907 A.2d 693 (Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006)
In April 1994, Frank Wells, Disney's President and COO, died in a helicopter crash, leaving Michael Eisner as the sole leader of the company and prompting the need for a successor.1 Three months later, Eisner himself suffered a heart attack and underwent quadruple bypass surgery, intensifying the urgency to identify leadership help.2 By the summer of 1995, Eisner intensified long-standing efforts to recruit his friend of twenty-five years, Michael Ovitz, the founder and head of Creative Artists Agency who earned roughly $20 million annually, after Ovitz's negotiations with MCA fell through.3
Negotiations produced a letter agreement dated August 14, 1995 that set a five-year term, $1 million annual salary, discretionary bonus, and two tranches of stock options, together with a Non-Fault Termination provision that entitled Ovitz to his remaining salary, a $7.5 million annual bonus for unaccrued years, immediate vesting of three million options, and a $10 million cash payment if he were terminated without gross negligence or malfeasance.4 On August 10, 1995, compensation-committee chairman Irwin Russell, director Raymond Watson, and compensation consultant Graef Crystal met to value the proposed package using Black-Scholes analysis; Crystal later reported an annual value of approximately $23.6 million for the first five years, with only Eisner, Russell, and Watson participating in these discussions.
On September 26, 1995, the compensation committee met for one hour, reviewed a term sheet rather than the full draft agreement, heard presentations from Russell and Watson, and unanimously approved the economic terms subject to reasonable further negotiation; the full board then elected Ovitz President effective October 1, 1995, and the final employment agreement was executed shortly thereafter.
Ovitz's performance as President quickly deteriorated as he clashed with senior executives Sanford Litvack and Stephen Bollenbach over reporting lines, failed to integrate with Disney's culture, and produced few tangible results in areas such as Disney Interactive and Hollywood Records.5 By mid-September 1996, Eisner and Litvack concluded that Ovitz had to leave, and after failed discussions about a possible move to Sony, Eisner decided to terminate Ovitz without cause.6
On December 12, 1996, Litvack signed a letter confirming a Non-Fault Termination effective January 31, 1997, with the departure date later accelerated to December 27, 1996; Ovitz received approximately $38 million in cash and the immediate vesting of three million options.7 Stockholder plaintiffs filed a derivative action alleging that the directors had breached their fiduciary duties in approving the employment agreement and in effecting the termination.8 After a thirty-seven-day trial that generated 9,360 pages of transcript and 1,083 exhibits, Chancellor Chandler issued a post-trial decision on August 9, 2005.9
Whether the director defendants breached their fiduciary duties of care or loyalty or acted in bad faith in connection with the 1995 hiring of Michael Ovitz as President and the approval of his employment agreement?10
The business judgment rule presumes that directors act on an informed basis, in good faith, and in the honest belief that the action was in the best interests of the company.11 Plaintiffs rebut this presumption only by showing gross negligence or bad faith.12 Gross negligence requires reckless indifference to or deliberate disregard of the whole body of stockholders.13 Bad faith includes intentional dereliction of duty or conscious disregard for responsibilities.14
No. The directors were informed of all material information reasonably available when they approved Ovitz's hiring and the economic terms of the OEA.15 Russell and Watson conducted extensive valuation analysis with Crystal using Black-Scholes methodology on August 10, 1995, producing an estimated annual value of $23.6 million for the first five years.16 On September 26, 1995, the compensation committee met for one hour, reviewed a term sheet, heard presentations from Russell and Watson, and unanimously approved the terms subject to reasonable further negotiation.17 Eisner kept key directors informed through individual calls, and the full board elected Ovitz as President after discussion in executive session.18
No evidence shows reckless indifference or conscious disregard; the process reflected ordinary care and good faith belief that Ovitz would benefit the company after Wells's death and Eisner's health issues.19
The director defendants did not breach their fiduciary duties of care or loyalty or act in bad faith in connection with the 1995 hiring of Michael Ovitz as President and the approval of his employment agreement.20
Whether the director defendants committed waste in connection with the approval of Ovitz's employment agreement?21
No. The OEA was not so one-sided that no rational business person would approve it.24 Ovitz was a highly regarded industry figure leaving a successful agency earning $20 million annually, and the company needed a successor after Wells's death and Eisner's health crisis.25 The compensation committee and board approved the package after valuation analysis showing it approximated Ovitz's prior earnings, with downside protection necessary to induce him to join.26 The NFT payout, though substantial, was a contractual consequence of termination without cause, and the company received Ovitz's services for over a year.27
Plaintiffs failed to show irrational squandering of assets.28
The director defendants did not commit waste in connection with the approval of Ovitz's employment agreement.29
Whether Michael Ovitz breached his fiduciary duty of loyalty in connection with his 1996 termination and receipt of benefits under the employment agreement?30
A fiduciary owes undivided loyalty and must not manipulate corporate processes for personal advantage.31 An officer or director who receives a contractual benefit after termination does not breach loyalty if he played no part in the decision to terminate or the determination that termination was without cause.32
No. Ovitz did not breach his fiduciary duty of loyalty.33 He played no part in the decisions to terminate him or to classify the termination as without cause under the OEA.34 Eisner and Litvack made those decisions independently after concluding Ovitz could not be terminated for cause.35 Ovitz was contractually entitled to the NFT benefits once the company imposed the termination without cause, and he did not interject himself into or manipulate the process.36
No reasonably prudent fiduciary in Ovitz's position would have called a board meeting to force reconsideration of his own termination.37
Michael Ovitz did not breach his fiduciary duty of loyalty in connection with his 1996 termination and receipt of benefits under the employment agreement.38
Whether the director defendants breached their fiduciary duties or acted in bad faith in connection with Ovitz's 1996 termination and the payment of benefits under the employment agreement?39
Directors owe duties of care and loyalty and must act in good faith.40 The business judgment rule protects decisions made on an informed basis and in good faith.41 A CEO has authority to terminate inferior officers unless the board expressly limits that authority.42 Good faith requires honesty of purpose and absence of intentional dereliction of duty.43
No. Eisner possessed authority under the certificate of incorporation and bylaws to terminate Ovitz without board action, and the New Board was not under a duty to act.44 Litvack correctly concluded after reviewing the facts that Ovitz could not be terminated for cause, and Eisner relied in good faith on that advice.45 The board was informed of and supported the decision.46 No defendant intentionally disregarded a known duty or acted with conscious disregard for corporate interests.47
The NFT payment was the contractual consequence of a good-faith termination decision.48
The director defendants did not breach their fiduciary duties or act in bad faith in connection with Ovitz's 1996 termination and the payment of benefits under the employment agreement.49
Whether the compensation committee members satisfied their fiduciary duties when they approved the economic terms of Ovitz's employment agreement?50
Directors satisfy their duty of care when they consider all material information reasonably available and are not grossly negligent.51 Reliance on experts and management presentations is permitted when the experts are selected with reasonable care and the information is not so deficient as to put the directors on notice of problems.52
Yes. The compensation committee members satisfied their fiduciary duties.53 On September 26, 1995, they reviewed a term sheet, heard presentations from Russell and Watson who had worked with Crystal on Black-Scholes valuation, and unanimously approved the economic terms.54 Poitier and Lozano received sufficient information from the presentations to exercise informed judgment.55
The committee reasonably relied on Crystal's analysis, which was not so deficient as to warrant questioning.56 The one-hour meeting and term-sheet review were adequate given the nature of the transaction and the information provided.57
The compensation committee members satisfied their fiduciary duties when they approved the economic terms of Ovitz's employment agreement.58