In re Disney Derivative Litigation

Supreme Court of Delaware · 2006 · Corporations

CorporationsFiduciary DutiesBusiness Judgment RuleCorporate WasteGood Faithbusiness judgment rulegood faithgross negligence

Facts

Disney hired Michael Ovitz as President under an employment agreement that gave him substantial compensation and a non-fault termination package. After about fourteen months, Disney terminated Ovitz without cause, resulting in a severance payout valued at about $130 million. Shareholders claimed Ovitz and Disney directors breached fiduciary duties in negotiating, approving, and paying that package, and also claimed waste. The Court of Chancery found no fiduciary breach or waste, and the Supreme Court reviewed those rulings.

Issue

Whether Disney's directors and Ovitz breached fiduciary duties in approving Ovitz's employment agreement, terminating him without cause, and paying the non-fault termination benefits; whether the directors acted in bad faith or with gross negligence so as to lose business judgment rule protection; and whether the payout constituted corporate waste.

Rule

Directors are presumed under the business judgment rule to have acted on an informed basis, in good faith, and in the honest belief that their action was in the corporation's best interests. Those presumptions may be rebutted by showing breach of the duty of care, breach of loyalty, or bad faith, but gross negligence alone does not equal bad faith. Bad faith includes intentional dereliction of duty, conscious disregard for known responsibilities, intentional action for a purpose other than advancing the corporation's best interests, or intentional failure to act in the face of a known duty to act. Corporate waste exists only where the exchange is so one-sided that no 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.

The board of Lakefront Robotics, Inc., a Delaware corporation based in Chicago, approved a lucrative employment package for a new president after a short meeting. Directors received an oral summary of the material terms and a term sheet, but they did not read every draft agreement or valuation model. Shareholders later sue, alleging the directors acted in bad faith because the process was sloppy and rushed.

Which is the strongest argument for the directors under the governing rule?

Explanation. The majority distinguished due care from good faith. Bad faith requires more culpable conduct, such as intentional dereliction of duty or conscious disregard for known responsibilities; gross negligence alone does not equal bad faith. A sloppy process may be criticized, but that alone does not establish bad faith. (Derived from In re Disney Derivative Litigation (n.d.).)