Wolfe and Pittenger on Disney and Good faith

Wolfe and Pittenger on Disney and Good faith


In its June 8, 2006 opinion in In Re The Walt Disney Company Derivative Litigation, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s determination that Disney’s directors had not breached their fiduciary duties in connection with the hiring or termination of Michael Ovitz as President of The Walt Disney Company. Analyzing the case, Donald J. Wolfe, Jr. and Michael A. Pittenger write:
 
     The Disney litigation involved a derivative suit against Disney’s directors and officers for damages allegedly arising out of the 1995 hiring and the 1996 termination of Michael Ovitz as Disney’s President. Ovitz was employed by Disney for little more than a year before he was terminated. The termination resulted in a non-fault termination payment to Ovitz under his employment contract and the immediate vesting of stock options–termination benefits collectively valued at approximately $140 million. The shareholder plaintiffs alleged that Disney’s directors had breached their fiduciary duties both in approving Ovitz’s employment agreement and in later allowing the payment of the nonfault termination benefits.
 
     In 2003, the Court of Chancery had declined to dismiss an amended complaint filed by plaintiffs, finding that the amended complaint adequately alleged facts that, if true, might be sufficient to overcome the presumptions of the business judgment rule by calling into question the good faith of Disney’s directors in making the challenged decisions. The matter proceeded to a lengthy trial, after which Chancellor Chandler concluded in a 175 page post-trial opinion that plaintiffs had failed to prove their claims. The trial court entered judgment in favor of defendants on all counts.
 
     The Delaware Supreme Court affirmed the decision, finding that “the Chancellor’s factual findings and legal rulings were correct and not erroneous in any respect.” With respect to the hiring of Ovitz and the approval of his employment agreement, the Supreme Court held that the Court of Chancery had a sufficient evidentiary basis from which to conclude, and had properly ruled, that the defendants had not breached their fiduciary duty of care and had not acted in bad faith. As to the ensuing no-fault termination of Ovitz and the resulting termination benefits pursuant to his employment agreement, the Supreme Court affirmed the trial court’s holdings that the full board did not (and was not required to) approve Ovitz’s termination, that Michael Eisner, Disney’s CEO, had authorized the termination, and that neither Eisner nor Sanford Litvack, Disney’s General Counsel, had breached his duty of care or acted in bad faith in connection with the termination.
 
 
(footnotes omitted)