In re Walt Disney Co. Derivative Litigation
| Citation | 906 A.2d 27 |
| Decision Date | 08 June 2006 |
| Docket Number | No. 411, 2005.,411, 2005. |
| Parties | In re the WALT DISNEY COMPANY DERIVATIVE LITIGATION. William Brehm and Geraldine Brehm, as Trustees and Custodians; Michael Grening; Richard Kaplan and David Kaplan, as Trustees; Thomas M. Malloy; Richard J. Kager and Carol R. Kager, as Joint Tenants; Michael Caesar, as Trustee for Howard Gunty, Inc. Profit Sharing Plan; Robert S. Goldberg, I.R.A.; Michael Shore; Michele DeBendictis; Peter Lawrence, I.R.A.; Melvin Zupnick; Judith B. Wohl, I.R.A. James C. Hays; and Barnett Stepak, Plaintiffs Below, Appellants, v. Michael D. Eisner, Michael S. Ovitz, Stephen F. Bollenbach, Sanford M. Litvack, Irwin Russell, Roy E. Disney, Stanley P. Gold, Richard A. Nunis, Sidney Poitier, Robert A.M. Stern, E. Cardon Walker, Raymond L. Watson, Gary L. Wilson, Reveta F. Bowers, Ignacio E. Lozano Jr., George J. Mitchell, Leo J. O'Donovan, Thomas S. Murphy and The Walt Disney Company, Defendants Below, Appellees. |
| Court | United States State Supreme Court of Delaware |
Court Below: Court of Chancery of the State of Delaware, in and for New Castle County, C.A. No. 15452.
Upon appeal from the Court of Chancery.
AFFIRMED.
Joseph A. Rosenthal and Norman M. Monhait, Esquires, of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware; Seth D. Rigrodsky, Esquire, of Milberg Weiss Bershad & Schulman LLP, Wilmington, Delaware; Of Counsel: Steven G. Schulman (argued), Joshua H. Vinik, Jennifer K. Hirsh, John B. Rediker and Laura H. Gundersheim, Esquires, of Milberg Weiss Bershad & Schulman LLP, New York, New York; for Appellants.
Lawrence C. Ashby, Richard D. Heins and Philip Trainer, Jr., Esquires, of Ashby & Geddes, P.A., Wilmington, Delaware; Of Counsel: Gary P. Naftalis (argued), Michael S. Oberman, Paul H. Schoeman and Shoshana Menu, Esquires; of Kramer Levin Naftalis & Frankel, LLP, New York, New York; for Appellee Eisner.
David C. McBride and Christian Douglas Wright, Esquires, of Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; Of Counsel: Mark H. Epstein (argued), Bart H. Williams and Jason L. Haas, Esquires, of Munger, Tolles & Olson LLP, Los Angeles, California; for Appellee Ovitz.
Jesse A. Finkelstein, Gregory P. Williams (argued), Anne C. Foster, Lisa A. Schmidt, Evan O. Williford, and Michael R. Robinson, Esquires, of Richards, Layton & Finger, P.A., Wilmington, Delaware for Appellees Bollenbach, Russell, Nunis, Poitier, Stern, Walker, Watson, Wilson, Bowers, Lozano, Mitchell, O'Donovan, and Murphy.
Robert K. Payson, Stephen C. Norman and Kevin R. Shannon, Esquires, of Potter Anderson & Corroon LLP, Wilmington, Delaware; for Appellee Litvack.
A. Gilchrist Sparks, III and S. Mark Hurd, Esquires, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware; Of Counsel: Stephen D. Alexander and Susan C. Chun, Esquires, of Bingham McCutchen LLP, Los Angeles, California; for Appellees Disney and Gold.
Andre G. Bouchard and Joel Friedlander, Esquires, of Bouchard Margules & Friedlander, Wilmington, Delaware; for Appellee The Walt Disney Company.
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, constituting the Court en Banc.
In August 1995, Michael Ovitz ("Ovitz") and The Walt Disney Company ("Disney" or the "Company") entered into an employment agreement under which Ovitz would serve as President of Disney for five years. In December 1996, only fourteen months after he commenced employment, Ovitz was terminated without cause, resulting in a severance payout to Ovitz valued at approximately $130 million.
In January 1997, several Disney shareholders brought derivative actions in the Court of Chancery, on behalf of Disney, against Ovitz and the directors of Disney who served at the time of the events complained of (the "Disney defendants"). The plaintiffs claimed that the $130 million severance payout was the product of fiduciary duty and contractual breaches by Ovitz, and breaches of fiduciary duty by the Disney defendants, and a waste of assets. After the disposition of several pretrial motions and an appeal to this Court,1 the case was tried before the Chancellor over 37 days between October 20, 2004 and January 19, 2005. In August 2005, the Chancellor handed down a well-crafted 174 page Opinion and Order, determining that "the director defendants did not breach their fiduciary duties or commit waste."2 The Court entered judgment in favor of all defendants on all claims alleged in the amended complaint.
The plaintiffs have appealed from that judgment, claiming that the Court of Chancery committed multitudinous errors. We conclude, for the reasons that follow, that the Chancellor's factual findings and legal rulings were correct and not erroneous in any respect. Accordingly, the judgment entered by the Court of Chancery will be affirmed.
We next summarize the facts as found by the Court of Chancery that are material to the issues presented on this appeal.3 The critical events flow from what turned out to be an unfortunate hiring decision at Disney, a company that for over half a century has been one of America's leading film and entertainment enterprises.
In 1994 Disney lost in a tragic helicopter crash its President and Chief Operating Officer, Frank Wells, who together with Michael Eisner, Disney's Chairman and Chief Executive Officer, had enjoyed remarkable success at the Company's helm. Eisner temporarily assumed Disney's presidency, but only three months later, heart disease required Eisner to undergo quadruple bypass surgery. Those two events persuaded Eisner and Disney's board of directors that the time had come to identify a successor to Eisner.
Eisner's prime candidate for the position was Michael Ovitz, who was the leading partner and one of the founders of Creative Artists Agency ("CAA"), the premier talent agency whose business model had reshaped the entire industry. By 1995, CAA had 550 employees and a roster of about 1400 of Hollywood's top actors, directors, writers, and musicians. That roster generated about $150 million in annual revenues and an annual income of over $20 million for Ovitz, who was regarded as one of the most powerful figures in Hollywood.
Eisner and Ovitz had enjoyed a social and professional relationship that spanned nearly 25 years. Although in the past the two men had casually discussed possibly working together, in 1995, when Ovitz began negotiations to leave CAA and join Music Corporation of America ("MCA"), Eisner became seriously interested in recruiting Ovitz to join Disney. Eisner shared that desire with Disney's board members on an individual basis.4
Eisner and Irwin Russell, who was a Disney director and chairman of the compensation committee, first approached Ovitz about joining Disney. Their initial negotiations were unproductive, however, because at that time MCA had made Ovitz an offer that Disney could not match. The MCA-Ovitz negotiations eventually fell apart, and Ovitz returned to CAA in mid-1995. Business continued as usual, until Ovitz discovered that Ron Meyer, his close friend and the number two executive at CAA, was leaving CAA to join MCA. That news devastated Ovitz, who concluded that to remain with the company he and Meyer had built together was no longer palatable. At that point Ovitz became receptive to the idea of joining Disney. Eisner learned of these developments and re-commenced negotiations with Ovitz in earnest. By mid-July 1995, those negotiations were in full swing.
Both Russell and Eisner negotiated with Ovitz, over separate issues and concerns. From his talks with Eisner, Ovitz gathered that Disney needed his skills and experience to remedy Disney's current weaknesses, which Ovitz identified as poor talent relationships and stagnant foreign growth. Seeking assurances from Eisner that Ovitz's vision for Disney was shared, at some point during the negotiations Ovitz came to believe that he and Eisner would run Disney, and would work together in a relation akin to that of junior and senior partner. Unfortunately, Ovitz's belief was mistaken, as Eisner had a radically different view of what their respective roles at Disney should be.
Russell assumed the lead in negotiating the financial terms of the Ovitz employment contract. In the course of negotiations, Russell learned from Ovitz's attorney, Bob Goldman, that Ovitz owned 55% of CAA and earned approximately $20 to $25 million a year from that company. From the beginning Ovitz made it clear that he would not give up his 55% interest in CAA without "downside protection." Considerable negotiation then ensued over downside protection issues. During the summer of 1995, the parties agreed to a draft version of Ovitz's employment agreement (the "OEA") modeled after Eisner's and the late Mr. Wells' employment contracts. As described by the Chancellor, the draft agreement included the following terms:
Under the proposed OEA, Ovitz would receive a five-year contract with two tranches of options. The first tranche consisted of three million options vesting in equal parts in the third, fourth, and fifth years, and if the value of those options at the end of the five years had not appreciated to $50 million, Disney would make up the difference. The second tranche consisted of two million options that would vest immediately if Disney and Ovitz opted to renew the contract.
The proposed OEA sought to protect both parties in the event that Ovitz's employment ended prematurely, and provided that absent defined causes, neither party could terminate the agreement without penalty. If Ovitz, for example, walked away, for any reason other than those permitted under the OEA, he would forfeit any benefits remaining under the OEA and could be enjoined from working for a competitor. Likewise, if Disney...
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