746 A.2d 244 (Del. 2000)
In 1995, The Walt Disney Company hired Michael Ovitz as its president through an employment agreement dated October 1, 1995.1 Ovitz, a longtime friend of Disney Chairman and CEO Michael Eisner and a prominent Hollywood talent broker, lacked experience managing a diversified public company.2 The agreement, unilaterally negotiated by Eisner and approved by the Old Board, provided Ovitz with a five-year term, a $1 million annual base salary, a discretionary bonus, and stock options to purchase five million shares of Disney common stock, split between "A" options vesting over three years starting in 1998 and "B" options conditioned on contract extension.3
The Old Board knew Disney needed a strong second-in-command due to recent acquisitions and questions about Eisner's health following heart surgery.4 When Eisner informed three Old Board members of his decision to hire Ovitz in mid-August 1995, they denounced it, but the Board ultimately approved the agreement unanimously two months later.5 The Board received advice from compensation expert Graef Crystal, though Crystal later stated in media interviews that no one had quantified the total cost of the severance package under a non-fault termination.6
Ovitz's performance deteriorated during his first year, leading him to seek alternative employment and express dissatisfaction in a September 1996 letter to Eisner.7 On December 11, 1996, Eisner and Ovitz agreed to a non-fault termination, which the New Board approved by mutual consent.8 A December 27, 1996 letter confirmed the end of Ovitz's service as an officer and director, treated the departure as a Non-Fault Termination, set the total amount payable at $38,888,230.77 net of withholding, and provided for immediate vesting of the three million "A" options.9
Stockholders filed a derivative complaint in the Court of Chancery on January 8, 1997, later amended on May 28, 1997, alleging breaches of fiduciary duty and waste by both the Old and New Boards in connection with the Ovitz agreement and termination.10 The Court of Chancery dismissed the amended complaint with prejudice for failure to plead particularized facts excusing pre-suit demand under Chancery Rule 23.1.11
The Supreme Court of Delaware granted review on appeal.12
Whether appellate review of a Court of Chancery dismissal of a derivative suit under Chancery Rule 23.1 for failure to plead demand futility is de novo or for abuse of discretion?13
The scope of review of decisions of the Court of Chancery applying Rule 23.1 is de novo and plenary.14 The Court applies the law to the allegations of the Complaint as does the Court of Chancery.15 The nature of the analysis of a complaint in a derivative suit is the same as that applied by the Court of Chancery in making its decision in the first instance.16
Yes. Analyzing a pleading for legal sufficiency is not the equivalent of the deferential review of discretionary rulings such as an administrative agency's findings of fact or a trial judge's evaluation of witness credibility.17 The Court of Chancery, like this Court, is merely reading the English language of a pleading and applying to that pleading statutes, case law, and Rule 23.1 requirements.18 To that extent the scope of review is analogous to that accorded a ruling under Rule 12(b)(6).19
The Court therefore reviews the dismissal de novo rather than for abuse of discretion.20
The Supreme Court of Delaware reviews the Court of Chancery dismissal de novo.21
Whether the amended complaint alleged particularized facts creating a reasonable doubt that a majority of the Disney board was disinterested and independent?22
The first prong of the Aronson test for demand futility asks whether under the particularized facts alleged a reasonable doubt is created that the directors are disinterested and independent.23 This means they are incapable, due to personal interest or domination and control, of objectively evaluating a demand if made.24
No. The Complaint alleges that a majority of the New Board was beholden to Eisner because a lavish contract for Ovitz would redound to Eisner's benefit in his quest to have his own compensation increased.25 This theory is not supported by well-pleaded facts, only conclusory allegations.26 The Court of Chancery found that Eisner owned several million options to purchase Disney stock.27 It would not be in Eisner's economic interest to cause the Company to issue millions of additional options unnecessarily and at considerable cost.28
Such a gesture would dilute the value of Eisner's own very substantial holdings.29 No reasonable doubt can exist as to Eisner's disinterest in the approval of the Employment Agreement as a matter of law.30 The same holds for the non-fault termination.31
The amended complaint failed to allege particularized facts creating a reasonable doubt that a majority of the Disney board was disinterested and independent.32
Whether the amended complaint alleged particularized facts creating a reasonable doubt that the Old Board's approval of the Ovitz Employment Agreement was protected by the business judgment rule?33
To survive a Rule 23.1 motion to dismiss in a due care case where an expert has advised the board in its decisionmaking process, the complaint must allege particularized facts that, if proved, would show for example that the directors did not in fact rely on the expert, that their reliance was not in good faith, or that the subject matter that was material and reasonably available was so obvious that the board's failure to consider it was grossly negligent regardless of the expert's advice.34
No. The Complaint, fairly construed, admits that the directors were advised by Crystal as an expert and that they relied on his expertise.35 The Old Board is entitled to the presumption that it exercised proper business judgment, including proper reliance on the expert under Section 141(e).36 What Crystal now believes in hindsight that he and the Board should have done in 1995 does not provide a rebuttal of the presumption of proper reliance on the expert under Section 141(e).37 The Complaint includes no particular allegations that the directors did not rely on the expert, that their reliance was not in good faith, or that the cost calculation was so obvious that the board's failure to consider it was grossly negligent regardless of the expert's advice.38
The amended complaint failed to allege particularized facts creating a reasonable doubt that the Old Board's approval of the Ovitz Employment Agreement was protected by the business judgment rule. The dismissal is without prejudice to permit repleading.39
Related opinions on this issue
Justice Hartnett concurred in the result.40 He stated that in his view the present complaint is adequate as to some of the asserted claims, if only barely so.41 He noted that Chancery Rules 23.1 and 12(b)(6) are predicated on the Federal Rules of Civil Procedure.42
The federal precedents therefore carry great weight.43 Rule 23.1 does not abrogate Rule 12(b)(6).44 From the totality of the factual allegations in the complaint, a reasonable doubt that the business judgment rule precludes judicial inquiry already exists as to some of the other claims, such as whether the directors were aware of the total cost of Ovitz' compensation package when they approved it.45
Plaintiffs must not be held to a too-high standard of pleading because they face an almost impossible burden when they must plead facts with particularity and the facts are not public knowledge.46
Whether the amended complaint alleged particularized facts creating a reasonable doubt that the New Board's approval of Ovitz's non-fault termination was protected by the business judgment rule?47
The second prong of the Aronson test for demand futility asks whether the pleading creates a reasonable doubt that the challenged transaction was otherwise the product of a valid exercise of business judgment.48 The waste test requires an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.49
No. The Complaint does not allege facts that would show that Ovitz had in fact resigned before the Board acted on his nonfault termination or that he was unarguably subject to firing for cause.50 The facts show only that Ovitz' performance was disappointing at best, that he lacked commitment to the Company, and that he negotiated for other jobs while required to devote his full time to Disney.51 All this shows is that the Board had arguable grounds to fire Ovitz for cause.52
The Complaint fails on its face to meet the waste test because it does not allege with particularity facts tending to show that no reasonable business person would have made the decision that the New Board made under these circumstances.
The amended complaint failed to allege particularized facts creating a reasonable doubt that the New Board's approval of Ovitz's non-fault termination was protected by the business judgment rule. The dismissal is without prejudice to permit repleading.53
Whether directors may rely in good faith on a qualified expert under 8 Del. C. § 141(e) to fulfill the informational component of their duty of care when approving an executive compensation agreement?54
Under 8 Del. C. § 141(e), a member of the board of directors shall be fully protected in relying in good faith upon information, opinions, reports or statements from experts.55 The expert must be selected with reasonable care by or on behalf of the corporation, and the director must reasonably believe the matter is within the expert's professional competence.56
Yes. The Old Board is entitled to the presumption that it exercised proper business judgment, including proper reliance on the expert under Section 141(e). Plaintiffs must rebut the presumption that the directors properly exercised their business judgment, including their good faith reliance on Crystal's expertise.57 The Complaint admits that the directors were advised by Crystal as an expert and that they relied on his expertise.58
What Crystal now believes in hindsight that he and the Board should have done in 1995 does not provide that rebuttal.59 The directors fulfilled the informational component of their duty of care by relying in good faith on the qualified expert.60
Directors may rely in good faith on a qualified expert under 8 Del. C. § 141(e) to fulfill the informational component of their duty of care when approving an executive compensation agreement.61