Cengage Advantage Books: Foundations of the Legal Environment of Business 3rd Edition by Marianne Jennings

تمرين 19

Brehm v. Eisner 746 A.2d 244 (Del. 2000)
Kind of a Mickey Mouse Judgment Call
Facts
Michael Eisner, as then-CEO and chairman of Disney, hired Michael Ovitz as Disney's president. Mr. Ovitz was a long-time friend of Mr. Eisner. Mr. Ovitz was also an important talent broker in Hollywood. Although he lacked experience managing a diversified public company, other companies with entertainment operations had been interested in hiring him for high-level executive positions. Mr. Ovitz's employment agreement was unilaterally negotiated by Eisner and approved by the "Old Board." The Old Board felt that Ovitz was a valuable person to hire as president of Disney. Disney agreed to give Ovitz a base salary of $1 million per year, a discretionary bonus, and two sets of stock options.
Disney needed a strong second-in-command because Mr. Eisner's health, due to major heart surgery, was in question, and there really was no succession plan. Mr. Eisner also had a rugged history when it came to working with important or well-known subordinate executives who wanted to position themselves to succeed him. Over the past five years, Disney executives Jeffrey Katzenberg, Richard Frank, and Stephen Bollenbach had all left after short tenures under Eisner.
Following a tumultuous year and legendary battles between the two, Mr. Ovitz and Mr. Eisner negotiated Mr. Ovitz's departure. Mr. Ovitz was given a "Non-Fault Termination" that carried $38,888,230.77 as well as the option to purchase 3 million Disney shares.
The shareholders (plaintiffs) filed suit against the directors for its failure to adequately consider the Ovitz contract initially, for not considering the issues surrounding that hiring as well as the employment package itself, and for committing waste in giving Ovitz what amounted to a $140 million severance package (when the value of the options were included). The Court of Chancery dismissed the suit and the shareholders appealed.
Judicial Opinion
VEASEY, Chief Justice
This is potentially a very troubling case on the merits.
On the one hand, it appears from the Complaint that: (a) the compensation and termination payout for Ovitz were exceedingly lucrative, if not luxurious, compared to Ovitz's value to the Company; and (b) the processes of the boards of directors in dealing with the approval and termination of the Ovitz Employment Agreement were casual, if not sloppy and perfunctory.
From what we can ferret out of this deficient pleading, the processes of the Old Board and the New Board were hardly paradigms of good corporate governance practices.
Moreover, the sheer size of the payout to Ovitz, as alleged, pushes the envelope of judicial respect for the business judgment of directors in making compensation decisions. Therefore, both as to the processes of the two Boards and the waste test, this is a close case.
All good corporate governance practices include compliance with statutory law and case law establishing fiduciary duties. But the law of corporate fiduciary duties and remedies for violation of those duties are distinct from the aspirational goals of ideal corporate governance practices. Aspirational ideals of good corporate governance practices for boards of directors that go beyond the minimal legal requirements of the corporation law are highly desirable, often tend to benefit stockholders, sometimes reduce litigation and can usually help directors avoid liability. But they are not required by the corporation law and do not define standards of liability.
Ovitz's performance as president was disappointing at best. Eisner admitted it had been a mistake to hire him, that Ovitz lacked commitment to the Company, that he performed services for his old company, and that he negotiated for other jobs (some very lucrative) while being required under the contract to devote his full time and energy to Disney.
All this shows is that the Board had arguable grounds to fire Ovitz for cause. But what is alleged is only an argument-perhaps a good one-that Ovitz's conduct constituted gross negligence or malfeasance. The Complaint contends that the Board committed waste by agreeing to the very lucrative payout to Ovitz under the non-fault termination provision because it had no obligation to him, thus taking the Board's decision outside the protection of the business judgment rule.
The Board made a business decision to grant Ovitz a Non-Fault Termination. Plaintiffs may disagree with the Board's judgment as to how this matter should have been handled. But where, as here, there is no reasonable doubt as to the disinterest of or absence of fraud by the Board, mere disagreement cannot serve as grounds for imposing liability based on alleged breaches of fiduciary duty and waste. There is no allegation that the Board did not consider the pertinent issues surrounding Ovitz's termination. Plaintiffs' sole argument appears to be that they do not agree with the course of action taken by the Board regarding Ovitz's separation from Disney. This will not suffice to create a reasonable doubt that the Board's decision to grant Ovitz a Non-Fault Termination was the product of an exercise of business judgment.
One can understand why Disney stockholders would be upset with such an extraordinarily lucrative compensation agreement and termination payout awarded a company president who served for only a little over a year and who underperformed to the extent alleged. That said, there is a very large-though not insurmountable-burden on stockholders who believe they should pursue the remedy of a derivative suit instead of selling their stock or seeking to reform or oust these directors from office.
Affirmed.
Case Questions
1. What must the shareholders prove to recover?
2. What does the court say is the relationship between good corporate governance, liability, and business judgment?
3. What alternatives do shareholders have to litigation?