March 18, 2006
Disney Arguments in the Ovitz case
I am again late to the table, but I have just listened to the arguments before the Delaware Supreme Court in the Disney case. One: Did someone at Disney overpay Mr. Ovitz? Two: If so, should that someone be liable personally for the mistake?
Most agree that Mr. Ovitz was overpaid: $140 million for 15 months of work is too generous. [One need not get into the details: The no-fault termination agreement was so badly drafted that it gave Ovitz an incentive to quit and take his severance money and run. Disney could have chosen to fired Ovitz for fault. And so on].
The second question is the tough one. The CEO, Eisner, negotiated the agreement. Should Eisner be liable? He was not a director but only an officer. [Is negligence enough (a prudent person standard)? Or does the business judgment rule apply (protecting negligence but not gross negligence)?] The board of directors assented at some level. Should the board of Disney be liable for failure to supervise Eisner or to otherwise monitor the compensation arrangements? [Does the board have a duty to review employment contracts of this import? Does the business judgment rule apply(requiring gross negligence for liability)?]
The lawyers before the Delaware Supreme Court were there to argue law and wasted too much time arguing the facts, point one. At one point the plaintiff's counsel took the position that Eisner had lied on the witness stand and the Chancellor had not caught the lie. One defense counsel reargued the Chancellor's finding on whether Ovitz could have been terminated for cause; another spent time on risk of producing movies.
Justice Jacobs asked the critical question: When the board (or its compensation committee) is genuinely surprised by the payoff ex post how can one say the committee was adequately informed ex ante. Bingo. If Jacobs writes the opinion, Disney loses.
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I suppose the answer to Jacobs's question is by being negligent (which Chandler found the directors to be in his opinion) or grossly negligent, both of which are protected by Disney's exculpatory clause.
Posted by: S. | Mar 21, 2006 5:50:27 AM
$30 million for 15 months is negligent; $60 million for 15 months is grossly negligent: $140 million for 15 months is abandonment of post
Posted by: oesterle | Mar 23, 2006 3:46:23 PM