Case Could Redefine Board Members’ Liability

The short but lucrative stint Michael Ovitz served as president of the Walt Disney Company is now haunting directors of other companies as well as current and former members of Disney’s board.

By PATRICK McGEEHAN NY Times

Corporate directors are worried about their own liability after a Delaware judge ruled that a five-year-old shareholders’ suit against Disney and its directors could proceed to trial, directors and lawyers said this week. The revised complaint contends that Disney directors had almost no say in the hiring of Mr. Ovitz in October 1995 or his departure 14 months later, when he walked away with $38 million in cash and options with an estimated value of $100 million.
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Delaware courts generally do not second-guess the business judgments of disinterested corporate directors. But Judge William B. Chandler III of the Delaware Chancery Court found that the plaintiffs’ contentions, if they can be proved, suggest that the directors were "consciously indifferent" to the terms of the contract Mr. Ovitz negotiated with Disney’s chairman and chief executive, Michael D. Eisner.

Joseph E. Bachelder, a New York lawyer who specializes in executive compensation, called the decision "a warning, a cautionary note to directors that state courts will be taking a close look" at their behavior in overseeing companies. Most shareholder suits against companies are filed in state courts.

Robert Holland Jr., a former chief executive of Ben & Jerry’s and a director of four companies, said Judge Chandler’s decision made for "chilling" reading. "This just upped the bar as far as how deep the court will ask you to go to validate that you used reasonable business judgment."

The decision is the first to allow a case to stand against directors simply accused of failing to uphold their duties without any suggestion of self-dealing, corporate lawyers said. If the plaintiffs were to prevail at trial and hold the directors and Mr. Ovitz personally liable for repayment of the money Disney paid to him, some said, being a corporate director might be deemed too risky.

The suit seeks repayment to Disney through disgorgement by Mr. Ovitz and damages assessed against the company and its directors. Some of that money would probably come from insurance policies the company has to protect its directors and officers against lawsuits.

A Disney spokesman, John W. Spelich, said, "It’s a procedural decision that simply says the plaintiffs get a chance to prove what they have asserted, not that what they have asserted is true." All of the defendants continue to contest the allegations, he said.

Steven Schulman, a partner in Milberg Weiss Bershad Hynes & Lerach who is leading the litigation for the plaintiffs, said the judge had been persuaded by new information the plaintiffs gathered after their initial complaint was rejected. They discovered documents that they contend show the board knew little about the terms of Mr. Ovitz’s employment.

On Aug. 13, 1995, Mr. Eisner broached the idea of hiring Mr. Ovitz to three Disney directors: Stephen M. Bollenbach, Sanford Litvack and Irwin Russell, the suit contends. Though all three protested, it says, Mr. Eisner sent Mr. Ovitz a letter the next day that laid out some terms of his prospective employment.

The suit says that members of the Disney board and its compensation committee approved the basic outlines of Mr. Eisner’s plan to hire Mr. Ovitz without seeing a copy of the employment agreement, without consulting an expert on executive pay and without asking how much severance Mr. Ovitz stood to receive.

In a meeting on Sept. 25, a week before Mr. Ovitz joined Disney, the compensation committee met for less than an hour, the suit contends. The committee, whose members included Mr. Russell, who was Mr. Eisner’s personal lawyer, and the actor Sidney Poitier, spent less of that time considering the hiring of Mr. Ovitz than discussing Mr. Russell’s $250,000 fee for negotiating Mr. Ovitz’s contract, the suit says.

The final negotiation of the contract was left to Mr. Eisner, who was a longtime friend of Mr. Ovitz.

The suit says that Mr. Ovitz ended up with a five-year contract that differed in one important aspect from the drafts the directors had seen: it allowed him to collect termination benefits upon his dismissal as long as he did not act with gross negligence or malfeasance. In the end, the suit contends, Mr. Eisner worked with Mr. Ovitz to ensure that he received the full severance.

In a letter to Mr. Ovitz discovered by the plaintiffs, Mr. Eisner wrote: "I agree with you that we must work together as close personal friends to assure a smooth transition and deal with the public relations brilliantly. I am committed to make this a win-win situation, to keep our friendship intact, to be positive, to say and write only glowing things."

"Nobody ever needs to know anything other than positive things from either of us," he adds in the letter. "This can all work out!"