In 1995, Disney's board approved hiring Michael Ovitz as President under an employment agreement that would grant him generous severance if terminated without cause. Within a year, Ovitz left Disney under these terms, receiving approximately $130 million. Shareholders filed a derivative lawsuit alleging that Eisner and the board breached their fiduciary duties by failing to act in good faith and with due care regarding Ovitz's hiring and subsequent severance. The plaintiffs argued that this constituted a waste of corporate assets and sought damages from the directors.
Did Disney's board of directors breach their fiduciary duties of care and good faith by approving Michael Ovitz's employment agreement and severance package?
Directors must act in good faith, with the care an ordinarily prudent person would exercise, and in the corporation's best interests. The business judgment rule protects directors if they meet these standards, barring gross negligence.
The Delaware Chancery Court held that Disney's directors did not breach their fiduciary duties. It concluded that the board's actions, while not exemplary, met the standards of due care and good faith required under Delaware law.
The court found that the board was informed of the key terms of Ovitz's contract and understood the intricacies of his employment agreement, albeit the process was less structured than ideal. Despite missing best practices, the court decided that the directors' actions did not amount to gross negligence. Additionally, the court concluded that the directors acted in good faith because there was no intentional dereliction of duty or conscious disregard for responsibilities.
This case is pivotal for law students and practitioners studying corporate governance. It underscores the broad protections afforded to directors under the business judgment rule, provided they act in good faith and with due care. It also clarifies the concept of 'bad faith' in corporate fiduciary duty claims and the limits of judicial intervention in business decisions.
In re The Walt Disney Co. Derivative Litigation presents a crucial lesson for corporate entities about the scope and application of fiduciary duties. It affirms that while Delaware courts afford latitude to directors under the business judgment rule, directors must still fulfill baseline standards of good faith and careful deliberation. For law students and practitioners, this case serves as an essential study in corporate law by articulating the limitations on liability for business decisions and providing clarity on fiduciary responsibilities. It further highlights the sometimes complex interplay between corporate governance practices and legal standards that courts use to assess director actions.