Brehm v. Eisner
906 A.2d 27, 2006 Del. LEXIS 307, 37 Employee Benefits Cas. (BNA) 2756 (2006)
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Rule of Law:
The business judgment rule protects directors' decisions from judicial scrutiny unless plaintiffs prove a breach of the fiduciary duties of care or loyalty, or that the directors acted in bad faith. A breach of the duty to act in good faith requires conduct that is more culpable than gross negligence, such as an intentional dereliction of duty or a conscious disregard for one's responsibilities.
Facts:
- In 1994, following the death of its President Frank Wells and CEO Michael Eisner's heart surgery, The Walt Disney Company sought to hire a new President.
- Eisner recruited Michael Ovitz, a powerful Hollywood agent and co-founder of Creative Artists Agency (CAA), for the position.
- During negotiations for Ovitz's employment agreement (OEA), Ovitz insisted on significant "downside protection" to compensate for leaving his lucrative position at CAA.
- The OEA included a Non-Fault Termination (NFT) provision, entitling Ovitz to his remaining salary, unaccrued bonuses, and the immediate vesting of stock options if terminated without cause (defined as gross negligence or malfeasance).
- Disney's compensation committee, after receiving analysis from an outside compensation expert and two of its own members, approved the OEA's terms.
- After approximately 14 months of employment marked by significant friction between Ovitz and other top executives, Eisner decided Ovitz's tenure was not working out.
- Eisner, after consulting with Disney's general counsel, Sanford Litvack, concluded that there was no legal basis to terminate Ovitz for cause under the OEA's strict definition.
- In December 1996, Ovitz was terminated without cause, triggering the NFT provision and resulting in a severance payout valued at approximately $130 million.
Procedural Posture:
- Disney shareholders filed derivative actions in the Delaware Court of Chancery (trial court) against Michael Ovitz and the Disney directors.
- The shareholders alleged that the approval of Ovitz's employment contract and his subsequent severance payment constituted breaches of fiduciary duty and corporate waste.
- The Court of Chancery's initial dismissal of the complaint was appealed to the Delaware Supreme Court, which affirmed in part, reversed in part, and granted the plaintiffs leave to amend their complaint.
- After the amended complaint was filed, the Court of Chancery denied a subsequent motion to dismiss by the defendants.
- Following a 37-day trial, the Chancellor of the Court of Chancery found in favor of all defendants on all claims.
- The shareholder plaintiffs (appellants) appealed the final judgment of the Court of Chancery to the Delaware Supreme Court (this court).
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Issue:
Did the Disney directors breach their fiduciary duties or commit corporate waste by approving a lucrative employment agreement with a large non-fault termination provision for Michael Ovitz, and then later terminating him under that provision?
Opinions:
Majority - Jacobs, Justice.
No, the Disney directors did not breach their fiduciary duties or commit waste. Their actions in both approving Michael Ovitz's employment agreement and later authorizing his non-fault termination payout were protected by the business judgment rule. Regarding the hiring, while the compensation committee's process was not ideal, it was not grossly negligent; the members were adequately informed of the potential magnitude of the severance package and were entitled to rely on information from experts and fellow directors under 8 Del. C. § 141(e). The full board's duty was to elect the president, which it did based on sufficient information about Ovitz's qualifications and the key terms of his contract. Regarding the termination, CEO Michael Eisner had the authority to fire Ovitz without a formal board vote, and his decision, based on the advice of general counsel that no 'cause' existed, was a valid exercise of business judgment. The board's acquiescence in this decision was likewise protected, as there was no evidence of bad faith or gross negligence. Finally, the payout was not waste because Disney was contractually obligated to make it, and the underlying contract served the rational business purpose of inducing a uniquely qualified executive to join the company.
Analysis:
This landmark decision powerfully reaffirms the protection afforded by the business judgment rule, establishing that a flawed corporate process does not automatically equate to a breach of the duty of care. The court clarified that 'best practices' are not the legal standard for director conduct; liability for a due care violation requires gross negligence. Most significantly, the opinion provides a foundational definition of the duty to act in good faith, distinguishing it from the duty of care and establishing that a bad faith finding requires more than negligence, such as an 'intentional dereliction of duty' or 'conscious disregard for one's responsibilities.' This high bar makes it extremely difficult for shareholders to hold directors personally liable for business decisions that turn out poorly, reinforcing Delaware's director-centric model of corporate governance.
