2 Ex-Directors Allege Fraud in Disney’s Search for CEO

Dissident former directors Roy E. Disney and Stanley P. Gold opened a new front Monday in their long-standing battle with Walt Disney Co., alleging in a lawsuit that the company’s board conducted a sham search for a new chief executive before giving the job in March to President Robert Iger.

The Delaware Chancery Court filing alleged that directors duped Gold and Disney into not running an alternative slate of directors at Disney’s annual meeting the previous month by misleading investors into believing that a good-faith effort was underway to find CEO Michael Eisner’s successor.

In a novel request, the two men want the court to scrap the February election results. They are asking for a new vote and want the court to hold up any changes to Iger’s contract, which has not been finalized, before he formally assumes the top job at the Burbank entertainment company Oct. 1.

But the case may be a tough sell in court, several legal experts said.

“You have to have something pretty blatant to kick out directors,” said Joe Hadzima, a corporate governance expert at the MIT Sloan School of Management. “It’s not clear to me how they are going to prove that.”

The lawsuit, which alleges fraud and breach of disclosure to shareholders, is likely to drum up more publicity for Disney and Gold, who led the shareholder revolt against Eisner in 2004 that resulted in a 45% vote of no confidence. Experts, however, note that the Delaware court typically gives directors wide latitude in their decision making under the “business judgment rule.”

Company spokeswoman Zenia Mucha called the action a “frivolous and baseless lawsuit” that reflects the “mean-spirited, self-serving interest of two ex-board members.”

Mike Sitrick, spokesman for Disney and Gold, countered: “We believe the facts will speak for themselves and ultimately we will prevail.”

The suit comes at an awkward time for Iger, who is eager to shape a company that for two decades has carried Eisner’s imprint.

Chairman George J. Mitchell, who is named in the suit along with Eisner, Iger and five other directors, has previously said Iger was rewarded with the job after a “lengthy, thorough and professional selection process.” That included a careful review of outside candidates, he has said.

Disney and Gold alleged, however, that directors interviewed only one external candidate. Shortly before naming Iger, Disney directors interviewed EBay Inc. Chief Executive Meg Whitman, who took herself out of the running.

They also allege that the search was skewed to favor Iger. The two claim the company promoted Iger’s candidacy and agreed to allow Eisner to sit in on expected interviews with outside candidates. Eisner had endorsed his second in command for the job.

Disney and Gold also chided the board for what they said was its failure to investigate whether Iger pressured staff members to present a false rosy picture of the results at the company’s ABC Family cable channel, which he oversaw. Iger and other Disney executives have denied any wrongdoing.

Disney, who with his family owns more than 30 million shares of the company, is one of the entertainment giant’s largest individual shareholders and nephew of the company’s namesake. He and Gold quit the board in late 2003.

Although they did not run an opposition slate at the annual meeting, Disney and Gold withheld their support from the board. Unlike in 2004, Eisner and other directors were overwhelmingly reelected.

Disney and Gold said they filed their lawsuit after the board rejected their request in April for records on the search process.

Charles Elson, corporate governance professor at the University of Delaware, questioned whether shareholders had an appetite for more feuding between the two camps.

“This is a tale of war and peace, and you would hope for the shareholders’ sake that we’re getting to the last chapter,” he said.