is the act of the board in approving the transaction and whether such act is presumptively valid which are the objects of inquiry, not the terms, negotiations or other intrinsic fairness analyses. Whether or not Modell ever informed the board members of his plans is clearly a matter within the normal sphere of inner-corporate governance and expertise, and not a subject for judicial Monday morning, armchair quarterbacking.
Ordinarily, there would be no cause to review the intrinsic fairness of the subject transaction since the business judgment rule clearly ought to protect the board’s decision to acquire CSC for six million dollars. The majority’s simplistic and novel approach to Delaware'law on the subject of the business judgment rule is seconded only by its slanted misinterpretation of the transactions at issue. Quite simply, Gries takes the position that CSC was not worth the price paid. The board asserts that it was.
On March 12, 1986, this court received a motion filed within this case seeking an injunction by Gries against the board of directors, requesting that the board be enjoined from selling CSC (now called Clesta, Inc.) to another corporation. The purchase price offered is seven million dollars. The position now adopted by appellants is that CSC had not been sufficiently appraised. This backhanded admission that CSC may be presently worth more than the offered seven million dollars is out of harmony with appellants’ argument on the merits before this court. It certainly undermines the majority’s finding that the transaction was somehow unfair.
Accordingly, I would affirm the court of appeals.
Douglas, J., concurs in the foregoing dissenting opinion.