The Walt Disney Co.'s board did not breach its fiscal responsibilities by agreeing to hire Hollywood superagent Michael Ovitz as president...
WILMINGTON, Del. — The Walt Disney Co.’s board did not breach its fiscal responsibilities by agreeing to hire Hollywood superagent Michael Ovitz as president in 1995, then granting him a $140 million severance package when he left just 14 months later, a judge ruled yesterday.
Chancellor William Chandler III said that while the directors’ conduct “fell significantly short of the best practices of ideal corporate governance,” board members did not violate their duties or waste Disney resources.
“It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk — the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known,” Chandler in a 175-page decision.
The ruling closes a shareholder derivative trial that revealed the stormy inner workings of one of the world’s largest entertainment companies.
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Trial testimony included details of Ovitz’s lavish spending and the enmity he engendered among fellow Disney executives, including Chief Executive Officer Michael Eisner, who described Ovitz in company memos as a “psychopath” with a “character problem.”
Ovitz contended that he loved Eisner “like a brother” but was micromanaged, undermined by other key executives and “cut out like cancer” before he had time to prove his worth.
Eisner and the company contended Ovitz wasted money, alienated executives and could not be trusted.
Attorneys for the plaintiffs said they will appeal Chandler’s decision to the Delaware Supreme Court.
“It would be unfortunate for shareholders and employees of public companies if this decision is read by corporate managers as a license to act in disregard of their duties to engage in the deliberate processes required by fiduciaries,” said Melvyn Weiss, a partner with Milberg Weiss Bershad & Schulman.
The lawsuit claimed that current and former members of Disney’s board did not properly scrutinize Ovitz’s employment contract after Eisner tapped him as president, then wrongly granted Ovitz a nonfault termination entitling him to a $140 million severance package just over a year later.
Lawyers for the shareholders alleged that Ovitz’s performance was so poor that he should have been fired for cause and not paid the remainder of his contract. The defendants, including Eisner and Ovitz, said Ovitz’s contract was given careful consideration, and that while Ovitz’s tenure was stormy, there was no gross negligence or malfeasance that would justify denying him his severance package.
Sanford Litvack, Disney’s former chief of corporate operations and chief legal officer, testified that Ovitz’s “total failure” as president didn’t mean he could be fired for cause.
Litvack said that after Eisner told him he planned to fire Ovitz, he discussed the matter with in-house lawyers and outside counsel, and that they agreed Ovitz couldn’t be fired for cause.
Chandler agreed with Litvack’s conclusion that even though Ovitz received a large cash payment and the vesting of 3 million stock options, no formal action by the board was needed because Ovitz reported to the CEO.
“Because the board was under no duty to act, they did not violate their fiduciary duty of care, and they also individually acted in good faith,” Chandler wrote.
While ruling for plaintiffs, Chandler still chided Eisner — who leaves as CEO next month — for not adequately involving the board in business matters and having “enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom.”
“His lapses were many. He failed to keep the board as informed as he should have. He stretched the outer boundaries of his authority as CEO by acting without specific board direction or involvement,” the judge wrote. “Eisner’s failure to better involve the board in the process of Ovitz’s hiring, usurping that role for himself, although not in violation of the law, does not comport with how fiduciaries of Delaware corporations are expected to act.”
Eisner’s attorney, Gary Naftalis, said the CEO was “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.
“This was a case where the evidence didn’t support any claims, and the judge after hearing it agreed,” Naftalis said. “We’re pretty happy.”
TV ratings, park
lift Disney earnings
Higher television ratings at ABC and increased theme-park attendance boosted The Walt Disney Co.’s third-quarter profit.
The media conglomerate reported net income of $851 million, or 41 cents per share, compared with $604 million, or 29 cents per share in the same period last year.
Revenue increased to $7.72 billion in the quarter ended July 2, compared with $7.47 billion in the same period last year.
Analysts surveyed by Thomson Financial had expected earnings of 38 cents per share.
The biggest gains in the quarter came from Disney’s media-networks division, which includes the ABC network and cable channels such as ESPN.
Disney shares rose 73 cents to close at $26.14 yesterday, before the income report was released. The stock dropped 29 cents in after-hours trading.