Emerging Issues in Management (Mgmt 440)

1. Emerging Issues in Management (Mgmt 440) Case Study – Walt Disney Co. and Michael Ovitz Professor Charles H. Smith Fall 2010

2. Introduction • See In re Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Delaware Supreme Ct. 2006) – “derivative litigation” means that shareholder’s right to sue company for bad business decision is derived from status as shareholder.

3. Introduction cont. • This case is 37 pages long so only read the summaries and headnotes at the beginning of the case; no need to read all 37 pages! • However, I do urge you to read the facts of the case since this is a good example of • Detailed factual analysis necessary for cases involving the business judgment rule. • Behind-the-scenes machinations that occur at top companies.

4. Pertinent Facts • Walt Disney Co. (“Disney”) hired Michael Ovitz (“Ovitz”) as president for 5 years but Ovitz worked for only 14 months before termination without cause; severance payout = $130 million. • Ovitz had insisted on generous severance payout when 1st negotiating with Disney since he would be leaving lucrative talent agent firm; he wanted “down-side protection.” • Ovitz hired due to his influence and proven track record of success in the entertainment industry.

5. Pertinent Facts cont. • Negotiations took months and involved Ovitz and his lawyer on one side and several Disney representatives led by CEO (and Ovitz friend) Michael Eisner on the other side.

6. Issue Presented • Did Ovitz and Disney board of directors (which made the decision to hire Ovitz) breach their fiduciary duties to the shareholders?

7. Applicable Law – Business Judgment Rule • “[I]n making a business decision the directors of a corporation [are presumed to have] acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.” • “Thus, directors’ decisions will be respected by the courts unless the directors are interested or lack independence relative to the decision, do not act in good faith, act in a manner that cannot be attributed to a rational business purpose or reach their decision by a grossly negligent process that includes the failure to consider all material facts reasonably available.”

8. Delaware Supreme Court’s Decision • The Delaware Supreme Court ruled that Disney’s board did not violate the business judgment rule and therefore the board upheld its fiduciary duties to the corporation and did not commit waste.

9. Delaware Supreme Court’s Reasoning • Given all of the facts, the board acted properly. • Board must act with “true faithfulness and devotion to the corporation and its shareholders” which requires conscious misconduct to show breach of fiduciary duties.

10. Delaware Supreme Court’s Reasoning cont. • How to show board’s failure to act in good faith? • Acting with purpose other than that of advancing corporation’s best interests. • Acting with intent to violate applicable positive law. • Intentionally failing to act despite known duty to act (conscious disregard for duty).