In re Walt Disney Co. Derivative Litigation

Summary

The Delaware Supreme Court affirmed the Court of Chancery’s judgment for the defendants in a derivative action arising from Michael Ovitz’s hiring and termination as president of The Walt Disney Company. The court upheld findings that the Disney directors did not breach their fiduciary duties or commit waste, and that Ovitz’s approximately $130 million severance payment was required under his employment agreement.

Holdings

1. Ovitz was not a fiduciary during the material pre-October 1, 1995 negotiation of the employment agreement because he had not assumed or purported to assume the duties of Disney's presidency, and the material terms at issue had already been agreed upon before he became an officer.
2. Ovitz did not breach fiduciary duties by receiving the non-fault termination payment because he did not participate in the decisions to terminate him or to terminate him without cause, and the corporation imposed the contractual transaction upon him.
3. Grossly negligent conduct, including a failure to inform oneself of available material facts, does not by itself constitute bad faith or breach the fiduciary duty to act in good faith.
4. The compensation committee and Disney directors did not breach their duties of care or good faith in approving the employment agreement, including its non-fault termination provisions, or in electing Ovitz as President.
5. Neither the new board nor the compensation committee was required to act on Ovitz's termination or the resulting non-fault payment because Disney's governing instruments gave the Chairman/CEO concurrent authority to remove a lesser officer, and the compensation committee had already approved the contractual termination provisions.
6. The non-fault termination provisions and the resulting payment did not constitute corporate waste because they served a rational business purpose and the payment was contractually required.

Questions Presented

1. Whether Ovitz owed fiduciary duties during the negotiation of the employment agreement before formally assuming office.
2. Whether Ovitz breached fiduciary duties by receiving the non-fault termination payment or by failing to convene a board meeting to consider termination for cause.
3. Whether Disney's compensation committee and directors breached fiduciary duties of care or good faith in approving the employment agreement and electing Ovitz as President.
4. Whether gross negligence, without more, constitutes bad faith and defeats business-judgment-rule protection.
5. Whether the Disney board or compensation committee was required to approve Ovitz's termination and the resulting severance payment.
6. Whether Disney's directors acted improperly in concluding that Ovitz could not be terminated for cause.
7. Whether the non-fault termination provisions or the severance payment constituted corporate waste.

Disposition

affirmed