In re Walt Disney Company Derivative Litigation Disney II Case Brief Summary | Law Case Explained

In re Walt Disney Company Derivative Litigation (Disney II) | 825 A.2d 275 (2003)

In nineteen ninety-five, Walt Disney C E O Michael Eisner hired his good friend Michael Ovitz as president of Disney. This turned out not to be a good decision. Ovitz soon departed, taking with him a substantial severance package. In re Walt Disney Company Derivative Litigation was the outraged shareholders’ response to this debacle. This case, Disney II, was an early stage involving a motion to dismiss.

Ovitz began serving as Disney’s president in October of nineteen ninety-five. Eisner and Ovitz had essentially negotiated the terms of Ovitz’s employment agreement on their own. The Disney compensation committee and the board of directors spent very little time discussing the hire before approving it.

The final version of Ovitz’s employment agreement differed substantially from the drafts the compensation committee had reviewed and was highly favorable to Ovitz. Ovitz would receive a salary of one million dollars a year and stock options that let him purchase up to three million shares of Disney stock at an advantageous price. In the event of a nonfault termination, Ovitz would receive millions.

Ovitz was not successful as Disney’s president. He’d come to Disney with no experience serving as an executive of a major media company, and his critics claimed that he made no effort to learn how to do his new job. Instead, he more or less immediately started looking for another position. Eisner decided to help his friend receive a nonfault termination. They negotiated a deal under which Ovitz left Disney at the end of January of nineteen ninety-seven. Disney sent Ovitz a letter listing the amount payable to him as nearly thirty-nine million dollars along with stock options worth one hundred forty million dollars.

Appalled, Disney shareholders filed a derivative action against the board of directors, both the current and former members who’d been involved in approving Ovitz’s arrangement. The shareholders alleged that the directors had breached their fiduciary duties by approving the employment agreement and the nonfault termination without any review or deliberation. The directors asked the court to dismiss the complaint. They claimed that the exculpatory provision in Disney’s charter, based on Delaware law, should protect the individual directors from personal damages liability for any breach of his or her duty of care.




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