Delaware Court of Chancery Decides Disney/Ovitz Compensation Case in Favor of All Director Defendants
Total Page：16
File Type：pdf, Size：1020Kb
Litigation Delaware Court of Chancery Decides Disney/Ovitz Compensation Case In Favor Of All Director Defendants “Times may change, but fiduciary duties do not.” Chancellor Chandler, In re The Walt Disney Co. Deriv. Litig., Consolidated C.A. No. 15452, slip op. at 3 (del. Ch. Aug. 9, 2005) On August 9, 2005, the Delaware Court of Chancery issued its decision in the seminal Disney/Ovitz compensation case, In re The Walt Disney Company Derivative Litigation, In the end, the Disney case concluding that the defendant directors and officers of The Walt Disney Company did not violate their fiduciary duties when they hired Chief Operating Officer Michael Ovitz nearly ten broke little new legal ground: years ago and then fired him a little over one year later. the considerations undertaken The closely-watched case has provided years of fodder for court-watchers and Hollywood- watchers alike, especially given the personalities involved and the enormity of the estimated by Disney’s senior officers and $140 million severance package paid to Ovitz after his stunted tenure. In the end, Chancellor Board in the hiring and firing of Chandler concluded: breaches of duty are determined on a director-by-director basis, as opposed to viewing Ovitz withstood scrutiny as a the board as a whole the Court should take into account the corporate governance climate in existence at the matter of due care, loyalty and time the activities occurred, as well as the materiality of the transaction when weighed good faith. against the gravity of other decisions ordinarily undertaken by the company’s Board (or, indeed, even left to management) and while corporate governance “best practices” may provide context in which to evaluate the fulfillment of director/officer fiduciary duties, they do not provide an absolute standard for determining whether such duties have been violated. Although the Court attempted to bolster its prior efforts to define a “duty of good faith” in the context of traditional directorial duties of due care and loyalty, in the end it broke little new legal ground: the considerations undertaken by Disney’s senior officers and Board in the hiring and firing of Ovitz would have withstood scrutiny as a matter of due care, loyalty, or of good faith, however defined, when viewed in the context of the corporate governance environment as it existed in the mid-1990s. At the same time, however, this case provides a virtual roadmap of “Director Don’ts” for both actual deliberative processes and the documentation of such processes. 08.2005 | 01 SF/21631520.1 Background and Key Holdings In his 2003 opinion denying the defendants’ motion to dismiss the second amended complaint, Chancellor Chandler sent shock waves through corporate board rooms when he implied that the Company’s directors might be subject to liability for violating a newly-emerging “duty of good faith,” i.e., based on plaintiffs’ allegations that “the defendant directors consciously and intentionally disregarded their responsibilities, adopting a ‘we don’t care about the risks’ attitude concerning a material corporate decision.” In re The Walt Disney Co. Deriv. Litig., 825 A.2d 275, 289 (Del. Ch. 2003) (emphasis in original). These allegations were tested in 37 days of trial, which generated 9,360 pages of transcript from 24 witnesses and 1,033 trial exhibits. After carefully reviewing that record, the Court While the Court focused found, in a 174-page Opinion, that the director defendants did not breach their fiduciary duties. substantial discussion on The Court’s key findings include: The decision to hire Ovitz and the Compensation Committee’s approval of his employment whether a “duty of good faith” agreement was not grossly negligent or in bad faith, given that: (1) the Compensation Committee Chair was fully informed of the details of the proposed agreement, retained a also existed under Delaware respected compensation consultant, Graef Crystal, to review and prepare a report on it, and discussed it in varying levels of detail with other members of the Committee (although law, its discussion did not not necessarily together as a group); and (2) Michael Eisner, Disney’s Chairman and clarify exactly what this CEO, relied on Crystal’s analysis and discussed Ovitz’s hiring with individual directors, including, in particular, individual members of the Compensation Committee. concept entails. The Board of Directors was not under a duty to discuss and approve Ovitz’s termination pursuant to the Company’s governing instruments and Eisner, in his roles and subject to the control of the Board, possessed the right to remove subordinate officers and employees of the corporation. Hence, Eisner’s termination of Ovitz without Board approval or intervention did not usurp any Board authority and the Board did not violate their fiduciary duty of care in failing to meet prior to the termination or more closely question whether Ovitz should be terminated without cause. Eisner’s decision to terminate Ovitz was not an act of bad faith and did not breach his fiduciary duties as “he weighed the alternatives, received advice from [Disney General Counsel Sanford Litvack] and then exercised his business judgment in the manner he thought best for the corporation.” He “was not personally interested in the transaction in any way that would make him incapable of exercising business judgment.” Litvack analyzed Ovitz’s employment agreement and Ovitz’s performance and opined in good faith that there was no cause for terminating Ovitz. He also concluded that any attempt to terminate for cause would likely lead to costly litigation and would harm Disney’s reputation. 08.2005 | 02 SF/21631520.1 Ovitz did not breach his duty of loyalty by receiving the no-fault termination payment because he played no part in the decisions which resulted in his being terminated and, moreover, the termination was not for cause. The Court strongly rejected the plaintiffs’ claim for waste — i.e., that Ovitz’s compensation package incentivized Ovitz to leave the Company and receive a no-fault termination payment — because such a finding would have to be based on certain preposterous assumptions, including: (1) that Ovitz was somehow able to determine if he would be terminated and whether such a termination would be with or without cause; and (2) that Eisner had agreed to terminate Ovitz even before Ovitz had been hired. Disney’s Legal Implications Implication 1 — No Substantial Change to Legal Standard Under Which Directors or Chancellor Chandler was Officers of Delaware Corporations Will Be Held Liable careful to distinguish what Support for a new “duty of good faith?” In its finding that the directors acted in good faith and discharged their fiduciary duties of Delaware law requires of due care and loyalty, the Court relied upon well-established standards under Delaware corporate fiduciaries — that law governing these duties. While the Court focused substantial discussion on whether a “duty of good faith” also existed under Delaware law, its discussion did not clarify exactly they not breach fiduciary what this concept entails. Describing the duty as one to avoid any conduct “disloyal to the corporation,” Chancellor Chandler ultimately wrote that the threshold for liability for failing duties — from so-called “best to act in good faith is high: such a breach requires an “intentional dereliction of duty, a practices of ideal corporate conscious disregard for one’s responsibilities . [This] may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best governance.” interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act.” At the same time, it remains unclear how the duties of due care, loyalty, and good faith will interrelate in the post-Disney era. One of the Court’s formulations of the duty of good faith – i.e., a “[d]eliberate indifference and inaction in the face of a duty to act . , conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct.” — appears to encompass elements of both the duties of care and loyalty. Given the almost certainty of an appeal in this matter, it appears the Delaware Supreme Court will have an opportunity to clarify the precise contours and interrelationship of these duties. Directors’ and officers’ fiduciary duties should not be equated with “aspirational ideals” or “best practices of ideal corporate governance.” In his analysis, Chancellor Chandler was careful to distinguish what Delaware law requires of corporate fiduciaries — that they not breach their fiduciary duties — from so-called 08.2005 | 03 “best practices of ideal corporate governance” — a standard which he asserted the Disney SF/21631520.1 directors “fell significantly short of.” According to Chancellor Chandler, “[u]nlike ideals of corporate governance, a fiduciary’s duties do not change over time.” Thus, while “strongly” encouraging directors and officers to employ “best practices,” the Court concluded that: “Delaware law does not — indeed, the common law cannot — hold fiduciaries liable for a failure to comply with the aspirational ideal of best practices. .” The Court explained this conclusion as follows: [s]hould the Court apportion liability based on the ultimate outcome of decisions taken in good faith by faithful directors or officers, those decisions-makers would necessarily take decisions that minimize risk, not maximize value. The entire advantage of the risk-taking, innovative, wealth-creating engine that is the Delaware corporation would cease to exist, with disastrous results for shareholders and society alike. That is why, under our corporate law, corporate decision-makers are held strictly to their fiduciary duties, but within the boundaries of those duties are free to act as their judgment and abilities dictate, free of post hoc penalties from a reviewing The Court rejected the court using perfect hindsight.