In re The Walt Disney Company Derivative Litigation

Delaware Court of Chancery · Corporations

Corporationsfiduciary dutiesbusiness judgment ruleexecutive compensationwastegood faithdirector fiduciary dutiesofficer fiduciary duties

Facts

Disney hired Michael Ovitz as President in 1995 under an employment agreement that gave him substantial compensation and, if terminated without cause, a large non-fault termination package. The compensation committee approved the economic terms of the agreement, and the board elected Ovitz as President; although the process fell short of ideal corporate governance practices, the relevant directors were informed of the material terms and relied on analyses by Russell, Watson, and compensation consultant Graef Crystal. Ovitz did not succeed at Disney and by late 1996 Eisner decided he had to go; Eisner and Disney's general counsel Litvack concluded there was no cause to terminate him under the agreement. Eisner then terminated Ovitz without cause, which triggered the contractual non-fault termination benefits, and stockholder plaintiffs sued derivatively alleging due care, loyalty, good faith, and waste violations.

Issue

Whether Disney's directors and officers breached fiduciary duties of care, loyalty, or good faith, or committed corporate waste, by hiring Ovitz on the terms of his employment agreement and later terminating him without cause so that he received the contractual non-fault termination package. The case also presented whether board inaction regarding the termination was actionable and whether Ovitz himself breached loyalty in receiving the payout.

Rule

The business judgment rule presumes directors acted on an informed basis, in good faith, and in the honest belief that their action was in the corporation's best interests; plaintiffs rebut that presumption by proving a fiduciary breach or an unintelligent or unadvised judgment. Duty of care liability for board decisionmaking requires gross negligence, and in the inaction context bad faith may be shown by a sustained or systematic failure to exercise oversight or by an intentional failure to act in the face of a known duty to act. Good faith includes honesty of purpose and faithful devotion to corporate interests; bad faith includes intentionally acting for a purpose other than advancing corporate welfare, knowingly violating positive law, or intentionally failing to act in the face of a known duty to act, demonstrating conscious disregard of duty. Corporate waste exists only where the exchange is so one-sided that no person of ordinary, sound business 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 Cedar Point Media, a Delaware corporation based in Seattle, hired Dana Kerr as president after its compensation committee received a term sheet, oral presentations from the committee chair and another director, and a valuation memorandum from an outside compensation consultant. The committee did not circulate the draft employment agreement itself, but the directors knew the material compensation terms and approved them. Kerr later performed poorly and stockholders sue derivatively, arguing the board's process was too sloppy to merit protection.

Which is the strongest argument for the directors?

Explanation. The majority emphasized that the business judgment rule presumes directors acted on an informed basis, in good faith, and in the corporation's best interests. Directors need not read every contract in haec verba if they know the material terms reasonably available. Process flaws or departures from ideal governance do not alone establish a breach; duty-of-care liability for a board decision requires gross negligence, not ordinary negligence. (Derived from In re The Walt Disney Company Derivative Litigation (n.d.).)