In Re Walt Disney Co. Derivative Litigation
906 A.2d 27 (2006)
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Rule of Law:
A board's decisions are protected by the business judgment rule unless the directors breach their fiduciary duties of care or loyalty, or act in bad faith. A finding of bad faith requires more than a showing of gross negligence; it requires conduct such as an intentional dereliction of duty or a conscious disregard for one's responsibilities.
Facts:
- In 1994, after the death of its President Frank Wells and CEO Michael Eisner's subsequent heart surgery, The Walt Disney Company sought a new president.
- In 1995, Eisner recruited his friend Michael Ovitz, a powerful Hollywood agent and co-founder of Creative Artists Agency (CAA).
- To induce Ovitz to leave his lucrative position at CAA, Disney's compensation committee, aided by an executive compensation consultant, negotiated and approved a five-year employment agreement that included a substantial Non-Fault Termination (NFT) provision.
- The full Disney board of directors then elected Ovitz as President in September 1995.
- Ovitz's tenure at Disney was unsuccessful, marked by a poor fit with the company's culture and a strained working relationship with Eisner and other senior executives.
- After approximately 14 months, in December 1996, Eisner decided to terminate Ovitz.
- Relying on the advice of Disney's General Counsel, Sanford Litvack, Eisner concluded that there was no legal cause for the termination, which triggered the NFT provision.
- As a result of his non-fault termination, Ovitz received a severance package valued at approximately $130 million.
Procedural Posture:
- Shareholders filed derivative actions in the Delaware Court of Chancery against Michael Ovitz and The Walt Disney Company's directors.
- 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 remanded with leave to amend.
- The Court of Chancery then denied the defendants' motion to dismiss the amended complaint.
- After discovery, the court granted partial summary judgment in favor of Ovitz on claims related to his pre-employment conduct.
- Following a 37-day trial, the Court of Chancery entered a final judgment in favor of all defendants on all claims.
- The shareholder plaintiffs (Appellants) appealed that final judgment to the Delaware Supreme Court.
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Issue:
Do corporate directors breach their fiduciary duties of care and good faith, thereby losing the protection of the business judgment rule, when they approve a lucrative employment agreement containing a large non-fault termination provision and subsequently authorize that payment upon the employee's termination?
Opinions:
Majority - Jacobs, Justice.
No. The directors' actions are protected by the business judgment rule because they did not breach their fiduciary duties of care or good faith. In approving the employment agreement, the compensation committee was adequately informed of the potential magnitude of the non-fault termination payout, even if its process fell short of best practices, and the full board was entitled to rely on the committee's work. The decision to terminate Ovitz without cause was a valid exercise of business judgment by CEO Michael Eisner, who had the authority to do so, based on his own assessment and the rational legal advice from the general counsel that no cause for termination existed. The court clarified that bad faith is distinct from gross negligence and involves a 'conscious disregard' for one's duties, which the plaintiffs failed to prove. Furthermore, the severance payment was not corporate waste because it was a contractually obligated payment made pursuant to an agreement that had the rational business purpose of inducing a highly sought-after executive to join the company.
Analysis:
This decision significantly clarifies the high threshold required to rebut the business judgment rule and hold directors liable for a poor business outcome. By distinguishing the duty of good faith from the duty of care, the court makes it more difficult for plaintiffs to plead around exculpatory charter provisions like Delaware's Section 102(b)(7), which immunize directors from monetary liability for breaches of the duty of care. The ruling underscores the judiciary's deference to board decisions, even when the process is flawed and the financial results are disastrous, so long as the decision is not irrational and the directors do not consciously disregard their responsibilities. The case serves as a landmark for defining bad faith and reinforcing the formidable protection of the business judgment rule in corporate governance litigation.
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