Chancery Court Finds That Disney Chief Michael D. Eisner Did Not Breach His Fiduciary Duties Or Waste Corporate Assets: Gary Naftalis Leads Eisner Trial Team

On August 9, 2005, Chancellor William B. Chandler III of the Delaware Chancery Court issued his widely anticipated ruling in The Walt Disney Company Derivative Litigation. The Chancellor found that Disney Chief Executive Michael D. Eisner and other current and former board members “did not breach their fiduciary duties or commit waste” and entered judgment in favor of Mr. Eisner and the other defendants on all counts.

Plaintiffs had brought the derivative law suit in 1997, charging that the defendant directors had breached their fiduciary duties and committed corporate waste in connection with the 1995 hiring and then the 1996 termination of Michael Ovitz as president of Disney. Plaintiffs argued that Disney should not have paid Ovitz $140 million in termination benefits when Ovitz was terminated 14 months after his hiring, contending that Ovitz should have been fired with cause. They sought to recover from the director defendants $262 million (including interest).

In his 174-page opinion, Chancellor Chandler laid out in close detail the sequence of events leading to both the hiring and termination of Ovitz. Based on his review of the lengthy trial record (which included almost five days of testimony from Mr. Eisner), the Court concluded that Mr. Eisner’s actions “were taken in good faith” and “with the subjective belief that those actions were in the best interests of the Company.” The Court observed that “[i]t is easy, of course, to fault a decision that ends in a failure, once hindsight makes the result of that decision plain to see,” [b]ut the essence of business is risk—the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known. “Because courts are ill equipped,” Chancellor Chandler stated, “to engage in post hac substantive review of business decisions,” Delaware law presumes that “in making a business decision the directors of a corporation acted on an informed basis,...and in the honest belief that the action taken was in the best interests of the company [and its stockholders].” This business judgment rule covered the conduct of Mr. Eisner, because plaintiffs failed to prove at trial that Mr. Eisner violated any of his fiduciary duties in connection with the hiring or termination of Ovitz.

Chancellor Chandler also dismissed plaintiffs’ claim for waste. He found that Mr. “Eisner believed that Ovitz would be an excellent addition to the Company throughout 1995” and that “Ovitz could not have been fired for cause” under his employment agreement.

Kramer Levin was lead trial counsel for Mr. Eisner. Gary P. Naftalis (Co-Chairman of our Firm and Chair of our Litigation Department), headed our trial team, assisted by  Michael S. Oberman, Paul Schoeman and Shoshana Menu. Mr. Naftalis stated that “Mr. Eisner is very pleased that the Court, after hearing all the testimony and seeing the witnesses, has found that he and the other directors properly carried out their fiduciary duties to the shareholders. We always believed that there was no basis for this case.”