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In re Walt Disney Co. Derivative Litig. - 825 A.2d 275 (Del. Ch. 2003)

Rule:

With respect to whether a plaintiff's complaint survives a Del. Ch. Ct. R. 23.1 motion to dismiss under the Aronson second prong, in order for demand to be excused under the second prong of Aronson, the plaintiffs must allege particularized facts that raise doubt about whether the challenged transaction is entitled to the protection of the business judgment rule. The plaintiffs may rebut the presumption that the board's decision is entitled to deference by raising a reason to doubt whether the board's action is taken on an informed basis or whether the directors honestly and in good faith believe that the action is in the best interests of the corporation. Thus, the plaintiffs must plead particularized facts sufficient to raise (1) a reason to doubt that the action is taken honestly and in good faith, or (2) a reason to doubt that the board is adequately informed in making the decision.

Facts:

In this derivative action filed on behalf of nominal defendant Walt Disney Company, plaintiffs alleged that the defendant directors breached their fiduciary duties when they blindly approved an employment agreement with defendant president Michael Ovitz and then, again without any review or deliberation, ignored defendant CEO Michael Eisner's dealings with Ovitz regarding his non-fault termination. Plaintiffs sought rescission and/or money damages from defendants and Ovitz, or compensation for damages allegedly sustained by Disney and disgorgement of Ovitz's unjust enrichment.

Issue:

Was the motion to dismiss meritorious?

Answer:

No

Conclusion:

The chancery court treated the dismissal motion (converted to a summary judgment motion because defendants relied on documents not in the complaint) as a dismissal motion and did not consider the other documents. CEO Eisner and president Ovitz had been friends for 25 years when the presidency opened when a prior president of the entertainment corporation died. The allegations included that the CEO negotiated the president's hiring and that the compensation committee and the old directors knowingly or intentionally abdicated their responsibility to exercise business judgment and to make a good faith attempt to fulfill their fiduciary duties to the Disney corporation and its shareholders to review the hiring. Similar allegations were made for the termination against the new board. The hiring and termination allegedly awarded president Ovitz in excess of $140,000,000 for barely one year of allegedly ineffectual service. The president's employment arrangement involved, in part, a large salary, stock options back-dated to be in the money, discretionary bonuses (both vested unless he was fired for cause), and an arranged no-fault termination so vesting would take place. The chancery court decided the alleged facts excused demand, and, if proven true, portrayed directors consciously indifferent to a material corporation issue, the law had to intervene against an abuse of trust, and denied the motion to dismiss the claims against (1) board members, concerning fiduciary duty breaches and waste, and (2) president Ovitz, for breach of his fiduciary duties by engaging in a self-interested transaction with his friend, CEO Eisner.

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