Most days, the state Court of Chancery in this small town near the beach is a placid place where corporate lawyers quietly ply their trade, far from the spotlight.
But on Wednesday, the red brick building teemed with lawyers, onlookers and reporters, many of whom gathered before daybreak to secure one of 86 seats for what promises to be a blockbuster trial.
The case, which has been meandering toward trial for seven years, pits shareholders of the Walt Disney Co. against nearly two dozen current and former Disney directors over a severance package valued at roughly $140 million paid in 1997 to Hollywood super-agent Michael Ovitz. Ovitz spent an unhappy 14 months as Disney's president before being forced out by the close friend who recruited him, Disney chief executive Michael D. Eisner.
Both Ovitz and Eisner are expected to testify during the trial, as are current and former Disney directors including actor Sidney Poitier, former senator George Mitchell and architect Robert A.M. Stern.
Beyond the tabloid attraction of bold-faced names, the stakes in the trial are enormous.
For Disney, the case promises to generate painful flashbacks from a dark chapter in the media giant's history. For corporate directors, it could set a significant precedent, possibly opening the door for scores of other lawsuits against board members for failing to exercise proper oversight over corporate management, a problem shareholder groups say was at the heart of many business meltdowns of the last several years. For weeks, possible fallout from the case has been a hot topic among corporate lawyers and board members.
"The thing that should be terrifying to directors is that this case opens the door for a finding that when board members know they are making a material decision and don't arm themselves with adequate information and don't deliberate, their conduct could be construed to lack good faith," said Laura Thatcher, head of the executive compensation practice at Atlanta law firm Alston & Bird LLP. "That pokes a hole in two or three layers of protection directors have relied on."
The trial, expected to last about a month, is being heard in Delaware because Disney, like many other public companies, is headquartered in the state.
The proceedings are being broadcast live over the Internet. Rocky Justice, the security director for the court, said he has fielded hundreds of calls from around the world from people interested in coming to the trial. Among the reporters lining up for a seat was Vanity Fair scribe Dominick Dunne, not known for his regular visits to Delaware courts.
Many firms incorporate in Delaware because its Court of Chancery, which handles business matters, has historically been friendly to management and hostile to shareholder lawsuits.
But that may be changing, according to legal experts. The fact that the Disney case made it into court, a rarity, shows that judges here are reacting to the rash of business scandals.
"For director liability, this is the most significant case in years," said Charles M. Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware. "Delaware seems to be saying, 'Enough. Enough with boards that are not independent and are sloppy in their process.' "
Shareholders in the Disney case are demanding that directors named in the suit repay Disney the full value of Ovitz's severance package plus interest, a total the plaintiffs estimate at $200 million. The plaintiffs claim board members named in the suit never properly signed off on Ovitz's hiring, failed to examine the details of his employment contract when he was hired and then offered him a no-fault termination deal instead of firing him for doing a bad job. Had Ovitz been fired for cause, much of the severance package, which included about $40 million in cash and $100 million worth of stock options, could have been voided, plaintiffs say.
The plaintiffs argue that Eisner and two directors close to him essentially slipped Ovitz's hiring by the full board in 1995, announcing the move to the press before the board had held a formal vote.
And they say Eisner conspired with Ovitz to ensure that the former agent walked out the door with a fully inflated golden parachute despite clear evidence that he did a spectacularly poor job, running up millions of dollars in bills on the company tab for an elaborate office renovation, lavish parties at his home, sports tickets and other perks, including his subscription to Playboy magazine.
"Our position is that the board of directors of Disney, both at the time of the hiring and firing of Ovitz, completely abdicated its duty and didn't review the contract and didn't exercise its business judgment," Steven G. Schulman, a lawyer for the plaintiffs, said in an interview before the trial began. "Ovitz's performance was awful at best and dishonest and certainly malfeasant at worst."
Lawyers for directors named in the suit plan to argue that Eisner received approval for Ovitz's hiring from every director in one-on-one meetings and that directors reviewed the employment agreement and deemed it fair and appropriate. The lawyers will also argue that Ovitz's contract stipulated that he would be entitled to his entire compensation package unless he was dismissed for "gross negligence or malfeasance," a standard they say Ovitz's performance did not meet. They will argue that Eisner tried to "trade" Ovitz to Sony Corp. but failed and then tried to deny Ovitz's severance package but was told by a Disney lawyer that the company had no legal right to do so.
The court's chief judge, Chancellor William B. Chandler III, who is overseeing the case and will decide it without a jury, directed lawyers to skip opening arguments. So the case began Wednesday with plaintiffs calling Deborah A. DeMott, a professor at Duke University Law School who prepared a report for the plaintiffs arguing that Disney directors failed in their responsibilities.
"Neither the choice of Mr. Ovitz nor the terms by which Mr. Ovitz would be employed by the company, based on my review of the record, was the subject of any board meeting," she said Wednesday.
The defense, for its part, challenged DeMott's status as an expert, saying she had never served on the board of a public company. "Does this place her in the category of an expert?" asked defense attorney Jesse Finkelstein.
The plaintiffs plan to call two more expert witnesses this week. The defense then plans to call Ovitz to testify next week, followed by Eisner and other directors.
The case comes at an unfortunate time for Disney. After years of disappointing earnings and shareholder unrest, the company recently has seemed to regain its stride. For the first nine months of fiscal 2004, Disney's revenue was up 16 percent from the same period the year before.
But testimony and documents filed in the case will detail Disney circa 1995, when Eisner dominated the board and the hiring of Ovitz, at first hailed as a masterstroke, blew up in the company's face. Eisner, who has been under pressure from shareholders, announced last month that he would retire in 2006.
Among the scores of papers filed in the case so far is a pained letter Eisner wrote to Ovitz in November 1996. "I believe you should resign . . . and we should put the best possible face on it," Eisner wrote. "When we talked last Friday, I told you again that my biggest problem was that you played the angles too much, exaggerated the truth too far, manipulated me and others too much. I told you 98 percent of the problem was that I did not know when you were telling the truth, about big things, about small things."
Thatcher, of the Alston & Bird law firm, said if the Disney directors are held liable, "it could have the intended effect of improving the quality of decision making, or it could make reasonable and competent people unwilling to serve on boards."
But Thatcher said the second result might be mitigated by Delaware enacting new statutes to restore any safeguards for directors that the Disney case erodes. "My prediction is that if it comes out that there was a lack of good faith [among Disney directors] we are going to see a scramble to build back up enough protection so good, reasonable people will serve on boards."