Gries Sports Enterprises, Inc. v. Modell

• Decision Date: 31 December 1984
• Docket Number: No. 84-130,84-130
• Citation: 473 N.E.2d 807,15 Ohio St.3d 284,15 OBR 417
• Parties: , 15 O.B.R. 417 GRIES SPORTS ENTERPRISES, INC. et al., Appellants, v. MODELL, Appellee.
• Court: Ohio Supreme Court

Page 284

15 Ohio St.3d 284

473 N.E.2d 807, 15 O.B.R. 417

GRIES SPORTS ENTERPRISES, INC. et al., Appellants, v. MODELL, Appellee.

No. 84-130.

Supreme Court of Ohio.

Dec. 31, 1984.

Syllabus by the Court

In the absence of an effective choice of law by the parties, the contacts to be taken into account to determine the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the contract, and

(e) the domicile, residence, nationality, place of incorporation and place of business of the parties.

(Section 188 of 1 Restatement of the Law 2d, Conflict of Laws, adopted and applied.)

Plaintiffs-appellants, Gries Sports Enterprises, Inc. and Robert Gries ("Gries"), brought the instant action against defendant-appellee, Arthur B. Modell ("Modell"), in the Court of Common Pleas of Cuyahoga County seeking specific performance of an agreement between Gries and Modell. The trial court granted the requested relief.

Prior to 1965, Gries were minority shareholders and Modell was the majority shareholder in Cleveland Browns, Inc. ("C.B.I."), a Delaware corporation. In 1965, Modell proposed a corporate reorganization plan that would create a new Delaware corporation named Cleveland Browns Football Company, Inc. ("the Browns"). As proposed, Modell and Gries would exchange their C.B.I. stock for a proportional amount of the Browns stock, and upon completion of such exchange, C.B.I. would be a wholly-owned subsidiary of the Browns.

Gries agreed to the implementation of Modell's proposed corporate organization only upon condition that Modell agreed to certain conditions demanded by Gries. Modell agreed to the conditions and the agreements dated December 8, 1965 (the 1965 agreement), which is the subject of this action, was executed.

The 1965 agreement provided inter alia for:

(1) The holding of regular directors' meetings of both the Browns and C.B.I.;

(2) the election of two directors nominated by Gries;

(3) the establishment, composition, and functioning of an investment committee (4) the disclosure of Modell to Gries of the commencement of any negotiation to sell any of his shares;

(5) Gries' right to obtain copies of the corporations' financial statements and reasonable access to the books and records of the Browns and C.B.I.;

(6) the prepayment, when possible, by C.B.I. of its outstanding notes; and

(7) the election of Gries designates as vice-president of both the Browns and C.B.I.

The 1965 agreement also provided that the agreement would remain in effect as long as Modell owned at least fifty percent of the common stock of the Browns or C.B.I.

In 1967, Delaware enacted a statute that limited the duration of a voting agreement among stockholders to ten years.

In 1971, Modell proposed a redemption plan whereby a certain portion of the Browns stock would be redeemed in exchange for cash. In order to obtain a federal tax advantage, Modell's holdings after the redemption would fall below fifty percent of the outstanding shares. Gries and Modell executed a document dated June 15, 1971, that reaffirmed the 1965 agreement but altered the duration of the agreement. The 1971 accord provided that the terms of the 1965 agreement would remain in effect as long as Gries and Modell owned, in the aggregate, at least fifty percent of the stock in the Browns or C.B.I. The actual redemption took place shortly after the 1971 document was executed.

On March 16, 1982, Gries demanded that pursuant to the terms of the 1965 agreement as amended, Modell exercise his voting rights to elect two directors nominated by Gries to serve on the board of directors of the Browns and C.B.I. Modell, in refusing to vote his stock to elect the two directors demanded by Gries, stated that he considered the 1965 agreement "as modified by letter agreement dated June 16, 1971, * * * [to be] invalid under Delaware corporation law." Gries thereafter commenced the instant action seeking specific performance of the 1965 agreement.

The cause was submitted to the trial court upon stipulated facts, judgment was entered for Gries, and specific performance was ordered. The trial court ruled that Ohio law, as opposed to Delaware law, controls and that the 1971 agreement was simply an amendment to the 1965 agreement and did not constitute a completely new contract. The court of appeals reversed and remanded, holding that Delaware law applies and that the 1971 agreement constituted an entirely new agreement as of 1971. The cause is now before this court pursuant to the allowance of a motion to certify the record.

Ulmer, Berne, Laronge, Glickman & Curtis and Marvin I. Karp, Cleveland, for appellants.

Jones, Day, Reavis & Pogue, Patrick F. McCartan, Robert C. Weber, Cleveland, and Matthew T. Fitzsimmons, Columbus, for appellee.

WISE, Justice.

Gries argue that Ohio law should apply since the 1965 agreement and 1971 amendment were negotiated in Ohio, executed in Ohio, between Ohio parties, to be performed in Ohio, and an Ohio court is being requested to enforce the agreement. Gries maintain that the general rule is that the law of the place of performance controls the agreement and that Ohio, not Delaware, bears the most significant relationship to this agreement.

Modell argues that Delaware law applies. Were Delaware law to apply the agreement between Gries and Modell would have terminated, at the latest, in 1981 (ten years from the execution of the 1971 amendment), and cannot, therefore, be specifically performed. Modell's position is that matters affecting the internal affairs of the corporation should be controlled by the law of the state of incorporation. Modell also maintains that application of the law of the incorporating state promotes uniformity and predictability in corporate affairs, particularly in agreements among shareholders.

The issue before this court is whether or not the court of appeals was correct in applying Delaware law, rather than Ohio law, to the instant agreement between Gries and Modell.

The court of appeals stated that "[a]pplying the law of the state of incorporation results in uniform treatment of these directors, officers and shareholders when the corporation becomes involved in business in more than one state. See Reese & Kaufman, The Law Governing Corporate Affairs: Choice of Law and the Impact of Full Faith and Credit, 58 Colum.L.Rev. 1118 (1958), 1124-1126."

The court of appeals further stated that even in cases where the only contact with the incorporating state is the "naked fact of incorporation" (Reese & Kaufman, supra, refer to such a corporation as "tramp" or "pseudo-foreign" corporations), "the law of the incorporating state has been followed in the absence of an explicitly applicable local statute." In discussing this rule Reese & Kaufman state at 1126:

"This being the rule, what of its desirability? As has already been indicated, we do not here deal with 'tramp' or 'pseudo-foreign' corporations, and therefore no opinion is expressed as to whether the rule should be applied to them."

In Schulke Radio Productions, Ltd. v. Midwestern Broadcasting Co. (1983), 6 Ohio St.3d 436, 438, 453 N.E.2d 683, this court stated:

"Generally, Ohio follows the rule that where a conflict of law issue arises in a case involving a contract, the law of the state where the contract is to be performed governs. * * * [Citation omitted.] Some courts have noted that the rationale for this rule is that the place of performance bears the most significant relationship to the contract."

In Schulke, supra, the court confronted the situation where the parties to a contract specifically designated that the law of a forum, other than the place of performance, would apply. The court looked to 1 Restatement of the Law 2d, Conflict of Laws (1971) 561, Section 187, to resolve the question.

The court of appeals in holding that Delaware law applied stated that other states...