In re Walt Disney Co. Derivative Litigation

• Citation: 907 A.2d 693
• Decision Date: 09 August 2005
• Docket Number: No. Civ.A. 15452.,Civ.A. 15452.
• Parties: In re THE WALT DISNEY COMPANY DERIVATIVE LITIGATION
• Court: Court of Chancery of Delaware

Page 693

907 A.2d 693

In re THE WALT DISNEY COMPANY DERIVATIVE LITIGATION

No. Civ.A. 15452.

Court of Chancery of Delaware.

Submitted April 28, 2005.

Decided August 9, 2005.

COPYRIGHT MATERIAL OMITTED

Joseph A. Rosenthal, Norman M. Monhait and Carmella P. Keener of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware; Seth D. Rigrodsky, of Milberg Weiss Bershad & Schulman LLP, Wilmington, Delaware; Steven G. Schulman, Joshua H. Vinik, Jennifer K. Hirsh and John B. Rediker, of Milberg Weiss Bershad & Schulman LLP, New York, New York, for Plaintiffs, of counsel.

David C. McBride and Christian Douglas Wright, of Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; Mark H. Epstein and Jason L. Haas, of Munger, Tolles & Olson LLP, Los Angeles, California, for Defendant Michael S. Ovitz, of counsel.

Andre G. Bouchard and Joel Friedlander, of Bouchard, Margules & Friedlander, P.A., Wilmington, Delaware, for Nominal Defendant The Walt Disney Company.

Robert K. Payson, Stephen C. Norman and Kevin R. Shannon, of Potter Anderson & Corroon LLP, Wilmington, Delaware, for Defendant Sanford M. Litvack.

Jesse A. Finkelstein, Gregory P. Williams, Anne C. Foster, Lisa A. Schmidt, Evan O. Williford and Michael R. Robinson, of Richards, Layton & Finger, P.A., Wilmington, Delaware, for Defendants Stephen F. Bollenbach, Reveta F. Bowers, Ignacio E. Lozano, Jr., George J. Mitchell, Thomas S. Murphy, Richard A. Nunis, Leo J. O'Donovan, S.J., Sidney Poitier, Irwin E. Russell, Robert A.M. Stern, E. Cardon Walker, Raymond L. Watson and Gary L. Wilson.

A. Gilchrist Sparks, III and S. Mark Hurd, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware; Stephen D. Alexander and Fred L. Wilks, formerly of Fried, Frank, Harris, Shriver & Jacobson LLP, Los Angeles, California, for Defendants Roy Disney and Stanley P. Gold, of counsel.

Lawrence C. Ashby and Richard D. Heins, of Ashby & Geddes, Wilmington, Delaware; Gary P. Naftalis, Michael S. Oberman, Paul F. Schoeman and Shoshana Menu, of Kramer Levin Naftalis & Frankel LLP, New York, New York, for Defendant Michael Eisner, of counsel.

OPINION

CHANDLER, J.

TABLE OF CONTENTS

                Introduction ..................................................................... 697
                  I. FACTS ....................................................................... 699
                     A. Michael Ovitz Joins The Walt Disney Company .............................. 699
                        1. Background ............................................................ 699
                        2. Ovitz First Contemplates Leaving CAA But His Negotiations With MCA
                            Fail ................................................................. 701
                        3. Ovitz Seriously Considers Joining The Walt Disney Company ............. 702
                        4. Ovitz's Contract With Disney Begins to Take Form ...................... 703
                        5. Crystal is Retained to Assist Russell and Watson in Evaluating the OEA. 704
                        6. Ovitz Accepts Eisner's Offer .......................................... 706
                        7. Disney's Board of Directors Hires Michael Ovitz ....................... 708
                        8. The October 16, 1995 Compensation Committee Meeting ................... 710
                     B. Ovitz's Performance as President of the Walt Disney Company .............. 711
                        1. Ovitz's Early Performance ............................................. 711
                        2. A Mismatch of Cultures and Styles ..................................... 713
                        3. Approaching the Endgame ............................................... 714
                        4. Specific Examples of Ovitz's Performance as President of The Walt
                            Disney Company ....................................................... 715
                        5. Veracity and "Agenting" ............................................... 719
                        6. Gifts and Expenses .................................................... 722
                     C. Ovitz's Termination ...................................................... 724
                        1. The Beginning of the End .............................................. 724
                        2. The September 30, 1996 Board Meeting .................................. 726
                        3. Options for Ovitz's Termination ....................................... 728
                        4. The November 25, 1996 Board Meeting ................................... 730
                        5. The Illusion Dispelled ................................................ 732
                        6. Ovitz's Bonus and His Termination ..................................... 733
                     D. Expert Witnesses ......................................................... 740
                        1. Professor Deborah DeMott .............................................. 740
                        2. Professor John Donohue ................................................ 741
                        3. Professor Kevin Murphy ................................................ 742
                        4. Larry R. Feldman ...................................................... 743
                        5. John C. Fox ........................................................... 744
                        6. Frederick C. Dunbar ................................................... 744
                 II. LEGAL STANDARDS ............................................................. 745
                     A. The Business Judgment Rule ............................................... 746
                     B. Waste .................................................................... 748
                     C. The Fiduciary Duty of Due Care ........................................... 749
                     D. The Fiduciary Duty of Loyalty ............................................ 750
                     E. Section 102(b)(7) ........................................................ 751
                     F. Acting in Good Faith ..................................................... 753
                III. ANALYSIS .................................................................... 756
                     A. Ovitz Did Not Breach His Duty of Loyalty ................................. 757
                     B. Defendants Did Not Commit Waste .......................................... 758
                     C. The Old Board's Decision to Hire Ovitz and the Compensation Committee's
                         Approval of the OEA Was Not Grossly Negligent and Not in Bad Faith ...... 760
                        1. Eisner ................................................................ 760
                        2. Russell ............................................................... 763
                        3. Watson ................................................................ 765
                

                        4. Poitier and Lozano .................................................... 765
                        5. The Remaining Members of the Old Board ................................ 771
                     D. Eisner and Litvack Did Not Act in Bad Faith in Connection With Ovitz's
                         Termination, and the Remainder of the New Board Had No Duties in
                         Connection Therewith .................................................... 772
                        1. The New Board Was Not Under a Duty to Act ............................. 773
                        2. Litvack ............................................................... 776
                        3. Eisner ................................................................ 777
                IV. CONCLUSION ................................................................... 779
                

INTRODUCTION

This is the Court's decision after trial in this long running dispute over an executive compensation and severance package. The stockholder plaintiffs have alleged that the director defendants breached their fiduciary duties in connection with the 1995 hiring and 1996 termination of Michael Ovitz as President of The Walt Disney Company. The trial consumed thirty-seven days (between October 20, 2004 and January 19, 2005) and generated 9,360 pages of transcript from twenty-four witnesses. The Court also reviewed thousands of pages of deposition transcripts and 1,033 trial exhibits that filled more than twenty-two 3½-inch binders. Extensive post-trial memoranda also were submitted and considered. After carefully considering all of the evidence and arguments, and for the reasons set forth in this Opinion, I conclude that the director defendants did not breach their fiduciary duties or commit waste. Therefore, I will enter judgment in favor of the defendants as to all claims in the amended complaint.

As I will explain in painful detail hereafter, there are many aspects of defendants' conduct that fell significantly short of the best practices of ideal corporate governance. Recognizing the protean nature of ideal corporate governance practices, particularly over an era that has included the Enron and WorldCom debacles, and the resulting legislative focus on corporate governance, it is perhaps worth pointing out that the actions (and the failures to act) of the Disney board that gave rise to this lawsuit took place ten years ago, and that applying 21^st century notions of best practices in analyzing whether those decisions were actionable would be misplaced.

Unlike ideals of corporate governance, a fiduciary's duties do not change over time. How we understand those duties may evolve and become refined, but the duties themselves have not changed, except to the extent that fulfilling a fiduciary duty requires obedience to other positive law. This Court strongly encourages directors and officers to employ best practices, as those practices are understood at the time a corporate decision is taken. But Delaware law does not—indeed, the common law cannot—hold fiduciaries liable for a failure to comply with the aspirational ideal of best practices, any more than a common-law court deciding a medical malpractice dispute can impose a standard of liability based on ideal—rather than competent or standard—medical treatment practices, lest the average medical practitioner be found inevitably derelict.

Fiduciaries are held by the common law to a high standard in fulfilling their stewardship over the assets of others, a standard that (depending on the circumstances) may not be the same as that contemplated by ideal corporate governance. Yet therein lies perhaps the greatest strength of...