Disney Trial Challenging Ovitz Payout Begins

In almost every conceivable way, the Walt Disney Co.'s board of directors failed to exercise any responsibility over the hiring and firing of former president Michael Ovitz, leaving the company liable

(The Hollywood Reporter) -- In almost every conceivable way, the Walt Disney Co.'s board of directors failed to exercise any responsibility over the hiring and firing of former president Michael Ovitz, leaving the company liable for a $140 million severance payout, a corporate governance expert testified Oct. 20. The testimony came in the opening session of the closely watched trial before Delaware Chancery Court Judge William Chandler III in the small town of Georgetown.

Duke University law professor Deborah DeMott also took Disney CEO Michael Eisner to task for helping his friend get the plum position -- even though he and other executives had serious concerns about Ovitz's transformation from superagent to corporate executive.

"Neither the choice of Mr. Ovitz nor the terms under which Mr. Ovitz was employed by the corporation was, based on my review of the record, the subject of a board meeting," DeMott testified on behalf of the shareholders who brought the case to force a return of the Ovitz payout to Disney.

"The board was not informed that Mr. Eisner himself harbored serious reservations about Mr. Ovitz's suitability for the position," DeMott added. "It also appears from the review of the record that the board was not informed that two of the companies' other senior executives opposed the selection of Mr. Ovitz, as did a major shareholder."

DeMott said the board did not follow common corporate practices by discussing Ovitz's potential employment, reviewing the pay package, comparing it to the salaries and stock options offered by similar companies or consulting a compensation expert.

DeMott's opinions were based on depositions and other documents from Eisner and others who served on the Disney board when Ovitz was hired in 1995. She acknowledged under cross-examination that she had not spoken to any of these people personally and that her analysis was based on an understanding of common corporate practices in Delaware, where Disney is incorporated.

The shareholders' suit accuses Disney's then-board of intentionally failing to exercise proper oversight in hiring Ovitz, who was let go just 14 months later for poor job performance. His hiring, largely at the behest of then-friend Eisner, included a nonfault termination clause that triggered the massive payout of cash and stock options. Such a provision usually requires board consent. The shareholders want the $140 million and perhaps as much as $60 million in interest returned to Disney.

DeMott further claimed that the employment contract gave Ovitz little incentive to serve the whole term because he would still get most of the benefits.

"In my opinion this structure muted or dulled incentives that the agreement might otherwise have created for Mr. Ovitz to be motivated to perform consistently with the interests of the corporation and its shareholders," DeMott said.

She said Eisner and Ovitz were, by any indication, good friends and that while Eisner discussed Ovitz's potential hiring with a few individual board members, it was no substitute for a full and formal discussion by the board.

"I saw nothing in the record to indicate that Disney's directors in a collegiate and deliberate fashion considered the relevance of those factors to the role that Mr. Eisner might play in negotiating Mr. Ovitz's employment agreement," DeMott said.

The first time the board met to discuss Ovitz's hiring was on Sept. 26, 1995, well after his hiring had been publicly announced.

On the second day of trial, an employment law expert testified that board members had more than enough reason to fire Ovitz for cause, depriving him of a final payout for a 14-month tenure that was allegedly marked by poor performance and rampant dishonesty.

Yale Law School professor John Donohue III, the second of three plaintiffs' witnesses, said Oct. 21 that there was no justification for Ovitz to receive a $140 million severance, especially considering that his former friend, CEO Michael Eisner, major shareholders like Sid Bass and others complained openly about Ovitz's actions and attitude.

"If there's repeated instances of dishonest and untrustworthy behavior by the president of the company that undermines the trust that the other officers of the company have in him, in my opinion that's a basis for termination for cause," Donohue said.

Ovitz's representatives blasted Donohue's opinions, which were based on a review of depositions, statements and audits generated by this 7-year-old suit.

"The plaintiffs' expert based his unfounded opinion on nothing more than second- and third-hand hearsay and gossip," according to a statement on behalf of Ovitz. "When the facts are presented and fairly considered, they will clearly show that there was absolutely no cause to terminate Mr. Ovitz's employment and that he was absolutely entitled to accept the contractual benefits he received from Disney."

In arguing that Ovitz should have been fired for cause under a finding of gross negligence, Donohue said Ovitz failed to achieve any of the goals set out for him when he was hired in 1995, including becoming a potential successor to Eisner.

"Eisner had essentially hoped for a number of benefits from hiring Mr. Ovitz as president and in each of the three areas," Donohue said, based on a review of case documents. "Ovitz failed to take any burden off Eisner's shoulders, and indeed Eisner indicated that Ovitz only added to his burden as Eisner had to repeatedly clean up after Ovitz's mess."

Donohue quoted Eisner as saying, "If I should be hit by a truck, the company cannot leave him as CEO or as a figurehead CEO -- it would be catastrophic."

According to Donohue, Eisner and other top Disney officials grew intensely frustrated with Ovitz's alleged penchant to lie.

"Even in the final act of negotiating the departure of Ovitz, Ovitz engaged in a complete betrayal of an agreement that Eisner had worked really hard for him to have -- this giant windfall," Donohue said. "At the start of Mr. Ovitz's tenure, there was concern about his lack of truthfulness and dishonesty. During the course of his tenure, there were example after example of dishonesty on the part of Mr. Ovitz and even at the final moment he betrayed an agreement."

Ovitz is expected to testify the week of Oct. 25.