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:
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.
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