Risk & Compliance

Disney Wins Shareholder Lawsuit

Judge rules that directors did not violate their fiduciary responsibilities regarding the hiring, firing, and $140 million severance of former pres...
Stephen TaubAugust 10, 2005

Score one for boards of directors.

Walt Disney directors were vindicated Tuesday when a Delaware judge ruled they did not violate their responsibilities to shareholders when they approved chief executive officer Michael Eisner’s decisions to hire and fire former president Michael Ovitz. The dismissal resulted in a no-fault termination that entitled Ovitz to $140 million in severance, according to Bloomberg.

Investors wanted to hold Eisner and the directors personally responsible for the huge payment and sought damages of over $260 million from directors, which would have been placed in the company’s treasury.

Ovitz, once a close friend of Eisner’s, was hired as president in 1995 and fired 14 months later. Shareholders filed a lawsuit in 1997, alleging that the Disney board did not sufficiently review Ovitz’s hiring or his termination. They argued that he should have been fired for nonperformance and denied a severance.

“Eisner’s actions in connection with the termination are, for the most part, consistent with what is expected of a faithful fiduciary,” wrote Delaware Chancery Court Chief Judge William B. Chandler III in a long-anticipated ruling, according to the wire service. Shareholders intend to appeal, according to The Wall Street Journal.

In the 174-page ruling, Chandler wrote that Eisner “exercised his business judgment in the manner he thought best for the corporation,” wrote the Chancellor. “The redress for failures that arise from faithful management must come from the markets….and not from the court.”

“This ruling strengthens the notion that directors who make decisions on behalf of the company in good faith are protected from liability,” Robert Zito, a partner at law firm Schiff Hardin, told Bloomberg.

Seth Rigrodsky of law firm Milberg Weiss characterized the decision as “disappointing,” according to the Journal. Rigrodsky added, however, that “this lawsuit has already positively impacted how corporate America manages its affairs, making clear that company resources cannot be used to line the pockets of senior executives.”

Although some experts feel the ruling is a setback for corporate governance advocates, the judge noted in his ruling that the events in the Ovitz case took place 10 years ago, before the recent drive to strengthen governance practices, the Journal also reported.

Indeed, Chandler did not exonerate Eisner and the Disney board outright, reportedly asserting that their conduct “fell significantly short of the best practices of ideal corporate governance,” noted the paper. Chandler reportedly wrote that Eisner “enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom,” and that he “stacked his…board of directors with friends and other acquaintances who, though not necessarily beholden to him, were certainly more willing to accede to his wishes.”

He also reportedly wrote that “Eisner’s actions in connection with Ovitz’s hiring should not serve as a model for fellow executives and fiduciaries to follow. He stretched the outer boundaries of his authority as CEO by acting without specific board direction or involvement.”

Eisner is scheduled to step down as Disney’s chief executive on September 30 and be succeeded by president Robert Iger.