In re Walt Disney Company Derivative Litigation


PROCEDURAL BASIS Decision on a motion to dismiss.

FACTS Eisner (D) was chairman of the board of Disney. Ovitz was hired by Disney, and his contract provided that he would receive $10 million, along with other payments and stock options, if he were terminated without cause before September 30, 2002. Ovitz asked to be terminated without cause only fourteen months after joining Disney, and Eisner (D) agreed to the termination. The Disney board approved
Ovitz's termination without cause. Brehm (P), Disney shareholder, brought a derivative suit against Eisner (D) and other directors, claiming that the termination of Ovitz was corporate waste, and that the employment contract and termination were breaches of fiduciary duty. Brehm (P) claimed that a majority of the members of the board were not independent because of their ties to Eisner (D).

ISSUE: Did Brehm (P) adequately allege that Eisner (D) dominated a majority of the board by focusing on their ties to Eisner?

RULE: In order to show that directors were dominated by another, it is necessary to show that the dominating director had a personal interest in obtaining the board's approval of a transaction and that the dominated directors could not exercise independent business judgment.

HOLDING and Analysis: (Holland, J) Yes.. In this appeal, P acknowledge that the directors neither 'knew nor should have known that violations of law were occurring,' that there were no 'red flags' before the directors Ps argue that the Court of Chancery erred by dismissing the derivative complaint which alleged that 'the defendants had utterly failed to implement any sort of statutorily required monitoring, reporting or information controls that would have enabled them to leam of problems requiring their attention ' It is a fundamental principle of the Delaware General Corporation Law that '[t]he business and affairs of every corporation shall be managed by or under the direction of a board of directors Therefore, the right of a stockholder to prosecute a derivative suit is limited to situations where either the stockholder has demanded the directors pursue a corporate claim and the directors have wrongfully refused to do so, or where demand is excused because the directors are incapable of making an impartial decision regarding whether to institute such litigation Court of Chancery Rule 23 1, accordingly, requires that the complaint in a derivative action 'allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors [or] the reasons for the plaintiffs failure to obtain the action or for not making the effort' Allegations of demand futility under Rule 23 1 must comply with stringent requirements of factual particularity that differ substantially from the permissive notice pleadings governed solely by Chancery Rule 8(a).