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Valparaiso Univ. Law School

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Tuesday, September 23, 2008

Business Associations Limerick of the Week: Brehm v. Eisner

DisneylandMichael Eisner, Disney's CEO for 20 years, hired his friend, the celebrated Hollywood agent, Michael Ovitz, to be Disney's President. The hire was a disaster from the start. I don't think it was really Ovitz's fault. I blame Eisner. Eisner's subordinates all took an immediate dislike to Ovitz and, according to James Stewart's Disney War, refused to answer to him. Eisner did nothing to protect his #2. He threw Ovitz to the dogs.

In addition, there were all sorts of irregularities in the hiring process. Ovitz had packed the board with loyal supporters. Nobody really looked very closely at Ovitz's employment agreement, including the compensation expert retained by the company. Indeed, by the time Disney's Board too a look at the agreement, Eisner had already told Ovitz he had the job. So many within Disney, as well as many shareholders, were shocked when Ovitz's severance package was valued at around $140 million, far more than he was likely to have made if he had not been fired within two years of taking the position.

In Brehm v. Eisner, the court stressed that when evaluating the decisions of a corporate board, the court reviews only the process, not the board's substantive business decisions. And since under Delaware law, a board is permitted to rely on an expert's opinion, Disney's Board could not be sued for a breach of the duty of care, even though the compensation expert had not done a very good job. That ruling was eventually reversed, since it turned out that there was no proper expert report supplied to and relied on by the Board. However, after a couple more years of litigation, the end result was the same. The main claim was that the Disney Board breached its duty of care, and that claim was dismissed.

I have often wondered if plaintiffs could have made some sort of breach of loyalty claim against the officers of the corporation who refused to answer to Ovitz. Weren't they putting their own interests ahead of those of the corporation? James Stewart's book suggests that Ovitz had some pretty good ideas about directions Disney might have taken in the late 1990s, but he couldn't implement any of them because nobody would work with him.

In any case, while the court found the process sound, I have my doubts . . . .

Brehm v. Eisner

That board meeting, it was a quickie,
And Ovitz left sporting a hickey.
Though questions abound,
The process was sound.
Did Ovitz slip Disney a mickey?

[Jeremy Telman]

http://lawprofessors.typepad.com/contractsprof_blog/2008/09/business-asso-3.html

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