Brehm v. Eisner

The Walt Disney Company (Disney) hired Michael Ovitz as its president in 1995. Ovtiz’s employment agreement was negotiated by Disney chairman and CEO Michael Eisner and was approved by the 1995 board of directors (the Old Board). Under the five-year agreement, Disney agreed to give Ovitz a $1 million per year salary, a discretionary bonus, and stock options that would enable Ovitz to buy five million shares of Disney common stock. A nonfault-termination provision in the agreement provided that if Ovitz left his employment with Disney through no fault of his own, he would receive a severance package, including a $10 million termination fee, his remaining salary under the five-year agreement term, the amount of probable unpaid installments of bonuses, and acceleration of his options for three million shares, which would become immediately exercisable at market price. Fourteen months after he was hired, the 1996 board (the New Board) terminated Ovitz’s employment on a nonfault basis. Ovitz received approximately $140 million under his severance package in cash payments and the value of his stock options that vested upon termination. Shareholders (plaintiffs) brought a derivative action against Disney’s directors (defendants), claiming that the Old Board breached its fiduciary duty and committed waste by approving the employment agreement without properly informing itself of the cost of the nonfault-termination provision. The complaint admitted that the Old Board was advised by a corporate-compensation expert in deciding whether to approve the agreement. The complaint also alleged that the New Board breached its fiduciary duty by agreeing to the nonfault termination, which constituted waste. The Delaware Court of Chancery dismissed the complaint.