Brehm v. Eisner

Supreme Court of Delaware · 2000 · Corporations

746 A.2d 244 (2000)

Updated August 1, 2026

Corporationsdue carewastederivative suitdemand futilityAronsonRule 23.1business judgment rule

Facts

Disney hired Michael Ovitz as president in 1995 under a highly lucrative five-year employment agreement negotiated by CEO Michael Eisner and approved by the board. The agreement provided substantial salary, bonuses, stock options, and a very large payout if Disney terminated Ovitz without cause, while termination for good cause required gross negligence, malfeasance, or voluntary resignation. After Ovitz's first year, his performance allegedly deteriorated, and Eisner and Ovitz agreed in December 1996 to end his employment on a non-fault basis, resulting in roughly $39 million in cash plus immediate vesting of 3 million options. Plaintiffs alleged the old board acted without adequate information in approving the contract, the new board wasted assets by approving the non-fault termination, and the directors lacked disinterestedness and independence.

Issue

Whether the complaint alleged particularized facts sufficient under Chancery Rule 23.1 to excuse pre-suit demand by creating a reasonable doubt either that the Disney directors were disinterested and independent or that the challenged decisions were protected by the business judgment rule. The case also asked what standard of appellate review applies to dismissal of a derivative complaint under Rule 23.1.

Rule

Appellate review of a Rule 23.1 dismissal is de novo. To excuse demand under Aronson, a derivative complaint must plead particularized facts creating a reasonable doubt either that the directors are disinterested and independent or that the challenged transaction was the product of a valid exercise of business judgment. For due care claims, the complaint must plead particularized facts creating a reasonable doubt that the board's decisionmaking process, measured by concepts of gross negligence, included consideration of all material information reasonably available; conclusory allegations are insufficient. Directors are fully protected when they rely in good faith on expert advice within DGCL § 141(e), absent particularized facts rebutting that protection. Waste exists only for an exchange so one-sided that no reasonable person of ordinary, sound judgment could conclude the corporation received adequate consideration.

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

Stockholders of Lakefront Robotics, Inc., a Delaware corporation based in Chicago, filed a derivative complaint in Delaware Chancery without making demand. The complaint alleged the board approved a lucrative retention package for a departing executive, and the Court of Chancery dismissed under Rule 23.1 for failure to plead demand futility with particularity.

On appeal, what standard should the Delaware Supreme Court apply to review the dismissal?

Explanation. The majority held that appellate review of a Rule 23.1 dismissal is de novo and plenary, not abuse of discretion. The reviewing court applies the law to the complaint's allegations just as the Court of Chancery does when assessing whether particularized facts create a reasonable doubt under the demand-futility standard.