In Re Walt Disney Co. Derivative Litigation

The shareholders' claim that Ovitz was a de facto officer was procedurally barred because they had not fairly raised it in the Court of Chancery. It also failed on the merits. A de facto officer must actually assume an office and discharge its duties under color of appointment. Ovitz's pre-start-date activities—reviewing information, preparing for his position, working on his office, and limited work connected to Disney—were preparations for future service, not an assumption of presidential authority.

The Court also rejected the argument that post-October 1 revisions made the agreement subject to fiduciary review. The challenged core terms, including the non-fault-termination protection, had been negotiated before Ovitz became President. Later changes were not material to the issues in the case.

The factual record supported the Chancellor's finding that Ovitz did not voluntarily leave or secretly negotiate a deal to obtain a non-fault termination. He resisted leaving Disney, while Eisner and other Disney personnel decided outside his presence that he should be removed.

Once Disney terminated Ovitz without cause, the employment agreement automatically entitled him to the contractual benefits. Ovitz sought some additional concessions during the separation, but Disney rejected them and paid only what the agreement required.

Ovitz had no duty to call a board meeting to reconsider whether Disney should fire him for cause. He did not know a for-cause termination was under consideration, and no reasonably prudent fiduciary who had just been terminated would be required to force the corporation to revisit a decision in a way that could harm his own contractual interests.

Disney's governing documents validly allocated executive-compensation decisions to the compensation committee. The full board retained responsibility for electing officers and properly elected Ovitz as President. Delaware law permits a board to delegate executive-compensation responsibilities to a board committee.

The compensation committee knew the essential terms of the agreement. Its term sheet disclosed that a non-fault termination would provide remaining salary, projected bonuses, a $10 million payment, and accelerated options. The committee was also aware that Ovitz sought substantial downside protection because he would give up a highly lucrative position at CAA.

Committee members received and discussed analyses by committee members Russell and Watson, who had worked with compensation consultant Graef Crystal. The committee was entitled under DGCL section 141(e) to rely in good faith on the information and expert analysis supplied by Crystal, Russell, and Watson, even though the documentation was imperfect and Crystal did not personally present to the full committee.

The Court stressed the difference between legally sufficient process and best practices. A best-practices process would have created a clear written spreadsheet showing potential payments under every termination scenario and attached it to the meeting minutes. But the absence of that ideal record did not establish gross negligence on the trial record.

The remaining directors were adequately informed when they elected Ovitz President. They knew Disney needed a senior executive and potential successor to Eisner; understood Ovitz's reputation, qualifications, and the favorable market reaction to his hiring; and received information about the principal compensation terms and the compensation committee's approval.

The Court held that the Chancellor's pretrial and post-trial descriptions of bad faith were materially consistent. Both described a conscious and intentional disregard of fiduciary responsibilities, not merely an inadequate decision-making process.

The Court distinguished three categories of conduct: subjective bad faith, such as an actual intent to harm the corporation; ordinary or gross negligence without wrongful intent; and an intermediate category involving intentional dereliction of duty or conscious disregard of known responsibilities. The latter category is properly treated as bad faith even when there is no classic self-dealing conflict.

A due-care violation does not automatically become a good-faith violation. Treating gross negligence alone as bad faith would collapse distinct fiduciary duties and undermine DGCL section 102(b)(7), which permits charter provisions exculpating directors from monetary liability for care violations but not for acts or omissions not in good faith.

The evidence did not show that Disney's directors intentionally ignored their responsibilities, acted for an improper purpose, knowingly violated law, or consciously disregarded a known duty. Thus, the business-judgment presumption remained available.

Disney's certificate and bylaws gave the board power to remove officers but also gave the Chairman and CEO general management, direction, and supervision over Disney's officers. The provisions were reasonably susceptible to more than one interpretation, so the Court considered extrinsic evidence of Disney's practice and understanding.

That evidence showed that Disney directors and its general counsel understood Eisner to have authority to terminate officers without a board vote. Disney had previously handled officer terminations without formal board action. The board was informed of and supported the decision to remove Ovitz.

The compensation committee's delegated role was to set and approve executive compensation. By approving the employment agreement, including its termination provisions, it had already authorized the compensation consequences of a non-fault termination. No further committee action was required.

The Court upheld the factual findings that Ovitz was not insubordinate, did not make material false statements, and did not violate Disney's policies concerning expenses or gifts. His failure to fit Disney's culture and his disappointing performance did not establish gross negligence or malfeasance under the employment agreement.

Litvack reviewed the agreement and the relevant facts, consulted Disney lawyers, and concluded that a for-cause termination was not a close question. He advised that falsely asserting cause would expose Disney to a wrongful-termination claim and harm its reputation as a business partner.

Eisner considered the available alternatives: retaining Ovitz as President, moving him to another role, or terminating him. Retaining or reassigning him was not workable, and an attempted move to Sony failed. On counsel's advice, Eisner exercised business judgment to terminate Ovitz without cause rather than manufacture grounds for a for-cause dismissal.

The remaining directors could reasonably rely in good faith on Eisner's and Litvack's accurate advice that Disney lacked grounds to terminate Ovitz for cause.

A waste claim succeeds only in the rare case of an exchange so one-sided that no person of ordinary, sound business judgment could find that the corporation received adequate consideration. Once business-judgment review applies, courts do not second-guess a decision that can be attributed to any rational corporate purpose.

Disney's payment itself could not be wasteful merely because it honored a valid contractual obligation. The relevant question was whether the agreement's non-fault-termination provisions were wasteful when Disney adopted them.

The provisions rationally helped induce Ovitz to leave CAA, where he expected to receive $150 million to $200 million in commissions over the proposed five-year period. Disney could reasonably offer downside protection to obtain the services of a uniquely successful entertainment executive.

The claim that the agreement gave Ovitz an irrational incentive to perform badly was unsupported. Ovitz did not control whether Disney would fire him, he resisted the termination, and it was implausible that he would deliberately damage his industry reputation and long-standing relationship with Eisner to obtain a contractual payout.