In re Walt Disney Co. Derivative Litigation 907 A.2d 693 (Del. Ch. 2005) is a U.S. corporate law case concerning the standard of review for business judgments under the Delaware General Corporation Law.
The Walt Disney Company appointed Mr Michael Ovitz as executive president and director. He had founded Creative Artist Agency, a premier Hollywood talent finder. He had had an income of £20m. Mr Michael Eisner asked him to join Disney in 1995, and negotiated with him on compensation, led by Disney compensation committee chair Mr Irwin Russell. The other members of the committee and the board were not told until the negotiations were well underway. Ovitz insisted his pay would go up if things went well, and an exit package if things did not. It all totalled about $24m a year. Mr Irwin Russell cautioned that the pay was significantly above normal levels and "will raise very strong criticism". Mr Graef Crystal, a compensation expert warned that Ovitz was getting "low risk and high return" but the report was not approved by the whole board or the committee. On 14 August 1995 Eisner released to the press the appointment, before the compensation committee had formally met to discuss it. They met on 26 September for an hour. They discussed four other major items and the consultant, Mr Graef Crystal, was not invited. Within a year Ovitz lost Eisner’s confidence and terminated his contract (though it was certainly not gross negligence). Ovitz walked away with $140m for a year’s work. Shareholders brought a derivative action, alleging that the directors were grossly negligent in their approval of the package.
Chancellor Chandler held that the directors were not liable for gross negligence. He said that in Delaware this meant ‘reckless indifference to or a deliberate disregard of the whole body of stockholders’ or actions which are ‘without the bounds of reason’. He noted for this reason ‘duty of care violations are rarely found. Then he remarked how good corporate standards are aspirations that change, but fiduciary duties are law that do not.
Chancellor Chandler said Eisner’s decision to hire Ovtiz was a business judgment. To counter that, gross negligence or bad faith must be shown. He said Eisner rightly informed himself of all the facts, so was not grossly negligent (even if the behaviour should not serve as a model, ‘especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom’). It was in good faith, with a subjective belief that he was right and in the company’s best interests.
Two non-executive directors, Ignacio Lozano and Sidney Poitier, also sat on the compensation committee but were almost entirely uninvolved. It was concluded that neither were grossly negligent or acted in bad faith. He said that in Smith v. Van Gorkom the sale for $735m of TransUnion was much more significant to the company than Ovitz’s hiring here. And TransUnion had absolutely no documentation before it when it considered the merger agreement. The compensation committee here was provided with a term sheet for all the key points of the employment contract. TransUnion’s senior management completely opposed the merger, but here everyone saw hiring Ovitz as a ‘boon for the Company’. So Poitier and Lozano did not ‘intentionally disregard a duty to act, nor did they bury their heads in the sand knowing a decision had to be made. They acted in a manner that they believed was in the best interests of the company.’
Directors of a Delaware corporation must ‘use that amount of care which ordinarily careful and prudent men would use in similar circumstances,’ and ‘consider all material information reasonably available’ in making business decisions.’
The other compensation committee members were also considered but absolved of responsibility.
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