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In re Walt Disney Company Derivative Litigation (Disney II)

Delaware Court of Chancery
825 A.2d 275 (Del. Ch. 2003)


[Shareholders (plaintiffs) filed a derivative action against the old and the new Disney board of directors (defendants), challenging the board's approval of the compensation package for the company's number-two executive, Michael Ovitz (defendant).] When the Disney compensation committee first met to discuss Ovitz's compensation, the committee received a summary of the employment contract. The summary indicated that Ovitz would receive stock options for 5,000,000 shares, which were worth around $80–$100 million. The committee failed to calculate the value of the options. The board approved the employment contract based on the committee's recommendation. No director asked about the details of the options. The board let Michael Eisner (defendant), Disney's chief executive officer and Ovitz's good friend, negotiate the specific terms of the agreement. The contract also included a non-fault termination clause. Under it, Ovitz would receive: (1) his salary for the remainder of the contract, (2) a $7.5 million bonus for each year remaining on his contract, though no bonus was guaranteed if he was not terminated, and 3) a termination payment of $10 million, which was the amount he would receive if he completed his full term without receiving a new contract. Further, Ovitz's stock options would vest immediately. In other words, "the contract was most valuable to Ovitz the sooner he left Disney." When Ovitz wanted out due to his unsatisfying performance, Eisner granted him a non-fault termination and awarded him more than $38 million cash and $3 million stock options, which had a total present value of $140 million. Although the new board played no role in Eisner's agreement to award Ovitz cash and stock options, the new board refused to explore any alternatives or delay the transaction. Disney's charter had an exculpatory provision based on Del. C. tit. 8 § 102(b)(7), which would protect individual directors from personal liability for breaches of the duty of care. The defendants moved to dismiss based on the exculpatory provision.

Rule of Law


Holding and Reasoning (Chandler, J.)

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