Brehm v. Eisner

746 A.2d 244 (Del.Sup.Ct.2000)

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Nature of the Case

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Facts

Disney hired Ovitz in 1995. The employment agreement was negotiated by his longtime friend, Eisner, who was the Chairman and CEO of Disney. There was a nice salary agreement and a clause that allowed the A options to vest immediately if Disney granted Ovitz a non-fault termination of his employment agreement. The agreement had three ways in which the employment could end. If Ovitz served the five years and Disney would not renew, he would get a $10 million termination payment. Ovitz could be terminated for good cause only if he committed gross negligence or malfeasance. Ovitz could also resign voluntarily. No additional fees were owed if Ovitz were terminated for good cause. Termination without cause would entitle Ovitz to the present value of his remaining salary payments and a $10 million severance and an additional $7.5 million for each fiscal year remaining under the agreement and the vesting of his 3 million “A” stock options. P sued alleging that this contract was a breach of the board’s fiduciary duty. P alleges that even though it was known that Disney needed strong management due to Eisner’s health problems it also knew that Eisner had never worked well with strong executives around him. This was evidenced by the existing of several strong and capable parties from Disney. When three members of the board were told that Eisner was going to hire Ovitz, they denounced the decision. The eventual contract approval was unanimous. P alleges that the Board failed to properly inform itself of the total costs and incentives and that the contract gave Ovitz an incentive to find a way to exit the company without fault on his part. Statements from Graef Crystal, a compensation expert, form the basis of the allegation that the board failed to consider the incentives and the total cost of severance but these statements were not made until Ovitz left Disney 14.5 months after being hired. The expert admitted that he had wished he made a spreadsheet of what the deal would actually cost if Ovitz had been fired at any time and then he admitted later that no one had added up the costs of Ovitz being fired. The allegations by Crystal were the only factual allegations that Ps had against the board. P also alleges that the problems that began immediately on Ovitz’s employment amounted to gross negligence or malfeasance. Ovitz eventually sent Eisner a letter telling him he was looking to leave but Ps have never seen the letter. Eisner and Ovitz agreed to let Ovitz leave on a no-fault basis, and Eisner got a new board to rubber-stamp the deal. The termination package was valued at $140 million. P claims this is waste. The court of chancery concluded that the board of directors was not required to be informed of every fact but only required to be reasonably informed. This appeal resulted.