In re The Walt Disney Co. Derivative Litigation
Delaware Supreme Court
906 A.2d 27 (Del. June 8, 2006)
Michael Ovitz was hired as the president of The Walt Disney Company (Disney). Ovitz was a much respected and well known executive, and in convincing him to leave his lucrative and successful job with Creative Artists Agency (CAA), Disney signed Ovitz to a very lucrative contract. The contract was for five years, but if Ovitz were terminated without cause, he would be paid the remaining value of his contract as well as a significant severance package in the form of stock option payouts. The contract was approved by Disney’s compensation committee after its consideration of term sheets and other documents indicating the total possible payout to Ovitz if he was fired without cause. The compensation committee then informed Disney’s board of directors of the provisions of the contract, including the total possible payout to Ovitz. The board approved the contract and elected Ovitz as president. After Ovitz’s first year on the job, it was clear that he was not working out as president and that he was “a poor fit with his fellow executives.” However, Disney’s CEO and attorneys could not find a way to fire him for any cause, so Disney instead fired him without cause, triggering the severance package in the contract. Ovitz ended up being paid $130 million upon his termination. Disney shareholders (plaintiffs) brought derivative suits against Disney’s directors for failure to exercise due care and good faith in approving the contract and in hiring Ovitz, and, even if the contract was valid, for breaching their fiduciary duties by actually making the exorbitant severance payout to Ovitz. The Delaware Court of Chancery found that although the process of hiring Ovitz and the resulting contract did not constitute corporate “best practices,” the Disney directors did not breach any fiduciary duty to the corporation. The Disney shareholders appealed.
Rule of Law
Holding and Reasoning (Jacobs, J.)