In re the Walt Disney Company Derivative Litigation
731 A.2d 342 (Del.Ch. 1998)
825 A.2d 275 (Del.Ch. 2003)
907 A.2d 693 (Del.Ch. 2005)

  • Disney hired a guy named Ovitz to be their number 2 executive, even though he lacked any management experience at a public corporation. After 13 months, he was fired.
    • As part of his severance package, Ovitz was given $140M. That’s over $350k for each day he worked!
      • Most of that compensation came from stock options that Ovitz had negotiated as part of his employment.
  • Shareholders, led by Brehm, filed a derivative lawsuit against Disney executives, represented by Eisner (the CEO) for agreeing to pay Ovitz a ridiculous amount of money.
    • The shareholders argued that 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 shareholders appealed.
    • 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.
  • The Delaware Supreme Court remanded.
    • The Delaware Supreme Court thought that the shareholders’ case was weak, but they 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 noted that ordinary negligence is insufficient to constitute a violation of the fiduciary duty of care.
  • The Delaware Supreme Court affirmed.
    • The Delaware Supreme Court found that there were two categories of actions that arguably constituted bad faith:
      • Subjective bad faith, where the fiduciary conduct is motivated by an actual intent to do harm.
      • Fiduciary actions taken solely by reason of gross negligence and without any malevolent intent (including a failure to inform oneself of the material facts).
    • The Court noted that there is a difference between bad faith and a failure to exercise due care.
    • The Court found that the directors are not required to be informed of every single contingency (like if Ovitz’ left early), they just have to be ‘reasonably informed’ in order to meet the requirements of the duty of care.