In Re Walt Disney Co. Derivative Litigation

Facts

All of these facts are necessary. Eisner at Disney first approached Ovitz about joining Disney. Ovitz gave the cold shoulder. Then Meyers announced his decision to leave CAA, and Ovitz concluded that to remain with the company he and Meyer had built together was no longer palatable. Ovitz became receptive to Disney. Ovitz came to believe that he and Eisner would run Disney, and would work together in a relationship akin to that of junior and senior partner. Ovitz was mistaken. Ovitz owned 55% of CAA and earned approximately $20 to $25 million a year from that company. Ovitz made it clear that he would not give up his 55% interest in CAA without 'downside protection.' Ovitz would receive a five-year contract with two tranches of options. The first tranche of three million options vesting in equal parts in the third, fourth, and fifth years, and if the value of those options at the end of the five years had not appreciated to $50 million, Disney would make up the difference. The second tranche consisted of two million options that would vest immediately if Disney and Ovitz opted to renew the contract. Neither party could terminate the agreement without penalty. If Ovitz, for example, walked away, for any reason other than those permitted under the OEA, he would forfeit any benefits remaining under the OEA and could be enjoined from working for a competitor. If Disney fired Ovitz for any reason other than gross negligence or malfeasance, Ovitz would be entitled to a non-fault payment, which consisted of his remaining salary, $7.5 million a year for unaccrued bonuses, the immediate vesting of his first tranche of options and a $10 million cash out payment for the second tranche of options. Russell, a director who assisted in the negotiations, expressed his concern that the negotiated terms represented an extraordinary level of executive compensation. Russell acknowledged that Ovitz was an 'exceptional corporate executive' and 'highly successful and unique entrepreneur' who merited 'downside protection and upside opportunity.' Graef Crystal, an executive compensation consultant, and Raymond Watson, a member of Disney's compensation committee also evaluated the terms. Crystal concluded that the OEA would provide Ovitz with approximately $23.6 million per year for the first five years, or $23.9 million a year over seven years if Ovitz exercised a two-year renewal option. This actually approximated Ovitz's current annual compensation at CAA. Crystal was opposed to a pay package that would give Ovitz the best of both worlds-low risk and high return. Eisner and Ovitz reached a separate agreement. Eisner told Ovitz that: (1) the number of options would be reduced from a single grant of five million to two separate grants, of three million options for the first five years and the second consisting of two million more options if the contract was renewed; Ovitz would join Disney only as President, not as a co-CEO. Ovitz accepted those terms. The next day, Disney's General Counsel, and its Chief Financial Officer, Litvack and Bollenbach, voiced concerns that Ovitz would disrupt the cohesion that existed between Eisner, and them. They indicated they would not report to Ovitz. Ovitz then became concerned about his 'shrinking authority' as Disney's future President. Eisner reassured him, and Ovitz acceded the new terms. Public reaction was extremely positive: Disney was applauded for the decision, and Disney's stock price rose 4.4 % in a single day, thereby increasing Disney's market capitalization by over $1 billion. The Disney compensation committee met for one hour to consider, among other agenda items, the proposed terms of the OEA. The committee voted unanimously to approve the OEA terms, subject to 'reasonable further negotiations within the framework of the terms and conditions' described in the OEA. The Disney board met in executive session. It was told about the reporting structure to which Ovitz had agreed, but the initial negative reaction of Litvack and Bollenbach was not recounted. It would delay the formal grant of Ovitz's stock options until further issues between Ovitz and the Company were resolved. The stock options were approved. Ovitz began on October 1, 1995, the date that the OEA was executed. By the fall of 1996, however, it had become clear that Ovitz was 'a poor fit with his fellow executives.' Disney directors were discussing that Ovitz would have to be terminated. After 14 months Ovitz was terminated without cause by Eisner, resulting in a severance payout of $130 million. Attempts were made to trade Ovitz off to Sony so no severance would be owed but they failed. Ovitz even reassured Eisner that he was now a company man willing to appreciate the unique character of Disney management. Eisner even examined if Ovitz could be fired for cause or to negotiate a lower payout but they were deemed to create further legal liability. On December 10, the Executive Performance Plan Committee met and awarded a $7.5 million bonus to Ovitz for his services performed during fiscal year 1996, despite Ovitz's poor performance and the fact that the bonuses were discretionary. The Committee knew that Ovitz was to be terminated without cause. That bonus was later rescinded after more deliberate consideration, following Ovitz's termination. Disney shareholders (Ps) brought derivative actions in the Court of Chancery, on behalf of Disney. Ps claimed that the $130 million severance payout was the product of fiduciary duty and contractual breaches by Ovitz, and breaches of fiduciary duty by the Disney defendants (Ds), and a waste of assets. The Court of Chancery dismissed the original complaint in 2000. On appeal, this Court affirmed the dismissal in part and reversed it in part, remanding the case to the Court of Chancery and granting the plaintiffs leave to replead. Ps filed their second amended complaint in January 2002. Eventually, after extensive discovery, Ovitz moved for summary judgment. That motion was granted in part and denied in part in September 2004. Ps have appealed from that judgment.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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