Litigation
Delaware Court of Chancery Decides
In the end, the Disney case
broke little new legal ground:
the considerations undertaken
by Disney’s senior officers and
Board in the hiring and firing of
Ovitz withstood scrutiny as a
matter of due care, loyalty and
good faith.
08.2005 | 01
Disney/Ovitz Compensation Case In
Favor Of All Director Defendants
“Times may change, but fiduciary duties do not.”
Chancellor Chandler, In re The Walt Disney Co. Deriv. Litig., Consolidated C.A. No. 15452, slip op.
at 3 (del. Ch. Aug. 9, 2005)
On August 9, 2005, the Delaware Court of Chancery issued its decision in the seminal
Disney/Ovitz compensation case, In re The Walt Disney Company Derivative Litigation,
concluding that the defendant directors and officers of The Walt Disney Company did not
violate their fiduciary duties when they hired Chief Operating Officer Michael Ovitz nearly ten
years ago and then fired him a little over one year later.
The closely-watched case has provided years of fodder for court-watchers and Hollywood-
watchers alike, especially given the personalities involved and the enormity of the estimated
$140 million severance package paid to Ovitz after his stunted tenure. In the end, Chancellor
Chandler concluded:
breaches of duty are determined on a director-by-director basis, as opposed to viewing
the board as a whole
the Court should take into account the corporate governance climate in existence at the
time the activities occurred, as well as the materiality of the transaction when weighed
against the gravity of other decisions ordinarily undertaken by the company’s Board (or,
indeed, even left to management) and
while corporate governance “best practices” may provide context in which to evaluate the
fulfillment of director/officer fiduciary duties, they do not provide an absolute standard for
determining whether such duties have been violated.
Although the Court attempted to bolster its prior efforts to define a “duty of good faith” in the
context of traditional directorial duties of due care and loyalty, in the end it broke little new legal
ground: the considerations undertaken by Disney’s senior officers and Board in the hiring and
firing of Ovitz would have withstood scrutiny as a matter of due care, loyalty, or of good faith,
however defined, when viewed in the context of the corporate governance environment as it
existed in the mid-1990s. At the same time, however, this case provides a virtual roadmap of
“Director Don’ts” for both actual deliberative processes and the documentation of such
processes.
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While the Court focused
substantial discussion on
whether a “duty of good faith”
also existed under Delaware
law, its discussion did not
clarify exactly what this
concept entails.
08.2005 | 02
Background and Key Holdings
In his 2003 opinion denying the defendants’ motion to dismiss the second amended complaint,
Chancellor Chandler sent shock waves through corporate board rooms when he implied that
the Company’s directors might be subject to liability for violating a newly-emerging “duty of
good faith,” i.e., based on plaintiffs’ allegations that “the defendant directors consciously and
intentionally disregarded their responsibilities, adopting a ‘we don’t care about the risks’
attitude concerning a material corporate decision.” In re The Walt Disney Co. Deriv. Litig., 825
A.2d 275, 289 (Del. Ch. 2003) (emphasis in original).
These allegations were tested in 37 days of trial, which generated 9,360 pages of transcript
from 24 witnesses and 1,033 trial exhibits. After carefully reviewing that record, the Court
found, in a 174-page Opinion, that the director defendants did not breach their fiduciary duties.
The Court’s key findings include:
The decision to hire Ovitz and the Compensation Committee’s approval of his employment
agreement was not grossly negligent or in bad faith, given that: (1) the Compensation
Committee Chair was fully informed of the details of the proposed agreement, retained a
respected compensation consultant, Graef Crystal, to review and prepare a report on it,
and discussed it in varying levels of detail with other members of the Committee (although
not necessarily together as a group); and (2) Michael Eisner, Disney’s Chairman and
CEO, relied on Crystal’s analysis and discussed Ovitz’s hiring with individual directors,
including, in particular, individual members of the Compensation Committee.
The Board of Directors was not under a duty to discuss and approve Ovitz’s termination
pursuant to the Company’s governing instruments and Eisner, in his roles and subject to
the control of the Board, possessed the right to remove subordinate officers and
employees of the corporation. Hence, Eisner’s termination of Ovitz without Board approval
or intervention did not usurp any Board authority and the Board did not violate their
fiduciary duty of care in failing to meet prior to the termination or more closely question
whether Ovitz should be terminated without cause.
Eisner’s decision to terminate Ovitz was not an act of bad faith and did not breach his
fiduciary duties as “he weighed the alternatives, received advice from [Disney General
Counsel Sanford Litvack] and then exercised his business judgment in the manner he
thought best for the corporation.” He “was not personally interested in the transaction in
any way that would make him incapable of exercising business judgment.”
Litvack analyzed Ovitz’s employment agreement and Ovitz’s performance and opined in
good faith that there was no cause for terminating Ovitz. He also concluded that any
attempt to terminate for cause would likely lead to costly litigation and would harm
Disney’s reputation.
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Disney’s Legal Implications
Implication 1 — No Substantial Change to Legal Standard Under Which Directors or
Chancellor Chandler was
Officers of Delaware Corporations Will Be Held Liable
careful to distinguish what
Delaware law requires of
corporate fiduciaries — that
they not breach fiduciary
duties — from so-called “best
practices of ideal corporate
governance.”
08.2005 | 03
SF/21631520.1
Ovitz did not breach his duty of loyalty by receiving the no-fault termination payment
because he played no part in the decisions which resulted in his being terminated and,
moreover, the termination was not for cause.
The Court strongly rejected the plaintiffs’ claim for waste — i.e., that Ovitz’s compensation
package incentivized Ovitz to leave the Company and receive a no-fault termination
payment — because such a finding would have to be based on certain preposterous
assumptions, including: (1) that Ovitz was somehow able to determine if he would be
terminated and whether such a termination would be with or without cause; and (2) that
Eisner had agreed to terminate Ovitz even before Ovitz had been hired.
Support for a new “duty of good faith?”
In its finding that the directors acted in good faith and discharged their fiduciary duties of
due care and loyalty, the Court relied upon well-established standards under Delaware
law governing these duties. While the Court focused substantial discussion on whether a
“duty of good faith” also existed under Delaware law, its discussion did not clarify exactly
what this concept entails. Describing the duty as one to avoid any conduct “disloyal to the
corporation,” Chancellor Chandler ultimately wrote that the threshold for liability for failing
to act in good faith is high: such a breach requires an “intentional dereliction of duty, a
conscious disregard for one’s responsibilities . . . . [This] may be shown, for instance,
where the fiduciary intentionally acts with a purpose other than that of advancing the best
interests of the corporation, where the fiduciary acts with the intent to violate applicable
positive law, or where the fiduciary intentionally fails to act in the face of a known duty to
act.”
At the same time, it remains unclear how the duties of due care, loyalty, and good faith will
interrelate in the post-Disney era. One of the Court’s formulations of the duty of good faith
– i.e., a “[d]eliberate indifference and inaction in the face of a duty to act . . . , conduct that
is clearly disloyal to the corporation. It is the epitome of faithless conduct.” — appears to
encompass elements of both the duties of care and loyalty. Given the almost certainty of
an appeal in this matter, it appears the Delaware Supreme Court will have an opportunity
to clarify the precise contours and interrelationship of these duties.
Directors’ and officers’ fiduciary duties should not be equated with “aspirational
ideals” or “best practices of ideal corporate governance.”
In his analysis, Chancellor Chandler was careful to distinguish what Delaware law requires
of corporate fiduciaries — that they not breach their fiduciary duties — from so-called
“best practices of ideal corporate governance” — a standard which he asserted the Disney

The Court rejected the
plaintiffs’ attempts to hold
certain directors to a generally
higher standard in light of their
specialized expertise, except
where it was specifically
relevant.
08.2005 | 04
directors “fell significantly short of.” According to Chancellor Chandler, “[u]nlike ideals of
corporate governance, a fiduciary’s duties do not change over time.” Thus, while “strongly”
encouraging directors and officers to employ “best practices,” the Court concluded that:
“Delaware law does not — indeed, the common law cannot — hold fiduciaries liable for a
failure to comply with the aspirational ideal of best practices. . . .” The Court explained
this conclusion as follows:
[s]hould the Court apportion liability based on the ultimate outcome of decisions taken
in good faith by faithful directors or officers, those decisions-makers would
necessarily take decisions that minimize risk, not maximize value. The entire
advantage of the risk-taking, innovative, wealth-creating engine that is the Delaware
corporation would cease to exist, with disastrous results for shareholders and society
alike. That is why, under our corporate law, corporate decision-makers are held
strictly to their fiduciary duties, but within the boundaries of those duties are free to
act as their judgment and abilities dictate, free of post hoc penalties from a reviewing
court using perfect hindsight. Corporate decisions are made, risks are taken, the
results become apparent, capital flows accordingly, and shareholder value is
increased.
Implication 2 — Breaches of Duty Are To Be Determined Director-By-Director, Not By
Viewing The Board As A Whole
Another legal milestone lurking in the background of the Disney decision involved whether the
defendant directors and officers would be evaluated according to sliding-scale standards,
based on their individual positions and experience. Recently, in In re Emerging
Communications, Inc. Shareholders Litigation, 2004 WL 1305745 (Del. Ch. May 3, 2004,
revised June 4, 2004), Supreme Court Justice Jacobs (acting in his capacity as Vice
Chancellor) suggested that individual directors with greater knowledge of the company and the
industry may be held to a standard of review which demands greater scrutiny of a proposed
transaction. The decision set off a firestorm of commentary, and at one point prompted former
Delaware Supreme Court Chief Justice E. Norman Veasey to say it “should probably be read
more narrowly as a factual decision in the context of [that] particular trial record.”
The Disney court cited the Emerging Communications decision, but only in support of the
proposition that, in determining whether there was a breach of fiduciary duty, a court should
look not at the board of directors as a whole, but rather at each officer or director on an
individual basis (or, where relevant, as a sub-group, such as when the information available
and other facts and circumstances were the same for that sub-group). In addition, Chancellor
Chandler rejected the plaintiffs’ attempt to hold the attorney directors, Stanley Gold, George
Mitchell and Irwin Russell, to a generally higher standard in light of their legal background, and
took the fact of “special expertise” into consideration only where it was specifically relevant, as
in the case of Litvack’s provision of legal advice.
SF/21631520.1
 Practical Lessons From Disney: Director “Do’s And Don’ts”

The Disney decision is replete with practical lessons stemming from the Court’s description of
the ways in which the Ovitz compensation and termination process “fell significantly short of”
corporate governance ideals. A few key “takeaways” include:

Lesson 1 — Document, Document, Document the Bases for Board Decisions

The Court’s decision provides yet another reminder of some of the lessons learned from
Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985): if decision making practices by boards of
directors can be shown to be adequate, courts will respect the business judgment rule and
will defer to any reasonable decision which emerges from such an acceptable process.
Thus, the bottom line is that directors, while they need to act in the best interests of the
Simple steps of ensuring that
corporation, also need to be able to show that they acted in the best interests of the

important documents are
adequately distributed and that
decisions and their bases are
corporation. Without evidence of the reasonableness of any deliberative process, a court
is less likely to determine the merits of a case pre-trial and might even not be convinced
that the process was actually reasonable. Notable in the Disney case is the extent to
which Chancellor Chandler looked to non-Board meeting conversations, exchanges, and
informal meetings in support of his finding that no fiduciary duties had been breached.

adequately memorialized will Others might not be so fortunate.

likely make the defense of
decisions made by directors
and officers easier, and may
help avoid the costly and
lengthy litigation of such
issues in court.
Had there been better documentation relating to decisions that were made in the Disney
case, as well as better distribution of information to those involved in the process, it might
have been that the case would have been dismissed, thus avoiding the significant
expense and risk of trial.
For example, there were instances where documents could have (and perhaps should
have) been created, circulated, and made part of the Board Minutes. The defendants’
position in the case would have benefited from:
(1) some form of summary, created around August 1995, perhaps from Eisner to
the Board, of the reasons why Ovitz was the best choice for President, to which
documents supporting this conclusion (such as the compensation consultant’s
report) could have easily been attached and

(2) a document from Litvack (and/or other attorneys) to the Board and Eisner
summarizing the legal advice that Ovitz was entitled to a no-fault termination
payment under his employment contract

Indeed, the documentation of the deliberative process was so sparse that at one point
there was some dispute as to whether or not the Board held an Executive Session at
which Ovitz’s impending termination was discussed: while the Court concluded that such a
session was held, some Board members did not recall such a session and Eisner himself
08.2005 | 05
testified that it “was not an official executive session, but instead [a gathering of] the non-
management directors in a room to discuss Ovitz.”

SF/21631520.1
 There were also certain key documents that did exist but were not circulated to all
Directors nor made a part of the Board minutes. Examples include: (1) an August 1995
memorandum authored by Russell, which states, inter alia, that “all the members of the
Compensation Committee heartily endorse this pay package. Watson had a long
discussion with Ignacio Lozano and I had two long conversations with Sidney Poitier in
which all the details were reviewed and discussed before the deal was signed”; (2)
Crystal’s report regarding Ovitz’s proposed compensation; (3) Ovitz’s biography; (4) the
Ovitz Letter Agreement, which outlined the essential terms of his employment; and (5) the
Ovitz compensation term sheet.

Bottom Line:

Important information which forms the basis for and explains actions taken by
directors (together with any reports from experts or others retained to assist the
The Court’s decision suggests
deliberative process) should be adequately memorialized and distributed to all

that corporations should pay Committee or Board members and made part of the Board or Committee minutes.
Board or Committee minutes should contain more than sparse summaries of who
close attention to when and attended the meetings and who made presentations.

If less formal discussions have been held at prior Board meetings or Executive
under what circumstances
Sessions thereof, they should be referenced (with a short description of the
discussion) in the minutes of the Board meeting in which the related action is taken
Board action need to be taken.
(or reported on). Thus, important informal deliberations should be incorporated into
formal documentation.

While minutes of Executive Sessions might be less detailed than those of actual
Board meetings, the fact of an Executive Session, along with an identification of the
directors present, should be clearly set out in formal Board minutes.

In sum, simple steps of ensuring that important documents are adequately distributed
and that decisions and their bases are adequately memorialized will likely make the
defense of decisions made by directors and officers easier, and may help avoid the
costly and lengthy litigation of such issues in court.

Lesson 2 — Be Very Clear As To When Board Action Is Required

Chancellor Chandler found, after a careful review of Disney’s Charter, By-laws and prior
practice, that Board action was not required to terminate Ovitz’s employment and pay him
his no-fault termination payments under his employment contract. Chancellor Chandler
also found that the $140 million severance payment was not “material” to the Company’s
operation, in light of the Company’s overall revenues and in light of other decisions of
similar magnitude which were typically handled by management rather than by the Board.
The centrality of these findings to the Court’s decision suggests that corporations should
pay close attention to when and under what circumstances Board action need be taken.
08.2005 | 06

SF/21631520.1

Officers and directors should
take heed from this
cautionary tale of how the
decision-making process
occurred at Disney, and how,
in particular, that process
was documented.
08.2005 | 07
Bottom Line:
Directors, officers, and General Counsel must be sure that they know what matters
can only be taken by Board action and what additional matters — although not
required to be acted upon by the Board — should nonetheless be considered by the
Board or one of its Committees.
Where there is doubt as to whether a Board need act because of the materiality
(either quantitatively or qualitatively) of an issue or when there is a conflict (or
perception of a conflict) of interest, such as the termination of a friend, a more prudent
course of action would be to bring the decision to the Executive Committee, or at
least have such a matter reviewed by the Executive Committee. Indeed, the purpose
of Executive Committees and shortened or waiver of notice provisions is to provide
for such review and action in between regular Board meetings.
Conclusion
Chancellor Chandler’s 174-page decision provides a fascinating behind-the-scenes analysis of
Disney’s controversial hiring and less-than-ceremonious ouster of Ovitz a little over a year
later. Despite lengthy discussion of the newly-emerging “duty of good faith,” the Chancery
Court in the end fell back on fairly traditional notions of corporate fiduciary duties in concluding
that neither the members of the Disney Board nor its senior officers had violated their duties
when hiring and terminating Ovitz. At the same time, the case must be read in the context in
which Ovitz’s tenure took place — almost ten years ago, and long before anyone had heard of
Sarbanes-Oxley or associated “Enron” or “WorldCom” with “unprecedented fraud.” Would the
decision have come out differently if Ovitz had been hired and fired using the same processes
now? It is difficult to speculate, but the call may have been much closer. Regardless, today’s
officers and directors should take heed from this cautionary tale of how the decision-making
process occurred at Disney, and how, in particular, that process was documented. Indeed, had
the process been more orderly and the documentation more thorough, the litigation might
never have ensued or, at a minimum, would likely have not followed the course it did.
THIS ALERT WAS WRITTEN BY STEPHEN D. ALEXANDER* AND BETH I.Z. BOLAND, SECURITIES
LITIGATION/CORPORATE GOVERNANCE PARTNERS IN BINGHAM MCCUTCHEN’S LOS ANGELES AND
BOSTON OFFICES, RESPECTIVELY. ASSOCIATES T. PETER POUND (BOSTON), JENNIFER CORINIS
(BOSTON) AND JENNIFER PHELPS (LOS ANGELES) PROVIDED DRAFTING AND RESEARCH ASSISTANCE.
* Mr. Alexander represented director defendants Roy E. Disney and Stanley P. Gold as trial counsel in this
litigation.
SF/21631520.1
Boston For more information about the Alert, please contact any of the attorneys listed below:
Hartford
London Boston
Los Angeles
Beth I.Z. Boland beth.boland@bingham.com 617.951.8143
New York
Steven W. Hansen steven.hansen@bingham.com 617.951.8538
Orange County
San Francisco Jordan D. Hershman jordan.hershman@bingham.com 617.951.8455
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Walnut Creek Washington
Washington
Stephen J. Crimmins stephen.crimmins@bingham.com 202.778.6108
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Hartford
Stuart D. Rosen stuart.rosen@bingham.com 860.240.2997
Los Angeles
Stephen D. Alexander stephen.alexander@bingham.com 213.680.6518
New York
Mary Gail Gearns marygail.gearns@bingham.com 212.705.7252
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San Francisco
David M. Balabanian david.balabanian@bingham.com 415.393.2170
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Silicon Valley
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