In re the Walt Disney Company Derivative Litigation
731 A.2d 342 (Del.Ch. 1998)
825 A.2d 275 (Del.Ch. 2003)
907 A.2d 693 (Del.Ch. 2005)
Disney hired a guy named Ovitz
to be their number 2 executive, even though he lacked any management
experience at a public corporation. After 13 months, he was fired.
As part of his severance
package, Ovitz was given $140M. That's over $350k for each day he
worked!
Most of that compensation
came from stock options that Ovitz had negotiated as part of his
employment.
Shareholders, led by Brehm,
filed a derivative lawsuit against
Disney executives, represented by Eisner (the CEO) for agreeing to pay
Ovitz a ridiculous amount of money.
The shareholders argued that
Eisner breached his fiduciary duties by agreeing to pay Ovitz so much,
and for not consulting the board of directors before firing Ovitz.
The Trial Court found for
Eisner in summary judgment. The shareholders appealed.
The Trial Court found that a
large severance package alone is not enough to show a lack of due care or
to constitute waste.
The Court found that Ovitz
severance package turned out to be large, but it wasn't
"sufficiently unusual" to warrant an evidentiary hearing on the
issue of waste.
The Delaware Supreme Court
remanded.
The Delaware Supreme Court
thought that the shareholders' case was weak, but they should be allowed
more discovery of Disney's corporate records.
After discovery, the Trial
Court looked at the new evidence and found that there was enough to
proceed to trial.
The Trial Court found that
there was evidence that the directors had breached their duty of good
faith.
"These facts, if true,
do more than portray directors who, in a negligent or grossly negligent
manner, merely failed to inform themselves or to deliberate adequately
about an issue of material importance to their corporation. Instead the
facts alleged in the new complaint suggest that the defendant directors
consciously and intentionally disregarded their responsibilities..."
Turns out, the directors
relied on the advice of a financial consultant named Crystal, who never
bothered to calculate how much Ovitz would be entitled to if he left
early.
The Trial Court found for
Eisner. The shareholders appealed.
The Trial Court found that
the directors' conduct was less than ideal, but not in bad faith or grossly negligent.
The Court noted that
ordinary negligence is insufficient to constitute a violation of the fiduciary
duty of care.
The Delaware Supreme Court
affirmed.
The Delaware Supreme Court
found that there were two categories of actions that arguably constituted
bad faith:
Subjective bad faith, where the fiduciary conduct is motivated by
an actual intent to do harm.
Fiduciary actions taken
solely by reason of gross negligence and without any malevolent intent
(including a failure to inform oneself of the material facts).
The Court noted that there
is a difference between bad faith
and a failure to exercise due care.
The Court found that the
directors are not required to be informed of every single contingency
(like if Ovitz' left early), they just have to be 'reasonably informed'
in order to meet the requirements of the duty of care.