In re Walt Disney Co. Derivative Litigation Case Brief Summary | Law Case Explained

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In re Walt Disney Co. Derivative Litigation | 731 A.2d 342 (1998)

In nineteen ninety-five, the Walt Disney Company hired Michael Ovitz as president. This turned out to be a disastrous decision. Ovitz’s tenure at the happiest place on earth was short-lived, and he soon left, taking with him a substantial severance package that could’ve easily made him the happiest man on earth. In re Walt Disney Company Derivative Litigation was the outraged shareholders’ response to this debacle.

Michael Ovitz, a well-known Hollywood executive and the chairman of Creative Artists Agency, was recruited by the Walt Disney Company to serve as its president. To induce Ovitz to leave Creative Artists, Disney’s board of directors approved a lucrative employment contract.

Under the five-year contract, Ovitz received a one-million-dollar annual salary and options to purchase five million shares of Disney stock vesting over the five-year term. The contract also included a substantial severance package for a nonfault termination.

After fourteen months, Ovitz requested a nonfault termination. The board agreed that Ovitz wasn’t working out and granted his request. The board also honored Ovitz’s full severance package, which was worth about one hundred forty million dollars. Although Ovitz forfeited two million Disney stock options, he was granted three million options, a ten-million-dollar lump sum payment, and additional compensation for forgone bonuses.

Several Disney stockholders filed a derivative action against Disney’s board, alleging, among other things, that the directors breached their fiduciary duties by approving Ovitz’s employment contract, granting Ovitz a nonfault termination, and honoring the full severance package. Further, the stockholders claimed that Ovitz’s contract amounted to corporate waste and incentivized Ovitz to leave Disney.

The directors moved to dismiss on the ground that the stockholders failed to plead demand futility.

The Delaware Court of Chancery considered the directors’ motion.

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