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CASE 35-4
BREHM v. EISNER
Supreme Court of Delaware, 2000
746 A.2d 244
http://scholar.google.com/scholar_case?
q=746+A.2D+244+&hl=en&as_sdt=2,34&case=2721397479365362562&scilh=0
Veasey, C. J.
[On October 1, 1995, Disney hired as its president Michael S. Ovitz, who was a long-time
friend of Disney Chairman and CEO Michael Eisner. At the time, Ovitz was an important
talent broker in Hollywood. Although he lacked experience managing a diversified public
operations had been interested in hiring him for high-level executive positions. The
employment I agreement approved by the board of directors then | in office (Old Board) 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
The employment agreement provided three ways for Ovitz’ employment to end. 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. Before the end of the initial
term, Disney could terminate Ovitz for “good cause” only if Ovitz committed gross
negligence or malfeasance, or 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 salary payments
remaining under the agreement, 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 “A” Options).
Soon after Ovitz began work, problems surfaced and the situation continued to
deteriorate during the first year of his employment. The deteriorating situation led Ovitz to
begin seeking alternative employment and expressing his desire to leave the Company. On
Shareholders brought a derivative suit alleging that: (a) the Old Board had breached its
fiduciary duty in approving an extravagant and wasteful employment agreement of Michael
S. Ovitz as president of Disney and (b) the New Board had breached its fiduciary duty in
agreeing to an extravagant and wasteful “non-fault” termination of the Ovitz employment
agreement. The plaintiffs alleged that the Old Board had failed properly to inform itself
about the total costs and incentives of the Ovitz employment agreement, especially the
severance package, and failed to realize that the contract gave Ovitz an incentive to find a
way to exit the Company via a non-fault termination as soon as possible because doing so
This is potentially a very troubling case on the merits. On the one hand, it appears from
the Complaint that: (a) the compensation and termination payout for Ovitz were exceedingly
lucrative, if not luxurious, compared to Ovitz’ value to the Company; and (b) the processes
of the boards of directors in dealing with the approval and termination of the Ovitz
Employment Agreement were casual, if not sloppy and perfunctory. [T]he processes of the
* * *
This is a case about whether there should be personal liability of the directors of a
Delaware corporation to the corporation for lack of due care in the decisionmaking process
and for waste of corporate assets. This case is not about the failure of the directors to
establish and carry out ideal corporate governance practices.
governance practices. Aspirational ideals of good corporate governance practices for boards
of directors that go beyond the minimal legal requirements of the corporation law are highly
desirable, often tend to benefit stockholders, sometimes reduce litigation and can usually
help directors avoid liability. But they are not required by the corporation law and do not
define standards of liability. [Citation.]
The inquiry here is not whether we would disdain the composition, behavior and
decisions of Disney’s Old Board or New Board as alleged in the Complaint if we were
Disney stockholders. In the absence of a legislative mandate, [citation], that determination is
Plaintiffs claim that the Court of Chancery erred when it concluded that a board of
directors is “not required to be informed of every fact, but rather is required to be reasonably
informed.” [Citation.] * * * The “reasonably informed” language used by the Court of
Chancery here may have been a short-hand attempt to paraphrase the Delaware
jurisprudence that, in making business decisions, directors must consider all material
information reasonably available, and that the directors’ process is actionable only if grossly
Certainly in this case the economic exposure of the corporation to the payout scenarios
of the Ovitz contract was material, particularly given its large size, for purposes of the
directors’ decisionmaking process. [Court’s footnote: The term “material” is used in this
context to mean relevant and of a magnitude to be important to directors in carrying out their
* * *
* * * The Complaint, fairly construed, admits that the directors were advised by Crystal
as an expert and that they relied on his expertise. Accordingly, the question here is whether
the directors are to be “fully protected” (i.e., not held liable) on the basis that they relied in
good faith on a qualified expert [citation]. * * *
* * * Plaintiffs must rebut the presumption that the directors properly exercised their
business judgment, including their good faith reliance on Crystal’s expertise. * * *
* * * [T]he complaint must allege particularized facts (not conclusions) that, if proved,
would show, for example, that: (a) the directors did not in fact rely on the expert; (b) their
reliance was not in good faith; (c) they did not reasonably believe that the expert’s advice
* * *
We conclude that * * * the Complaint * * * as drafted, fails to create a reasonable doubt
that the Old Board’s decision in approving the Ovitz Employment Agreement was protected
by the business judgment rule. * * *
* * *
Plaintiffs’ principal theory is that the 1995 Ovitz Employment Agreement was a
“wasteful transaction for Disney ab initio” because it was structured to “incentivize” Ovitz
to seek an early non-fault termination. The Court of Chancery correctly dismissed this
theory as failing to meet the stringent requirements of the waste test, i.e., “‘an exchange that
* * *
* * * Irrationality is the outer limit of the business judgment rule. Irrationality may be
the functional equivalent of the waste test or it may tend to show that the decision is not
made in good faith, which is a key ingredient of the business judgment rule. [Court’s
footnote: The business judgment rule has been well formulated by Aronson and other cases.
(“It is a presumption that in making a business decision the directors * * * acted on an
decision by a grossly negligent process that includes the failure to consider all material facts
reasonably available.]
The plaintiffs contend in this Court that Ovitz resigned or committed acts of gross
negligence or malfeasance that constituted grounds to terminate him for cause. In either
event, they argue that the Company had no obligation to Ovitz and that the directors wasted
* * *
Construed most favorably to plaintiffs, the facts in the Complaint (disregarding
conclusory allegations) show that Ovitz’ performance as president was disappointing at best,
that Eisner admitted it had been a mistake to hire him, that Ovitz lacked commitment to the
Company, that he performed services for his old company, and that he negotiated for other
jobs (some very lucrative) while being required under the contract to devote his full time and
energy to Disney.
All this shows is that the Board had arguable grounds to fire Ovitz for cause. But what is
alleged is only an argument—perhaps a good one—that Ovitz’ conduct constituted gross
negligence or malfeasance. * * *
The Complaint, in sum, contends that the Board committed waste by agreeing to the
very lucrative payout to Ovitz under the non-fault termination provision because it had no
obligation to him, thus taking the Board’s decision outside the protection of the business
* * *
To rule otherwise would invite courts to become super- directors, measuring matters of
degree in business decision- making and executive compensation. Such a rule would run
counter to the foundation of our jurisprudence.
* * *
One can understand why Disney stockholders would be upset with such an
extraordinarily lucrative compensation agreement and termination payout awarded a
Duty of Loyalty
An ocer or director must subordinate his interests to the interests of the
corporation and is required to disclose fully any financial interest in any
contract or transaction to which the corporation is a party.
For breach of fiduciary duty a suit may be brought by the corporation, or a
derivative suit may be instituted by a shareholder to require the fiduciary to
pay to the corporation the profits he obtained through the breach. Whenever
a director or ocer breaches his fiduciary duty, he forfeits his right to
compensation during the period he engaged in the breach.
Conflict of interests — Transactions between an ocer or a director and
the corporation inherently involve a con ict of interests. In contracts
between corporations having an interlocking directorate (the boards share
one or more members), courts scrutinize the contracts and will set them
Loans to directors and o cers — The Model Act and some states permit
a corporation to lend money to its directors only with shareholders’
authorization for each loan. The 1988 amendments to the Revised Act
subject loans to directors to the procedure that applies to directors’
con icting-interests transactions. The Sarbanes-Oxley Act prohibits any
publicly held corporation from making personal loans to its directors or its
executive ocers. The Act provides certain limited exceptions to this
prohibition.
CASE 35-5
BEAM v. STEWART
Court of Chancery of Delaware, New Castle, 2003
833 A.2d 961, affirmed, 845 A.2d 1040
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Chandler, Chancellor
Monica A. Beam, a shareholder of Martha Stewart Living Omnimedia, Inc. (“MSO”), brings
this derivative action against the defendants, all current directors and a former director of
MSO, and against MSO as a nominal defendant. * * *
* * *
Plaintiff Monica A. Beam is a shareholder of MSO and has been since August 2001.
Derivative plaintiff and nominal defendant MSO is a Delaware corporation that operates in
the publishing, television, merchandising, and internet industries marketing products bearing
the “Martha Stewart” brand name.
Defendant Martha Stewart (“Stewart”) is a director of the company and its founder,
chairman, chief executive officer, and by far its majority shareholder. * * * [S]he controls
roughly 94.4% of the shareholder vote. Stewart, a former stockbroker, has in the past twenty
years become a household icon, known for her advice and expertise on virtually all aspects
of cooking, decorating, entertaining, and household affairs generally.
* * *
remains the personification of our brands as well as our senior executive and primary
creative force.” In fact, under the terms of her employment agreement, Stewart may be
terminated for gross misconduct or felony conviction that results in harm to MSO’s business
or reputation but is permitted discretion over the management of her personal, financial, and
legal affairs to the extent that Stewart’s management of her own life does not compromise
her ability to serve the company.
Stewart’s alleged misadventures with ImClone arise in part out of a longstanding
personal friendship with Samuel D. Waksal (“Waksal”). Waksal is the former chief executive
officer of ImClone as well as a former suitor of Stewart’s daughter. More pertinently, * * *
Waksal and Stewart have provided one another with reciprocal investment advice and
assistance, and they share a stockbroker, Peter E. Bacanovic (“Bacanovic”) of Merrill
Lynch. Bacanovic, coincidentally, is a former employee of ImClone. * * * The speculative
value of ImClone stock was tied quite directly to the likely success of its application for
market Erbitux. The following day the trading price closed slightly more than 20% lower
than the closing price on the date that Stewart had sold her shares. By mid-2002, this
convergence of events had attracted the interest of the New York Times and other news
agencies, federal prosecutors, and a committee of the United States House of
Representatives. Stewart’s publicized attempts to quell any suspicion were ineffective at best
because they were undermined by additional information as it came to light and by the other
* * *
* * * [T]he amended complaint alleges that the director defendants * * * breached their
fiduciary duties by failing to ensure that Stewart would not conduct her personal, financial,
and legal affairs in a manner that would harm the Company, its intellectual property, or its
business. The “duty to monitor” has been litigated in other circumstances, generally where
directors were alleged to have been negligent in monitoring the activities of the corporation,
activities that led to corporate liability. Plaintiff’s allegation, however, that the Board has a
* * *
* * * Regardless of Stewart’s importance to MSO, she is not the corporation. And it is
unreasonable to impose a duty upon the Board to monitor Stewart’s personal affairs because
such a requirement is neither legitimate nor feasible. * * *
* * * [This count] is dismissed for failure to state a claim.
* * * [T]he amended complaint alleges that Stewart * * * breached [her] fiduciary duty
of loyalty, usurping a corporate opportunity by selling large blocks of MSO stock to
In this analysis, no single factor is dispositive. Instead the Court must balance all factors
as they apply to a particular case. For purposes of the present motion, I assume that the sales
of stock to ValueAct could be considered to be a “business opportunity.” I now address each
of the four factors articulated in Broz.
The amended complaint asserts that MSO was able to exploit this opportunity because
the Company’s certificate of incorporation had sufficient authorized, yet unissued, shares of
Class A common stock to cover the sale to ValueAct. Defendants do not deny that the
Company could have sold previously unissued shares to ValueAct. I therefore conclude that
the first factor has been met.
A corporation has an interest or expectancy in an opportunity if there is “some tie
between that property and the nature of the corporate business.” * * * Here, plaintiff does
not allege any facts that would imply that MSO was in need of additional capital, seeking
additional capital, or even remotely interested in finding new investors. * * *
* * *
“The corporate opportunity doctrine is implicated only in cases where the fiduciary’s
seizure of an opportunity results in a conflict between the fiduciary’s duties to the
corporation and the self-interest of the director as actualized by the exploitation of the
opportunity.” Given that * * * MSO had no interest or expectancy in the issuance of new
* * *
IT IS SO ORDERED.
Transactions in shares — If directors and ocers cause the corporation to
issue shares to them at favorable prices by excluding other shareholders,
this action normally is a violation of the fiduciary duty. So is the issuance of
shares to a director at a fair price if the purpose of the issuance is to
perpetuate corporate control rather than to raise capital or to serve some
other corporate interest.
Duty not to compete — As fiduciaries, directors and ocers may not
compete with the corporation. A director or ocer who does compete with
the corporation is liable for damages caused to the corporation. Although
Indemnification of Directors and Officers
Directors and ocers incur personal liability for breaching any of the duties
they owe to the corporation and to its shareholders. Under many modern
Liability Limitation Statutes
Prompted by Smith v. Van Gorkom, more than 40 states recently have
enacted legislation limiting the liability of directors. Most states, including
Delaware, now authorize corporations, with shareholder approval, to limit or
eliminate directors’ liability for certain breaches of duty. A few states also
permit shareholders to limit the liability of ocers.
The Delaware statute provides that the articles of incorporation may contain
a provision eliminating or limiting a director’s personal liability to the
corporation or its stockholders for monetary damages for breach of
directorial duty, provided that such provision does not eliminate or limit the
