Closing a long-running legal saga that galvanized critics of corporate boards, the Delaware Supreme Court ruled Thursday that Walt Disney Co. directors acted properly in giving a fat severance in 1996 to former President Michael Ovitz after a little more than a year on the job.
In a 5-0 ruling, the state’s high court upheld an August decision by Delaware Chancery Court Judge William B. Chandler III, who had criticized the way former Chief Executive Michael Eisner handled the hiring and firing of Ovitz.
Nonetheless, he found that Eisner and other directors did not betray their duty to shareholders when Ovitz departed with a stock-and-cash payout valued at $130 million. Ovitz ultimately reaped $109 million because some of his stock options were worthless when they expired.
“The chancellor’s factual findings and legal rulings were correct and not erroneous in any respect,” the court concluded in a 91-page opinion written by Justice Jack Jacobs.
The ruling, which is not subject to appeal, ends a case that riveted Hollywood in late 2004 and early 2005. Over several days of testimony in a small Georgetown, Del., courthouse, both Eisner and Ovitz testified in detail not only about their inability to work together, but also about the disintegration of their long friendship.
The case was closely watched by corporate activists, who saw it as a referendum on boardroom conduct. Despite the outcome, some legal experts said the ruling wouldn’t hurt shareholder efforts to hold directors more accountable for their actions.
The ruling broadens and clarifies the responsibilities of directors, said Lyman Johnson, a professor of corporate law at Washington and Lee University in Lexington, Va.
“I think they validated that there is a basis for lawsuits against directors and officers who misbehave,” Johnson said.
Eisner attorney Gary Naftalis said in a statement: “We always believed that there was no basis for this case and that Mr. Eisner had acted properly and in the best interests of the Disney shareholders.”
Attorney Mark Epstein, who represented Ovitz, said, “We’re thrilled and delighted that the Delaware Supreme Court concluded, as did the Court of the Chancery, that Michael Ovitz got what his contract provided.”
Gregory P. Williams, who represented 13 Disney directors, said, “We could not be more happy for our clients, who can now put the matter behind them.”
Despite losing the decision, lead plaintiff lawyer Steven Schulman was encouraged.
“We are disappointed that the court did not agree with our appeal, but nonetheless we believe that we have vindicated important principles of corporate governance,” he said.
He noted that Jacobs made clear that directors could be held liable for acting in bad faith even in cases that don’t involve deliberate misconduct.
Schulman is on a leave of absence from Milberg Weiss Bershad & Schulman in New York. He and another partner were indicted by a federal grand jury in Los Angeles last month on charges of taking part in an alleged scheme to pay illegal kickbacks to clients serving as plaintiffs in shareholder lawsuits.
Both men have denied wrongdoing and vowed to fight the charges.