Corporate Law

In re Walt Disney Co. Derivative Litigation — Study Notes

906 A.2d 27 (Del. 2006), aff'g 907 A.2d 693 (Del. Ch. 2005)

Study notes for In re Walt Disney Co. Derivative Litigation: professor notes, cold call prep, exam angles, and memory aids.

Delaware directors are shielded from liability for business decisions unless acted in bad faith, particularly under a § 102(b)(7) exculpation clause.
Professor Notes

This case revolves around the contentious employment contract of Michael Ovitz, which was highly scrutinized due to its enormous severance package. A critical aspect emphasized by professors will be the directors' business judgment and the significance of the § 102(b)(7) exculpation clause that shields directors from personal liability for breaches of fiduciary duty as long as bad faith is not proven. Professors will likely stress the balance between exercising due care and the limits of judicial scrutiny of corporate decisions, particularly when directors rely on their internal business judgment.

Cold Call Prep
  1. 1Explain the significance of the § 102(b)(7) exculpation clause in this case.
  2. 2Discuss the role of business judgment in the context of Disney's board's decision-making process regarding Ovitz.
  3. 3What does this case indicate about the standard for proving bad faith or waste by corporate directors?
  4. 4How did the Delaware Supreme Court interpret the directors' actions concerning Ovitz's employment contract and termination?
  5. 5Identify any major implications for future cases involving executive compensation and fiduciary duties.
  6. 6Discuss the precedent set by this case regarding the limits on shareholder derivative actions.
  7. 7What are potential criticisms of the court's decision in terms of corporate governance?
Mnemonic Device

O v. B - Ovitz's Victory (for the Board), suggesting the board's decisions were upheld.

Distinguish From
CaseDistinction
Smith v. Van GorkomSmith involved a clear demonstration of lack of due care in a merger decision, unlike the Ovitz case where the court found that directors acted within their discretion.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.Revlon emphasizes the duty of directors during a sale of a corporation, whereas Disney focused on employment contracts and severance which did not reach the level of bad faith.
Iowa Implement Dealers Ass'n v. A.C. NielsenThis case involved a more explicit breach of fiduciary duties with direct harm shown to shareholders, unlike Disney's case where the board's judgment was protected.
Policy Arguments

For the Rule

The rule promotes the stability of managerial decision-making by protecting directors from personal liability, thereby encouraging them to take risks in the interest of the company.

Against the Rule

This rule can lead to a lack of accountability among directors, allowing them to approve excessively generous compensation packages without fear of repercussions.

Class Discussion Points
  • The effectiveness of exculpation clauses in protecting directors versus the need for accountability.
  • Analyzing the thresholds for proving bad faith and waste in corporate governance.
  • The role of shareholders in overseeing executive pay and corporate decisions following this ruling.
Exam Angle

This case is likely to appear on exams regarding the standards for judicial review of directors' decisions and the implications of exculpation clauses in corporate governance, focusing on the concepts of bad faith and waste.

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