In Re The Walt Disney Company Derivative Litigation

731 A.2d 342 (Del. Ch. 1998), aff’d in part, rev’d in part sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000)

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Nature of the Case

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Facts

Ovitz gave up his lucrative position at CAA to come to Disney and was rewarded handsomely for it, both in salary (on the upside) and in potential severance (on the downside). After fourteen months, all parties agreed that Ovitz was not working out as president, so he left the company. After he left the Board awarded him the significant amount of severance detailed in his employment agreement. Ovitz gave up options that he could have received had he stayed longer, and Disney avoided protracted litigation with Ovitz over his rights under that agreement. William and Geraldine Brehm (P) filed this derivative action on behalf of the Walt Disney Company, a Delaware corporation. P alleged that twelve current or former members of Disney's Board of Directors (the 'Board') breached their fiduciary duties by approving the employment agreement by which Michael S. Ovitz joined the Company as Disney's president. The Brehms also alleged that the Director Defendants breached their fiduciary duties by granting Ovitz a non-fault termination, thus entitling Ovitz to receive generous severance benefits under the terms of the agreement. Ds moved for judgment on the pleadings on the ground that Ps had failed to comply with Court of Chancery Rules 12(b)(6) (failure to state a claim upon which relief can be granted) and 23.1 (failure to make demand on the Board). Ps filed an amended complaint (the 'amended complaint'), substantially enlarging the Delaware lawsuit. Ps added sixteen parties to the action. Ps brought suit against the entire current Disney Board. Ps added class claims for breach of the fiduciary duty of disclosure. Ps also added a claim directed solely against Ovitz for breach of contract. Ps seek injunctive and rescissory or other equitable relief on behalf of Disney and its shareholders or, alternatively, damages. Under the contract, if Disney terminated Ovitz's employment without good cause or if Ovitz resigned from Disney with the consent of the Company, three million of Ovitz's options would vest immediately upon his separation from the Company, and Ovitz would be entitled to wait until the later of September 30, 2002, or twenty-four months after the date of separation to exercise these options. The Employment Agreement also provided for Ovitz to receive a lump payment of $10,000,000 if he were terminated without cause prior to September 30, 2002. In addition, if Ovitz were terminated without cause, he would receive an additional payment equal to the present value of the remaining salary payments due under the Agreement through September 30, 2000, as well as the product of $7.5 million times the number of fiscal years remaining under the Agreement. It was widely known that Ovitz was seeking alternative employment elsewhere because his move to Disney did not work out so well. Ps allege that in September 1996, Ovitz sent Eisner a letter stating his desire to leave Disney. That letter notwithstanding, on December 11, 1996, only fourteen months after Ovitz joined Disney, Eisner consented to Ovitz's request for a Non-Fault Termination. The following day, Disney announced that Ovitz's employment with the Company would be terminated. Thereafter, the Disney Board approved Ovitz's Non-Fault Termination.