1. Explain the business judgment rule.

2. Did the court approve of CEO Eisner’s management practices?

3. When it becomes evident to shareholders that the directors approved the hiring of a president who turned out to be a spectacular failure with the consequence being the payment of a breathtaking amount of severance pay to the failed president, should the directors not be held liable under corporate law for such an error in judgment?

Michael Ovitz was a founder of Creative Artists Agency (CAA), an agency in 1995 with 1,400 of Hollywood’s top actors, directors, writers, and musicians. Ovitz was considered one of the most powerful figures in Hollywood at that time. Because of the untimely death of Disney’s prior president in a helicopter crash, Disney CEO Michael Eisner focused on hiring Ovitz as president. The chairman of Disney’s compensation committee, Irwin Russell, in consultation with Eisner, negotiated the Ovitz employment agreement (OEA). The OEA provided that if Disney fired Ovitz for any reason other than gross negligence or malfeasance, Ovitz would be entitled to a nonfault termination (NFT) package consisting of his remaining salary for the five-year period, bonuses, and the immediate vesting of stock options. Russell met with a compensation expert for advice on the contract, and had telephone conversations with two compensation committee members, Sidney Poitier and Ignatio Lozano. CEO Eisner telephoned each member of the board of directors to inform them of his plan to hire Ovitz. On September 26, 1995, the compensation committee had a one-hour meeting to discuss several topics, including the Ovitz employment contract. Thereafter, the full board of directors met and elected Ovitz president of Disney. After he joined Disney, it soon became apparent that a “mismatch of cultures and styles” ensued and that Ovitz was not succeeding as president. The trial court gave an example as follows:

In January 1996, a corporate retreat was held at Walt Disney World in Orlando, Florida. At that retreat, Ovitz failed to integrate himself in the group of executives by declining to participate in group activities, insisting on a limousine, when the other executives, including Eisner, were taking a bus, and making inappropriate demands of the park employees. In short, Ovitz “was a little elitist for the egalitarian Walt Disney World cast members [employees],” and a poor fit with his fellow executives.

When it became clear that Ovitz was not working out, Eisner considered his options. Sanford Litvak, Disney’s general counsel, advised Eisner and other directors that Ovitz had not been shown to have been grossly negligent or malfeasant in his year at Disney, and no cause existed to avoid the NFT payments. Eisner decided it was necessary to terminate Ovitz on a nonfault basis, and notified the board members. The board members supported this decision under the nonfault termination agreement. Ovitz was ultimately paid $140 million in severance pay. Stockholders brought a derivative suit, asserting that Eisner and the board of directors had breached their fiduciary duties in connection with the hiring and termination of Ovitz. Years of litigation cumulated in a 37-day trial that ended on January 19, 2005.

JUDICIAL OPINION

CHANDLER, Ch.… Unlike ideals of corporate governance, a fiduciary’s duties do not change over time. How we understand those duties may evolve and become refined, but the duties themselves have not changed, except to the extent that fulfilling a fiduciary duty requires obedience to other positive law. This Court strongly encourages directors and officers to employ best practices, as those practices are understood at the time a corporate decision is taken. But Delaware law does not—indeed, the common law cannot—hold fiduciaries liable for a failure to comply with the aspirational ideal of best practices, any more than a common-law court deciding a medical malpractice dispute can impose a standard of liability based on ideal—rather than competent or standard—medical treatment practices, lest the average medical practitioner be found inevitably derelict.… ………………..