In re The Walt Disney Co. Derivative Litigation
906 A.2d 27




PROCEDURE: Appellant shareholders brought derivative actions on behalf of appellee corporation against appellees, the corporation's former president and directors who served at the time of the events complained of. The Court of Chancery of the State of Delaware, in and for New Castle County, ruled in favor of appellees, finding that the director defendants did not breach their fiduciary duties or commit waste. Appellants challenged that judgment.


FACTS: Disney's (D) president and COO, Frank Wells, died in a helicopter crash in 1994. Board chairman and CEO Eisner stepped in to temporarily fill Wells's shoes, but, when Eisner underwent heart surgery just three months later, Eisner and the board realized they needed to name a new company president. Ovitz was selected. Eisner and Ovitz entered into a letter agreement that outlined the terms of Ovitz's employment, including a five-year term and a generous severance package, all of which was subject to approval by the board. The board granted its approval shortly thereafter, and Ovitz began his employment on the date the agreement was officially executed. It soon became clear, however, that Ovitz was a poor fit with other Disney executives. Disney attempted to work out a deal whereby Sony took Ovitz in "trade," but negotiations with Sony proved fruitless, and it became clear that Disney would need to terminate Ovitz. Disr 's legal counsel advised Eisner that there were no grounds to terminate Ovitz for cause. Nonetheless, just fourteen months after Ovitz began his employment with Disney, Eisner advised Ovitz that his employment was terminated. Eisner further advised Ovitz that upon termination he would receive all that was offered under the severance terms of the employment agreement, which amounted to a staggering $130 million.



ISSUE: Whether the Disney directors breach their fiduciary duties to the shareholders and commit waste by entering into an employment agreement with a new company president that included a termination provision allowing for $130 million in severance payments after just fourteen months of employment?


RULE: Black Letter Rule: The law presumes that in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.

HOLDING: The Supreme Court, held that:
1 president did not breach any fiduciary duties when he negotiated employment agreement with corporation;
2 president did not breach any fiduciary duties by accepting $130 million severance payout, pursuant to his employment agreement, when he was terminated;
3 evidence was sufficient to establish that corporation's compensation committee did not violate its fiduciary duties when it approved president's employment agreement;
4 neither board of directors nor compensation committee was required to act and vote on termination of president when chief executive officer (CEO) and corporate general counsel decided to terminate president;