Walt Disney CEO Michael Eisner and a group of board members were cleared of any wrongdoing Aug. 9 in a long-running lawsuit over the hiring and rapid termination former president Michael Ovitz that co


LOS ANGELES (The Hollywood Reporter) -- Walt Disney CEO Michael Eisner and a group of board members were cleared of any wrongdoing Aug. 9 in a long-running lawsuit over the hiring and rapid termination former president Michael Ovitz that cost the company more than $140 million in severance.

Delaware Court of Chancery Judge William Chandler III ruled that neither Eisner, Ovitz nor any of the current or former board members who brought Ovitz aboard as president in 1995 breached their duties or wasted the company's money, which could have made them personally liable to repay the severance with interest.

The shareholder plaintiffs, who had pursued the case for eight years, wanted the severance and interest returned to Disney because they believed that Ovitz, Eisner's close friend at the time, was so incompetent that he should have been fired for cause. This would have relieved the company from the obligation of paying the entire amount to Ovitz.

The defendants had insisted that they exercised sufficient oversight in approving the hiring of Ovitz and then agreeing to pay him his full, five-year contract when he was fired after just 14 months on the job.

Although he was absolved legally, Eisner was scolded for unilaterally committing the company to hiring Ovitz with one of the richest pay packages in U.S. history.

"Eisner's actions in connection with Ovitz's hiring should not serve as a model for fellow executives and fiduciaries to follow," Chandler said, adding that Eisner's lapses in judgment included failing to keep the board sufficiently informed or involved.

"Despite all the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom, I nonetheless conclude, after careful consideration and weighing all the evidence, that Eisner's actions ... were taken with the subjective belief that those actions were in the best interest of the company," Chandler said.

Eisner attorney Gary Naftalis said his client was pleased with the outcome as "we always believed that there was no basis for this case."

Ovitz, who was accused of intentionally failing so he could leave early and collect severance, was said to be thrilled with the decision.

"We were very gratified to see that the chancellor went through all of the allegations that have been made against Mr. Ovitz for almost a decade now and found that none of them have any merit," Ovitz attorney Mark Epstein said. "He feels that hopefully now he can put this behind him and move on with his life."

Ovitz had said that the one-time friend who recruited him to the second spot at Disney failed to stand by him when other executives who had been passed over for the job balked at answering to the newcomer.

The plaintiffs vowed to appeal, a process that could take a year or more. They called the outcome "disappointing" but welcomed the opportunity to raise awareness about corporate governance.

"This lawsuit has already positively impacted how corporate America manages its affairs, making clear that company resources cannot be used to line the pockets of senior executives," said co-lead trial counsel Seth Rigrodsky of Milberg Weiss. "In addition, the Disney case has impelled America's boardrooms into closer scrutiny of chief executive officers' usurpation of managerial and supervisory duties -- duties that boards have an obligation to companies and shareholders to oversee."

The case started in October and included testimony from Eisner and Ovitz, as well as the current and former Disney directors who were serving during Ovitz's tenure from 1995 to 1996.

The 175-page decision came seven months after the conclusion of nearly three months of testimony during the bench trial.

The plaintiffs not only sought to recoup Ovitz's severance for Disney's shareholders but establish stricter corporate accountability in Delaware, where many corporations are based. It was for the latter reason that the case was closely watched across corporate America.

The plaintiffs asked the court to hold Ovitz, Eisner and the directors accountable for $262.2 million in damages, which included more than $120 million in interest.

The board was accused of violating its fiduciary duty by taking a "we don't care about the risks" attitude toward the hiring of Ovitz. It was alleged that the directors were grossly negligent in allowing Eisner to unilaterally hire Ovitz and failing to scrutinize terms of the employment contract, which included a "no-fault termination" that enabled Ovitz to leave with his full, five-year salary and stock options.

"As it relates to job performance, I find it patently unreasonable to assume that Ovitz intended to perform just poorly enough to be fired quickly but not so poorly that he could be terminated for cause," Chandler said. "Based upon my personal observations of Ovitz, he possesses such an ego, and enjoyed such a towering reputation before his employment at [Disney], that he is not the type of person that would intentionally perform poorly."

On the most critical issue, Chandler said Ovitz could not be fired for cause based on his performance.

"Although the general consensus on Ovitz's tenure is largely negative, Ovitz did make some valuable contributions while president of the company," Chandler wrote. "Ultimately, however, Ovitz's time as president was marked by more 'woulda, coulda, shoulda' than actual success."

In the trial's opening days, Ovitz testified that he was thwarted at nearly every turn by Eisner and a group of senior executives, including operations chief Sanford Litvack and finance chief Stephen Bollenbach, who refused to report to him. Among others, Ovitz proposed to expand Hollywood Records by signing such artists as Janet Jackson and acquiring EMI, take a stake in Yahoo! Inc. or an NFL franchise in Los Angeles and expand into the publishing realm by acquiring Putnam Publishing and signing book deals with Stephen King and Michael Crichton.

If anything, Chandler blamed Ovitz's failures at Disney on a clash of cultures and conflict between "two proud and stubborn individuals" -- Eisner and Ovitz.

As to the directors, who included Roy E. Disney, Stanley Gold, Sidney Poitier and former Sen. George Mitchell, the judge said there was no evidence that they acted with gross negligence or bad faith. This group was not let off entirely scot-free, as Chandler cautioned that "for the future, many lessons of what not to do can be learned from defendants' conduct here."

Chandler reserved his strongest criticism for Eisner for stacking the board with friends and acquaintances.

"By virtue of his Machiavellian [and imperial] nature as CEO, and his control over Ovitz's hiring in particular, Eisner to a large extent is responsible for the failings in process that infected and handicapped the board's decisionmaking abilities," Chandler wrote.

Still, the judge found no evidence that Eisner actively took steps to "defeat or short-circuit" any steps the board otherwise would have taken.

"Eisner unexpectedly found himself confronted with a situation that did not have an easy solution," Chandler said. "He weighed the alternatives, received advice from counsel and then exercised his business judgment in a manner he thought best for the corporation ... and I conclude that plaintiffs have not demonstrated by a preponderance of the evidence that Eisner breached his fiduciary duties or acted in bad faith in connection with Ovitz's termination and receipt of the [severance]."

Questions? Comments? Let us know: @billboardbiz

Print