Man Without Qualities

Tuesday, July 08, 2003

More Corporate Governance In Disneyland: Holding Hands At Midnight With Mr. Eisner!

Recently Michael Eisner and the Walt Disney Company - among the nation's most egregious debasers of substantial corporate governance - have been telling the world that they are running around, trying everything new, in hopes of improving Disney management accountability. But nothing meaningful has changed.

Some shareholders aren't convinced by the Disney/Eisner charm assault - and have sued over the disastrous Disney/Ovitz fling.

Now the Delaware Chancery Court has released an opinion regarding that disastrous Disney/Ovitz fling that gives some insight into just how awful management abuse at Disney can be. Some care is required in construing this decision because the Court did assume the facts as the plaintiffs alleged them. But the facts pretty well square with what has been publicly reported.

Ovitz’s tenure at Disney was unsuccessful and negotiations regarding his termination among Ovitz, Eisner and one board member began. That board member wrote two letters to Ovitz, indicating that Ovitz would face a non-fault termination and that he would receive nearly $40 million in cash, plus vesting of three million stock options. The letter was signed by Eisner and the board member. There was no record that the board as then constituted either reviewed or approved the letter, nor did they raise any questions about the termination.

The plaintiffs contended that Disney’s by-laws required the board’s approval of Ovitz’s nonfault termination. The Court concluded (assuming the truth of the facts in the complaint) that Delaware corporate law’s “theoretical justification for disregarding honest errors simply does not apply to intentional misconduct or to egregious process failures that implicate the foundational directoral obligation to act honestly and in good faith to advance corporate interests.”

Despite writing that the “Court is appropriately hesitant to second-guess the business judgment of a disinterested and independent board of directors,”Chancellor William B. Chandler III, wrote that “[t]hese facts, if true, do more than portray directors who, in a negligent or grossly negligent manner, merely failed to inform themselves or to deliberate adequately about an issue of material importance to their corporation. Instead, the facts alleged in the new complaint suggest 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.”

Chancellor Chandler also stated that, “where a director consciously ignores his or her duties to the corporation, thereby causing economic injury to its stockholders, the director’s actions are either ‘not in good faith’ or ‘involve intentional misconduct’. Thus, plaintiffs’ allegations support claims that fall outside the liability waiver provided under Disney’s certificate of incorporation.”

The plaintiffs also contended that, because Ovitz was serving as an officer prior to finalizing his employment agreement, he owed the company a duty to negotiate honestly and in good faith so as not to advantage himself at the shareholders’ expense. The Court made note of Eisner and Ovitz’s twenty-five year relationship and stated that Ovitz should have negotiated with an impartial entity – such as the compensation committee – rather than with his good friend. The Court also held that the final version of the employment agreement differed significantly from the summaries of the drafts that were provided to the directors, and the Court was therefore unable to dismiss the claims against Ovitz since the facts as alleged sugges ted that the subsequent changes were not the result of arms’ length bargaining and were the product of Ovitz engaging in a self-interested transaction by negotiating with his close personal friend.

The Court goes on to state that Ovitz did not advise the Disney board of his departure, but worked with Eisner to negotiate a contract that was ultimately entered into without approval by the Disney board.

All in all, nice work if you can get it.

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