Corporate Governance

Executive Compensation, Disney and Delaware Law (Part 4)

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.  As part of that, we have been reminiscing about 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 few posts cannot do the case justice.  My article, Disloyalty without Limits, discusses some aspects of the case in greater detail.

Although finding that Eisner was not interested in the Ovitz transaction, a decision that by definition rendered the board "independent" with respect to the contract, the Chancery Court, no doubt aware of the weakness of the reasoning, went on to analyze the independence of the board.  To the extent that the board contained a majority of independent directors, even assuming Eisner's interest in the contract, the case could still be dismissed for failure to make demand.  

Needless to say, the Chancery Court concluded that the Disney board contained a majority of independent directors.  To get there, however, the court had to find as independent a director who headed a non-profit (Georgetown University) that received more than $1 million from Eisner, a director who served as the principal of an elementary school, ignoring the materiality of the fees because the payment of fees "without more, do not establish any financial interest", the payment of $121,122 to a design firm owned by a wife of one of the directors, and a director who served as special counsel to a law firm that received $122,764 for services from Disney and who directly received $50,000 from Disney for performing services in part because plaintiffs failed to allege that the director "shared in the legal fees paid to his firm" as if at the motion to dismiss stage shareholders would have any way of showing this.

This was more or less the same corporate board thatBusiness Week two years running called the worst in corporate America.  The magazine noted that the board "remains packed with Eisner chums."  Business Week could see it; institutional investors could see it.  Everyone, apparently, except that Delaware courts.  This was the type of analysis that allowed the court to conclude that the compensation decision ought to be analyzed under the duty of care, as if there was no conflict on the board and the board could act in an "independent" fashion.   

Can any other case better illustrate the meaningless of the independent director standard used by Delaware courts?  Delaware courts have elevated to the talisman level the importance of independent directors.  The courts do not, however, ensure that directors are in fact independent. 

Full post as published by The Race to the Bottom on February 07, 2008 (boomark / email).