Judge Throws Out Disney Shareholders' Case Against Eisner

by Glen Shapiro, LawAndTax-News.com, New York

11 August 2005

A Delaware judge, Chancellor William B. Chandler III, in a 174-page ruling, has thrown out Walt Disney Co shareholders' attempt to recover $260m for the company from its directors over the sacking of Michael Ovitz in 1995.

The ruling says that directors did perform their fiduciary duty in the controversial hiring and firing of former President Michael Ovitz, although in places the judge is highly critical of the directors' conduct.

Mr. Ovitz, previously a close friend of Disney CEO Michael Eisner, was hired as his deputy in 1995 and fired just 14 months later in a no-fault termination with a pay-off valued at about $140m.

The plaintiffs attempted to show that the directors had broken established standards of corporate governance, and the ruling, which they plan to appeal, will be seen as a setback for the movement towards better corporate governance.

The judge concluded that Mr. Eisner acted in good faith. "Despite all of the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom, I nonetheless conclude … that Eisner's actions were taken in good faith."

"It is easy, of course, to fault a decision that ends in a failure, once hindsight makes the result of that decision plain to see," wrote Judge Chandler. He added that risk is the essence of business, and that to apportion liability based on the outcome of a bad decision would prompt future board members to take decisions that minimize risk, not maximize value. "The redress for failures that arise from faithful management must come from the markets … and not from this Court."

However, he was scathing about Michael Eisner: "By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz's hiring in particular, Eisner to a large extent is responsible for the failings … that infected and handicapped the board's decisionmaking abilities. . . . Eisner stacked his (and I intentionally write "his" as opposed to "the Company's") board of directors with friends and other acquaintances who .. were certainly more willing to accede to his wishes … than truly independent directors."

The trial lasted 37 days (between October 20, 2004 and January 19, 2005) and generated 9,360 pages of transcript from twenty-four witnesses. The Court, said the judge, also reviewed thousands of pages of deposition transcripts and 1,033 trial exhibits that filled more than twenty-two 3 1/2-inch binders.

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