August 10, 2005
The Disney Case
Last week Chancellor William B. Chandler III of the Delaware Chancery Court released a 174 page opinion on the shareholder derivative suit against the Walt Disney Company and its board of directors over the hiring and firing of ex-President Michael S. Ovitz in 1995 and 1996.
Michael D. Eisner, the CEO, led the both the hiring and firing of Ovitz, who received a severance package of around $140 million for his fourteen months on the job. Shareholders sued the company and the board in 1997, alleging that the excessive payments to Ovitz constituted a breach of the board's fiduciary duty to the company. Now, ten years after the payment, the Chancery Court has ruled, after a full trial, that the board did not breach its fiduciary duty in making the payments. The ruling was front page news in the New York Times and the Wall Street Journal.
It would be wrong to assume that Disney in particular and corporate boards in general have once again escaped judicial oversight. The Disney board won this case only technically (and perhaps only temporarily), the board and its members have been big losers for months, years really.
Eisner and the other members of the Disney board lost irrevocably when Chancellor Chandler decided two years ago that the case deserved to be tried (he denied motions to dismiss and for summary judgment). This was the big change in the law; under earlier doctrine, cases such as this were easily dismissed and trail avoided -- the board was protected by the "business judgment rule" and the plaintiff's usually, absent conflicts of interest on the board could not pled enough facts to show that they could win on the merits at trial. Now, plaintiffs can force these cases to trial if the alleged facts smell enough.
Once Eisner lost the on the preliminary motions, he knew and the board knew that they would be embarrassed and humiliated in public. During the trial earlier this year, skillful lawyers, in a room full of press, bought out the dirty laundry of the management practices of Disney. The testimony was painful. Eisner was shown to be imperialistic, arrogant, and wrong-headed and his board members were shown to be toadies. The management team at Disney was revealed as petty back-stabbers; it was a new form of a TV reality show. We listened as office decorating became a huge company issue, as a funeral procession became an issue -- it was awful.
The Chancellor's opinion in many ways was anti-climactic, only confirming the obvious, bashing Eisner and the board for "less than best practice." Furthermore, the Chancellor Chandler's opinion will not be the last word on the case; the Delaware Supreme Court will get the case on appeal and will, no doubt, offer its own opinion, adding further language of ignominy. I doubt the Supreme Court will reverse the holding; it will just add its own language on condemnation.
The board members will not pay cash to reimburse the company for Ovitz payments (even these would have been indemnified probably by the company or a insurance company) but they have paid and will pay more. Their reputations have been permanently and publicly sullied. The corporate bar and all current managers will learn through the case (no-one wants to be embarrassed like this) and successive generations of law students and business students will read the final version of the case and be similarly told of this reality show. No, this was not a victory for the defendants.
August 10, 2005 | Permalink
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