Judge Sides With Disney Board in Ovitz Shareholder Suit

Tuesday, August 09, 2005

Directors of The Walt Disney Co. (DIS) did not breach their fiduciary responsibilities in approving the ill-fated hiring of Hollywood superagent Michael Ovitz (search) as president in 1995, then granting him a $140 million severance package when he left just 14 months later, a judge ruled Tuesday.

Chancellor William Chandler III said that while directors' conduct "fell significantly short of the best practices of ideal corporate governance," board members did not breach their duties or commit waste.

"It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known," Chandler wrote in a 175-page opinion.

Click here to read the ruling (pdf).

His decision closes a shareholder derivative trial that revealed the stormy inner workings of one of world's largest entertainment companies.

Trial testimony included details of Ovitz's lavish spending and the enmity he engendered among fellow Disney executives, including CEO Michael Eisner (search), who described Ovitz in company memos as a "psychopath" with a "character problem."

Ovitz contended that he loved Eisner "like a brother" but was micromanaged, undermined by other key executives and "cut out like cancer" before he had time to prove his worth.

Eisner and the company contended Ovitz was a lavish spender whose arrogance alienated executives and who ultimately could not be trusted.

The lawsuit claimed that current and former members of Disney's board of directors did not properly scrutinize Ovitz's employment contract after Eisner tapped him as president, then wrongly granted Ovitz a no-fault termination entitling him to a $140 million severance package just over a year later.

Lawyers for the shareholders alleged that Ovitz's performance was so poor that he should have been fired for cause and not paid the remainder of his contract. The defendants, including Eisner and Ovitz, contended that Ovitz's contract was given careful consideration, and that while Ovitz's tenure was stormy from the start, there was no gross negligence or malfeasance that would justify denying him his severance package.

Sanford Litvack (search), Disney's former chief of corporate operations and chief legal officer, testified that Ovitz's "total failure" as Disney's second in command didn't mean he could be fired for cause.

After Eisner told him he planned to fire Ovitz, Litvack said he discussed the matter with in-house lawyers and outside counsel, and that they concurred that Ovitz couldn't be fired for cause.

Litvack testified that formal action by Disney's board of directors wasn't required when Ovitz was terminated because he reported to the CEO.