In re the Walt Disney Co. Derivative Litigation

Delaware Court of Chancery · 2003 · Corporations

CorporationsDerivative suitsDemand futilityFiduciary dutiesBusiness judgment ruleGood faithderivative actiondemand excused

Facts

According to the complaint, CEO Michael Eisner unilaterally decided to hire his close friend Michael Ovitz as Disney's president, while the compensation committee and board approved the hiring after only brief meetings, without reviewing draft agreements, expert analysis, payout scenarios, or final terms. The final contract differed materially from the terms summarized to the board, including favorable stock-option pricing and a broader non-fault termination provision, yet neither the committee nor the board reviewed or approved the final agreement before it became binding. After Ovitz performed poorly and sought to leave, Eisner and Ovitz worked together to secure a non-fault termination that yielded Ovitz more than $38 million in cash plus immediate vesting of three million stock options. The complaint alleged that the new board was not consulted, took no recorded action, and failed to question, review, or attempt to stop the termination even though board approval was allegedly required.

Issue

Whether the complaint alleged particularized facts creating a reason to doubt that the challenged decisions to hire Ovitz and grant him a non-fault termination were the product of a valid exercise of business judgment, such that demand was excused under Aronson and the claims could survive dismissal. Also, whether the alleged conduct was merely due-care negligence barred by Disney's Section 102(b)(7) exculpatory charter provision, or instead alleged bad faith or intentional misconduct outside that protection.

Rule

Under Aronson's second prong, demand is excused if the complaint pleads particularized facts creating a reason to doubt that the challenged transaction was the product of a valid exercise of business judgment. A plaintiff may do so by alleging facts raising reason to doubt either that the board acted honestly and in good faith or that it was adequately informed. Conduct amounting to conscious and intentional disregard of directors' responsibilities, or acts not taken honestly and in good faith, falls outside the protection of both the business judgment rule and a Section 102(b)(7) exculpatory provision.

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

Pine Harbor Media, a Delaware corporation based in Seattle, hired a new chief operating officer after its CEO pushed the decision through. The compensation committee met for 20 minutes, saw only a one-page oral summary, reviewed no draft agreement or payout scenarios, asked no questions, and let the CEO finalize all remaining terms with the executive, who was the CEO’s longtime friend.

In a derivative suit challenging the hiring decision, are stockholders most likely to have demand excused?

Explanation. Under Aronson’s second prong, demand is excused if particularized facts create reason to doubt the challenged transaction resulted from a valid exercise of business judgment. The majority opinion held that plaintiffs may do so by pleading reason to doubt either that directors acted honestly and in good faith or that they were adequately informed. Here, the committee allegedly approved a material decision with almost no information or deliberation and delegated final terms to the CEO, supporting an inference of conscious disregard rather than mere poor judgment. (Derived from In re the Walt Disney Co. Derivative Litigation (2003).)