Brehm v. Eisner

Supreme Court of Delaware
746 A.2d 244 (2000)

ELI5:

Rule of Law:

A complaint in a shareholder derivative suit will be dismissed for failure to make a pre-suit demand unless it alleges particularized facts creating a reasonable doubt that the board's decision was protected by the business judgment rule. To rebut the presumption of the business judgment rule in a duty of care claim involving expert advice, the complaint must plead particularized facts showing the directors' reliance on the expert was not in good faith or was otherwise grossly negligent.

Facts:

In 1995, Disney's CEO and Chairman, Michael Eisner, a longtime friend of Michael Ovitz, unilaterally negotiated to hire Ovitz as Disney's president.
The Disney board of directors (the "Old Board") approved a five-year employment agreement for Ovitz which included a salary, bonuses, stock options, and a lucrative "non-fault termination" provision.
The Old Board was advised by a corporate compensation expert, Graef Crystal, in connection with its decision to approve the agreement.
Ovitz's tenure as president lasted approximately 14 months, and his performance was considered disappointing.
In late 1996, Eisner and Ovitz agreed that Ovitz would leave the company.
The new Disney board of directors (the "New Board") approved a "non-fault termination" for Ovitz, consistent with the terms of his 1995 employment agreement.
Pursuant to the non-fault termination, Ovitz received a severance package valued by the plaintiffs at over $140 million, which included cash and the immediate vesting of 3 million stock options.
After the termination, Graef Crystal was quoted in the media stating that "[n]obody quantified" the total potential cost of the severance package and that he wished they had.

Procedural Posture:

Shareholders of The Walt Disney Company filed a derivative lawsuit against the company's directors in the Delaware Court of Chancery.
The shareholders filed an amended complaint alleging breach of fiduciary duty and corporate waste related to the hiring and termination of Disney's president, Michael Ovitz.
The defendants moved to dismiss the amended complaint for failure to make a pre-suit demand on the board as required by Court of Chancery Rule 23.1.
The Court of Chancery granted the defendants' motion and dismissed the complaint with prejudice, holding that the plaintiffs had failed to plead particularized facts to excuse demand.
The shareholders, as appellants, appealed the dismissal to the Supreme Court of Delaware.

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

Does a shareholder derivative complaint, which alleges that a board of directors approved an extravagant employment contract and a costly non-fault termination without fully calculating the potential severance payout, plead particularized facts sufficient to create a reasonable doubt that the board's actions were a valid exercise of business judgment, thereby excusing the pre-suit demand requirement under Chancery Rule 23.1?

Opinions:

Majority - Chief Justice Veasey

No, the complaint as drafted fails to plead particularized facts sufficient to create a reasonable doubt that the board's actions were a valid exercise of business judgment. The court affirmed the dismissal but reversed the determination that it be with prejudice, remanding to allow plaintiffs an opportunity to file an amended complaint. The court reasoned that while the allegations are troubling, they do not meet the high pleading standards of Rule 23.1. Regarding the Old Board's approval of the contract, the complaint fails to rebut the presumption under 8 Del. C. § 141(e) that the directors were entitled to rely in good faith on their expert, Graef Crystal; Crystal's statements of regret in hindsight do not demonstrate the board was grossly negligent at the time of the decision. Regarding the New Board's approval of the non-fault termination, the complaint fails to plead facts that would satisfy the stringent waste standard. The board faced a choice between honoring the contract or engaging in protracted, expensive, and uncertain litigation over whether Ovitz could be fired for cause; choosing to honor the contract was a business decision that cannot be characterized as so one-sided that no reasonable business person would have made it.

Concurring - Justice Hartnett

Yes, in part, the complaint is adequate as to some claims, if only barely. The pleading burden on shareholders should not be impossibly high, given that the relevant facts are often not public. Taking all factual allegations as true and drawing reasonable inferences in the plaintiffs' favor, the complaint raises a reasonable doubt as to whether the directors were fully aware of the total cost of Ovitz's compensation package and whether Ovitz had effectively resigned before the termination deal was struck. These allegations are sufficient to survive a motion to dismiss and warrant at least limited discovery.

Analysis:

This case is significant for clarifying and reinforcing several key doctrines in Delaware corporate law. First, it definitively established that the appellate standard of review for a Rule 23.1 dismissal for demand futility is de novo, not abuse of discretion, thereby intensifying scrutiny of such dismissals. Second, it provides a crucial framework for analyzing duty of care claims against boards that rely on expert advice, outlining specific factual allegations required to overcome the statutory safe harbor of 8 Del. C. § 141(e). Finally, the decision reaffirms the extremely high bar for pleading corporate waste, particularly in the context of executive compensation, distinguishing between poor business judgment and the kind of irrational decision-making that warrants judicial intervention.

Gunnerbot

AI-powered case assistant

Loaded: Brehm v. Eisner (2000)

Try: "What was the holding?" or "Explain the dissent"