William Brehm v. Michael D. Eisner, Michael s. Ovitz, and The Walt Disney Company,
Supreme Court of Delaware, 2000.
746 A.2d 244,
2000 Del. LEXIS 51.
Facts: The three claims being made here, are that (a) the board of directors of The Walt Disney
Company (“Disney”) as it was constituted in 1995 (the “Old Board”) breached its fiduciary duty
in approving an extravagant and wasteful Employment Agreement of Michael S. Ovitz as
president of Disney; (b) the Disney board of directors as it was constituted in 1996 (the “New
Board”) breached its fiduciary duty in agreeing to a non-fault” termination of the Ovitz
Employment Agreement, a decision that was extravagant and wasteful; and (c) the directors were
not disinterested and independent.
An agreement was made on October 1, 1995, when Disney hired Ovitz as president. He was a
long time friend of Disney’s Chairman and CEO Michael Eisner. At the time Ovitz was an
important talent broker in Hollywood, and although he lacked experience managing a diversified,
public company, other companies wanted to hire him for high level, executive positions. Eisner
thought that Disney should hire him and gave him a lucrative contract. Ovitz’ Employment
Agreement had an initial term of five years and required that Ovitz “devote his full time and best
efforts exclusively to the Company,” with exceptions for volunteer work, service on the board of
another company, and managing his passive investments. In return, Disney agreed to give Ovitz
a base salary of $ 1 million per year, a discretionary bonus, and two sets of stock options that
collectively would enable Ovitz to purchase 5 million shares of Disney common stock. In the
Employment Agreement, it states three ways that Ovitz’ contract can be terminated. (1) He might
serve his five years and Disney might decide against offering him a new contract. If so, Disney
would owe Ovitz a $10 million termination payment. (2) Before the end of the initial term,
Disney could terminate Ovitz for “good cause” only if Ovitz committed gross negligence or
malfeasance, or (3) if Ovitz resigned voluntarily. Disney would owe Ovitz no additional
compensation if it terminated him for “good cause.” Termination without cause (non-fault
termination) would entitle Ovitz to the present value of his remaining salary payments through
September 30, 2000, a $10 million severance payment, an additional $ 7.5 million for each fiscal
year remaining under the agreement, and the immediate vesting of the first 3 million stock
options.
The stockholders and plaintiffs alleged that the Board failed to realize that the contract gave
Ovitz an incentive to find a way to exit the company through a non-fault termination, because
doing so would permit him to earn more than he would earn by fulfilling his contract.
B. The New Board’s Actions in Approving the Non-Fault Termination
Soon after Ovitz began to work, there were problems that came up and they were only getting
worse, during his first year. To support this allegation, the plaintiffs gave various media reports,
detailing internal complaints and provided external examples of alleged business mistakes. The
complaint uses these reports to suggest that the New Board had reason to believe that Ovitz’s
performance and lack of commitment met the gross negligence or malfeasance standards of the
termination-for-cause provisions of the contract.
The situation, according to the Complaint, led Ovitz to begin seeking alternative employment
and to send Eisner a letter in September, 1996, that states his unhappiness at the company, and
that he wants to leave the company. On December 11, 1996, Eisner and Ovitz agreed to arrange
for Ovitz to leave Disney on the non-fault basis provided for in the 1995 Employment
Agreement. Eisner then “caused” the New Board “to rubber-stamp his decision (by ‘mutual
