Arthur Modell, president, CEO, and a director of the Cleveland Browns Football Co., Inc., (Browns) owned 53 percent of that corporation. Other members of the board at that time included Pat Modell, Modell’s wife; James Bailey, who was also chief counsel for and an employee of the Browns; James Berick, who was outside counsel representing the corporation and a Browns shar e holder; Richard Cole; and Nate Wallack, who was also an employee of the Browns. The final member of the board of directors was Robert Gries, who owned 43 percent of the Browns and also owned Gries Sports Enterprises, Inc. (GSE). Modell also owned 80 percent of the Cleveland Stadium Corporation (CSC), which leased Cleveland Stadium from the city, and which then subleased the Stadium to the Browns and the Cleveland Indians. Other shareholders of CSC included Berick, Bailey, Cole, Wallack, Gries, and GSE. Modell was also president of CSC, and Bailey was both secretary and general counsel of that corporation.
CSC purchased 190 acres of land in Strongsville, Ohio, from Modell for $3,000,000 in cash and a promissory note for $1,000,000. Although Modell later canceled the $1,000,000 note, CSC still had debts exceeding $4,000,000. Modell decided that it would be expedient for the Browns to purchase CSC. Accordingly, he had CSC appraised by the brokerage and investment banking firm of McDonald and Company. Modell and Bailey, along with Michael Poplar, chief financial officer of CSC, determined that the Browns should pay $6,000,000 for the purchase of CSC. After this decision had been made, Modell , Bailey, Berick , and Poplar told Gries and Cole that CSC would be purchased by the Browns for $6,000,000. The purchase plan involved a payment of $120 per share of CSC to the minority shareholders, among whom were Berick , Bailey, Wallack , and Cole.
Modell , the majority shareholder in CSC, was to receive a payment of $4,800,000 for his shares.
Subsequently, Gries did his own investigation into the value of CSC and concluded that Modell , Bailey, and Poplar had seriously overvalued the worth of that corporation. When the board met to consider the purchase, Modell made a presentation in support of the plan, and Gries explained his opposition. When the matter came to a vote, Bailey, Berick , Cole, and Wallack all voted for the plan.
Neither Arthur nor Pat Modell participated in the vote, and Gries voted against the transaction. The following day, Gries filed a derivative lawsuit, the objective of which was to co m pel a reversal of the decision to purchase CSC. Gries stated that the transaction was unfair to the corporation, in that CSC was worth only $2,000,000 at the time that the Browns purchased it for $6,000,000. Gries argued that the fairness rule rather than the business judgment rule should be used to evaluate the directors’ conduct because the directors who voted for the purchase were either “interested” directors due to their stock ownership or were dominated by Modell and had simply “rubber stamped” his decision.
Moreover, Gries contended that the overvaluation of CSC was prompted by Modell’s need to secure the money to pay off outstanding debts to several banks.  Modell and the other directors a r gued that the decision to buy CSC should be evaluated by the business judgment rule. The trial court agreed with Gries , but the appeals court reversed that decision. The case then went to the Ohio Supreme Court.

The Court’s Opinion:

The appellees -directors herein claim that they are protected by the presumption of good faith and fair dealing that arises from the business judgment and, therefore, they do not have the burden of proving that their decision to purchase CSC was intrinsically fair to the Browns’ minority shar e holders.
The issue before us, then, centers on the applicability of the business judgment rule. The bus i ness 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. . . . 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. . . .
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 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 i n quire into the fairness of the director’s decision.
(A) [A] director is interested if:

(1) He appears on both sides of the transaction or

(2) He has or expects to derive a 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 relationship; 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.
Browns’ directors Modell , Gries , Bailey, Berick , Cole, and Wallack , were all stockholders in CSC.
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). [These facts convinced the court that the directors were interested in the challenged decision and were therefore not entitled to the protection of the business judgment rule. The court then went on to apply the fairness rule to the purchase of CSC by the Browns.]
(W)hen 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 . . . 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.’”
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 Po p lar . . . 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 and disclosed to plaintiffs therefore did not satisfy the reasonable concept of fair dealing. . . .
The judgment of the court of appeals is reversed, and the judgment of the trial court is reinstated. Judgment reversed.

Question 

1. Which party had the burden of proof in this case?
2. According to the court’s opinion, what factors should be taken into consideration in determining whether a director has an interest in a transaction that is challenged by a shareholder in a derivative lawsuit?
3. According to the court’s opinion, when is a director independent, and under what circumstances does the director lose that independence?

4. What circumstances does the court say will make a director informed?
5. When the business judgment rule cannot be used, as occurred in this case, what standard is a p plied by the court to determine whether to reverse a challenged decision made by the directors?
6. Did the court consider the purchase of the Cleveland Stadium Corporation by the Cleveland Browns to be fair to the corporation and the minority shareholders in this case? Why or why not?