Tuesday, November 15, 2011

In re the Walt Disney Company Derivative Litigation case brief

In re the Walt Disney Company Derivative Litigation 
907 A.2d 693 (Del. Ch. 2005)

-Disney hired Ovitz to be their executive, however he lacked any management experience at a public corporation.
-After 13 months, he was fired.
-Ovitz was given $140M as severance.
-Most of the compensation came from stock options that were negotiated as part of Ovitz's employment.
-Shareholders, led by Brehm, filed a derivative lawsuit against Disney executives, represented by Eisner (the CEO) for agreeing to pay Ovitz such a large amount of money.
-The shareholders argued: Eisner breached his fiduciary duties by agreeing to pay Ovitz so much, and for not consulting the board of directors before firing Ovitz.

-The Trial Court found for Eisner in summary judgment.
-The Trial Court found that a large severance package alone is not enough to show a lack of due care or to constitute waste.
-The Court found that Ovitz severance package turned out to be large, but it wasn't "sufficiently unusual" to warrant an evidentiary hearing on the issue of waste.
-Shareholder's appealed.
-The Delaware Supreme Court remanded, and thought that the shareholders' had a weak case, but should be allowed more discovery of Disney's corporate records.
-After discovery, the Trial Court looked at the new evidence and found that there was enough to proceed to trial.
-The Trial Court found that there was evidence that the directors had breached their duty of good faith.
"These facts, if true, do more than portray directors who, in a negligent or grossly negligent manner, merely failed to inform themselves or to deliberate adequately about an issue of material importance to their corporation. Instead the facts alleged in the new complaint suggest that the defendant directors consciously and intentionally disregarded their responsibilities..."
-Turns out, the directors relied on the advice of a financial consultant named Crystal, who never bothered to calculate how much Ovitz would be entitled to if he left early.
-The Trial Court found for Eisner. The shareholders appealed.
-The Trial Court found that the directors' conduct was less than ideal, but not in bad faith or grossly negligent.
-The Court stated ordinary negligence is insufficient to constitute a violation of the fiduciary duty of care.
-The Delaware Supreme Court affirmed.

Two categories of actions that arguably constitute bad faith: 
1.  Subjective bad faith: where the fiduciary conduct is motivated by an actual intent to do harm.
2.  Fiduciary actions taken solely by reason of gross negligence and w/o any malevolent intent (including a failure to inform oneself of the material facts).
-There is a difference between bad faith and a failure to exercise due care.
-Ordinary negligence is insufficient to constitute a violation of the fiduciary duty of care.

-The Court found that the directors are not required to be informed of every single contingency (example: if Ovitz' left early).  Instead, they have to be 'reasonably informed' in order to meet the requirements of the duty of care.

Class: Corporations
Subjects: Duty of Care, Bad Faith, Negligence

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