The trial continues in the suit brought seven years ago by shareholders against the Walt Disney Co. over the hiring of former president Michael Ovitz.

(The Hollywood Reporter) -- The trial continues in the suit brought seven years ago by shareholders against the Walt Disney Co. over the hiring of former president Michael Ovitz.

The shareholders want the board held negligent for allowing CEO Michael Eisner to hire Ovitz with a pay package that gave him a $130 million severance -- after just 14 months on the job -- due to a no-fault termination clause. They seek recovery of the severance plus interest.

The shareholders claim that Ovitz, a founder of Creative Artists Agency (CAA) and one of Hollywood's most powerful men, was so incompetent that he should have been fired without further compensation.

On Oct. 25, the plaintiffs called on University of Southern California business and law professor Kevin Murphy, a compensation expert, to build the case of negligence.

"The initial contract was one of the most generous, if not the most generous, contract ever offered to a non-CEO-level individual in the history of corporate America," Murphy testified in the Georgetown, Del., courtroom of Chancery Court Judge William Chandler III.

Chandler, without the aid of a jury, will decide if the board properly compensated Ovitz or whether some or all of the payout should be returned to the company's coffers.

Murphy was the third of the plaintiffs' three witnesses. Other plaintiff experts have testified that the board not only should have paid closer attention to the details of Ovitz's firing but should have fired him for his poor job performance, thus depriving him of any severance.

During cross-examination, Murphy acknowledged that he did not take certain factors into consideration, including the fact that Ovitz earned about $20 million-$25 million annually as founder of CAA.

Murphy said Ovitz's pay package was excessive on nearly every level.

The contract called for a $1 million base salary -- even though Eisner earned $750,000 -- and $7.5 million in annual bonuses. Murphy estimated that Ovitz's 5 million stock options were worth $107 million. In all, he estimated that the payout cost Disney $130 million. Other estimates associated with the trial have been higher.

However, termination for good cause would have meant no continuation of salary or bonus and all unvested options would have been canceled.

During Ovitz's first day of testimony on Oct. 26, he cataloged his efforts to grow Disney after he was hired in 1995, from trying to expand Hollywood Records by bringing in such artists as Janet Jackson to attempts to acquire EMI, a stake in Yahoo! Inc. and an NFL franchise for Los Angeles.

Eisner vetoed each of those ideas, Ovitz said, adding that his boss "had the final say on everything."

Being offered the presidency of Disney was the "dream position of all time" in Ovitz's assessment, even though the $8.5 million annual salary meant taking a pay cut from the estimated $20 million-$25 million he earned each year at CAA.

Ovitz said he had no illusions that the transition from superagent to corporate president would be easy.

"I said to [Eisner], 'How are you going to put me into a company that you've worked at so many years and expect it to function?'" Ovitz said. "I said I have never run a public company. I need a year of education -- you have to teach me what to do. Frankly, I expected the first year to be a very steep learning curve for me in the management of a public institution."

The problems began immediately. The day before he started -- and after he'd already agreed to sell his interest in CAA -- Disney's then-chief of operations Sanford Litvack and finance chief Stephen Bollenbach told Ovitz they wouldn't be reporting to him.

"My mind was spinning like a Univac, trying to sort out what to do, what's going on. Is this a practical joke?" Ovitz said.

Ovitz said he pressed on despite that, looking for ways to control spending at the studio, hosting weekly strategy meetings at his house and encouraging top Hollywood talent such as Martin Scorsese to work with Disney.

He said he even tried to intercede in the dispute after Jeffrey Katzenberg left Disney. Ovitz said he brokered a tentative deal to settle the dispute for $85 million-$90 million but had it rejected by Eisner and Litvack. Disney eventually settled with Katzenberg for more than $250 million, Ovitz said.

On Oct. 27, Ovitz testified that he remained optimistic to the end that he could succeed as president of Disney even after he was all but fired by good friend and confidant Eisner.

"The success, the deal, the fraternal environment and doing things that were interesting with interesting people moved me," Ovitz said. "Frankly I didn't even think about the money."

Under questioning by his attorney, Mark Epstein, Ovitz said he relished the chance to tell his side of the story.

As a condition of leaving CAA, Ovitz demanded employment guarantees such as a $10 million termination payment and longer terms to exercise options. What ultimately excited him, though, was the chance to work in partnership with Eisner, his friend of 25 years.

"I trusted Michael [Eisner] so much that I figured that based on all my analysis that it was a leap worth taking," Ovitz said, adding that he'd also grown tired of being an agent, especially after founding CAA partner Ron Meyer left to become president and COO of MCA Inc. in 1995 for the same reason.

In Ovitz's opinion, it was his fellow executives -- Bollenbach and Litvack in particular -- who acted in an underhanded fashion by working to undermine him.

Bollenbach resented that he had not been offered the presidency, driving him to leave Disney, Ovitz testified.

Synergy chief Jody Dreyer was accused of being meddlesome, but Ovitz reserved his harshest criticism for Litvack -- the person who ultimately brought the ax down for Eisner.

"I absolutely did not trust Mr. Litvack and assumed that he would do whatever he could to remove me from the premises," Ovitz said.

In fact, Litvack did deliver the news.

"I put the phone down and [Litvack] looked at me and he said 'Michael wants you out of the company. He's not going to change his mind, and he wants you to leave,'" Ovitz said. "I just looked into his eyes and didn't say a word. I was absolutely flabbergasted. You could have hit me over the head with a two-by-four."

Ovitz said he wanted to hear it from Eisner.

"As far as I was concerned I wasn't going to leave there a loser," Ovitz said. "The guy who hired me or the board was going to have to terminate me."

Though stunned and saddened, Ovitz said he continued to work, hoping that one of his projects would click with Eisner.

He pleaded his case to another close friend, Disney board member Gary Wilson, whom Eisner had put in the awkward position of making it clear that Ovitz was on his way out. When the two got back from a Caribbean vacation together, life around the Disney executive building was markedly different for Ovitz, who was cut out of the meetings, and activities bustled around him.

"I guess you can say I got pushed out of the sixth-floor window," he added.

Ovitz's third day on the stand on Oct. 28 was characterized by confrontational exchanges with plaintiffs' attorney Steven Schulman as he delved into details of Ovitz's CAA dealmaking before joining Disney on Oct. 1, 1995.

Much of the focus was on the interest Ovitz retained in previously-booked agency commissions.

Ovitz said that arrangement was part of a deal to turn the agency over to nine younger executives. The deal was structured so that he and former partner Meyer could benefit while ensuring that the company they founded would thrive under new leadership.

The questioning later explored Ovitz's role in bringing television executive Jamie Tarses from NBC to ABC in 1996.

Ovitz denied any role in the public disclosure that Tarses might pursue a sexual harassment claim against her boss at NBC. At the time, press reports saw that as a way to stop NBC from retaliating against ABC over interfering with its business.

The session on Oct. 29 dwelled on the Gulfstream III jet that Ovitz sold to Disney before being hired and the amount of money spent to furnish Ovitz's office at Disney.

The jet, which Ovitz used at CAA and sold to Disney for $7.8 million when he became president, was a routine, arms-length sale in which he took the price Disney offered -- which happened to be on the low end for that type of jet at the time -- Ovitz testified.

Attorney Schulman claimed that the sale was a "flip transaction" that allowed Ovitz and his partners to unfairly profit at Disney's expense.

Ovitz was also challenged on the role he played in building and furnishing his office at Disney's corporate headquarters in Burbank, Calif. Ovitz denied that he was responsible for its cost, though he acknowledged hiring an interior designer for the project because he was often on the road at the time.

"Michael [Eisner] said to me he would take care of the office," Ovitz said. "I didn't approve the [$1.7 million] though you continue to harp on it in the press."

During his final day of testimony on Nov. 1, Ovitz said that he was concerned about being fired from Disney before he even started, but denied that it had anything to do with the resistance he got early on from senior executives, including Eisner.

"Having done 30 years of employment negotiations, it was pretty much standard operating procedure for anyone like myself or any attorney who does employment contracts to deal with the frontside and then the backside -- and the backside usually has upside participation and downside protection," Ovitz told Schulman under cross-examination. "I was giving up a company that was taking off like a rocket ship."

Ovitz also testified that he had full faith in his longtime friend Eisner when they shook hands Aug. 12, 1995, during a hike near Aspen, Colo., and agreed that Ovitz would become Disney's next president.

A day later, as Ovitz had already testified, he was shocked that Eisner stood by and did nothing when Litvack and Bollenbach said that they would not report to Ovitz.

Ovitz said he was very unhappy about the situation but trusted that Eisner would work it out. He denied that that meeting prompted him to seek an even stronger termination package, though he was concerned about walking into a situation where he would likely be fired.

While the suit accuses board members of being negligent, Ovitz said that at least four directors -- including Eisner, Litvack and Bollenbach -- had detailed knowledge of his hiring. Any other board review was left to Eisner, he said.

"I assumed he'd been running the company and that he surely knew what to do and he'd do it appropriately -- as he always did," Ovitz said.

Ovitz also was questioned about his on-the-job spending, including the lavish gifts he gave influential investors, top talent and such former CAA clients as David Letterman and Barry Levinson. Gifts to Disney employees got him in trouble with Litvack because it violated company policy, he said. That forced Ovitz to clear the gifts with Eisner, like when they jointly gave a watch to current president and COO Bob Iger.

"That is how you make people feel special," Ovitz said, adding that he pioneered the giving of good-will gifts in the agency business. "Any time I had an opportunity to pass Disney paraphernalia, which we got at a steep discount, I would do it because I wanted to create good will and a softer image for the company."

Ovitz was followed on the witness stand by Irwin Russell, Eisner's personal attorney who was a Disney board member and chair of the compensation committee when Ovitz was hired. He was the first of several former and current board members scheduled to testify in their own defense.

Russell said he helped Eisner draw up an early outline of potential issues in the hiring.

"We wanted the compensation package to be consistent with the Disney compensation policies," Russell said, which included a below-market base salary and options.

As his testimony continued on Nov. 3, Russell said that a handful of key Disney directors spent a little more than a month evaluating and then hiring Ovitz as president. Some board members, like Sidney Poitier, were told of the intention to hire Ovitz on the evening before the press release went out in August 1995.

Russell said he started the first draft of an Ovitz hiring "case study" on July 7, 1995. It analyzed the potential offer and the fact that, as founder of CAA, Ovitz would be walking away from a job where he earned $25 million annually. Ovitz's hiring was made public Aug. 14, 1995, but he did not start until Oct. 1 of that year.

In the weeks leading up to the hiring, Russell said there was no formal meeting of the full Disney board, but he did hire a compensation expert to analyze the Ovitz offer.

Because he was being groomed as a potential successor to Eisner, Ovitz wanted parity in many areas of compensation, Russell said. That included 8 million stock options, the same amount that Eisner got in 1989.

Russell said a more proportional figure at that time would have been 3 million options and that Eisner was proud to get Ovitz to accept that with the possibility of another 2 million if his five-year contract was extended.

Ray Watson was another trusted board member who was privy to these discussions.

"Michael [Eisner] and I agreed that as soon as this had reached the point where we thought there was a good possibility of a deal and we were close to the parameters, then I would call upon Ray as my partner in deciding whether or not this was a good idea for the company," Russell said.

Some of these executives had doubts about Ovitz's ability to adapt to the corporate culture of a public company, as they would have had about anyone coming from a private firm, he said.

Litvack had his own concerns "based on his own situation and how it would affect him and what his role would be," Russell said. "I knew that in the back of his mind, Sandy [Litvack] had never given up the idea of becoming president himself."

After a day in which the court was in recess, Russell continued his testimony on Nov. 5.

It was unusual, but not wholly unheard of in corporate America, for the head of the compensation committee to be negotiating an employment contract that his group would eventually approve, Russell testified.

Efforts were made to keep the negotiations as confidential as possible, even if it meant keeping many board members in the dark, Russell said.

"Mr. Eisner would discuss it with board members or other people he felt should know," Russell said. "There was no discussion between us about the necessity of making this a secret negotiation. We wanted to make sure we avoided leaks to the press -- general leaks -- because it would completely disrupt the Walt Disney Co."

The full compensation committee did not meet before Ovitz's hiring was announced in August 1995.

General counsel Sanford Litvack was kept out of the negotiations because he would have to answer to Ovitz, Russell said, adding that there was no similar reason to avoid other board members like Poitier.

Russell denied that there was any conflict of interest in his handling of the terms of Ovitz's contract while overseeing the committee that would review and approve it. He said he did not need the authority of other compensation committee members to do this since Eisner felt the situation was appropriate.

Ovitz's hiring was a highly sensitive matter because, in addition to seeking a new president after Frank Wells had died in a helicopter accident in 1994, Eisner had hoped to find a successor in his close personal friend Ovitz, Russell said. Litvack wanted the job, and Jeffrey Katzenberg had been considered. The only other person who was approached was former Sen. George Mitchell, who turned down the offer but at least accepted a seat on the board. Mitchell was named Disney chairman in March.

Russell said the pay package presented to Ovitz, which included a base salary, bonus and stock options, was reasonable, especially considering how much Ovitz was giving up in leaving CAA.

"It seemed to me that we had made a very good deal," Russell testified. "It was less than I had originally envisioned that we would have to pay. It was a long, hard bargaining, and Michael Eisner was determined not to breech the line."

Eisner grew increasingly frustrated with Ovitz's performance, primarily for not keeping him informed and suggesting ventures that made no business sense, Russell said.

Still, he said there was no good reason to fire Ovitz for cause, which would have spared the company from having to pay the severance.

The Associated Press contributed to this report.

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