Corporate Governance

Executive Compensation, Disney and Delaware Law (Part 3)

By J. Robert Brown

We have been writing about the recent decision by Disney to give Michael Iger, the CEO and president, a new five year contract.  We would be remiss if we didn't take a moment to note one of the worst, most anti-shareholder decisions ever issued by a Delaware court, In re The Walt Disney Co. Derivative Litigation, 731 A.2d 342 (Del. Ch. 1998), rev'd in part, 746 A.2d 244 (Del. 2000).  A single post can not do the case justice.  My article, Disloyalty without Limits, discusses some aspects of the case in greater detail.

The issue, of course, was the contract awarded to Michael Ovitz, resulting in the payment of somewhere around $160 million for a little over a year of work.  The Chancery Court had to decide whether the derivative suit ought to be dismissed on demand excusal grounds.  The Court had to address whether Ovitz and Eisner had such a close relationship that Eisner was interested in the contract, creating interested influence inside the board room.  In addressing whether "Eisner's long-time personal relationship with Ovitz caused him to be interested in obtaining the Board's approval of the Employment Agreement" the court concluded that this "argument, however, finds no support under Delaware law."  In other words, no degree of closeness could result in Eisner having an interest in the outcome of the transaction that could prevent him from making a decision in a neutral manner.  Astoundingly, this point was upheld by the Delaware Supreme Court. 

The holding itself was largely overturned by the Martha Stewart decision.  But in any event, the dismissal prevented the plaintiffs from having an opportunity to use discovery to explore the relationship.  Had this avenue been available, they would have likely discovered that the two men had a close relationship, that the two families shared a house together over Christmas and that the two wives were best friends.  In other words, it is possible that personal friendship was a factor in the decision making process.  By concluding that no amount of friendship or outside business activities would be enough to show interest, the Chancery Court could find that the derivative suit should be dismissed.   

We will have one last post on this tomorrow.

Full post as published by The Race to the Bottom on February 06, 2008 (boomark / email).