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

Supreme Court of Ohio · 1986 · Corporations

26 Ohio St. 3d 15 (1986)

Updated August 22, 2026

Corporationsbusiness judgment ruledisinterested directorsindependent directorsinformed directorsintrinsic fairnessself-dealingdomination and control

Facts

The Browns' board approved the acquisition of CSC for $6,000,000, but several Browns directors held stock or positions in CSC as well, and Modell was the majority stockholder of both corporations. The trial court found there were no arm's-length negotiations over price, terms, or structure, and that Modell, Bailey, and others fixed the $6,000,000 price before disclosure to the plaintiffs. The acquisition caused the Browns to borrow $6,000,000 and assume ownership of CSC with $8,000,000 in outstanding debt, effectively increasing Browns indebtedness by $14,000,000. The trial court also found the transaction benefited the Browns' majority stockholder by reducing his own relative exposure to CSC while increasing the minority shareholders' relative exposure.

Issue

Whether the Browns' directors were entitled to the protection of the business judgment rule in approving the CSC acquisition, and if not, whether the evidence supported the trial court's finding that the acquisition was not intrinsically fair to the corporation and its minority shareholders. A separate issue was whether the trial court erred in refusing to compel production of law firm files sought by Cole.

Rule

In a stockholders' derivative action challenging a transaction approved by a board, a director must be disinterested, independent, and informed to obtain the benefit of the business judgment presumption. A director is interested if he appears on both sides of the transaction or receives or expects a personal financial benefit not equally shared by stockholders; independent if his decision rests on corporate merits rather than extraneous influences and he is not dominated or beholden to another; and informed if he makes a reasonable effort to become familiar with relevant and reasonably available facts before acting. If the presumption is unavailable, the transaction is subject to strict scrutiny for intrinsic fairness, and the directors bear the burden of proving fairness.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Redwood Transit Holdings, a Delaware corporation based in Columbus, approved the purchase of a logistics software company in Portland. In a shareholder derivative suit, the evidence shows that the three directors who approved the deal had no financial stake in the seller and were not beholden to anyone, but they voted after reviewing only a one-page summary despite readily available financial statements and debt schedules.

Which is the strongest argument that the board cannot invoke the business judgment presumption as to the transaction?

Explanation. To claim the benefit of the business judgment presumption in a derivative challenge to a transaction, directors must be disinterested, independent, and informed. A director is informed only if he makes a reasonable effort to become familiar with relevant and reasonably available facts before making the decision. Mere riskiness of a deal does not defeat independence, and filing a derivative suit does not itself strip the presumption. (Derived from Gries Sports Enterprises, Inc. v. Cleveland Browns Football Company (1986).)