C.A. No. 15452  

OPINION AND ORDER

Joseph A. Rosenthal, Norman M. Monhait and Carmella P. Keener of ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A., Wilmington, Delaware; Seth D. Rigrodsky, of MILBERG WEISS BERSHAD & SCHULMAN LLP, Wilmington, Delaware; OF COUNSEL: Steven G. Schulman, Joshua H. Vinik, Jennifer K. Hirsh and John B. Rediker, of MILBERG WEISS BERSHAD & SCHULMAN LLP, New York, New York, Attorneys for Plaintiffs.

David C. McBride and Christian Douglas Wright, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Mark H. Epstein and Jason L. Haas, of MUNGER, TOLLES & OLSON LLP, Los Angeles, California, Attorneys for Defendant Michael S. Ovitz.

Andre G. Bouchard and Joel Friedlander, of BOUCHARD, MARGULES & FRIEDLANDER, P.A., Wilmington, Delaware, Attorneys for Nominal Defendant The Walt Disney Company.

Robert K. Payson, Stephen C. Norman and Kevin R. Shannon, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, Attorneys for Defendant Sanford M. Litvack.

Jesse A. Finkelstein, Gregory P. Williams, Anne C. Foster, Lisa A. Schmidt, Evan O. Williford and Michael R. Robinson, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Defendants Stephen F. Bollenbach, Reveta F. Bowers, Ignacio E. Lozano, Jr., George J. Mitchell, Thomas S. Murphy, Richard A. Nunis, Leo J. O’Donovan, S.J., Sidney Poitier, Irwin E. Russell, Robert A. M. Stern, E. Cardon Walker, Raymond L. Watson and Gary L. Wilson.

A. Gilchrist Sparks, III and S. Mark Hurd, of MORRIS, NICHOLS, ARSHT & TUNNELL, Wilmington, Delaware; OF COUNSEL: Stephen D. Alexander and Fred L. Wilks, formerly of FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP, Los Angeles, California, Attorneys for Defendants Roy Disney and Stanley P. Gold.

Lawrence C. Ashby and Richard D. Heins, of ASHBY & GEDDES, Wilmington, Delaware; OF COUNSEL: Gary P. Naftalis, Michael S. Oberman, Paul F. Schoeman and Shoshana Menu, of KRAMER LEVIN NAFTALIS & FRANKEL LLP, New York, New York, Attorneys for Defendant Michael Eisner.

CHANDLER, Chancellor

INTRODUCTION

This is the Court’s decision after trial in this long running dispute over an executive compensation and severance package. The stockholder plaintiffs have alleged that the director defendants breached their fiduciary duties in connection with the 1995 hiring and 1996 termination of Michael Ovitz as President of The Walt Disney Company. The trial consumed thirty-seven days (between October 20, 2004 and January 19, 2005) and generated 9,360 pages of transcript from twenty-four witnesses. The Court also reviewed thousands of pages of deposition transcripts and 1,033 trial exhibits that filled more than twenty-two 3½-inch binders. Extensive posttrial memoranda also were submitted and considered. After carefully considering all of the evidence and arguments, and for the reasons set forth in this Opinion, I conclude that the director defendants did not breach their fiduciary duties or commit waste. Therefore, I will enter judgment in favor of the defendants as to all claims in the amended complaint.

As I will explain in painful detail hereafter, there are many aspects of defendants’ conduct that fell significantly short of the best practices of ideal corporate governance. Recognizing the protean nature of ideal corporate governance practices, particularly over an era that has included the Enron and WorldCom debacles, and the resulting legislative focus on corporate governance, it is perhaps worth pointing out that the actions (and the failures to act) of the Disney board that gave rise to this lawsuit took place ten years ago, and that applying 21st century notions of best practices in analyzing whether those decisions were actionable would be misplaced.

Unlike ideals of corporate governance, a fiduciary’s duties do not change over time. How we understand those duties may evolve and become refined, but the duties themselves have not changed, except to the extent that fulfilling a fiduciary duty requires obedience to other positive law. This Court strongly encourages directors and officers to employ best practices, as those practices are understood at the time a corporate decision is taken. But Delaware law does not—indeed, the common law cannot—hold fiduciaries liable for a failure to comply with the aspirational ideal of best practices, any more than a common-law court deciding a medical malpractice dispute can impose a standard of liability based on ideal—rather than competent or standard—medical treatment practices, lest the average medical practitioner be found inevitably derelict.

Fiduciaries are held by the common law to a high standard in fulfilling their stewardship over the assets of others, a standard that (depending on the circumstances) may not be the same as that contemplated by ideal corporate governance. Yet therein lies perhaps the greatest strength of Delaware’s corporation law. Fiduciaries who act faithfully and honestly on behalf of those whose interests they represent are indeed granted wide latitude in their efforts to maximize shareholders’ investment. Times may change, but fiduciary duties do not. Indeed, other institutions may develop, pronounce and urge adherence to ideals of corporate best practices. But the development of aspirational ideals, however worthy as goals for human behavior, should not work to distort the legal requirements by which human behavior is actually measured. Nor should the common law of fiduciary duties become a prisoner of narrow definitions or formulaic expressions. It is thus both the province and special duty of this Court to measure, in light of all the facts and circumstances of a particular case, whether an individual who has accepted a position of responsibility over the assets of another has been unremittingly faithful to his or her charge.

Because this matter, by its very nature, has become something of a public spectacle—commencing as it did with the spectacular hiring of one of the entertainment industry’s best-known personalities to help run one of its iconic businesses, and ending with a spectacular failure of that union, with breathtaking amounts of severance pay the consequence—it is, I think, worth noting what the role of this Court must be in evaluating decision-makers’ performance with respect to decisions gone awry, spectacularly or otherwise. It is easy, of course, to fault a decision that ends in a failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk—the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known. The decision-makers entrusted by shareholders must act out of loyalty to those shareholders. They must in good faith act to make informed decisions on behalf of the shareholders, untainted by self-interest. Where they fail to do so, this Court stands ready to remedy breaches of fiduciary duty.

Even where decision-makers act as faithful servants, however, their ability and the wisdom of their judgments will vary. The redress for failures that arise from faithful management must come from the markets, through the action of shareholders and the free flow of capital, and not from this Court. Should the Court apportion liability based on the ultimate outcome of decisions taken in good faith by faithful directors or officers, those decision-makers would necessarily take decisions that minimize risk, not maximize value. The entire advantage of the risk-taking, innovative, wealth-creating engine that is the Delaware corporation would cease to exist, with disastrous results for shareholders and society alike. That is why, under our corporate law, corporate decision-makers are held strictly to their fiduciary duties, but within the boundaries of those duties are free to act as their judgment and abilities dictate, free of post hoc penalties from a reviewing court using perfect hindsight. Corporate decisions are made, risks are taken, the results become apparent, capital flows accordingly, and shareholder value is increased.

Because of these considerations, I have tried to outline carefully the relevant facts and law, in a detailed manner and with abundant citations to the voluminous record. I do this, in part, because of the possibility that the Opinion may serve as guidance for future officers and directors—not only of The Walt Disney Company, but of other Delaware corporations. And, in part, it is an effort to ensure meaningful appellate review. Ultimately, however, it is for others to judge whether my effort here offers reasonable guidance to corporate directors, in general, on the subject of executive compensation and severance payments. ¹ What follows is my judgment on whether each director of The Walt Disney Company fulfilled his or her obligation to act in good faith and with honesty of purpose under the unusual facts of this case.

Table of Contents

I. FACTS ²

A. Michael Ovitz Joins The Walt Disney Company

1. Background

The story of Michael Ovitz’s rise and fall at The Walt Disney Company (“Disney” or the “Company”) begins with the unfortunate and untimely demise of Frank Wells. Before his death, Wells served as Disney’s President and Chief Operating Officer, and both he and Michael Eisner, Disney’s Chairman and CEO, enjoyed ten years of remarkable success at the Company’s helm. In April 1994, a fatal helicopter crash ended Wells’ tenure at Disney and forced the company to consider a decision it was not properly prepared or ready to make. ³

Disney’s short list of potential internal successors produced, for one reason or another, no viable candidates. ⁴ Instead, Eisner assumed Disney’s presidency, and for a brief moment, the Company was able to stave off the need to replace Wells. Within three months, however, misfortune again struck the Company when Eisner was unexpectedly diagnosed with heart disease and underwent quadruple bypass surgery. The unfortunate timing of Eisner’s illness and operation set off an “enormous amount of speculation” concerning Eisner’s health and convinced Eisner of the need to “protect[] the company and get[] help.” ⁵ Over the next year, Eisner and Disney’s board of directors discussed the need to identify Eisner’s successor. These events were the springboard from which Eisner intensified his longstanding desire to bring Michael Ovitz within the Disney fold. ⁶

By the summer of 1995, Michael Ovitz and Michael Eisner had been friends for nearly twenty-five years. These men were very well acquainted, both socially and professionally. Over time, this relationship engendered numerous overtures, by which Eisner and Ovitz flirted with the idea of joining ranks and doing something together. ⁷ As Eisner put it: “I had been trying to hire him forever.... I couldn’t do business with him ... he was too tough, so I thought he would be better ... on our side.” ⁸ But until Eisner had offered Ovitz Disney’s presidency, Ovitz had never seriously considered any of Eisner’s offers and, according to Ovitz, there was good reason.

Michael Ovitz’s interest in the entertainment industry was kindled during his high school years and, from that time through college, Ovitz held different posts at Universal Studios and Twentieth Century Fox. After graduating college, Ovitz left the studios and gained employment in the mailroom of the William Morris Agency. At that time, William Morris was well regarded as the oldest and largest theatrical talent agency in the world. ⁹ Ovitz worked for William Morris for six years, and had worked his way up to become a talent agent within the agency’s television department. Here, Ovitz began to question the company’s direction and its approach to representing its clients. Despite several colleagues’ attempts to address their discontent with management, their efforts were not well received and, eventually, these philosophical disagreements led to an impasse. Ovitz and four other William Morris agents left, and Creative Artist Agency (“CAA”) was born.

CAA had a modest beginning and, from 1974 to 1979, the company’s revenues were barely sufficient to meet its expenses. ¹⁰ During this period, most of CAA’s business focused on the television industry, because CAA was self-financed and television revenues were more certain than revenues from feature films. ¹¹ It was not until late 1979 that CAA branched off into the motion picture industry, and another four or five years later, the company moved into the music and consulting businesses. Ovitz attributes CAA’s rise, in part, to a business model that he dubbed: “packaging.” ¹² As Ovitz explained, before CAA, it was Hollywood studios, distributors or networks that controlled the talent “either contractually or by virtue of the fact that they had all of the distribution capability.” ¹³ CAA revolutionized this system by grouping various talents, whether they were actors, directors or writers. These “packaged” talents could then coordinate their efforts to best exploit their leverage and maximize the economics of any given deal. ¹⁴ The effect of Ovitz’s business model was clear. By 1995, CAA had reshaped an entire industry and had grown from five men sitting around a card table to the premier Hollywood talent agency. When Ovitz joined Disney, he left behind 550 employees and an impressive roster of about 1400 of Hollywood’s top actors, directors, writers and musicians—a roster that earned CAA approximately $150 million in annual revenues. In turn, this success translated into an annual income of $20 million for Ovitz and, for his part, he was regarded as one of the most powerful figures in Hollywood.

2. Ovitz First Contemplates Leaving CAA But His Negotiations With MCA Fail

In the spring of 1995, CAA was retained to facilitate negotiations between the Seagram Company and Matsushita where Seagram was to purchase eighty percent of Matsushita’s holdings in Music Corporation of America (“MCA,” now known as Universal Studios). During those negotiations, Edgar Bronfman Jr., Seagram’s Chairman and CEO, who had known Michael Ovitz for a number of years, began to discuss with Ovitz the possibility of leaving CAA and joining MCA. Bronfman’s deal contemplated MCA purchasing CAA’s consulting business from Ovitz, Ron Meyer and Bill Haber (the three remaining CAA founders and its only shareholders) in exchange for MCA stock. Ovitz, Meyer, and Haber would then sell their remaining CAA interest to a third party and use the proceeds to purchase more MCA stock. ¹⁵ If the deal were consummated, Ovitz would take MCA’s reins as Chairman and CEO and would be paid handsomely for the job, including options for an additional 3.5 percent of MCA, $1.5 million in Seagram shares, and a seven-year contract (with a three-year renewal option) that paid a seven-figure salary with performance-based cash bonuses that could reach three to five times the base salary. ¹⁶

By June 1995, it was apparent that Ovitz’s deal with MCA would never materialize. Ovitz attributed this failure to his rising skepticism over his ability to improve “a company that had been flat for five [or more] years” in a culture unlikely “to support the effort of expansion, capital expenses, and changing overhead” that Ovitz perceived was needed. ¹⁷ Fueling Ovitz’s skepticism was his perception that sudden changes to the terms of the CAA/MCA deal were not coming from Bronfman, but, in fact, were instigated at the behest of Bronfman’s father and uncle, who were controlling shareholders in the Seagram Company. In the end, Ovitz remained unconvinced that Bronfman could deliver the things that he was promising to deliver. ¹⁸

With the MCA deal falling apart, Ovitz returned to CAA and business continued as usual until Ovitz discovered that his close friend and number two at CAA, Ron Meyer, was leaving for MCA. This revelation devastated Ovitz, who had no idea Meyer was interested in leaving CAA, let alone leaving without Ovitz. Suddenly, the prospect of Ovitz remaining with the company he and Meyer built no longer seemed palatable, and Ovitz became receptive to the idea of joining Disney.

3. Ovitz Seriously Considers Joining The Walt Disney Company

Michael Eisner had been following Ovitz’s talks with MCA closely and believed that now was the time to either talk to Ovitz seriously about joining Disney or face the possibility of having Ovitz at the helm of a major Disney competitor. ¹⁹ Thus, the informal overtures that had spanned the last two decades intensified and Eisner was “on a hunt” ²⁰ to bring Ovitz to Disney.

Eisner’s renewed efforts to recruit Ovitz received support from Sid Bass and Roy Disney (Roy Disney was also a director of the Company), two of the company’s largest individual shareholders. ²¹ Hoping not to be outdone by MCA, Eisner and Irwin Russell (the chairman of Disney’s compensation committee) reached out to Ovitz and attempted to convince him to join Disney. Both Eisner and Russell knew the basic terms and economics of MCA’s offer and both knew that Disney would not match or exceed those terms. ²² For this reason, the initial talks with Ovitz were unproductive and ended in short order. Eisner could not compete with the rich terms MCA was offering and he settled on the notion that Disney would have “to live with [Ovitz going to] a competitor because [Disney] could not match [MCA’s terms].” ²³ Within a few weeks, however, the tides changed and Eisner learned that Meyer was leaving CAA to join MCA. For the first time, Eisner’s desire to hire Ovitz was aligned with Ovitz’s desire to leave CAA.

Eisner’s efforts to hire Ovitz were in full swing by mid-July 1995. Russell, per Eisner’s direction, assumed the lead role in negotiating the financial terms of the contract. These efforts took on significant import in the face of Disney’s recent announcement of the acquisition of CapCities/ABC, a transaction that would double the size of Disney, place even greater demands on Eisner, and exacerbate the need for someone else to shoulder some of the load. Russell, in his negotiations with Bob Goldman, Ovitz’s attorney, learned that Ovitz was making approximately $20 to $25 million a year from CAA and owned fifty-five percent of the company. ²⁴ From the start, Ovitz made it clear that he would not give up his fifty-five percent interest in CAA without downside protection. ²⁵

While Russell and Goldman were in the preliminary stages of negotiating the financial terms of Ovitz’s contract, Eisner and Ovitz continued their talks as well. From these talks, Ovitz gathered that it was his skills and experience that would be brought to bear on Disney’s current weaknesses, which he identified as poor talent relationships and stagnant foreign growth. ²⁶ Remaining cautious, Ovitz wanted assurances from Eisner that Ovitz’s vision was shared and that Eisner was sincere in his desire to reinvent Disney. Apparently, Eisner was able to assuage Ovitz’s concerns, because at some point during these negotiations, Ovitz came to the understanding that he and Eisner would run Disney as partners. Ovitz did recognize that Eisner was Chairman and would be his superior, but he believed that the two would work in unison in a relationship akin to the one that exists between senior and junior partners. ²⁷ As it would turn out, Ovitz was mistaken, for Eisner had a radically different perception of their respective roles at Disney.

4. Ovitz’s Contract With Disney Begins to Take Form

By the beginning of August 1995, the non-contentious terms of Ovitz’s employment agreement (the “OEA”) were $1 million in annual salary and a performance-based, discretionary bonus. ²⁸ The remaining terms were not as easily agreed to and related primarily to stock options and Ovitz’s insistence for downside protection. ²⁹ Ovitz, using Eisner’s contract as a yardstick, was asking for options on eight million shares of Disney’s stock. Both Russell and Eisner, however, refused to offer eight million options and believed that no options should be offered within the first five years of Ovitz’s contract. ³⁰ This was a non-starter, since Ovitz would not leave CAA without downside protection and Disney had a policy against front-loading contracts with signing bonuses. Using both Eisner’s and Wells’ original employment contracts as a template, the parties reached a compromise. ³¹ Under the proposed OEA, Ovitz would receive a five-year contract with two tranches of options. The first tranche consisted of three million options vesting in equal parts in the third, fourth and fifth years, and if the value of those options at the end of the five years had not appreciated to $50 million, Disney would make up the difference. The second tranche consisted of two million options that would vest immediately if Disney and Ovitz opted to renew the contract.

The proposed OEA sought to protect both parties in the event that Ovitz’s employment ended prematurely and provided that absent defined causes, neither party could terminate the agreement without penalty. If Ovitz, for example, walked away, for any reason other than those permitted under the OEA, he would forfeit any benefits remaining under the OEA and could be enjoined from working for a competitor. ³² Likewise, if Disney fired Ovitz for any reason other than gross negligence or malfeasance, Ovitz would be entitled to a non-fault payment (Non-Fault Termination or “NFT”), which consisted of his remaining salary, $7.5 million a year for any unaccrued bonuses, the immediate vesting of his first tranche of options and a $10 million cash out payment for the second tranche of options. ³³

5. Crystal is Retained to Assist Russell and Watson in Evaluating the OEA

As the basic terms of the OEA were coming together, Russell authored and provided Eisner and Ovitz with a “Case Study” outlining the OEA parameters and Russell’s commentary on what he believed was an extraordinary level of executive compensation. ³⁴ Specifically, Russell noted that it was appropriate to provide Ovitz with “downside protection and upside opportunity” and to assist Ovitz with “the adjustment in life style resulting from the lower level of cash compensation from a public company in contrast to the availability of cash distributions and perquisites from a privately held enterprise.” ³⁵ According to Russell, Ovitz was an “exceptional corporate executive” ³⁶ who was a “highly successful and unique entrepreneur.” ³⁷ Nevertheless, Russell cautioned that Ovitz’s salary under the OEA was at the top level for any corporate officer and significantly above that of the CEO and that the number of stock options granted under the OEA was far beyond the standards applied within Disney and corporate America “and will raise very strong criticism.” ³⁸ Russell rounded out his analysis by recommending an additional study so that he and Eisner could answer questions should they arise. Russell did not provide this Case Study to any other member of Disney’s board of directors. ³⁹

With the various financial terms of the OEA sufficiently concrete, Russell enlisted the aid of two people who could help with the final financial analysis: Raymond Watson, a current member of Disney’s compensation committee and the past chairman of Disney’s board of directors (and one of the men who designed the original pay structure behind Wells’ and Eisner’s compensation packages); ⁴⁰ and Graef Crystal, an executive compensation consultant, who is particularly well known within the industry for lambasting the extravagant compensation paid to America’s top executives. ⁴¹ The three men were set to meet on August 10. Before the meeting, Crystal prepared, on a laptop computer, a comprehensive executive compensation database that would accept various inputs and run Black Scholes ⁴² analyses to output a range of values for the options. ⁴³ At the meeting, the three men worked with various assumptions and manipulated inputs in order to generate a series of values that could be attributed to the OEA. ⁴⁴ In addition to Crystal’s work, Watson had prepared several spreadsheets presenting similar assessments, but these spreadsheets did not use the Black-Scholes valuation method. At the end of the day, the men made their conclusions, discussed them, and agreed that Crystal would memorialize his findings and fax the report to Russell.

Two days later, Crystal faxed his memorandum to Russell. In the memo, Crystal concluded that the OEA would provide Ovitz with approximately $23.6 million per year for the first five years of the deal. ⁴⁵ Crystal estimated that the contract was worth $23.9 million a year, over a seven-year period, if Disney and Ovitz exercised the two-year renewal option. ⁴⁶ Crystal opined that those figures would approximate Ovitz’s present compensation with CAA. That evening, Russell, Watson and Crystal phoned each other and further discussed Crystal’s conclusions and the assumptions underlying those conclusions. ⁴⁷ During those discussions some questions surfaced, and Russell asked Crystal to revise his memo to resolve the ambiguities Russell believed existed in the current draft. Instead of addressing the points Russell highlighted, Crystal faxed a new letter to Russell expressing Crystal’s concern over the portion of the OEA that created the $50 million option appreciation guarantee. ⁴⁸ Crystal contended that the current language of the OEA, if he was reading it correctly, would allow Ovitz to hold the first tranche of options, wait until his five-year term was up, collect the $50 million guarantee and then exercise in-the-money options for an additional windfall. ⁴⁹ In light of this, Crystal was philosophically opposed to a pay package that would give Ovitz the best of both worlds—i.e., low risk and high return. ⁵⁰ Crystal’s letter was never circulated to any board member other than Eisner. ⁵¹ Rather, Russell addressed Crystal’s concerns and clarified that the guarantee would not function in the manner Crystal believed ⁵² and, on August 18, Crystal augmented his August 12 memo and faxed Russell the revised copy. Again, Crystal opined that the OEA, during the first five years, was, as he originally estimated, worth $23.6 million, but as to the value of the OEA’s renewal option, Crystal revised his estimation and believed that the two additional years would increase the value of the entire OEA to $24.1 million per year. ⁵³ Up until this point, only three members of Disney’s board of directors were in the know concerning the status of the negotiations with Ovitz or the particulars of the OEA—Eisner, Russell and Watson.

6. Ovitz Accepts Eisner’s Offer

While Russell, Watson and Crystal were finalizing their analysis of the OEA, Eisner and Ovitz were coming to terms of their own. Eisner, having recently conferred with Russell concerning his ongoing research, gave Ovitz a take-it-or-leave-it offer: If Ovitz joined Disney as its new President, he would not assume the duties or title of COO. ⁵⁴ After short deliberation, Ovitz accepted Eisner’s terms, and that evening he, Eisner and Sid Bass (and their families) celebrated Ovitz’s decision.

As it would turn out, the celebratory mood was short lived. The next day, August 13, Eisner called a meeting at his home in Los Angeles to discuss his decision and, in addition to Ovitz and Russell, Sanford Litvack (Disney’s General Counsel) ⁵⁵ and Stephen Bollenbach (Disney’s Chief Financial Officer) were invited to attend. At the meeting, Litvack and Bollenbach, who had just found out the day before that Eisner was negotiating with Ovitz, ⁵⁶ were not happy with the decision. Their discontent “officially” stemmed from the perception that Ovitz would disrupt the cohesion that existed between Eisner, Litvack and Bollenbach, ⁵⁷ and both Litvack and Bollenbach made it clear that they would not agree to report to Ovitz but would continue to report to Eisner. ⁵⁸ At trial, the Court was left with the perception that Litvack harbored resentment that he was not selected to be Disney’s President and that this fueled, to some extent, Litvack’s resistance to Ovitz assuming the post he coveted. ⁵⁹ Bollenbach’s resistance was more curious. Indeed, Bollenbach had been hired before Ovitz and, at the time, his expectation was that he would report only to Eisner. Still, his testimony seemed disingenuous to the Court when he pinned his resistance on the fact that he had been part of a cohesive trio (i.e., Bollenbach, Litvack, and Eisner). After all, Bollenbach had been with the Company for a total of three months before he was informed of the negotiations with Ovitz. ⁶⁰ Despite this mutiny, Eisner was able to assuage Ovitz’s concern about his shrinking authority in the Company, and Ovitz, with his back against the wall, acceded to Litvack and Bollenbach’s terms.

The next day, August 14, Ovitz and Eisner signed the letter agreement (“OLA”) that outlined the basic terms of Ovitz’s employment. ⁶¹ The OLA specified that Ovitz’s hiring was subject to approval of Disney’s compensation committee ⁶² and board of directors. ⁶³ That same day, Russell contacted Sidney Poitier (for a second time) to inform him that Eisner and Ovitz reached an agreement. ⁶⁴ At trial, Poitier failed to recount with any specificity his conversation with Russell. He made clear that he was never faxed Crystal’s analysis or the draft of the OLA (which Litvack had prepared for Russell on August 12). ⁶⁵ Nevertheless, Poitier did testify that Russell had “mention[ed] the terms” of the OEA and that Russell promised to stay in touch with any developments. ⁶⁶ Poitier believed that hiring Ovitz was a good idea because he knew Ovitz’s reputation in the entertainment business and considered him an innovator who understood the movie business. ⁶⁷ Poitier also expressed the opinion that Ovitz would adequately adapt to running a public company such as Disney. ⁶⁸ Watson also contacted Ignacio “Nacho” Lozano by phone. ⁶⁹ The record is unclear as to exactly when Lozano was called. ⁷⁰ As with Poitier, relatively little of Lozano’s phone conversation was recounted at trial, except to say that Lozano testified that he felt comfortable with Ovitz’s ability to make the transition from a private company culture to that of a public company. ⁷¹ As for communications with the other board members, Eisner contacted each of them by phone to inform them of the impending deal. During these calls, Eisner described his friendship with Ovitz, and Ovitz’s background and qualifications. ⁷²

On the same day that Eisner and Ovitz signed the OLA, the news of Ovitz’s hiring was made public via a press release. Public reaction was extremely positive. Disney was applauded for the decision, and Disney’s stock price increased 4.4 percent in a single day—increasing Disney’s market capitalization by more than $1 billion. ⁷³

7. Disney’s Board of Directors Hires Michael Ovitz

Once the OLA was signed, Joseph Santaniello, who was an in-house attorney within Disney’s legal department, took charge of embodying the terms Russell and Goldman had agreed upon and which were memorialized in the OLA. ⁷⁴ To that end, Santaniello concluded that the $50 million guarantee presented negative tax implications for the Company, as it might not have been deductible. ⁷⁵ Concluding that the provision must be eliminated, Russell initiated discussions on how to compensate Ovitz for this change—from this, an amalgamation of amendments to certain terms of the OEA arose in order to replace the back-end guarantee. ⁷⁶ Russell again worked with Watson and Crystal to consider the possible consequences of the proposed changes. ⁷⁷ Russell and Crystal applied the Black-Scholes methodology to assess the value of the extended exercisability features of the options and Watson generated his own analysis to the same end. ⁷⁸

On September 26, 1995, the compensation committee met for one hour to consider (1) the proposed terms of the OEA, (2) the compensation packages for various Disney employees, (3) 121 stock option grants, (4) Iger’s CapCities/ABC employment agreement and (5) Russell’s compensation for negotiating the Ovitz deal. ⁷⁹ The discussion concerning the OEA focused on a term sheet (the actual draft of the OEA was not distributed), from which Russell and Watson outlined the process they had followed back in August and described Crystal’s analysis. Russell testified that the topics discussed were historical comparables such as Eisner’s and Wells’ option grants, ⁸⁰ and the factors that he, Watson and Crystal had considered in setting the size of the option grants and the termination provisions of the contract. ⁸¹ Watson testified that he provided the committee with the spreadsheet analysis he had performed back in August and discussed his findings. ⁸² Crystal, however, did not attend the meeting and his work product was not distributed to the Committee. At trial, Crystal testified that he was available via telephone to respond to questions if needed, but no one from the committee in fact called. ⁸³ After Russell’s and Watson’s presentations, Litvack responded to various questions but the substance of those questions was not recounted in any detail at trial. ⁸⁴

Poitier and Lozano testified that they believed they had received sufficient information from Russell’s and Watson’s presentations ⁸⁵ to enable them to exercise their judgment in the best interest of the Company. ⁸⁶ When the discussions concluded, the Committee unanimously voted to approve the terms of the OEA subject to “reasonable further negotiations within the framework of the terms and conditions” ⁸⁷ described in the OEA. ⁸⁸

An executive meeting of Disney’s board immediately followed the compensation committee’s meeting. ⁸⁹ In executive session, the board was informed of the reporting structure that Eisner and Ovitz agreed to, but no discussion of the discontent Litvack or Bollenbach expressed at Eisner’s home was recounted. ⁹⁰ Eisner led the discussion regarding Ovitz, and Watson then explained his analysis and both he and Russell responded to questions by the board. ⁹¹ Upon resuming the regular session, the board deliberated further, then voted unanimously to elect Ovitz as President. ⁹²

8. The October 16, 1995 Compensation Committee Meeting

In accordance with the compensation committee’s resolution roughly three weeks before, ⁹³ the compensation committee convened again on October 16, 1995, in a special meeting to discuss several issues relating to stock options. ⁹⁴ After a presentation by Litvack, during which he responded to questions from the members of the committee, the compensation committee unanimously approved amendments to The Walt Disney Company 1990 Stock Incentive Plan, thereafter titled The Walt Disney Company Amended and Restated 1990 Stock Incentive Plan (the “1990 Plan”), and also approved a new plan, known as The Walt Disney Company 1995 Stock Incentive Plan (the “1995 Plan”). ⁹⁵ Both plans were subject to further approval by the full board of directors and by shareholders. ⁹⁶Following approval of these plans, Litvack reviewed the terms of the proposed OEA with the compensation committee, ⁹⁷ after which the committee unanimously approved the terms of the OEA and the award of Ovitz’s options pursuant to the 1990 Plan. ⁹⁸ Ovitz’s options were priced at market as of the date of the meeting. ⁹⁹ As a final wrap-up before adjourning, the compensation committee passed a resolution “that all of the actions heretofore taken by the officers of the Corporation in connection with the foregoing resolutions [relating to the OEA] be, and they hereby are, confirmed and ratified.” ¹⁰⁰

The amendment to the 1990 Plan (consistent with the provisions of the new 1995 Plan), together with the terms of the Stock Option Agreement, ¹⁰¹ provided that, in the event of an NFT, Ovitz’s options would be exercisable until the later of September 30, 2002, or twenty-four months after termination, but in no event later than October 16, 2005 (ten years from the date of grant). ¹⁰²

B. Ovitz’s Performance as President of The Walt Disney Company

1. Ovitz’s Early Performance

Ovitz’s tenure as President of The Walt Disney Company officially began on October 1, 1995. ¹⁰³ Eisner authored three documents shortly after Ovitz began work that shed light on his early performance on the job. The first is a letter written to Ovitz dated October 10, 1995. ¹⁰⁴ Eisner lauded Ovitz’s initial performance, ¹⁰⁵ and also provided Ovitz with some written guidance with respect to Eisner’s management philosophies. ¹⁰⁶ Ovitz testified that this letter was a continuation of conversations he had already had with Eisner, and that the letter was “incredibly helpful and very supportive,” ¹⁰⁷ especially in light of the fact that Ovitz was adjusting to working at a publicly-traded company. ¹⁰⁸

The second document is a letter Eisner wrote to the board of directors, the Bass family, and his wife on October 20, 1995. ¹⁰⁹ In it, Eisner called Ovitz’s hiring “a great coup for us and a saving grace for me. … Everybody is excited being with him, doing business with him…. He has already run a private company, and being a quick study, has quickly adapted to the public institution.” ¹¹⁰ Eisner testified that the October 20 letter accurately reflected his views of Ovitz at the time it was written. ¹¹¹ Eisner also used the October 20 letter to reiterate his views regarding the appropriateness of acquisitions for the Company. ¹¹²

The third document is dated November 10, 1995, and is a memo addressed to Tony Schwartz, Eisner’s biographer. ¹¹³ In it, Eisner says that Ovitz has had a difficult time accepting Bollenbach and Litvack as his equals, but that Ovitz was adjusting, realizing that he need not “prove to himself, to the group, to the world, that he is in charge.” ¹¹⁴ Eisner also reaffirmed that “Michael Ovitz is the right choice. He will, in short order, be up to speed in the areas we have discussed endlessly—brand management, corporate direction, moral compass and all those difficult areas, especially for Disney, to define.” ¹¹⁵ Eisner described the already-existing tension between Ovitz and Litvack as attributable to Litvack by saying, “Sandy Litvack may never settle in because of his basic annoyance with the style of Michael Ovitz, but he may. Time may make it work, if he will let it.” ¹¹⁶

As late as the end of 1995, Eisner’s attitude with respect to Ovitz was positive. ¹¹⁷ Eisner wrote, “1996 is going to be a great year—We are going to be a great team—We every day are working better together—Time will be on our side—We will be strong, smart, and unstoppable!!!” ¹¹⁸ Eisner opined that Ovitz performed well during 1995, ¹¹⁹ notwithstanding the difficulties Ovitz was experiencing assimilating to Disney’s culture. ¹²⁰

2. A Mismatch of Cultures and Styles

In 1996, however, the tenor of the comments surrounding Ovitz’s performance and his transition to The Walt Disney Company changed. ¹²¹ In January 1996, a corporate retreat was held at Walt Disney World in Orlando, Florida. ¹²² At that retreat, Ovitz failed to integrate himself in the group of executives by declining to participate in group activities, insisting on a limousine when the other executives, including Eisner, were taking a bus, and making inappropriate demands of the park employees. ¹²³ In short, Ovitz “was a little elitist for the egalitarian Walt Disney World cast members [employees],” ¹²⁴ and a poor fit with his fellow executives. ¹²⁵

As 1996 wore on, it became apparent that the difficulties Ovitz was having at the Company were less and less likely to be resolved. By the summer of 1996, Eisner had spoken with several directors about Ovitz’s failure to adapt to the Company’s culture. ¹²⁶ In June 1996, Eisner, Ovitz, and Wilson were in France for a cycling trip during which “it became clear [to Wilson] that what [he] had been hearing was not just idle gossip,” but that “there was a problem of Mr. Ovitz being accepted into the organization.” ¹²⁷

3. Approaching the Endgame

By the fall of 1996, directors began discussing that the disconnect between Ovitz and the Company was likely irreparable, and that Ovitz would have to be terminated. ¹²⁸ Additionally, the industry and popular press were beginning to publish an increasing number of articles describing dissension within The Walt Disney Company’s executive suite. ¹²⁹ One of the more prominent of these articles was an article published in Vanity Fair based on an interview given by Bollenbach, ¹³⁰ which many of the directors discussed while present for the November 25, 1996 board meeting. ¹³¹

4. Specific Examples of Ovitz’s Performance as President of The Walt Disney Company

Throughout this litigation, plaintiffs have argued that Ovitz acted improperly while in office. The specific examples discussed below demonstrate that the record created at trial does not support those allegations.

Plaintiffs have alleged that even before Ovitz was formally elected as President and employed by Disney, that he exercised Presidential authority in connection with the construction or renovation of his office. ¹³² The record does provide support for the benign assertion that Ovitz performed some work for the Company before his hiring was official. ¹³³ In addition to the fact that the documents plaintiffs rely on evidence no effort by Ovitz to direct the office work or authorize expenditures for it, ¹³⁴ the testimony of both Ovitz and Eisner was that Ovitz’s involvement in the project was limited. Furthermore, Ovitz’s authority over the project both before and after October 1, 1995, was minimal at best, yet at the same time consistent with the input that would be expected from an executive when a new office is built for him or her. ¹³⁵

In addition to allegations that Ovitz overstepped his authority with respect to his office, plaintiffs contend that Ovitz acted improperly in connection with discussions he had, either personally, or on behalf of the Company, with representatives from the National Football League (“NFL”) with respect to bringing a team to the Los Angeles area. ¹³⁶ First and foremost, contemporary documents indicate that Disney, under Eisner’s direction, was considering bringing an NFL franchise to Los Angeles before Ovitz’s hiring was even announced, much less completed. ¹³⁷ Second, any work Ovitz may have done on behalf of the Company in regards to the NFL before his employment formally began is, in my mind, evidence of Ovitz’s good faith efforts to benefit the Company and bring himself up to speed— not evidence of malfeasance or other ulterior motives. ¹³⁸ Third, it is clear from the record that, as soon as Eisner instructed Ovitz to cease discussions with the NFL, Ovitz complied with Eisner’s directive. ¹³⁹ Again, the record fails to support allegations of misconduct by Ovitz in this regard either before or after October 1, 1995.

Plaintiffs argue that Ovitz is responsible, at least in part, for Bollenbach’s decision to leave the Company, ¹⁴⁰ and the controversy surrounding the hiring of Jamie Tarses to ABC. Bollenbach’s trial testimony, however, contradicts the assertion that he left because of Ovitz. ¹⁴¹ Instead, he left the Company to pursue a better opportunity with Hilton Hotels. ¹⁴²

In mid-1996, ABC hired Jamie Tarses. ¹⁴³ It was reported in the press that Ovitz “orchestrated” Tarses’ hiring even though she was under contract at NBC for roughly fifteen more months. ¹⁴⁴ Eisner testified that Ovitz was not at fault for the perceived negative repercussions of Tarses’ hiring, saying that he “was convinced that [Ovitz] was brought into something he did not instigate.” ¹⁴⁵ In fact, Tarses’ hiring was championed by Iger and approved by Litvack. ¹⁴⁶

Another “failure” plaintiffs have attempted to pin on Ovitz, but which is in reality more attributable to Iger, revolves around the film Kundun, directed by Martin Scorsese. ¹⁴⁷ The film was not well received by the Chinese government and, at least initially, may have caused the Company some setbacks in that rapidly expanding market. ¹⁴⁸ Once again, however, the testimony was clear that Ovitz did not have authority to approve the movie; instead, that authority (and the concomitant responsibility) rested wholly with Roth and Eisner. ¹⁴⁹

Although the general consensus on Ovitz’s tenure is largely negative, Ovitz did make some valuable contributions while President of the Company. As previously mentioned, ¹⁵⁰ Ovitz made a key recommendation with respect to the location of the gate to Disney’s California Adventure theme park, built on part of the Disneyland parking lot. ¹⁵¹ He was instrumental in recruiting Geraldine Laybourne, founder of the children’s cable channel Nickelodeon, and overhauling ABC’s Saturday morning lineup. ¹⁵² Ovitz was successful in bringing Tim Allen back to work after he walked off the set of Home Improvement due to a disagreement. ¹⁵³ He also helped retain several animators that Katzenberg was trying to bring over to Dreamworks. ¹⁵⁴ Ovitz also assisted Roth in handling relationships with “talent.” ¹⁵⁵ Ultimately, however, Ovitz’s time as President was marked by more “woulda, coulda, shoulda” than actual success.

As an example, Jeffrey Katzenberg was formerly the head of Walt Disney Studios. ¹⁵⁶ After his contract with Disney was not renewed, he founded Dreamworks and embroiled the Company in a very costly lawsuit. ¹⁵⁷ Ovitz testified that after some discussions with Katzenberg, he could have settled that dispute before the lawsuit was filed for roughly $90 million, and although the actual amount of the settlement remains confidential, Ovitz believes that it was in excess of $250 million. ¹⁵⁸ Ovitz, however, was not given authority to settle that suit on behalf of the Company. ¹⁵⁹ The litigation, therefore, was filed and continued until the confidential settlement in 1999. ¹⁶⁰

Ovitz was assigned to oversee Disney Interactive, which created interactive video games. ¹⁶¹ Eisner testified that Disney Interactive was “doing very badly, actually,” but he hoped that Ovitz might be able to turn it around. ¹⁶² Ovitz was unable to do so. ¹⁶³ In the face of Eisner’s critical view of Ovitz’s performance with respect to Disney Interactive, Ovitz testified that he had several ideas for Disney Interactive which could have potentially helped Disney Interactive, ¹⁶⁴ including a joint venture with Sony, ¹⁶⁵ and a purchase of part of Yahoo!®, ¹⁶⁶ all of which Eisner rejected. Ovitz also pursued, together with Roth, a deal intended to benefit Disney’s motion picture studio with Beacon Communications, a company run by Armyan Bernstein, a writer and director. Again Eisner instructed Ovitz not to close the deal. ¹⁶⁷

Ovitz wanted the Company to purchase Putnam Publishing in order to acquire the rights to author Tom Clancy. He also wanted to place other prominent authors (and former clients) such as Michael Crichton and Stephen King under contract with Disney’s publishing division. ¹⁶⁸ Eisner rejected these efforts as ill conceived. ¹⁶⁹

A similar story emerges of Ovitz’s leadership over Hollywood Records. ¹⁷⁰ Ovitz wanted to place Janet Jackson under contract with Hollywood Records, ¹⁷¹ acquire EMI (a Hollywood Records competitor) or enter into a joint venture with Sony. ¹⁷² Once again, however, Eisner rejected all of these suggestions. ¹⁷³ Eisner and others were also critical of what they perceived to be a lack of attention paid by Ovitz to Hollywood Records, ¹⁷⁴ though Ovitz’s files belie the assertion that Ovitz ignored his oversight of Hollywood Records. ¹⁷⁵

There are three competing theories as to why Ovitz was not successful. First, plaintiffs argue that Ovitz failed to follow Eisner’s directives, especially in regard to acquisitions, ¹⁷⁶ and that generally, Ovitz did very little. Second, Ovitz contends that Eisner’s micromanaging prevented Ovitz from having the authority necessary to make the changes that Ovitz thought were appropriate. ¹⁷⁷ In addition, Ovitz believes he was not given enough time for his efforts to bear fruit. ¹⁷⁸ Third, the remaining defendants simply posit that Ovitz failed to transition from a private to public company, from the “sell side to the buy side,” and otherwise did not adapt to the Company culture or fit in with other executives. In the end, however, it makes no difference why Ovitz was not as successful as his reputation would have led many to expect, so long as he was not grossly negligent or malfeasant.

Many of Ovitz’s efforts failed to produce results, often because his efforts reflected an opposite philosophy than that held by Eisner, Iger, and Roth. ¹⁷⁹ This does not mean that Ovitz intentionally failed to follow Eisner’s directives or that he was insubordinate. To the contrary, it demonstrates that Ovitz was attempting to use his knowledge and experience, which (by virtue of his experience on the “sell side” as opposed to the “buy side” of the entertainment industry) was fundamentally different from Eisner’s, Iger’s, and Roth’s, to benefit the Company. ¹⁸⁰ But different does not mean wrong. Total agreement within an organization is often a far greater threat than diversity of opinion. ¹⁸¹ Unfortunately, the philosophical divide between Eisner and Ovitz was greater than both believed, and as two proud and stubborn individuals, neither of them was willing to consider the possibility that their point of view might be incorrect, leading to their inevitable falling out. ¹⁸²

5. Veracity and “Agenting”

At trial, plaintiffs, together with their expert on these issues, Donohue, spent a great deal of effort attempting to persuade the Court that Ovitz was a habitual liar, and that his lack of veracity would constitute good cause to terminate him without paying the NFT. ¹⁸³ Defendants respond that the purported veracity problems attributable to Ovitz do not involve material falsehoods, but instead were caused by Ovitz’s tendency to “handle” or “agent” others.

Eisner testified that, with respect to Iger’s statement that Iger did not trust Ovitz, ¹⁸⁴ the lack of trust was related to Ovitz’s failure to communicate with Iger, and that Ovitz “wasn’t doing anything wrong.” ¹⁸⁵ Eisner also expressed that he personally did not trust Ovitz. ¹⁸⁶ From both the tenor of the document (written shortly after the stress of his mother’s death) and from Eisner’s more emotionally detached trial testimony, ¹⁸⁷ however, it is clear that Eisner was not referring to any material falsehoods, but instead to Ovitz’s salesmanship ¹⁸⁸ or, in other words, his “agenting.” ¹⁸⁹

Litvack felt the same way, saying that he did not trust Ovitz’s judgment and that he did not trust Ovitz generally because Ovitz would “handle” Litvack and “put his spin on things.” ¹⁹⁰ Litvack also said that the “worst that I could remember in terms of lies was—and I use the word ‘lies’—was ‘I was on the phone with someone important and couldn’t be on time for the meeting.’” ¹⁹¹ Other executives and directors made similar comments that they could recall no material falsehoods told to them by Ovitz. ¹⁹²

In the absence of any concrete evidence that Ovitz told a material falsehood during his tenure at Disney, plaintiffs fall back on alleging that Ovitz’s disclosures regarding his earn-out with, and past income from, CAA, were false or materially misleading. ¹⁹³ As a neutral fact-finder, I find that 119:13. the evidence simply does not support either of those assertions. ¹⁹⁴ The allegedly false or misleading disclosure regarding Ovitz’s earn-out rights is contained in the copy of the Company’s “Statement of Policy Regarding Conflicts of Interest and Business Ethics and Questionnaire Regarding Compliance” that Ovitz signed on October 24, 1995. ¹⁹⁵

Plaintiffs attack this disclosure on several grounds. First, they argue that Ovitz was entitled to a majority of some unknown list of booked commissions that allegedly changed over time. The disclosure by Ovitz makes clear that he owned a majority interest in his prior employer, which would lead any reasonable person to believe that he would receive a majority of the income from that entity. ¹⁹⁶ The disclosure also clearly spells out that Ovitz would be entitled to receive commissions from contracts entered into on or before September 30, 1995. ¹⁹⁷ Ovitz’s testimony that it is common practice in the industry for some of these contracts to be oral is not contradicted. ¹⁹⁸ Plaintiffs’ assertion that the commissions list evolved over time is consistent with the parties’ agreement, but there is no support in the record for the assertion that the definition of those commissions changed during any time relevant to this suit. ¹⁹⁹

Second, plaintiffs contend that Ovitz held a security interest in Newco that contradicts his disclosure that he had no direct or indirect ownership interest in Newco. ²⁰⁰ The form used to perfect the security interest is clear on its face that it relates to a debt instrument, hence Oldco is referred to as the “Secured Party” and Newco is referred to as the “Debtor.” ²⁰¹ As plaintiffs’ counsel no doubt understands, a security interest based upon a debt instrument is not an ownership interest. Upon considering the documentary evidence and testimony, I find that Ovitz’s disclosures were neither false nor misleading. ²⁰²

6. Gifts and Expenses

In moving from the talent agency he founded to a public company, Ovitz was faced with an array of new policies and rules relating to gifts and expenses. Eisner had asked Russell to speak to Ovitz about his expenses, ²⁰³ and on January 17, 1996, Russell and Ovitz met for breakfast to discuss the topic. ²⁰⁴ To follow up on their meeting, Ovitz sent a memo to Russell in January 1996 asking for help in handling his expenses. ²⁰⁵ According to Ovitz, Russell was “fantastic” in helping Ovitz’s assistant meet and confer with a knowledgeable Disney employee so that Ovitz’s expenses could be properly handled. ²⁰⁶

The only evidence in the record that is admissible to prove that Ovitz did not comply with Disney’s policies regarding expenses is (1) the statements by Eisner that Ovitz may not have been in compliance with those policies, and (2) the undisputed fact that Disney withheld $1 million from the cash payment of Ovitz’s NFT, but ultimately returned all but roughly $140,000 of that amount. ²⁰⁷

The record contains several examples of statements by Eisner where he believed that Ovitz’s compliance with Company expense policies was questionable. ²⁰⁸ The trial testimony of Eisner, Russell, and especially Litvack (whom Eisner had assigned to oversee Ovitz’s expenses), however, was credible and coherent in stating that Ovitz was in compliance with the Company’s expense policies. ²⁰⁹

With respect to the eventual holdback of $139,184 from Ovitz’s severance, ²¹⁰ only $70,212 was attributed to potential expense policy violations. ²¹¹ The remaining $68,972 related to the unamortized cost of capital improvements to Ovitz’s home, ²¹² and Litvack clearly testified at trial that the Company had no contractual right to recoup those costs from Ovitz. ²¹³

The record provides no support for, and indeed often contradicts, two key assertions made by plaintiffs regarding the holdback. First, plaintiffs’ assertions that the holdback itself is evidence that the defendants were on notice at the time of Ovitz’s termination that grounds to terminate him for cause may have existed cannot stand in light of the testimony that many executives at the Company were at least six months behind in billing their expenses. ²¹⁴ The holdback, then, was simply a way to avoid having to collect that money back from Ovitz after termination if there was insufficient justification for the billings. ²¹⁵ Second, the $70,212 ultimately withheld from Ovitz is not prima facie evidence that Ovitz “stole” from Disney. As to both of these points, Litvack testified that insufficient justification and documentation was the reason for the final holdback—not a determination that Ovitz had “stolen” from or otherwise intentionally defrauded the Company. ²¹⁶

Plaintiffs have repeatedly criticized Ovitz’s gift giving as self-serving and not in accordance with Company policies. Furthermore, they argue that he failed to properly report gifts that he received while serving as President of Disney. ²¹⁷ Once more, the record fails to support these assertions. As with Ovitz’s expenses, Eisner asked Russell to assist Ovitz in complying with Disney’s policies with respect to gifts. ²¹⁸ Litvack was also told of Eisner’s concerns, and following an investigation, he found that Ovitz was in compliance with Disney’s gift policies. ²¹⁹ At trial, plaintiffs’ counsel asked Litvack whether he was aware of several questionable gifts, but Litvack unambiguously testified that either he had approved those gifts, or that, had he been asked, he would have approved those gifts because they related to the business of the Company. ²²⁰ In sum, finding Litvack’s and Eisner’s trial testimony credible as cited above, I find that Ovitz was not in violation of The Walt Disney Company’s policies relating to expenses or giving and receiving gifts.

C. Ovitz’s Termination

1. The Beginning of the End

Ovitz’s relationship with Eisner, and with other Disney executives and directors, continued to deteriorate through September 1996. In mid-September, Litvack, with Eisner’s approval, spoke with, or more accurately cornered Ovitz. Litvack told Ovitz that he thought it was clear that Ovitz was not working out at Disney and that he should start looking for both a graceful way out of Disney and a new job. ²²¹ After Litvack reported this conversation to Eisner, Eisner, hoping to make Ovitz realize that there was no future for him at Disney, sent Litvack back to Ovitz and asked Litvack to make it clear that Eisner no longer wanted Ovitz at Disney and that Ovitz should seriously consider other employment opportunities, including the opportunity at Sony. ²²² It seems that Ovitz brought up the possibility of moving to Sony with Eisner during a flight in June 1996 to New Orleans. ²²³ Eisner believed that Ovitz meant it as a threat, but Eisner welcomed the idea of Ovitz leaving the Company. Litvack conveyed Eisner’s sentiments, and Ovitz responded by telling Litvack that he was “going to have to pull me out of here … I’m not leaving,” and that if Eisner wanted him to leave Disney, Eisner could tell him so to his face. ²²⁴ At trial, Ovitz testified that he felt that “as far as [he] was concerned, [he] was chained to that desk and that company. [That he] wasn’t going to leave there a loser,” that the guy that hired him or the full board would have to fire him, and that he hoped he could still make it work and make all these problems just disappear. ²²⁵

Following up on the discussions between Litvack and Ovitz, Eisner and Ovitz had several meetings on or around September 21, 1996, during which they discussed Ovitz’s future (or lack thereof) at Disney, and the possibility that Ovitz would seek employment at Sony. ²²⁶ Eisner believed that Sony would be both willing and excited to take Ovitz in “trade” from Disney because Ovitz had a very positive longstanding relationship with many of Sony’s top executives. Eisner favored the Sony “trade” because, not only would it remove Ovitz and his personality from the halls of Disney, but it would also relieve Disney of having to pay Ovitz under the OEA and would hopefully bring a valuable return to Disney in the form of licensing rights for The Young and the Restless. ²²⁷

The Sony discussions continued on October 8 when Ovitz wrote Eisner a note asking for formal permission to begin negotiations with Sony. ²²⁸ After stating that he was still shocked that Eisner wanted him out, Ovitz wrote that he had resolved to look at other employment possibilities, and he wanted to make sure that he did not leave himself or Sony open to a lawsuit because his departure from Disney would leave Ovitz in breach of the OEA. ²²⁹ On October 9 Eisner responded by letter, telling Ovitz that neither he nor anyone else at Disney had any objections to Ovitz working out a deal and eventually going to work for Sony. In fact, Eisner thought it was best that Ovitz and Disney work together to ensure a smooth departure. ²³⁰ Additionally, Eisner wrote a letter to Mr. Idei, Sony’s Chairman, trumpeting Ovitz and notifying Mr. Idei that Disney had given permission for Ovitz to enter into negotiations for a possible move to Sony. ²³¹ Apparently, however, only a limited number of directors knew that Ovitz was given permission to negotiate with Sony, including Litvack, ²³² Watson, ²³³ Russell, ²³⁴ Gold, ²³⁵ and Roy Disney, ²³⁶ and that the board as a whole was never approached about the possible Sony “trade.” Of these directors, only Litvack and Russell were ever asked for their opinions on the matter.

On November 1, Ovitz wrote a letter to Eisner notifying Eisner that things had failed to work out with Sony and that Ovitz had instead decided to recommit himself to Disney with “an even greater commitment of [his] own energies” than he had before and an “increased appreciation” of the Disney organization. ²³⁷ There are varying accounts of why Ovitz did not end up employed at Sony, but the important fact is that Ovitz remained at Disney. ²³⁸

2. The September 30, 1996 Board Meeting

During the course of the Sony discussions the Disney board convened a meeting on September 30, 1996, while attending a Disney anniversary at the Walt Disney World Resort in Orlando, Florida. Ovitz was in attendance at the board meeting, and it is undisputed that neither Ovitz’s future with Disney nor his conversations to date with Eisner and Litvack were discussed at the general board meeting. ²³⁹ Eisner, however, testified that he spoke with various directors either during an executive session held that same day at which Ovitz was not present, or in small groups during the weekend, to notify them that there were continuing problems with Ovitz’s performance. ²⁴⁰ Additionally, other directors testified that Eisner apprised them of the developing situation with Ovitz either during or prior to September 1996. ²⁴¹ Although Eisner never sat down at a full board meeting to discuss the persistent and growing Ovitz problem, it is clear that he made an effort to notify and talk with a large majority, if not all of the directors.

On the night of September 30, Eisner and Ovitz made their now-famous appearance on The Larry King Live Show in which Eisner refuted the then current Hollywood gossip that there was a growing rift between himself and Ovitz and emphatically stated that if given the chance, he would hire Ovitz again. ²⁴² It is clear now that this entire interview was a shameless public relations move during which both Eisner and Ovitz did not candidly answer Larry King’s questions with the goal of deflating the negative rumors surrounding their failed partnership.

On October 1, the day after the Larry King interview, Eisner sent a letter that he had been working on since the summer, to Russell and Watson detailing Eisner’s mounting difficulties with Ovitz, including Ovitz’s failure to adapt to Disney’s corporate culture in even the slightest fashion, Eisner’s lack of trust for Ovitz, and Ovitz’s complete failure to alleviate Eisner’s workload. ²⁴³ Apparently, an incident at Eisner’s mother’s funeral, which involved Ovitz getting into an argument on a New York City street over a parking space, spurred Eisner to finally send this letter. The letter stated that:

If I should be hit by a truck, the company simply cannot make [Ovitz] CEO or leave him as president with a figurehead CEO. It would be catastrophic. I hate saying it, but his strength of personality together with his erratic behavior and pathological problems, and I hate saying that, is a mixture leading to disaster for this company. ²⁴⁴

Eisner stated that his goal in writing the letter was to keep Ovitz from succeeding him at Disney should the opportunity arise. Because of that purpose, the letter contained a good deal of hyperbole to help Eisner better “unsell” Ovitz as his successor. ²⁴⁵ Neither Russell nor Watson divulged at any time the contents of the letter with other members of the board. ²⁴⁶

Eisner was informed on November 1 that Ovitz’s negotiations with Sony had failed to result in Ovitz leaving Disney. Once Eisner discovered that the Sony negotiations had failed to produce the desired result, Eisner decided that Ovitz must be gone by the end of the year. ²⁴⁷ To facilitate Ovitz’s departure, Eisner asked Wilson to take a Thanksgiving trip on the yacht that Ovitz and Wilson jointly owned, the Illusion. ²⁴⁸ It was Eisner’s hope that Wilson, a confidant of Ovitz’s, could help Ovitz finally understand not only that Ovitz had to leave Disney, but that everyone, including Ovitz, would be better off if he left.

Still struggling to make Ovitz understand that he had to leave Disney, Eisner wrote a letter to Ovitz on November 11 (which was never sent), in which he again tried to put Ovitz on notice that he was no longer welcome at Disney. ²⁴⁹ Eisner characterized this letter as:

[A] shot at trying to conjure up every argument, every issue exaggerated to the point of extreme nature so that [Ovitz] could see how deadly serious [Eisner] was. … However, [Eisner] realized it was … not accurate, way exaggerated, silly, hyperbole, insensitive, and it read like … a Vanity Fair article. ²⁵⁰

Eisner also stated that:

One of the reasons Litvack didn’t want me to send the memo is there were so many things in the memo … which just weren’t true, but I was trying to create a case that [Ovitz] could not argue with. ²⁵¹

In this letter, Eisner told Ovitz that:

I think we should part ways professionally. I believe you should resign (this is not a legal suggestion but a cosmetic one), and we should put the best possible face on it. When we talked last Friday, I told you again that my biggest problem was that you played the angles too much. I told you 98% of the problem was that I did not know when you were telling the truth, about big things, about small things. … We are beyond the curing stage. We are now in salvation. I would like to remain friends, to end this so it looks like you decided it, and to be positive and supportive… I hope we can work together now to accomplish what has to be done. I am ready to work as hard as necessary and as long. ²⁵²

Eisner sent this document to Bass and Russell for their review. ²⁵³ Eisner also believed that he may have shown the letter to Litvack, but Litvack did not recall having seen this letter before trial. ²⁵⁴ For my purposes, Russell was the only director to receive this document and he did not share it or the matters it concerned with anyone else on the board. ²⁵⁵ Instead of sending this letter to Ovitz, Eisner met with Ovitz personally on November 13 and they discussed much of what was contained in the letter, especially Ovitz’s alleged management and ethics problems. ²⁵⁶ Notes taken by Eisner following this meeting stated that the meeting was “2 hours and 15 minutes of [Eisner] telling [Ovitz] that it was not going to work.” ²⁵⁷ Eisner believed that Ovitz just would not listen to what he was trying to tell him and instead, Ovitz insisted that he would stay at Disney, going so far as to state that he would chain himself to his desk. ²⁵⁸

3. Options for Ovitz’s Termination

Since the Sony option was discussed in early September, Eisner and Litvack had also been discussing whether Ovitz could be terminated, and more importantly, whether he could be terminated for cause. ²⁵⁹ Eisner hoped to obtain a termination for cause because he believed that although Ovitz “had not done the job that would warrant [the NFT] payment” Disney was obliged to honor the OEA. ²⁶⁰ Honoring the OEA meant that if Ovitz was terminated without cause, he would receive the NFT payment that the OEA called for, which consisted of the balance of Ovitz’s salary, an imputed amount of bonuses, a $10 million termination fee and the immediate vesting of his three million stock options at the time. Litvack advised Eisner from the very beginning that he did not believe that there was cause to terminate Ovitz under the OEA.

As the end of November approached, Eisner again asked Litvack if Disney had cause to fire Ovitz and avoid the costly NFT payment. ²⁶¹ Litvack proceeded to examine more carefully the issue of whether cause existed under the OEA. Litvack reviewed the OEA, refreshed himself on the meaning of gross negligence and malfeasance and reviewed all of the facts concerning Ovitz’s performance of which he was aware. ²⁶² Litvack freely admits that he did not do any legal research in answering the cause question; ²⁶³ nor did he order an outside investigation to be undertaken or an outside opinion to be authored. ²⁶⁴ Litvack did state that in December he consulted with Morton Pierce, a senior partner at Dewey Ballantine, and that Pierce agreed that there was no cause. ²⁶⁵ Pierce, however, was not admitted to the California Bar (California law governed the OEA), was not an expert in employment law, ²⁶⁶ and could not recall speaking with Litvack regarding Ovitz. ²⁶⁷ Furthermore, Pierce’s bills to Disney do not clearly reflect that any such conversation took place regarding whether Ovitz could be terminated for cause. ²⁶⁸ After taking these steps, Litvack, for the second time, concluded that there was no cause to terminate Ovitz. In fact, despite Ovitz’s poor performance and concerns about his honesty, Litvack believed that the question of whether Ovitz could be terminated for cause was not a close question and, in fact, Litvack described it as “a no-brainer.” ²⁶⁹ Litvack, however, produced no written work product or notes to show to the board that would explain or defend his conclusion, and because he did not ask for an outside opinion to be authored, there was no written work product at all. When Litvack notified Eisner that he did not believe cause existed, Eisner testified that he “checked with almost anybody that [he] could find that had a legal degree, and there was just no light in that possibility. It was a total dead end from day one.” ²⁷⁰

In a perfect, more responsible world, both Litvack and Eisner would have had sufficient documentation not only to back up their conclusion that Ovitz could not be terminated for cause, but they would have also had sufficient evidence of the research and legwork they did to arrive at that conclusion. Despite the paucity of evidence, it is clear to the Court that both Eisner and Litvack wanted to fire Ovitz for cause to avoid the costly NFT payment, and perhaps out of personal motivations. The Court is convinced, based upon these two factors, that Eisner and Litvack did in fact make a concerted effort to determine if Ovitz could be terminated for cause, and that despite these efforts, they were unable to manufacture the desired result.

In addition to determining that there was no cause to fire Ovitz as defined in the OEA, Litvack also testified that it would be inappropriate and unethical for Disney to try to bluff Ovitz into accepting an amount less than agreed to in the OEA in case of an NFT. ²⁷¹ Litvack believed that it would be a bad idea to attempt to coerce Ovitz (by threatening a for-cause termination) into negotiating for a smaller NFT package than was provided for in the OEA because Disney, when pressed by Ovitz’s attorneys, would have to admit that there in fact was no cause and possibly subject Disney to a wrongful termination suit. ²⁷² Litvack also believed that a failed attempt to bluff Ovitz out of the NFT could be quite harmful to Disney’s reputation because it would appear as if Disney was trying to get out of contractual obligations (which it would have been), and that would make it difficult for Disney to do business and be viewed as an honest business partner. ²⁷³

4. The November 25, 1996 Board Meeting

The Disney board held its next meeting on November 25, and Ovitz was present. The minutes of this meeting contain no record that the board engaged in any discussion concerning Ovitz’s termination, or that they were informed of the actions that Eisner and Litvack had taken to this point concerning Ovitz. ²⁷⁴ The only action recorded in the minutes concerning Ovitz is his unanimous renomination to a new three-year term to the board. ²⁷⁵ Gold testified, however, that by this time the board knew that Ovitz would be fired, but because Ovitz was present at the meeting it would have been akin to a “public hanging” to fail to re-nominate him. ²⁷⁶

Although there was no mention of Ovitz’s impending termination at the board meeting, it is apparent, despite the lack of a written record, that directly following the board meeting, there was some discussion concerning Ovitz at the executive session which was held at Disney Imagineering in a glass-walled room (according to those in attendance who remember this event). ²⁷⁷ One of the more striking images of this trial is that apparently Ovitz was directly outside the glass walls—looking in at this meeting— while his fate at Disney was being discussed. There are no minutes to show who attended the executive session, but I am reasonably certain that at least Eisner, Gold, Bowers, Watson and Stern were in attendance. ²⁷⁸ In the absence of further evidence, I must conclude that no other directors attended this session. It is also clear that Eisner notified the directors in attendance at the executive session that it was his intention to fire Ovitz by year’s end and that he had asked Wilson to speak with Ovitz while they were onboard the Illusion during the upcoming Thanksgiving holiday. ²⁷⁹

Beyond Ovitz’s impending doom and Wilson’s upcoming boat trip, there is some controversy as to whether any details of the NFT and the cause question were discussed at this meeting. Eisner testified that, in addition to the other items, he informed those in attendance of what the NFT would cost Disney. ²⁸⁰ Gold tells a somewhat more elaborate (and certainly more self-serving) version of the meeting in which Gold asks Eisner whether Ovitz’s termination would be for cause, and Eisner assures Gold, in the presence of the other directors, that Litvack had advised Eisner that there were no grounds for a “for cause” termination. ²⁸¹ After the executive session adjourned, Gold testified that Litvack came into the room and Eisner told Gold to ask Litvack about cause, and that Litvack then told Gold that there was no cause to terminate Ovitz. ²⁸² Stern, noting at trial that he had failed to recall anything at all concerning this meeting during his deposition, echoed Gold’s version, stating that after the meeting, Litvack said that there was “no other way to go” besides an NFT. ²⁸³

Outside of Gold and Stern, nobody else present at the executive session recalled Gold raising the issue of fault with Eisner or having witnessed Gold speak with Litvack. Litvack recalls speaking with Gold sometime before December 12, and he recalls in substance a similar conversation to what Gold and Stern recall, that is, Eisner telling Gold to ask Litvack about cause. Litvack, however, cannot place that conversation in time, believes it took place in the boardroom and believes that the only people present were Eisner, Gold and himself. ²⁸⁴ Because of these numerous discrepancies, I cannot conclude that Gold questioned Eisner during this meeting regarding cause, nor can I conclude that the conversation that took place between Gold and Litvack occurred after the executive session in the presence of those who were in attendance.

5. The Illusion Dispelled

Shortly after the November 25 board meeting and executive session, the Ovitz and Wilson families left on the Illusion for a Thanksgiving trip to the British Virgin Islands. Ovitz embarked on this trip with the hope that if he could figure out a way to make it to Christmas, he could fix everything with Disney and make his problems go away. ²⁸⁵ Wilson, however, had other plans. ²⁸⁶ Ovitz recalled the conversations between him and Wilson quite well. Ovitz recalled that Wilson told him that “it wasn’t going to work and that [Eisner] wanted [Ovitz] out of the company.” ²⁸⁷ Ovitz said that after speaking with Wilson he began to realize how serious the situation with Disney had become and that he needed to talk to his attorneys and get some perspective on the situation. ²⁸⁸ Wilson was unable to recall the details of what he and Ovitz spoke about, ²⁸⁹ but Wilson does recall that Ovitz was quite “emotionally concerned” with his situation at Disney. ²⁹⁰

At some point during the trip, Eisner contacted Wilson by phone and Wilson related the situation and the progress he had made with Ovitz. ²⁹¹ Wilson was unable to remember the specifics of his conversation with Eisner, but his recollection was refreshed after viewing notes, dated December 1, taken by Eisner following the conversation. ²⁹² Wilson recalled describing Ovitz as a “wounded animal … in a corner,” and stated that by this he meant that Ovitz could become dangerous to the organization if the relationship with Disney continued. ²⁹³ Wilson also recalled stating that Ovitz was a “loyal friend and devastating enemy,” ²⁹⁴ and advising that Eisner should be reasonable and magnanimous, both financially and publicly, so Ovitz could save face. ²⁹⁵

On December 3, having returned from his Thanksgiving trip, Ovitz, armed with his newfound understanding that his time at Disney was rapidly coming to an end, met with Eisner to discuss the terms of his departure.

Eisner memorialized this meeting in a note to Russell which read “I met with Michael Ovitz today who wants to bring our discussions to a conclusion this week, wants you and Bob Goldman to settle out his contract immediately and sign it by weeks end.” ²⁹⁶ Essentially, this note asked Russell to take charge of managing the Ovitz departure. Ovitz asked that he not have to deal personally with Litvack during the termination process, although he had no qualms about Litvack being involved. ²⁹⁷ Ovitz also asked for several concessions from Disney, including keeping his seat on the board, obtaining a consulting/advising arran