The Walt Disney Company hired Ovitz as its executive president and as a board

member for five years after lengthy compensation negotiations. The negotiations

regarding Ovitz's compensation were conducted predominantly by Eisner and two of the

members of the compensation committee (a four-member panel). The terms of Ovitz's

compensation were then presented to the full board. In a meeting lasting around one

hour, where a variety of topics were discussed, the board approved Ovitz's

compensation after reviewing only a term sheet rather than the full contract. Ovitz's time

at Disney was tumultuous and short-lived.]...In December 1996, only fourteen months

after he commenced employment, Ovitz was terminated without cause, resulting in a

severance payout to Ovitz valued at approximately $ 130 million. [Disney shareholders

then filed derivative actions on behalf of Disney against Ovitz and the directors of

Disney at the time of the events complained of (the "Disney defendants"), claiming that

the $130 million severance payout was the product of fiduciary duty and contractual

breaches by Ovitz and of breaches of fiduciary duty by the Disney defendants and a

waste of assets. The Chancellor found in favor of the defendants. The plaintiff

appealed.]

We next turn to the claims of error that relate to the Disney defendants. Those claims

are subdivisible into two groups: (A) claims arising out of the approval of the OEA [Ovitz

employment agreement] and of Ovitz's election as President; and (B) claims arising out

of the NFT [nonfault termination] severance payment to Ovitz upon his termination. We

address separately those two categories and the issues that they generate....

...[The due care] argument is best understood against the backdrop of the

presumptions that cloak director action being reviewed under the business judgment

standard. Our law presumes that "in making a business decision the directors of a

corporation acted on an informed basis, in good faith, and in the honest belief that the

action taken was in the best interests of the company." Those presumptions can be

rebutted if the plaintiff shows that the directors breached their fiduciary duty of care or of

loyalty or acted in bad faith. If that is shown, the burden then shifts to the director

defendants to demonstrate that the challenged act or transaction was entirely fair to the

corporation and its shareholders....

The appellants' first claim is that the Chancellor erroneously (i) failed to make a

"threshold determination" of gross negligence, and (ii) "conflated" the appellants' burden

to rebut the business judgment presumptions, with an analysis of whether the directors'

conduct fell within the 8

Del. C.

102(b)(7) provision that precludes exculpation of

directors from monetary liability "for acts or omissions not in good faith." The argument

runs as follows:

Emerald Partners v. Berlin

required the Chancellor first to determine

whether the business judgment rule presumptions were rebutted based upon a showing

that the board violated its duty of care,

i.e.

, acted with gross negligence. If gross

negligence were established, the burden would shift to the directors to establish that the

OEA was entirely fair. Only if the directors failed to meet that burden could the trial court

then address the directors' Section 102(b)(7) exculpation defense, including the

statutory exception for acts not in good faith.

This argument lacks merit. To make the argument the appellants must ignore the

distinction between (i) a determination of bad faith for the threshold purpose of rebutting

the business judgment rule presumptions, and (ii) a bad faith determination for purposes

of evaluating the availability of charter-authorized exculpation from monetary damage

liability after liability has been established. Our law clearly permits a judicial assessment

of director good faith for that former purpose. Nothing in

Emerald Partners

requires the

Court of Chancery to consider only evidence of lack of due care (

i.e.

gross negligence)

in determining whether the business judgment rule presumptions have been rebutted....

The appellants argue that the Disney directors breached their duty of care by failing to

inform themselves of all material information reasonably available with respect to Ovitz's

employment agreement....[but the] only properly reviewable action of the entire board

was its decision to elect Ovitz as Disney's President. In that context the sole issue, as

the Chancellor properly held, is "whether [the remaining members of the old board]

properly exercised their business judgment and acted in accordance with their fiduciary

duties when they elected Ovitz to the Company's presidency." The Chancellor

determined that in electing Ovitz, the directors were informed of all information

reasonably available and, thus, were not grossly negligent. We agree.

...[The court turns to good faith.] The Court of Chancery held that the business

judgment rule presumptions protected the decisions of the compensation committee

and the remaining Disney directors, not only because they had acted with due care but

also because they had not acted in bad faith. That latter ruling, the appellants claim,

was reversible error because the Chancellor formulated and then applied an incorrect

definition of bad faith.

...Their argument runs as follows: under the Chancellor's 2003 definition of bad faith,

the directors must have "

consciously and intentionally disregarded their responsibilities

,

adopting a 'we don't care about the risks' attitude concerning a material corporate

decision." Under the 2003 formulation, appellants say, "directors violate their duty of

good faith if they are making material decisions without adequate information and

without adequate deliberation[,]" but under the 2005 post-trial definition, bad faith

requires proof of a subjective bad motive or intent. This definitional change, it is

claimed, was procedurally prejudicial because appellants relied on the 2003 definition in

presenting their evidence of bad faith at the trial....

Second, the appellants claim that the Chancellor's post-trial definition of bad faith is

erroneous substantively. They argue that the 2003 formulation was (and is) the correct

definition, because it is "logically tied to board decision-making under the duty of care."

The post-trial formulation, on the other hand, "wrongly incorporated substantive

elements regarding the rationality of the decisions under review rather than being

OEA was entirely fair. Only if the directors failed to meet that burden could the trial court

then address the directors' Section 102(b)(7) exculpation defense, including the

statutory exception for acts not in good faith.

This argument lacks merit. To make the argument the appellants must ignore the

distinction between (i) a determination of bad faith for the threshold purpose of rebutting

the business judgment rule presumptions, and (ii) a bad faith determination for purposes

of evaluating the availability of charter-authorized exculpation from monetary damage

liability after liability has been established. Our law clearly permits a judicial assessment

of director good faith for that former purpose. Nothing in

Emerald Partners

requires the

Court of Chancery to consider only evidence of lack of due care (

i.e.

gross negligence)

in determining whether the business judgment rule presumptions have been rebutted....

The appellants argue that the Disney directors breached their duty of care by failing to

inform themselves of all material information reasonably available with respect to Ovitz's

employment agreement....[but the] only properly reviewable action of the entire board

was its decision to elect Ovitz as Disney's President. In that context the sole issue, as

the Chancellor properly held, is "whether [the remaining members of the old board]

properly exercised their business judgment and acted in accordance with their fiduciary

duties when they elected Ovitz to the Company's presidency." The Chancellor

determined that in electing Ovitz, the directors were informed of all information

reasonably available and, thus, were not grossly negligent. We agree.

...[The court turns to good faith.] The Court of Chancery held that the business

judgment rule presumptions protected the decisions of the compensation committee

and the remaining Disney directors, not only because they had acted with due care but

also because they had not acted in bad faith. That latter ruling, the appellants claim,

was reversible error because the Chancellor formulated and then applied an incorrect

definition of bad faith.

...Their argument runs as follows: under the Chancellor's 2003 definition of bad faith,

the directors must have "

consciously and intentionally disregarded their responsibilities

,

adopting a 'we don't care about the risks' attitude concerning a material corporate

decision." Under the 2003 formulation, appellants say, "directors violate their duty of

good faith if they are making material decisions without adequate information and

without adequate deliberation[,]" but under the 2005 post-trial definition, bad faith

requires proof of a subjective bad motive or intent. This definitional change, it is

claimed, was procedurally prejudicial because appellants relied on the 2003 definition in

presenting their evidence of bad faith at the trial....

Second, the appellants claim that the Chancellor's post-trial definition of bad faith is

erroneous substantively. They argue that the 2003 formulation was (and is) the correct

definition, because it is "logically tied to board decision-making under the duty of care."

The post-trial formulation, on the other hand, "wrongly incorporated substantive

elements regarding the rationality of the decisions under review rather than being

constrained, as in a due care analysis, to strictly procedural criteria." We conclude that

both arguments must fail.

The appellants' first argumentthat there is a real, significant difference between the

Chancellor's pre-trial and post-trial definitions of bad faithis plainly wrong. We

perceive no substantive difference between the Court of Chancery's 2003 definition of

bad faitha "conscious and intentional disregard [of] responsibilities, adopting a we

don't care about the risks' attitude..."and its 2005 post-trial definitionan "intentional

dereliction of duty, a conscious disregard for one's responsibilities." Both formulations

express the same concept, although in slightly different language.

The most telling evidence that there is no substantive difference between the two

formulations is that the appellants are forced to contrive a difference. Appellants assert

that under the 2003 formulation, "directors violate their duty of good faith if they are

making material decisions without adequate information and without adequate

deliberation." For that

ipse dixit

they cite no legal authority. That comes as no surprise

because their verbal effort to collapse the duty to act in good faith into the duty to act

with due care, is not unlike putting a rabbit into the proverbial hat and then blaming the

trial judge for making the insertion.

...The precise question is whether the Chancellor's articulated standard for bad faith

corporate fiduciary conductintentional dereliction of duty, a conscious disregard for

one's responsibilitiesis legally correct. In approaching that question, we note that the

Chancellor characterized that definition as "

an

appropriate (

although not the only

)

standard for determining whether fiduciaries have acted in good faith." That observation

is accurate and helpful, because as a matter of simple logic, at least three different

categories of fiduciary behavior are candidates for the "bad faith" pejorative label.

The first category involves so-called "subjective bad faith," that is, fiduciary conduct

motivated by an actual intent to do harm. That such conduct constitutes classic,

quintessential bad faith is a proposition so well accepted in the liturgy of fiduciary law

that it borders on axiomatic....The second category of conduct, which is at the opposite

end of the spectrum, involves lack of due carethat is, fiduciary action taken solely by

reason of gross negligence and without any malevolent intent. In this case, appellants

assert claims of gross negligence to establish breaches not only of director due care but

also of the directors' duty to act in good faith. Although the Chancellor found, and we

agree, that the appellants failed to establish gross negligence, to afford guidance we

address the issue of whether gross negligence (including a failure to inform one's self of

available material facts), without more, can also constitute bad faith. The answer is

clearly no.

..."issues of good faith are (to a certain degree) inseparably and necessarily intertwined

with the duties of care and loyalty...." But, in the pragmatic, conduct-regulating legal

realm which calls for more precise conceptual line drawing, the answer is that grossly

negligent conduct, without more, does not and cannot constitute a breach of the

fiduciary duty to act in good faith. The conduct that is the subject of due care may

constrained, as in a due care analysis, to strictly procedural criteria." We conclude that

both arguments must fail.

The appellants' first argumentthat there is a real, significant difference between the

Chancellor's pre-trial and post-trial definitions of bad faithis plainly wrong. We

perceive no substantive difference between the Court of Chancery's 2003 definition of

bad faitha "conscious and intentional disregard [of] responsibilities, adopting a we

don't care about the risks' attitude..."and its 2005 post-trial definitionan "intentional

dereliction of duty, a conscious disregard for one's responsibilities." Both formulations

express the same concept, although in slightly different language.

The most telling evidence that there is no substantive difference between the two

formulations is that the appellants are forced to contrive a difference. Appellants assert

that under the 2003 formulation, "directors violate their duty of good faith if they are

making material decisions without adequate information and without adequate

deliberation." For that

ipse dixit

they cite no legal authority. That comes as no surprise

because their verbal effort to collapse the duty to act in good faith into the duty to act

with due care, is not unlike putting a rabbit into the proverbial hat and then blaming the

trial judge for making the insertion.

...The precise question is whether the Chancellor's articulated standard for bad faith

corporate fiduciary conductintentional dereliction of duty, a conscious disregard for

one's responsibilitiesis legally correct. In approaching that question, we note that the

Chancellor characterized that definition as "

an

appropriate (

although not the only

)

standard for determining whether fiduciaries have acted in good faith." That observation

is accurate and helpful, because as a matter of simple logic, at least three different

categories of fiduciary behavior are candidates for the "bad faith" pejorative label.

The first category involves so-called "subjective bad faith," that is, fiduciary conduct

motivated by an actual intent to do harm. That such conduct constitutes classic,

quintessential bad faith is a proposition so well accepted in the liturgy of fiduciary law

that it borders on axiomatic....The second category of conduct, which is at the opposite

end of the spectrum, involves lack of due carethat is, fiduciary action taken solely by

reason of gross negligence and without any malevolent intent. In this case, appellants

assert claims of gross negligence to establish breaches not only of director due care but

also of the directors' duty to act in good faith. Although the Chancellor found, and we

agree, that the appellants failed to establish gross negligence, to afford guidance we

address the issue of whether gross negligence (including a failure to inform one's self of

available material facts), without more, can also constitute bad faith. The answer is

clearly no.

..."issues of good faith are (to a certain degree) inseparably and necessarily intertwined

with the duties of care and loyalty...." But, in the pragmatic, conduct-regulating legal

realm which calls for more precise conceptual line drawing, the answer is that grossly

negligent conduct, without more, does not and cannot constitute a breach of the

fiduciary duty to act in good faith. The conduct that is the subject of due care may

overlap with the conduct that comes within the rubric of good faith in a psychological

sense, but from a legal standpoint those duties are and must remain quite distinct....

The Delaware General Assembly has addressed the distinction between bad faith and a

failure to exercise due care (

i.e.

, gross negligence) in two separate contexts. The first is

Section 102(b)(7) of the DGCL, which authorizes Delaware corporations, by a provision

in the certificate of incorporation, to exculpate their directors from monetary damage

liability for a breach of the duty of care. That exculpatory provision affords significant

protection to directors of Delaware corporations. The statute carves out several

exceptions, however, including most relevantly, "for acts or omissions not in good

faith...." Thus, a corporation can exculpate its directors from monetary liability for a

breach of the duty of care, but not for conduct that is not in good faith. To adopt a

definition of bad faith that would cause a violation of the duty of care automatically to

become an act or omission "not in good faith," would eviscerate the protections

accorded to directors by the General Assembly's adoption of Section 102(b)(7).

A second legislative recognition of the distinction between fiduciary conduct that is

grossly negligent and conduct that is not in good faith, is Delaware's indemnification

statute, found at 8

Del. C.

145. To oversimplify, subsections (a) and (b) of that statute

permit a corporation to indemnify (

inter alia

) any person who is or was a director, officer,

employee or agent of the corporation against expenses...where (among other things):

(i) that person is, was, or is threatened to be made a party to that action, suit or

proceeding, and (ii) that person "acted in good faith and in a manner the person

reasonably believed to be in or not opposed to the best interests of the corporation...."

Thus, under Delaware statutory law a director or officer of a corporation can be

indemnified for liability (and litigation expenses) incurred by reason of a violation of the

duty of care, but not for a violation of the duty to act in good faith.

Section 145, like Section 102(b)(7), evidences the intent of the Delaware General

Assembly to afford significant protections to directors (and, in the case of Section 145,

other fiduciaries) of Delaware corporations. To adopt a definition that conflates the duty

of care with the duty to act in good faith by making a violation of the former an automatic

violation of the latter, would nullify those legislative protections and defeat the General

Assembly's intent. There is no basis in policy, precedent or common sense that would

justify dismantling the distinction between gross negligence and bad faith.

That leaves the third category of fiduciary conduct, which falls in between the first two

categories of (1) conduct motivated by subjective bad intent and (2) conduct resulting

from gross negligence. This third category is what the Chancellor's definition of bad

faithintentional dereliction of duty, a conscious disregard for one's responsibilitiesis

intended to capture. The question is whether such misconduct is properly treated as a

non-exculpable, non-indemnifiable violation of the fiduciary duty to act in good faith. In

our view it must be, for at least two reasons.

First, the universe of fiduciary misconduct is not limited to either disloyalty in the classic

sense (

i.e.

, preferring the adverse self-interest of the fiduciary or of a related person to

overlap with the conduct that comes within the rubric of good faith in a psychological

sense, but from a legal standpoint those duties are and must remain quite distinct....

The Delaware General Assembly has addressed the distinction between bad faith and a

failure to exercise due care (

i.e.

, gross negligence) in two separate contexts. The first is

Section 102(b)(7) of the DGCL, which authorizes Delaware corporations, by a provision

in the certificate of incorporation, to exculpate their directors from monetary damage

liability for a breach of the duty of care. That exculpatory provision affords significant

protection to directors of Delaware corporations. The statute carves out several

exceptions, however, including most relevantly, "for acts or omissions not in good

faith...." Thus, a corporation can exculpate its directors from monetary liability for a

breach of the duty of care, but not for conduct that is not in good faith. To adopt a

definition of bad faith that would cause a violation of the duty of care automatically to

become an act or omission "not in good faith," would eviscerate the protections

accorded to directors by the General Assembly's adoption of Section 102(b)(7).

A second legislative recognition of the distinction between fiduciary conduct that is

grossly negligent and conduct that is not in good faith, is Delaware's indemnification

statute, found at 8

Del. C.

145. To oversimplify, subsections (a) and (b) of that statute

permit a corporation to indemnify (

inter alia

) any person who is or was a director, officer,

employee or agent of the corporation against expenses...where (among other things):

(i) that person is, was, or is threatened to be made a party to that action, suit or

proceeding, and (ii) that person "acted in good faith and in a manner the person

reasonably believed to be in or not opposed to the best interests of the corporation...."

Thus, under Delaware statutory law a director or officer of a corporation can be

indemnified for liability (and litigation expenses) incurred by reason of a violation of the

duty of care, but not for a violation of the duty to act in good faith.

Section 145, like Section 102(b)(7), evidences the intent of the Delaware General

Assembly to afford significant protections to directors (and, in the case of Section 145,

other fiduciaries) of Delaware corporations. To adopt a definition that conflates the duty

of care with the duty to act in good faith by making a violation of the former an automatic

violation of the latter, would nullify those legislative protections and defeat the General

Assembly's intent. There is no basis in policy, precedent or common sense that would

justify dismantling the distinction between gross negligence and bad faith.

That leaves the third category of fiduciary conduct, which falls in between the first two

categories of (1) conduct motivated by subjective bad intent and (2) conduct resulting

from gross negligence. This third category is what the Chancellor's definition of bad

faithintentional dereliction of duty, a conscious disregard for one's responsibilitiesis

intended to capture. The question is whether such misconduct is properly treated as a

non-exculpable, non-indemnifiable violation of the fiduciary duty to act in good faith. In

our view it must be, for at least two reasons.

First, the universe of fiduciary misconduct is not limited to either disloyalty in the classic

sense (

i.e.

, preferring the adverse self-interest of the fiduciary or of a related person to

the interest of the corporation) or gross negligence. Cases have arisen where corporate

directors have no conflicting self-interest in a decision, yet engage in misconduct that is

more culpable than simple inattention or failure to be informed of all facts material to the

decision. To protect the interests of the corporation and its shareholders, fiduciary

conduct of this kind, which does not involve disloyalty (as traditionally defined) but is

qualitatively more culpable than gross negligence, should be proscribed. A vehicle is

needed to address such violations doctrinally, and that doctrinal vehicle is the duty to

act in good faith. The Chancellor implicitly so recognized in his Opinion, where he

identified different examples of bad faith as follows:

The good faith required of a corporate fiduciary includes not simply the duties of care

and loyalty, in the narrow sense that I have discussed them above, but all actions

required by a true faithfulness and devotion to the interests of the corporation and its

shareholders. A failure to act in good faith may be shown, for instance, where the

fiduciary intentionally acts with a purpose other than that of advancing the best interests

of the corporation, where the fiduciary acts with the intent to violate applicable positive

law, or where the fiduciary intentionally fails to act in the face of a known duty to act,

demonstrating a conscious disregard for his duties. There may be other examples of

bad faith yet to be proven or alleged, but these three are the most salient.

...Second, the legislature has also recognized this intermediate category of fiduciary

misconduct, which ranks between conduct involving subjective bad faith and gross

negligence. Section 102(b)(7)(ii) of the DGCL expressly denies money damage

exculpation for "acts or omissions not in good faith or which involve intentional

misconduct or a knowing violation of law." By its very terms that provision distinguishes

between "intentional misconduct" and a "knowing violation of law" (both examples of

subjective bad faith) on the one hand, and "acts...not in good faith," on the other.

Because the statute exculpates directors only for conduct amounting to gross

negligence, the statutory denial of exculpation for "acts...not in good faith" must

encompass the intermediate category of misconduct captured by the Chancellor's

definition of bad faith.

For these reasons, we uphold the Court of Chancery's definition as a legally

appropriate, although not the exclusive, definition of fiduciary bad faith. We need go no

further. To engage in an effort to craft (in the Court's words) "a definitive and categorical

definition of the universe of acts that would constitute bad faith" would be unwise and is

unnecessary to dispose of the issues presented on this appeal....

For the reasons stated above, the judgment of the Court of Chancery is affirmed.

CASE QUESTIONS

1. How did the court view the plaintiff's argument that the Chancellor had developed

two different types of bad faith?

2. What are the three types of bad faith that the court discusses?

the interest of the corporation) or gross negligence. Cases have arisen where corporate

directors have no conflicting self-interest in a decision, yet engage in misconduct that is

more culpable than simple inattention or failure to be informed of all facts material to the

decision. To protect the interests of the corporation and its shareholders, fiduciary

conduct of this kind, which does not involve disloyalty (as traditionally defined) but is

qualitatively more culpable than gross negligence, should be proscribed. A vehicle is

needed to address such violations doctrinally, and that doctrinal vehicle is the duty to

act in good faith. The Chancellor implicitly so recognized in his Opinion, where he

identified different examples of bad faith as follows:

The good faith required of a corporate fiduciary includes not simply the duties of care

and loyalty, in the narrow sense that I have discussed them above, but all actions

required by a true faithfulness and devotion to the interests of the corporation and its

shareholders. A failure to act in good faith may be shown, for instance, where the

fiduciary intentionally acts with a purpose other than that of advancing the best interests

of the corporation, where the fiduciary acts with the intent to violate applicable positive

law, or where the fiduciary intentionally fails to act in the face of a known duty to act,

demonstrating a conscious disregard for his duties. There may be other examples of

bad faith yet to be proven or alleged, but these three are the most salient.

...Second, the legislature has also recognized this intermediate category of fiduciary

misconduct, which ranks between conduct involving subjective bad faith and gross

negligence. Section 102(b)(7)(ii) of the DGCL expressly denies money damage

exculpation for "acts or omissions not in good faith or which involve intentional

misconduct or a knowing violation of law." By its very terms that provision distinguishes

between "intentional misconduct" and a "knowing violation of law" (both examples of

subjective bad faith) on the one hand, and "acts...not in good faith," on the other.

Because the statute exculpates directors only for conduct amounting to gross

negligence, the statutory denial of exculpation for "acts...not in good faith" must

encompass the intermediate category of misconduct captured by the Chancellor's

definition of bad faith.

For these reasons, we uphold the Court of Chancery's definition as a legally

appropriate, although not the exclusive, definition of fiduciary bad faith. We need go no

further. To engage in an effort to craft (in the Court's words) "a definitive and categorical

definition of the universe of acts that would constitute bad faith" would be unwise and is

unnecessary to dispose of the issues presented on this appeal....

For the reasons stated above, the judgment of the Court of Chancery is affirmed.

CASE QUESTIONS

1. How did the court view the plaintiff's argument that the Chancellor had developed

two different types of bad faith?

2. What are the three types of bad faith that the court discusses?

3. What two statutory provisions has the Delaware General Assembly passed that

address the distinction between bad faith and a failure to exercise due care (i.e.,

gross negligence)?