The Delaware Chancellory Court issued its ruling yesterday in favor of the Walt Disney Company Board of Directors in the corporate case of the decade — i.e., the civil lawsuit over The Walt Disney Co. board’s decision to pay Michael Ovitz a rather generous severance package for essentially doing nothing during his short stay at Disney (earlier posts on the case are here, here and here). You can download a copy of the 175 page decision here and, based on a preliminary review, it appears that Larry Ribstein nailed it with his earlier prediction, which also provides excellent background on the fact and legal issues involved in the case. H’mm, I wonder if Professor Ribstein got any odds on his bet on the outcome of the decision?
As noted in this earlier post, check in at the Conglomerate blog for a discussion of the Disney decision by an outstanding group of corporate law scholars. Should be highly entertaining.
From my preliminary review, Chancellor Chandler rejected the plaintiffs’ arguments, although he did toss several sharp barba at Disney chairman and CEO Michael Eisner and the Disney directors’ actions during the Ovitz affair, including that the board’s conduct “fell significantly short” of best business practices. Nevertheless, that’s not the same as a breach of their fiduciary duties or waste, the judge concluded:
“It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk — the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known.”
Mr. Eisner hired Mr. Ovitz in 1995, but the hiring quickly turned into a debacle that led to a termination of Mr. Ovitz without cause after roughly a year. Shareholders argued that Disney’s directors failed to fulfill their fiduciary duties in regard to either the hiring or the without cause termination, and contended that Mr. Ovitz should have canned for cause and denied his severance package. Accordingly, the plaintiff shareholders asked the court to assess damages of more than $262 million — $129.8 million in damages plus $132.5 million in interest — against some current and former members of the board, including Mr. Ovitz and Mr. Eisner. The directors countered by arguing that they agreed to the without cause termination and payment of severance to Mr. Ovitz to head off an expensive lawsuit that would have distracted management and risked causing shareholders much more in reduced share price than the settlement amount paid to Mr. Ovitz.
Here are a few money quotes from the decision:
“Should the Court apportion liability based on the ultimate outcome of decisions taken in good faith, decision-makers would take decisions that minimize risk, not maximize value.”
“By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz’s hiring in particular, Eisner to a large extent is responsible for the failings . . . that infected and handicapped the board’s decisionmaking abilities.”
“Eisner stacked his (and I intentionally write ‘his’ as opposed to ‘the Company’s’) board of directors with friends and other acquaintances who .. were certainly more willing to accede to his wishes . . . than [act as]truly independent directors.”
“As it relates to [Ovitz’s] job performance, I find it patently unreasonable to assume that Ovitz intended to perform just poorly enough to be fired quickly, but not so poorly that he could be terminated for cause. First, based on my personal observations of Ovitz, he possesses such an ego, and enjoyed such a towering reputation before his employment at the Company, that he is not the type of person that would intentionally perform poorly. Ovitz did not build Hollywood’s premier talent agency by performing poorly.”
Interestingly, Professor Bainbridge’s Texas Law Review article on executive compensation is cited in the decision’s first footnote.