In re Walt Disney Co. Derivative Litigation
Encyclopedia
In re Walt Disney Co. Derivative Litigation 907 A.2d 693 (Del. Ch. 2005) is a US corporate law case concerning the standard of review for business judgments
under the Delaware General Corporation Law.
Company appointed Mr Michael Ovitz
as executive president and director. He had founded Creative Artist Agency, a premier Hollywood talent finder. He had had an income of £20m. Mr Michael Eisner
asked him to join Disney in 1995, and negotiated with him on compensation, led by Disney compensation committee chair Mr Irwin Russell. The other members of the committee and the board were not told until the negotiations were well underway. Ovitz insisted his pay would go up if things went well, and an exit package if things did not. It all totalled about $24m a year. Mr Irwin Russell cautioned that the pay was significantly above normal levels and "will raise very strong criticism". Mr Graef Crystal
, a compensation expert warned that Ovitz was getting "low risk and high return" but the report was not approved by the whole board or the committee. On 14 August 1995 Eisner released to the press the appointment, before the compensation committee had formally met to discuss it. They met on 26 September for an hour. They discussed four other major items and the consultant, Mr Graef Crystal, was not invited. Within a year Ovitz lost Eisner’s confidence and terminated his contract (though it was certainly not gross negligence). Ovitz walked away with $140m for a year’s work. Shareholders brought a derivative action, alleging that the directors were grossly negligent in their approval of the package.
. He said that in Delaware this meant ‘reckless indifference to or a deliberate disregard of the whole body of stockholders’ or actions which are ‘without the bounds of reason’. He noted for this reason ‘duty of care violations are rarely found. Then he remarked how good corporate standards are aspirations that change, but fiduciary duties are law that do not.
Chancellor Chandler said Eisner’s decision to hire Ovtiz was a business judgment. To counter that, gross negligence or bad faith must be shown. He said Eisner rightly informed himself of all the facts, so was not grossly negligent (even if the behaviour should not serve as a model, ‘especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom’). It was in good faith
, with a subjective belief that he was right and in the company’s best interests.
Two non-executive directors, Ignacio Lozano and Sidney Poitier
, also sat on the compensation committee but were almost entirely uninvolved. It was concluded that neither were grossly negligent or acted in bad faith. He said that in Smith v. Van Gorkom
the sale for $735m of TransUnion was much more significant to the company than Ovitz’s hiring here. And TransUnion had absolutely no documentation before it when it considered the merger agreement. The compensation committee here was provided with a term sheet for all the key points of the employment contract. TransUnion’s senior management completely opposed the merger, but here everyone saw hiring Ovitz as a ‘boon for the Company’. So Poitier and Lozano did not ‘intentionally disregard a duty to act, nor did they bury their heads in the sand knowing a decision had to be made. They acted in a manner that they believed was in the best interests of the company.’
Directors of a Delaware corporation must ‘use that amount of care which ordinarily careful and prudent men would use in similar circumstances,’ and ‘consider all material information reasonably available’ in making business decisions.’
The other compensation committee members were also considered but absolved of responsibility.
Business judgment rule
The business judgment rule is a US case law-derived concept in corporations law whereby the "directors of a corporation . . . are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose...
under the Delaware General Corporation Law.
Facts
The Walt DisneyWalt Disney
Walter Elias "Walt" Disney was an American film producer, director, screenwriter, voice actor, animator, entrepreneur, entertainer, international icon, and philanthropist, well-known for his influence in the field of entertainment during the 20th century. Along with his brother Roy O...
Company appointed Mr Michael Ovitz
Michael Ovitz
Michael S. Ovitz is an American talent agent who co-founded Creative Artists Agency in 1975 and served as its chairman until 1995. Ovitz later served as President of the Walt Disney Company from October 1995 to January 1997....
as executive president and director. He had founded Creative Artist Agency, a premier Hollywood talent finder. He had had an income of £20m. Mr Michael Eisner
Michael Eisner
Michael Dammann Eisner is an American businessman. He was the chief executive officer of The Walt Disney Company from 1984 until 2005.-Early life:...
asked him to join Disney in 1995, and negotiated with him on compensation, led by Disney compensation committee chair Mr Irwin Russell. The other members of the committee and the board were not told until the negotiations were well underway. Ovitz insisted his pay would go up if things went well, and an exit package if things did not. It all totalled about $24m a year. Mr Irwin Russell cautioned that the pay was significantly above normal levels and "will raise very strong criticism". Mr Graef Crystal
Graef Crystal
Graef "Bud" S. Crystal is an expert on executive compensation, often cited as a critic of excessive packages.He started work as an executive compensation consultant in 1959. He worked for twenty years at the consulting firm Towers Perrin, and also taught at the Haas School of Business...
, a compensation expert warned that Ovitz was getting "low risk and high return" but the report was not approved by the whole board or the committee. On 14 August 1995 Eisner released to the press the appointment, before the compensation committee had formally met to discuss it. They met on 26 September for an hour. They discussed four other major items and the consultant, Mr Graef Crystal, was not invited. Within a year Ovitz lost Eisner’s confidence and terminated his contract (though it was certainly not gross negligence). Ovitz walked away with $140m for a year’s work. Shareholders brought a derivative action, alleging that the directors were grossly negligent in their approval of the package.
Judgment
Chancellor Chandler held that the directors were not liable for gross negligenceGross negligence
Gross negligence is a legal concept which means serious carelessness. Negligence is the opposite of diligence, or being careful. The standard of ordinary negligence is what conduct one expects from the proverbial "reasonable person"...
. He said that in Delaware this meant ‘reckless indifference to or a deliberate disregard of the whole body of stockholders’ or actions which are ‘without the bounds of reason’. He noted for this reason ‘duty of care violations are rarely found. Then he remarked how good corporate standards are aspirations that change, but fiduciary duties are law that do not.
Chancellor Chandler said Eisner’s decision to hire Ovtiz was a business judgment. To counter that, gross negligence or bad faith must be shown. He said Eisner rightly informed himself of all the facts, so was not grossly negligent (even if the behaviour should not serve as a model, ‘especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom’). It was in good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
, with a subjective belief that he was right and in the company’s best interests.
Two non-executive directors, Ignacio Lozano and Sidney Poitier
Sidney Poitier
Sir Sidney Poitier, KBE is a Bahamian American actor, film director, author, and diplomat.In 1963, Poitier became the first black person to win an Academy Award for Best Actor for his role in Lilies of the Field...
, also sat on the compensation committee but were almost entirely uninvolved. It was concluded that neither were grossly negligent or acted in bad faith. He said that in Smith v. Van Gorkom
Smith v. Van Gorkom
Smith v. Van Gorkom 488 A.2d 858 is an important Delaware Supreme Court decision, primarily because of its discussion of a director's duty of care. It is often called the "Trans Union case".-Facts:...
the sale for $735m of TransUnion was much more significant to the company than Ovitz’s hiring here. And TransUnion had absolutely no documentation before it when it considered the merger agreement. The compensation committee here was provided with a term sheet for all the key points of the employment contract. TransUnion’s senior management completely opposed the merger, but here everyone saw hiring Ovitz as a ‘boon for the Company’. So Poitier and Lozano did not ‘intentionally disregard a duty to act, nor did they bury their heads in the sand knowing a decision had to be made. They acted in a manner that they believed was in the best interests of the company.’
Directors of a Delaware corporation must ‘use that amount of care which ordinarily careful and prudent men would use in similar circumstances,’ and ‘consider all material information reasonably available’ in making business decisions.’
The other compensation committee members were also considered but absolved of responsibility.
See also
- US corporate law
- Smith v. Van GorkomSmith v. Van GorkomSmith v. Van Gorkom 488 A.2d 858 is an important Delaware Supreme Court decision, primarily because of its discussion of a director's duty of care. It is often called the "Trans Union case".-Facts:...
- In re Caremark International Inc. Derivative LitigationIn re Caremark International Inc. Derivative LitigationIn re Caremark International Inc. Derivative Litigation, 698 A.2d 959 , is a Delaware Court of Chancery decision setting out an expanded discussion of a director's duty of care in the oversight context. The opinion was written by Chancellor Allen.-Facts:The shareholders of Caremark International, Inc...
698 A.2d 959 (Del. Ch. 1996) - DGCL §102(b)(7)