In re Walt Disney Co. Derivative Litigation

• Citation: 278 Del. Ch. 2003,825 A.2d 275
• Decision Date: 28 May 2003
• Docket Number: C.A. No. 15452.
• Parties: In re THE WALT DISNEY COMPANY DERIVATIVE LITIGATION
• Court: Court of Chancery of Delaware

825 A.2d 275

278 Del. Ch. 2003

In re THE WALT DISNEY COMPANY DERIVATIVE LITIGATION

C.A. No. 15452.

Court of Chancery of Delaware, New Castle County.

Submitted March 6, 2003.

Decided May 28, 2003.

Joseph A. Rosenthal, of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware; Steven G. Schulman, U. Seth Ottensoser and Seth D. Rigrodsky, of Milberg Weiss Bershad Hynes & Lerach LLP, New York, New York, for Plaintiffs, of counsel.

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

Joel Friedlander, of Bouchard, Margules & Friedlander, Wilmington, Delaware, for The Walt Disney Company.

R. Franklin Balotti and Anne C. Foster, of Richards, Layton & Finger, Wilmington, Delaware, for Director Defendants.

MEMORANDUM OPINION

CHANDLER, Chancellor.

In this derivative action filed on behalf of nominal defendant Walt Disney Company, plaintiffs allege that the defendant directors breached their fiduciary duties when they blindly approved an employment agreement with defendant Michael Ovitz and then, again without any review or deliberation, ignored defendant Michael Eisner's dealings with Ovitz regarding his non-fault termination. Plaintiffs seek rescission and/or money damages from defendants and Ovitz, or compensation for damages allegedly sustained by Disney and disgorgement of Ovitz's unjust enrichment.

The matter is now before the Court in a somewhat unusual posture. Defendants moved to dismiss plaintiffs' second amended derivative complaint (hereinafter the "new complaint") pursuant to Court of Chancery Rules 12(b)(6) and 23.1. Because defendants relied on certain documents (not incorporated by reference in plaintiffs' new complaint) in seeking dismissal of the new complaint, the Court converted the motions into summary judgment motions and afforded plaintiffs an opportunity to undertake discovery. Defendants promptly moved to reargue the Court's decision to convert the motions into summary judgment motions, offering to excise from the briefs all references to the disputed documents. I denied defendants' request for reargument.¹ Although the motions before me now have technically been converted to summary judgment motions, out of an abundance of caution the Court nevertheless will treat them as motions to dismiss, and address their merits without considering references to, or the contents of, the disputed documents.

As will be explained in greater detail below, I conclude that plaintiffs' new complaint sufficiently pleads a breach of fiduciary duty by the Old and the New Disney Board of Directors² so as to withstand a motion to dismiss under Chancery Rules 23.1 and 12(b)(6). Stated briefly, plaintiffs' new allegations give rise to a cognizable question whether the defendant directors of the Walt Disney Company should be held personally liable to the corporation for a knowing or intentional lack of due care in the directors' decision-making process regarding Ovitz's employment and termination. It is rare when a court imposes liability on directors of a corporation for breach of the duty of care, and this Court is hesitant to second-guess the business judgment of a disinterested and independent board of directors. But the facts alleged in the new complaint do not implicate merely negligent or grossly negligent decision making by corporate directors. Quite the contrary; plaintiffs' new complaint suggests that the Disney directors failed to exercise any business judgment and failed to make any good faith attempt to fulfill their fiduciary duties to Disney and its stockholders. Allegations that Disney's directors abdicated all responsibility to consider appropriately an action of material importance to the corporation puts directly in question whether the board's decision-making processes were employed in a good faith effort to advance corporate interests. In short, the new complaint alleges facts implying that the Disney directors failed to "act in good faith and meet minimal proceduralist standards of attention."³ Based on the facts asserted in the new complaint, therefore, I believe plaintiffs have stated cognizable claims for which demand is excused and on which a more complete factual record is necessary.

I. PROCEDURAL AND FACTUAL BACKGROUND

As mentioned, this case involves an attack on decisions of the Walt Disney Company's board of directors, approving an executive compensation contract for Michael Ovitz, as well as impliedly approving a non-fault termination that resulted in an award to Ovitz (allegedly exceeding $140,000,000) after barely one year of employment. After the Supreme Court's remand regarding plaintiffs' first amended complaint,⁴ plaintiffs used the "tools at hand," a request for books and records as authorized under 8 Del. C. § 220, to obtain information about the nature of the Disney Board's involvement in the decision to hire and, eventually, to terminate Ovitz. Using the information gained from that request, plaintiffs drafted and filed the new complaint, which is the subject of the pending motions. The facts, as alleged in the new complaint, portray a markedly different picture of the corporate processes that resulted in the Ovitz employment agreement than that portrayed in the first amended complaint.⁵ For that reason, it is necessary to set forth the repleaded facts in some detail. The facts set forth hereafter are taken directly from the new complaint and, for purposes of the present motions, are accepted as true. Of course, I hold no opinion as to the actual truth of any of the allegations set forth in the new complaint; nor do I hold any view as to the likely ultimate outcome on the merits of claims based on these asserted facts. I determine here only that the facts, if true, arguably support all three of plaintiffs' claims for relief, as asserted in the new complaint, and are sufficient to excuse demand and to state claims that warrant development of a full record.

A. The Decision to Hire Ovitz

Michael Eisner is the chief executive officer ("CEO") of the Walt Disney Company. In 1994, Eisner's second-in-command, Frank Wells, died in a helicopter crash. Two other key executives-Jeffrey Katzenberg and Richard Frank-left Disney shortly thereafter, allegedly because of Eisner's management style. Eisner began looking for a new president for Disney and chose Michael Ovitz. Ovitz was founder and head of CAA, a talent agency; he had never been an executive for a publicly owned entertainment company. He had, however, been Eisner's close friend for over twenty-five years.

Eisner decided unilaterally to hire Ovitz. On August 13, 1995, he informed three Old Board members-Stephen Bollenbach, Sanford Litvack, and Irwin Russell (Eisner's personal attorney)-of that fact. All three protested Eisner's decision to hire Ovitz. Nevertheless, Eisner persisted, sending Ovitz a letter on August 14, 1995, that set forth certain material terms of his prospective employment. Before this, neither the Old Board nor the compensation committee had ever discussed hiring Ovitz as president of Disney. No discussions or presentations were made to the compensation committee or to the Old Board regarding Ovitz's hiring as president of Walt Disney until September 26, 1995.

Before informing Bollenbach, Litvack, and Russell on August 13, 1995, Eisner collected information on his own, through his position as the Disney CEO, on the potential hiring of Ovitz. In an internal document created around July 7, 1995, concerns were raised about the number of stock options to be granted to Ovitz. The document warned that the number was far beyond the normal standards of both Disney and corporate America and would receive significant public criticism. Additionally, Graef Crystal, an executive compensation expert, informed board member Russell, via a letter dated August 12, 1995, that, generally speaking, a large signing bonus is hazardous because the full cost is borne immediately and completely even if the executive fails to serve the full term of employment.⁶ Neither of these documents, however, were submitted to either the compensation committee or the Old Board before hiring Ovitz. Disney prepared a draft employment agreement on September 23, 1995. A copy of the draft was sent to Ovitz's lawyers, but was not provided to members of the compensation committee.

The compensation committee, consisting of defendants Ignacio Lozano, Jr., Sidney Poitier, Russell, and Raymond Watson, met on September 26, 1995, for just under an hour. Three subjects were discussed at the meeting, one of which was Ovitz's employment. According to the minutes, the committee spent the least amount of time during the meeting discussing Ovitz's hiring. In fact, it appears that more time was spent on discussions of paying $250,000 to Russell for his role in securing Ovitz's employment than was actually spent on discussions of Ovitz's employment. The minutes show that several issues were raised and discussed by the committee members concerning Russell's fee. All that occurred during the meeting regarding Ovitz's employment was that Russell reviewed the employment terms with the committee and answered a few questions. Immediately thereafter, the committee adopted a resolution of approval.

No copy of the September 23, 1995 draft employment agreement was actually given to the committee. Instead, the committee members received, at the meeting itself, a rough summary of the agreement. The summary, however, was incomplete. It stated that Ovitz was to receive options to purchase five million shares of stock, but did not state the exercise price. The committee also did not receive any of the materials already produced by Disney regarding Ovitz's possible employment. No spreadsheet or similar type of analytical document...