The Legal Environment Assessed
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1.Modell owned 80 percent of the Cleveland Stadium Corporation (Stadium) and 53 percent of the Cleveland Browns Football Company (Browns). Gries owned 43 percent of Browns. The Brownsââ?¬â?¢ board consisted of Modell, the outside lawyer for both corporations, three individuals employed by both corporations, and Gries. Modell proposed that the Browns buy the Stadium for $6 million. Gries objected, saying that the Stadium appraised for only $2 million. The Brownsââ?¬â?¢ board approved the purchase nonetheless (all directors other than Gries voting in favor). Gries commenced a shareholders derivative suit seeking to rescind the purchase. Who should win? See Gries Sports Enterprises v. Cleveland Browns Football Company, 496 N.E.2d 959 (Ohio S. Ct. 1986).
2.A Fortune 500 CFO admits to having deliberately treated $4 billion in operating expenses as assets, thereby allowing the corporation to show profits instead of losses. The auditor never detected this. The corporationââ?¬â?¢s stock drops 95 percent and bond covenants related to billions in debt are breached. At its peak price last year, the CFO sold stock (acquired through options) for $15 million, generating a $10 million gain.
a. Why might the corporation have to file for bankruptcy protection?
b. What provision(s) of the securities law will probably be the basis for a class-action lawsuit by the stockholders?
c. Why will the 1995 Act probably not stop a class-action lawsuit from proceeding to the discovery phase?
d. Why will the CFO be subject to criminal (as well as civil) securities sanctions?
e. Will the SEC likely ever allow the CFO to be an officer or director of a publicly traded corporation in the future?
f. Will the SEC allow the CFO to keep the $10 million gain on the stock?
g. What kind of civil penalties could the SEC impose on the CFO?
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1.Modell owned 80 percent of the Cleveland Stadium Corporation (Stadium) and 53 percent of the Cleveland Browns Football Company (Browns). Gries owned 43 percent of Browns. The Brownsââ?¬â?¢ board consisted of Modell, the outside lawyer for both corporations, three individuals employed by both corporations, and Gries. Modell proposed that the Browns buy the Stadium for $6 million. Gries objected, saying that the Stadium appraised for only $2 million. The Brownsââ?¬â?¢ board approved the purchase nonetheless (all directors other than Gries voting in favor). Gries commenced a shareholders derivative suit seeking to rescind the purchase. Who should win? See Gries Sports Enterprises v. Cleveland Browns Football Company, 496 N.E.2d 959 (Ohio S. Ct. 1986).
The Gries should win the case because paying three times the price of the stadium is against the interests of the Cleveland Browns Football Company. Specifically, it is against the interest of minority shareholders of Cleveland Browns Football Company. So, Gries should win the case. Even Modell had a fiduciary duty towards the company and its shareholders but this duty was violated in the purchase. ...
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