Entertainment Law Reporter
June 2006 Volume 28 Number 1

Delaware Supreme Court affirms dismissal of shareholder derivative suit against Walt Disney Co. complaining about company’s hiring and firing of Michael Ovitz and payment to him of $130 million in severance

Michael Ovitz’s tenure as the President of The Walt Disney Company was painfully brief and ended badly. It also generated a long-running legal battle that has come, finally, to an end.

In the summer of 1995, when Disney publicly announced Ovitz’s hiring, the public’s response was enthusiastic – especially the response of the investing public. Disney’s stock price rose 4.4% in just one day, thereby increasing the company’s market value by more than $1 billion. Fourteen months later, though, Ovitz was gone, taking with him a severance package with initially valued at $90 million (ELR 18:7:3), which, over time (as the value of Disney stock continued to increase), grew to $130 million.

The circumstances of Ovitz’s hiring and firing were so fascinating, they were the grist for James Stewart’s best-selling book Disneywar. But a handful of Disney shareholders were less fascinated than annoyed, and they stated their complaints in a shareholders’ derivative suit.

Initially, the case didn’t get far. It was dismissed by the Delaware Chancery Court, without trial (ELR 21:3:9). That ruling was reversed, however, by the Delaware Supreme Court (ELR 22:2:11). And after the Chancery Court ruled that the shareholders had finally alleged valid claims (ELR 25:4:10), the case went to trial. Disney and Ovitz won; the shareholders lost. And the case went back to the Delaware Supreme Court, where it has fared no better.

The shareholders’ case was a small blitzkrieg of legal theories, so there were several separate issues the Supreme Court had to consider. In a nutshell, the Supreme Court held that the Chancery Court:

·   correctly determined that Ovitz did not breach any fiduciary duty that he owed to Disney when negotiating for, or when receiving severance payments under the non-fault termination clause of his employment agreement.

·   correctly found that Disney’s board of directors acted in good faith when it approved Ovitz’s employment agreement and elected him as the company’s President

·   correctly decided that Disney’s decision to terminate Ovitz “without fault” was a protected business judgment and not made in violation of any fiduciary duty, nor did it waste company assets.

For these reasons, the Delaware Supreme Court has affirmed Disney and Ovitz’s victory.

In re The Walt Disney Company Derivative Litigation, 2006 WL 1562466 , 2006 Del.LEXIS 307 ,  http://courts.delaware.gov/Opinions/Download.aspx?ID=77400  (Del. 2006)