Witness Assails Disney’s Ovitz Deal

GEORGETOWN, Del. — A law professor testified today that Walt Disney Co. directors should have met to discuss the hiring and firing of former President Michael Ovitz that proved so costly to the entertainment giant.

The testimony of Duke University’s Deborah A. DeMott came in the first day of a Delaware Chancery Court trial in which shareholders are seeking to have the company reimbursed as much as $200 million in severance and interest. Ovitz served 15 months as president of Burbank-based Disney before being fired in 1996.

A plaintiff’s witness, DeMott expanded on her earlier report that criticized Disney’s board for being passive during Ovitz’s hiring and firing. DeMott also said that reservations about Ovitz’s hiring by key Disney executives and investors were kept quiet.

Ovitz eventually reaped $109 million in cash and stock options as severance, although lawyers for the plaintiffs argue that the package was projected to be worth $140 million the day he left. With interest, the lawyers argue that the company should be reimbursed $200 million, an amount likely to be covered by insurance.

Ovitz was hired and then fired by his former close friend, Disney chief executive Michael Eisner. During the trial that started today in this small town, Ovitz and Eisner will be compelled to explain in detail why their relationship imploded.

Although Ovitz and Eisner barely speak to each other now, they must stand shoulder to shoulder to prove that though Ovitz’s parting was bitter, he was not fired for gross negligence or malfeasance. Were Ovitz guilty of such behavior, he could have been denied the rich cash and stock option package he reaped.

Based on pretrial depositions, Eisner is expected to argue that he engineered a once-in-a-lifetime coup by persuading Ovitz in 1995 to give up his position as Hollywood’s most powerful agent to become Disney’s second-in-command. At the same time, he must demonstrate that Ovitz’s performance at Disney was flawed — bad enough to cost him his job but not so bad as to cost him his severance.

Ovitz has his own fine line to walk. He is expected to accuse Eisner and other Disney executives of undercutting him. But he too will argue that Eisner acted properly in easing him out, clearing the way for the severance because the arrangement simply did not gel.

Lawyers for Eisner and other directors contend that they acted in the best interests of shareholders by protecting the company from a breach-of-contract suit that almost certainly would have been filed had they denied Ovitz his payout. That, they say, could have cost far more than the severance package.

The show is expected to last about a month, with testimony from Ovitz beginning sometime next week after the shareholders’ attorneys present several expert witnesses drawn largely from academia. Among other things, they will argue that Ovitz should have been fired “for cause” and discuss the value of Ovitz’s payout when he left in 1996.

The trial is taking place in Delaware because of the state’s business-friendly laws, which have encouraged Disney and many other major companies to incorporate here.

Legal experts say it’s rare for such shareholder cases to make it to trial because companies nearly always find it cheaper to settle.

Sources close to the case say proposed offers to settle the claims were floated but were rejected by American International Group, the liability insurance provider for Disney directors. An AIG spokesman could not be reached.

Eisner and Ovitz share a common goal of using the trial testimony to burnish their respective reputations, although documents already amassed in the case do little to facilitate that goal.

Eisner, who has said he will retire when his contract expires in 2006, has been credited with building Disney into a multibillion-dollar entertainment conglomerate. But in recent years, he has been criticized for the company’s poor financial performance and for the loss of key executives.

In March, Eisner endured a stinging rebuke by shareholders unhappy with his management. That effort was led by former directors Roy E. Disney and Stanley P. Gold, who also are defendants in the Delaware case because they served on Disney’s board when Ovitz was hired.

For Ovitz, the tiny Delaware courtroom offers a chance to rehabilitate an image that has never fully recovered after he tumbled from Hollywood’s highest perch.

His firm, Creative Artists Agency, represented numerous A-list actors and directors, including Tom Cruise, Dustin Hoffman, Barbra Streisand and Steven Spielberg. Ovitz will contend in court, according to deposition testimony, that after Eisner lured him away, he “never came out and took my back. Ever.”

Eisner’s take is vastly different. In often scathing language filed in court documents, he described Ovitz as something akin to a “junior partner” who failed to make the cut. He is quoted in documents as saying that Ovitz had “pathological problems,” that “nobody trusts him for he cannot tell the truth,” and that he was someone who “played the angles too much” at Disney.

Times staff writer Claudia Eller contributed to this report.