In re The Walt Disney Co. Derivative Litigation v. Michael Eisner

Delaware Court of Chancery · Corporations

Corporationsfiduciary dutiesbusiness judgment ruleexecutive compensationwastegood faithDelawareboard process

Facts

Disney hired Michael Ovitz as President under an employment agreement negotiated principally by Eisner and Russell and approved by the compensation committee and board. The agreement provided for substantial compensation and, if Ovitz were terminated without cause, a large Non-Fault Termination package including cash payments and accelerated vesting of options. Ovitz's tenure was unsuccessful, and Eisner ultimately decided to terminate him; Litvack advised that Disney lacked cause under the contract to fire him for gross negligence or malfeasance. The board did not formally vote on the termination, and plaintiffs challenged both the hiring process and the later severance payment.

Issue

Whether Disney's directors and officers breached their fiduciary duties of care, loyalty, or good faith, or committed waste, by approving Ovitz's employment agreement and by later terminating him without cause and paying the contractual Non-Fault Termination benefits. The court also considered whether Ovitz himself breached a duty of loyalty in connection with receiving those benefits.

Rule

The business judgment rule presumes that directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation's best interests; plaintiffs rebut that presumption by proving a fiduciary breach, bad faith, or an unintelligent or unadvised judgment. Duty-of-care liability for business decisions requires gross negligence, and bad faith includes intentional dereliction of duty, conscious disregard for known responsibilities, acting for a purpose other than advancing corporate welfare, or knowingly violating positive law. Corporate waste requires an exchange so one-sided that no person of ordinary, sound business judgment could conclude the corporation received adequate consideration, and Section 102(b)(7) bars monetary liability for directors for duty-of-care violations but not for bad faith or loyalty violations.

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

Crescent Media Group, a Delaware corporation based in Los Angeles, recruited a prominent entertainment executive from Seattle. Its compensation committee met for 45 minutes, reviewed a term sheet rather than the final contract, heard presentations from the committee chair and another director who had worked with a compensation consultant, and approved the package. After the hire failed badly, stockholders sued the directors for breach of fiduciary duty based largely on the committee’s short meeting and imperfect process.

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

Explanation. The majority emphasized that Delaware law does not impose liability for failure to follow aspirational best practices. For a board decision, the business judgment rule presumes informed, good-faith action; plaintiffs must show fiduciary breach, bad faith, or an unintelligent or unadvised judgment. A short meeting and use of a term sheet instead of the final contract do not alone establish gross negligence. (Derived from In re The Walt Disney Co. Derivative Litigation v. Michael Eisner (n.d.).)