Update on Disney: Decision on the Merits

John Olson, Amy Goodman, and Ronald O. Mueller, Gibson, Dunn & Crutcher

4 minutes to read

In his long-awaited decision in the case involving The Walt Disney Company's hiring and termination of Michael Ovitz in 1995 and 1996, Chancellor Chandler of the Delaware Chancery Court has provided a breath of relief to corporate directors while reminding them of their responsibility to consider "all material information reasonably available" in making business decisions.

The Court held that the defendant directors did not breach their fiduciary duties or commit waste in connection with Ovitz's hiring and termination. Moreover, while the Court found that "many aspects of the defendants' conduct...fell significantly short of the best practices of ideal corporate governance", it stated that "Delaware law does not...hold fiduciaries liable for a failure to comply with the aspirational ideals of best practice." The opinion also recognizes that "the essence of business is risk" and that where "decision-makers act as faithful servants,...[t]he redress for failures...must come from the markets, through the actions of shareholders and the free flow of capital, and not from this Court." Of most comfort to directors, perhaps, is the Court's statement that

under our corporate law, corporate decision-makers are held strictly to their fiduciary duties, but within the boundaries of those duties are free to act as their judgment and abilities dictate, free of post hac penalties from reviewing courts using perfect hindsight.

Nevertheless, boards and their advisors should not lose sight of the fact that the Court criticizes and comments upon a number of the practices followed by Disney, its CEO, Michael Eisner, and its Board, including:

  • The Boardroom culture: "[T]he unwholesome boardroom culture at Disney" in which "ornamental, passive directors contribute[d] to sycophantic tendencies among directors and how imperial CEOs can exploit this condition for their own benefit, especially in the executive compensation and severance area."
  • The imperial CEO. "Eisner stacked his (and I intentionally write 'his' as opposed to 'the Company's') board of directors with friends and other acquaintances who, though not necessarily beholden to him in a legal sense, were certainly more willing to accede to his wishes and support him unconditionally than truly independent directors."
  • Board involvement. "[A] reasonably prudent CEO would not have acted in as unilateral a manner as did Eisner when essentially committing the corporation to hire a second-in-command, appoint that person to the board, and provide him one of the largest and richest employment contracts ever enjoyed by a non-CEO."
  • Compensation committee activity. "Although it would have been ideal if the other members of the compensation committee were more substantively involved in those negotiations, it would certainly be unwieldy as a practical matter to require the entire committee, together and as a whole, to negotiate on the Company's behalf."
  • Expert advice: "Nor is it necessary for an expert to make a formal presentation at the committee meeting in order for the board to rely on that expert's analysis, although that certainly would have been the better course of action."

Thus, while the Court provided the directors relief from potential liability, adherence to better processes and practices could have spared the individual directors years of litigation and many hours of depositions.

The decision also contains an insightful discussion of the fiduciary duties owed by directors of a Delaware corporation. The question of a director's duty of good faith had been the subject of much discussion following the earlier decision in the motion to dismiss stage of this litigation. The Disney Court held that, in the end, "it makes no difference whether the words 'fiduciary duty of' are placed in front of 'good faith' because acts not in good faith (regardless of whether they might fall under the loyalty or care aspects of good faith) are in any event non-exculpable [under Section 102(b)(7) of the Delaware General Corporation Law] because they are disloyal to the corporation." In terms of the standard for determining whether directors have acted in good faith, the Court held that "the concept of intentional dereliction of duty, a conscious disregard for one's responsibilities, is an appropriate (although not the only one) standard." The Court also made clear that there is a distinction between standards of conduct for directors and standards of liability and that both standards may change over time. Thus, the liability standard for actions or omissions by directors today may be different from that applied to the Disney Board in light of corporate governance developments of the last ten years.

* * * * *

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, John F. Olson (202-955-8522, jolson@gibsondunn.com), Ronald O. Mueller (202-955-8671, rmueller@gibsondunn.com), or Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com) in the firm's Washington, D.C. office.