Disney CEO Ignored Board, Lawsuit Says

More Support Given to Drive To Withhold Shareholder Votes

Walt Disney Co. chief executive Michael D. Eisner hired his friend Michael Ovitz as the company's president in 1995 over the objections of some board members and negotiated his contract and termination deal with little board input, costing the company millions of dollars, according to allegations in a lawsuit unsealed by a Delaware court on Tuesday.

The opening of the documents -- part of a 1997 Disney shareholder suit against Eisner, Ovitz and Disney's board -- comes as former Disney directors Roy E. Disney and Stanley P. Gold attempt to incite an investor rebellion to oust Eisner, saying his decisions have hurt the company's performance and gone unchecked by the board.

Yesterday, a shareholder advisory firm and the nation's largest pension fund joined another influential advisory firm in agreeing that Eisner should go, setting the stage for what may be a raucous Disney annual shareholder meeting Wednesday in Philadelphia.

The lawsuit, which was unsealed by a judge over Disney's objection, says that Eisner hired Ovitz, then head of powerhouse Hollywood talent firm Creative Artists Agency Inc., in October 1995 to take the post left open when Disney president Frank Wells died more than a year earlier. Ovitz, who had never headed a publicly traded company, lasted a little over a year at Disney. Eisner later said the hiring had been a mistake.

Eisner unilaterally decided the terms of Ovitz's contract, the plaintiffs say, which included a $1 million salary, potential yearly bonuses of up to $10 million and 3 million stock options that vested instantly.

Some members of the board say they were unaware the company had hired a president. One board member said he believed the board had no oversight over management hiring, except for chief executive, the suit says.

The plaintiffs say Eisner, again unilaterally, worked up Ovitz's severance package, which totaled nearly $140 million -- about $38 million in cash and the rest in stock.

The 1997 lawsuit is a shareholder derivative action, which means that any money awarded goes to Disney rather than to individual shareholders. The case is scheduled to go to trial this year in Delaware Chancery Court.

Disney had no comment on the lawsuit. The company had asked the court to keep the case under seal until March 2 -- the eve of the shareholder meeting.

"It appears to me that you seek to sanitize the public record, effectively maintaining a cloak of secrecy with respect to certain testimony and documents concerning conduct of Disney officers and directors," wrote William B. Chandler III, chancellor of the Delaware Court of Chancery, in denying the request.

Yesterday, San Francisco proxy solicitation firm Glass, Lewis & Co. cited the unsealed Ovitz lawsuit in recommending that shareholders withhold their vote from Eisner and fellow directors George J. Mitchell, the board's presiding director, and Gary L. Wilson. Former company board members Roy Disney and Gold have asked shareholders to withhold votes from Eisner, Mitchell, Judith Estrin and John Bryson, a largely symbolic act designed to spur the board to oust Eisner.

"This report is a side show by Glass Lewis, an upstart company that is trying to grab publicity," Disney spokeswoman Zenia Mucha said in a written statement. The report "diverts attention from the fact that Disney's record of building value is indisputable and that it is a well-managed company with world-class governance and a laser focus on building shareholder value that is on track for earnings growth from continuing operations in excess of 30 percent this year and double-digit growth through 2007."

The dissident shareholder action comes as Disney has shunned an unsolicited $56 billion takeover bid from Comcast Corp. Some analysts believe that if 20 percent of Disney shareholders vote against Eisner, Comcast will sense a weakness in Disney's resolve and return with a higher offer.

In its report yesterday, Glass Lewis recommended that shareholders withhold their votes from Mitchell because "some of Mr. Mitchell's actual decisions as presiding director appear to have been flawed." For instance, as presiding director, he is required to advise the board on choices for board committees. Last year, the board made Bryson head of the nominating and governance committee, despite the fact that his wife, Louise Bryson, is an executive at Lifetime television network, which is half-owned by Disney, the firm said.

Glass Lewis said shareholders should withhold their votes from Wilson, as well, for his role in failing to practice oversight on Ovitz's hiring and firing. (Eisner, Mitchell and Wilson are the only directors who were on the Disney board at the time.)

Glass Lewis is the latest advisory group to weigh in on the upcoming board elections. Two weeks ago, proxy solicitation firm Institutional Shareholders Service Inc. recommended the shareholders not vote for Eisner.

Eisner and the board have said that they have installed several tough measures designed to ensure the independence of a majority of directors. Disney also said Glass Lewis made factual mistakes.

For example, the report says Disney purchased the ABC television network for $19 billion and then suggests that it was a questionable deal. "In fact, Disney acquired the entirety of Capital Cities/ABC for that price, which included a set of extremely valuable assets including ESPN, owned and operated television stations, and radio stations and a radio network in addition to the ABC network, a transaction that is widely viewed as a successful acquisition."

Also yesterday, the California Public Employees' Retirement System (Calpers) said it would withhold its votes for Eisner and the three members of the Disney board's audit committee, Monica Lozano, Robert Matschullat and the Rev. Leo J. O'Donovan, former Georgetown University president. Calpers, the nation's largest pension fund with 9.9 million Disney shares, is the company's 29th-largest shareholder.