By Ben White
Washington Post Staff Writer
Wednesday, August 10, 2005
NEW YORK, Aug. 9 -- Hollywood super-agent Michael S. Ovitz spent 14 disastrous months as the No. 2 executive at Walt Disney Co., taking $140 million in severance when he was forced out, or $10 million for each month on the job. On Tuesday, a Delaware judge ruled that the severance package, while "breathtaking," was perfectly legal and that directors did not violate their duty to protect shareholders when they approved it.
The decision, which comes at a time when executives and directors are being held to tough new standards for corporate accounting, continues to allow directors a relatively free hand in bestowing huge pay packages on executives, according to legal experts. But just the fact that directors were dragged into court in the Disney case may make others more cautious, they said.
"The court was obviously in a tenuous position, having already shaken directors awake by letting this case get to court to begin with," said Laura G. Thatcher, head of the corporate governance practice at Atlanta law firm Alston & Bird LLP. "I think the court recognized the importance, on the other hand, of not scaring off directors who have to be able to make decisions without fear of undue liability."
Tuesday's widely anticipated ruling from Delaware Court of Chancery chief judge William B. Chandler III came eight years after shareholders first filed suit against current and former Disney directors. The plaintiffs accused the directors of violating their duty to protect shareholder interests, saying they never properly signed off on Ovitz's hiring, failed to examine the details of his employment contract, and then awarded him a no-fault termination deal instead of firing him for making bad decisions and abusing his expense account.
Chandler rejected those claims, saying that while the amount of Ovitz's severance package might seem shocking, directors did nothing wrong in approving it because they had no self-interest in the matter and deliberated on the terms of the employment contract as best they could given the information available. But Chandler noted that the board's compensation committee met for only an hour to consider his pay package. Chandler said Eisner and Ovitz took Disney directors "for a wild ride, and most of it was in the dark."
Chandler said that while Ovitz's employment turned out to be a disaster, it was reasonable for directors to think, given the agent's reputation as among the most powerful men in Hollywood, that it could have succeeded. And he said it would set a dangerous precedent to second-guess the directors' decisions. Many large public companies, including Disney, are nominally headquartered in Delaware, so rulings from the state often set critical precedents in corporate law.
Chandler also described expectations about good corporate governance as laudable. But, he said, they should not be construed as legally binding. The "development of aspirational ideals, however worthy as goals for human behavior, should not work to distort the legal requirements by which human behavior is actually measured," he said.
Chandler's ruling comes after former directors at Enron Corp. and WorldCom Inc. earlier this year agreed to pay millions of dollars from their own pockets to settle shareholder lawsuits charging that they failed in their duty to protect shareholders. And it follows implementation of the Sarbanes-Oxley corporate accountability law, which holds officers personally responsible for signing off on fraudulent accounting and places new responsibilities on directors.
But the Disney case did not involve improper accounting, only a business decision gone bad. And even staunch advocates of stronger corporate oversight such as Charles M. Elson, chairman of the corporate governance department at the University of Delaware, declined to criticize Chandler's ruling.
"Had he found the directors liable, as comforting as that would have been to some, it could have had potential consequences beyond this case that would not have been so favorable," Elson said.
Chandler said in his opinion that ruling in favor of the plaintiffs could stifle corporate decision making in the future -- and that might hurt shareholders. "Should the Court apportion liability based on the ultimate outcome of decisions taken in good faith by faithful directors or officers, those decision-makers would necessarily take decisions that minimize risk, not maximize value."
Attorneys for plaintiffs said they would appeal the verdict. "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," Melvyn I. Weiss, a partner with Milberg Weiss Bershad & Schulman LLP, said in a prepared statement.
In a statement, Eisner attorney Gary P. Naftalis said, "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."
In a statement, Ovitz attorney Mark H. Epstein said, "The decision is consistent with what Mr. Ovitz has been saying all along. He always acted in accordance with his duties to Disney's shareholders and the allegations against him were without merit."
Defendants in the suit included high-profile current and former Disney directors, among them former Senate majority leader George J. Mitchell, actor Sidney Poitier, architect Robert A.M. Stern and former Georgetown University president the Rev. Leo J. O'Donovan. Mitchell is now chairman of the Disney board, and O'Donovan remains a director.
The case, which took seven years to wind its way into court last fall, drew reporters from across the world to the usually quiet town of Georgetown, Del., where Chandler lives and prefers to hear cases. (The main Delaware Chancery Court is in Wilmington.)
Ovitz testified during the trial that he went into his job at Disney with enormous energy and high hopes, only to be thwarted at every turn by a jealous and backstabbing Eisner.
"I went into a partnership with a man I was a life partner with, in a strange way, as a friend, and expected it to be a home run," Ovitz said on the stand in October. "And it was a nine-inning ballgame that was over in three innings." Ovitz said he was devastated by memos introduced in the trial in which Eisner referred to him as a "psychopath" and habitual liar.
Eisner testified that he kept the board fully informed about the terms of Ovitz's hiring and defended his decision to bring in Ovitz, even though the high-profile Hollywood agent had little experience as a senior executive at a publicly traded company. During the trial Eisner walked a fine line in his testimony, saying Ovitz was a bad fit for Disney but did nothing to warrant termination for cause.
Eisner's finely balanced testimony illustrated the strange alliance the case created. While bitterly estranged after a 25-year friendship, Eisner and Ovitz were on the same side in the case.
Elson of the University of Delaware said the fact that the case dragged on for so long, and aired so much dirty laundry, should be a deterrent to bad director behavior. "Even without liability, who would want to go through this kind of misery for eight years?" he said.
Elson also noted that Chandler sharply criticized the behavior of Disney directors and made a point of saying he took into account the fact that the decisions in question were made 10 years ago, before attitudes toward corporate governance changed. Chandler saved some of his strongest words for Eisner, saying the Disney chief did a poor job of keeping board members informed and "enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom."