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 arrangement with Disney, the continued use of an office and staff (but not on the Disney lot), continued health insurance and home security, continued use of the company car and the repurchase of his plane. ²⁹⁸

Although Eisner and Ovitz did not see eye to eye on Ovitz’s requests, Eisner initially objected only to Ovitz’s continued use of the company car, telling Russell, “I don’t want to nit pick here, but we are paying him a fortune.” ²⁹⁹ The memo to Russell does not reflect Eisner’s objections to Ovitz’s other requests. Eisner, however, testified that “by the time I got from number one to number five [of listing Ovitz’s requests] I had already realized it was a bad idea, and the next day I called him and told him that … it would be impossible.” ³⁰⁰ Eisner also told Russell that:

Any deal we make that is one cent more than the contract should include a non raid clause with teeth, a non compete in areas he advises us in, and a non disclose or bad mouth me or the company for five years at least. It would be great if you paid some of his money out over time which he would lose if he broke that deal. ³⁰¹

Shortly after this meeting, Ovitz spoke with Russell on the phone, and Russell described the conversation as “a very, very troubling and unusual conversation.” ³⁰² Russell stated that during their conversation, Ovitz made clear that he understood that the door to Disney was closed, but he was still “pleading his heart out… [with] tears in his voice.” ³⁰³ Over the next week, Disney, and more accurately, Eisner, rejected every request that Ovitz had made, informing him that all he would receive is what he had contracted for in the OEA and nothing more. ³⁰⁴ Other than the extra benefits which Ovitz requested and Disney summarily denied, there seems to have been no negotiation between anyone in Ovitz’s camp and anyone at Disney concerning whether there would be a for cause termination or an NFT, and nobody seems to have even mentioned to Ovitz or his representatives the possibility of a for cause termination. ³⁰⁵

6. Ovitz’s Bonus and His Termination

On December 10, the Executive Performance Plan Committee (“EPPC”) met to consider annual bonuses for Disney’s most highly-compensated executive officers. The EPPC was chaired by Gold, its other members Lozano, Poitier and Russell, attended, although Poitier and Lozano attended by phone. ³⁰⁶ Also in attendance were Eisner, Watson, Litvack, Santaniello, and Marsha Reed. ³⁰⁷ Russell informed all those in attendance of his conversations with Ovitz’s representatives and that Ovitz was going to be terminated, but that he was not going to be terminated for cause. ³⁰⁸ At this meeting, Russell recommended that Ovitz, despite his poor performance and imminent termination, should receive a $7.5 million bonus for his services during the 1996 fiscal year because Disney had done so well during the fiscal year and because Disney had a large bonus pool. ³⁰⁹ The EPPC approved this recommendation and it appears that Russell may have even advised the EPPC (despite the clear language in the OEA stating that the bonus was discretionary) that Disney was contractually obligated to pay Ovitz his bonus. ³¹⁰ Despite the fact that all of those in attendance should have known better, nobody spoke up to correct the mistaken perception that Ovitz had to receive a bonus, let alone a $7.5 million bonus.

The following evening, Eisner met with Ovitz at Eisner’s mother’s apartment in New York City. ³¹¹ By the time this meeting occurred, it had already been decided that Ovitz was being terminated, without cause, and would be receiving his contractual NFT payment, and that he would not be receiving any of the additional items that he asked for. ³¹² The purpose of this meeting was to agree to a press release to announce the termination, let Ovitz know that he would not receive any additional items, and as Eisner described it, it served as “the final parting.” ³¹³ Eisner and Ovitz apparently came to some understanding that neither Ovitz nor Disney was to defame each other in the press, and that the separation was to be undertaken with dignity and respect for both sides. ³¹⁴ Ovitz’s termination was memorialized the following day in a letter signed by Litvack and dated December 12. ³¹⁵ Litvack testified that Russell negotiated the terms in the letter, but Litvack signed this document on Eisner’s instructions. ³¹⁶ The board was not shown the December 12 letter, ³¹⁷ nor did it meet to approve its terms. ³¹⁸

Also on December 12, Disney issued the press release announcing Ovitz’s termination. ³¹⁹ The press release stated that “Michael S. Ovitz, will leave the company by mutual agreement effective January 31, 1997. He will continue to serve as an advisor and consultant to the company and the Board of Directors.” ³²⁰ Although I am puzzled by the use of the phrase “mutual agreement,” I am nonetheless convinced, based upon Ovitz’s constant self-denial and difficult behavior during the months leading up to his termination, and Eisner's commitment that he would handle the termination gracefully for Ovitz’s benefit (and likely to prevent Ovitz from defaming him and Disney in the press), ³²¹ that the termination was anything but a mutual agreement. ³²² Additionally, although I am troubled by the statement in the press release that Ovitz would continue to serve as an advisor and consultant to the board, because this was either a deliberate untruth or an incredibly irresponsible and sloppy error on Disney’s part, it is ultimately immaterial to the issues to be resolved in this case. Therefore, I do not believe that the statement in the press release regarding Ovitz continuing as an advisor and consultant to the Disney board is reflective of any agreement or understanding that Disney and Ovitz had at the time. ³²³ The Court believes that both of these untrue statements were likely made as part of an effort by Disney to make Ovitz’s departure seem as amicable as possible so that Ovitz’s reputation would not be publicly tarnished any more than could be avoided. In any event, once Ovitz left Eisner’s mother’s apartment, he never again returned to Disney. ³²⁴

That same day, Eisner at least attempted to contact each of the Board members by phone before the issuance of the press release in order to notify them that Ovitz had been officially terminated. ³²⁵ None of the board members at that time, or at any other time before or during trial, ever objected to Ovitz’s termination; in fact, most if not all thought it was the appropriate move for Eisner to make. ³²⁶ Also on December 12, copies of the press release along with a letter from Eisner were sent to each of the directors. ³²⁷ The letters contained no more information regarding the termination than was contained in the press release.

Thus, as of December 12, Ovitz was officially terminated without cause. Up to this point, however, the Disney board had never met in order to vote on, or even discuss, the termination at a full session, and few if any directors did an independent investigation of whether Ovitz could be terminated for cause. As a result, the Disney directors had been taken for a wild ride, and most of it was in the dark. Additionally neither the EPPC nor the compensation committee had a vote on the matter, and it seems as though they had yet to have a substantive discussion of whether Ovitz could be terminated for cause. Many directors believed that Eisner had the power to fire Ovitz on his own and that he did not need to convene a board meeting to do so. ³²⁸ Other directors believed that if a meeting was required to terminate Ovitz, that Litvack, serving as corporate counsel, would have advised them that was the case and he would have made sure one was called. ³²⁹ Litvack believed that Eisner had the power to fire Ovitz on his own accord and, therefore, did not believe it was necessary to convene a meeting. ³³⁰ Litvack also stated that he did not call a meeting because not only did he believe that Eisner was empowered to fire Ovitz on his own, but Litvack believed that all the directors were up to speed and in agreement that Ovitz should be terminated. ³³¹ Although there was no meeting called to vote on or even discuss Ovitz’s termination, it is clear that most, if not all, directors trusted Eisner’s and Litvack’s conclusion that there was no cause and that Ovitz should still be terminated without cause even though this entailed making the costly NFT payment. ³³²

During the week that Ovitz was terminated (December 11-16), articles began appearing in the press with quotes from Ovitz or his representatives describing why Ovitz left Disney and detailing to some extent the size of his severance package. ³³³ For example, a December 14 article in the Baltimore Sun reported that “Resigning Disney President Michael Ovitz said yesterday through a representative that Disney is giving him a $90 million severance package.” ³³⁴ Other articles describing Ovitz’s frustrations at Disney stated that Ovitz “wasn’t game to struggle against a bad situation,” ³³⁵ and that “Ovitz was frustrated by his poorly defined role, Eisner’s reluctance to share power and repeated clashes with other senior Disney executives … notably [Litvack] and [Bollenbach],” ³³⁶ and that “the reality was that Eisner did not let go … [and that] Eisner thwarted [Ovitz] by not giving him detailed responsibilities or the power to manage the various Disney divisions.” ³³⁷ The articles also stated that Ovitz’s departure was mutual, ³³⁸ and some went so far as to state that Ovitz’s departure was his own idea. ³³⁹ Additionally, it was reported that Ovitz had hired a public relations consultant named Steven Rivers to put a positive spin on the termination for Ovitz. ³⁴⁰ Ovitz, however, testified that he did not employ Rivers or any other PR firm at this time. ³⁴¹ Eisner believed that he had been generous in his treatment of Ovitz, as well as his agreement to make the termination seem mutual, and felt that these articles were:

an incredible betrayal not of a contract, not of any kind of written agreement, but that I had bent over backwards, and not because he was my friend. I would do it with anybody that was leaving under these circumstances, and he just, you know, threw it right in the company’s face. And I was reading every single day about what idiots we were, the Disney Company, and how he had done this enormous feat. ³⁴²

On December 16, Eisner reacted to these stories by sending an e-mail to John Dreyer, Disney’s communications chief, which among other things stated that Ovitz was a “psychopath” and “totally incompetent.” ³⁴³ Eisner described the letter as his effort at “venting” and that “although [he] didn’t know what the words meant, [he] was just so angry.” ³⁴⁴

Following the official termination, the EPPC met on December 20 with the sole purpose of rescinding Ovitz’s $7.5 million bonus. Litvack stated that after the December 10 EPPC meeting, he had questioned Russell as to whether the bonus was mandatory, and that Russell had sent Litvack a memo (which had been drafted almost a year earlier as an introduction to the OEA) on December 18, and in that document it became apparent that the bonus was not in fact mandatory. ³⁴⁵ Russell also had a discussion with Gold on December 18 during which he told Gold that his recommendation that Ovitz be paid a bonus was stupid and that he was worried that members of the EPPC were under the mistaken belief that the bonus was contractual. ³⁴⁶ Gold testified that within a week of the December 10 meeting, Litvack and Russell came to him “sheepishly, and said ‘we’ve made a mistake.’” ³⁴⁷ On December 20 a special telephonic meeting of the EPPC was convened with the purpose of rescinding Ovitz’s $7.5 million bonus, which the EPPC had voted in favor of just ten days earlier. ³⁴⁸ Gold, Lozano, Russell, Watson, Eisner and Litvack attended the meeting. ³⁴⁹

Russell’s self-prepared agenda for the meeting outlines what was discussed before revoking Ovitz’s bonus, including that it would be “illogical and impossible to justify any bonus one day and fire him the next, [and that] Committee members [could not] be asked to try to justify it based on good performance.” ³⁵⁰ The EPPC then revoked Ovitz’s bonus. After the revocation, Gold questioned Litvack if he had not also made a mistake as to whether Ovitz could be terminated for cause and Litvack told Gold that he was sure that he had not. Gold also contends that Litvack said his view was supported by outside counsel. ³⁵¹ Litvack denies ever having made this representation.

After Ovitz’s bonus was rescinded, Eisner, in a December 27 letter, accelerated Ovitz’s departure date from January 31, 1997, to December 27, 1996, and Ovitz’s tenure as both an executive and director of Disney ended on that date. ³⁵² Similar to the December 12 letter, this letter states that Ovitz’s termination “will for all purposes of the Employment Agreement be treated as a ‘Non-Fault Termination.’” There was no mention in this letter of Ovitz serving as a consultant to the board, however. ³⁵³ The letter, unlike the December 12 letter, contained specific details of Ovitz’s payout and stated Ovitz would immediately receive roughly $38 million in cash and that the first tranche of three million options would vest immediately. ³⁵⁴ Litvack is the signatory on this letter and Ovitz cosigned. Litvack, however, testified that he signed the letter agreement because no one else was available to do so during the holidays and that he had no role in drafting it. ³⁵⁵

As previously mentioned, Disney also chose to withhold $1,000,000 of Ovitz’s NFT payment “pending final settlement of [Ovitz’s] accounts.” ³⁵⁶ Ovitz has stated that his agreement to the holdback was a condition to “Disney honoring its contractual obligations.” ³⁵⁷ Eisner, however, testified that it was common for executives at Disney to be behind on their expenses up to six months, so it made sense to holdback $1 million in case of lingering expenses. ³⁵⁸ Besides Eisner, Litvack, and perhaps Russell, no defendant even saw the December 27 letter before it was signed. ³⁵⁹ Additionally, neither the full board nor any committee thereof met to discuss the acceleration of Ovitz’s departure or the $1 million holdback. ³⁶⁰ Shortly after Disney paid Ovitz what he was owed under the OEA for an NFT (minus the $1 million holdback), plaintiffs filed the current action.

The full board next met on January 27, 1997. By this time, the board was aware of the negative publicity that the Ovitz termination and NFT payment had received. There was an extensive discussion of Ovitz’s termination at this meeting and the pending lawsuit. Litvack, addressing the full board for the first time concerning the cause issue, notified the board that in his opinion there had been no gross negligence or malfeasance and, thus, Ovitz could not be terminated for cause. ³⁶¹ Litvack stood by his decision at trial, stating he had learned nothing since 1996 that made him reconsider his original advice to the board that Disney could not fire Ovitz for cause. ³⁶²

D. Expert Witnesses

Six expert witnesses testified over the course of the trial. ³⁶³ In general, their reports and testimony, while meeting the minimum standards for admissibility, were not of as much help to the Court as they could have been because of the polarized nature of their opinions, especially their interpretations of the factual questions that are of central importance in this trial. I shall discuss each expert seriatim. To the extent that my conclusions about an expert are decidedly negative, that characterization is based upon an objective evaluation of the witness and the strength and relevance of the evidence presented both in the report and at trial.

1. Professor Deborah DeMott

Plaintiffs offered Professor DeMott, the David F. Cavers Professor of Law at Duke Law School, as an expert on “the custom and practice with regard to corporate governance in Delaware public companies in the time period relevant to this case.” ³⁶⁴ Professor DeMott was subject to an earlier motion in limine, whereby defendants sought to exclude her testimony. That motion was granted on the grounds that her report and proposed testimony did not comply with D.R.E. 702 and improperly opined on the application of Delaware law to the facts of this case. ³⁶⁵ Professor DeMott rewrote her report, ³⁶⁶ and her testimony was received at trial over defendants’ objections. ³⁶⁷

Professor DeMott opined on the “custom and practice of corporate governance in publicly traded Delaware corporations as of the times relevant to the transactions in this case,” and also on “whether the conduct of the board of directors of [the Company] complied with or departed from those customs and those practices.” ³⁶⁸ Despite plaintiffs’ and Professor DeMott’s efforts to couch her opinion in terms of custom and practice of Delaware corporations, it was clear to all that her report and testimony were still directed to the core issues in this case—whether the defendants breached their fiduciary duties as they exist under Delaware law. ³⁶⁹

In addition to opining on the core issues in this case, ³⁷⁰ another key area of Professor DeMott’s report (and the corresponding testimony) that is of no value to the Court is her interpretation of the Company’s certificate of incorporation, bylaws, and board committee charters. ³⁷¹ Interpretation of the Company’s internal governing documents is a matter exclusively for the Court. ³⁷² Thus, there is very little, if any, of Professor DeMott’s report that is of benefit to the Court, especially because the relevant question is not whether the defendants complied with the custom and practice of other Delaware corporations during the relevant time frame, but whether they complied with their fiduciary duties. ³⁷³

2. Professor John Donohue

Professor Donohue, the William H. Neukom Professor of Law at Stanford Law School, came to the witness stand on behalf of plaintiffs three different times during the course of the trial. His report and testimony were directed to the issue of whether Ovitz could (and should) have been terminated for cause as opposed to the NFT he received. The fatal flaw in Donohue’s opinion is that it is based upon his factual determinations— determinations with which I, after weighing all of the evidence, do not agree. ³⁷⁴ For example, in the summary of his conclusions, Donohue states that Ovitz committed gross negligence or malfeasance because of his dishonesty, and because of eight other categories of bad acts. ³⁷⁵ As demonstrated above, in the lengthy and detailed recitation of the facts, I conclude that those determinations are simply not supported by a fair and neutral evaluation of the record.

Donohue’s opinion outlined an array of legal standards that might cover Ovitz’s termination. ³⁷⁶ In his zeal to crucify Ovitz, Donohue concluded that Ovitz’s conduct would meet any of the multiplicity of standards he discusses for gross negligence or malfeasance, and his report contains very little guidance in terms of which standard might be the most appropriate or most likely to be applied by a California court. ³⁷⁷ As a result, Donohue’s report and testimony are of little value to the Court in evaluating defendants’ conduct as it relates to Ovitz’s termination.

Donohue was permitted to file a supplemental report based upon his review of certain documents, which were produced by defendants shortly before trial. ³⁷⁸ The supplemental report made no substantive changes to Donohue’s opinions and conclusions. ³⁷⁹

3. Professor Kevin Murphy

Professor Murphy (to whom I will refer as “Professor Murphy” in order to avoid any potential confusion with defendant Thomas Murphy), the E. Morgan Stanley Chair in Business Administration at the Marshall School of Business at the University of Southern California, presented expert testimony for plaintiffs on the issue of damages together with an economic and reasonableness evaluation of Ovitz’s compensation package. ³⁸⁰ Professor Murphy concluded that Ovitz’s compensation package was unreasonably excessive and orders of magnitude larger than the compensation awarded to executives with arguably equivalent responsibilities. ³⁸¹ In determining the reasonableness of Ovitz’s compensation, Professor Murphy chose not to consider Ovitz’s past income at CAA and the effect that income would have on the remuneration he would expect from any future employment. ³⁸² As would be expected, Professor Murphy concluded that the most reasonable and appropriate assumptions are those that would maximize the value of the OEA and corresponding cost of the NFT. ³⁸³ Perhaps Professor Murphy’s most pointed criticism of the OEA is that the Company was unable to reduce its potential financial exposure because the OEA did not contain any provisions for mitigation or noncompete restrictions, ³⁸⁴ but that criticism is not supported by the language of the OEA. ³⁸⁵

Professor Murphy’s report did not include an event study, but at trial Professor Murphy gave a very brief and unpersuasive critique of Dunbar’s event study, which as discussed below, concluded that the Company’s market capitalization increased by more than $1 billion as a result of the announcement of Ovitz’s hiring. The record does not reflect that Professor Murphy’s qualifications as an expert extend to performing and interpreting event studies, and I therefore reject Professor Murphy’s critique of Dunbar’s conclusion with respect to the market’s reaction to the announcement of Ovitz’s hiring. ³⁸⁶ The remainder of his report, however, is of use to the Court in determining the economic consequences facing the defendants when the decisions at issue in this case were made.

4. Larry R. Feldman

Ovitz’s expert with respect to whether he could have been terminated for cause was Larry Feldman. Feldman is a renowned litigator in southern California and is currently employed at Kaye Scholer LLP. ³⁸⁷ Feldman opined that the Company had no grounds upon which to terminate Ovitz for cause, and that had the Company done so, that Ovitz would have been able to pursue meritorious claims for breach of contract, fraud and defamation, with damages far in excess of the value of the NFT. ³⁸⁸

Upon comparing Feldman’s report to the factual determinations I have made, I conclude that the evidence presented at trial is generally consistent with Feldman’s view of the relevant facts. Feldman’s legal analysis, however, is more troublesome. For example, I am not persuaded in the least that the legal standard used by Feldman in his report to define gross negligence or malfeasance—criminal misconduct or its equivalent—is the correct standard. ³⁸⁹ Additionally, his opinion with respect to potential claims for defamation and fraud in the inducement is thinly supported and fails to adequately address potentially meritorious defenses that the Company could have asserted to such causes of action. ³⁹⁰ In sum, therefore, Feldman’s report and testimony are of some value to the Court, but not substantial value.

5. John C. Fox

John Fox, a partner of Fenwick & West LLP, testified on behalf of all defendants but Ovitz as an expert with respect to whether Ovitz could have been terminated for cause. Fox’s report and testimony were very thorough, well reasoned and informed by Fox’s extensive practical experience as an employment law litigator and advisor. ³⁹¹

The overwhelming majority of Fox’s factual determinations are consonant with the conclusions I have reached above based upon the evidence presented at trial. His legal conclusions based upon those facts, therefore, are of far greater weight and persuasive value than the conclusions reached by Donohue. Similar to Feldman, Fox gives short shrift in his report to analyzing Ovitz’s potential claims for fraud in the inducement and defamation. ³⁹² Unlike Feldman, however, Fox was able to clearly articulate at trial the reasoning behind his conclusion with respect to the viability of these tort claims, bolstering the value of his report in those areas. ³⁹³ Fox also testified in great detail regarding the definition of gross negligence and malfeasance. ³⁹⁴ He also opined that, regardless of how gross negligence and malfeasance might be defined in a hypothetical Ovitz v. The Walt Disney Company suit had Ovitz been terminated for cause, after reviewing the evidence, Ovitz’s conduct (or misconduct) did not even come close to that high standard. ³⁹⁵ In summary, Fox’s report is of significant value to the Court, and I will weigh his conclusions accordingly in making my determinations regarding the ultimate issues in this case.

6. Frederick C. Dunbar

The remaining expert was Frederick Dunbar, Senior Vice President of National Economic Research Associates, Inc., who testified on behalf of the defendants as to the market reaction to the hiring of Ovitz and also critiqued Professor Murphy’s report as it related to the valuation of Ovitz’s options and the present value calculation of the cash portion of the NFT payment. ³⁹⁶

Dunbar’s conclusion with respect to the market’s overwhelmingly positive reaction to Ovitz’s hiring is not unassailable, but is nonetheless well supported by the evidence and based upon accepted methods of analysis. ³⁹⁷ With respect to his opinion that a reduced or discounted option expiration date is appropriate when performing a Black-Scholes valuation of the options, Dunbar’s testimony at trial was thorough and convincing. ³⁹⁸ Accordingly, Dunbar’s Black-Scholes calculations are more valuable and persuasive than those performed by Professor Murphy and will be useful in evaluating the defendants’ actions.

II. LEGAL STANDARDS

The outcome of this case is determined by whether the defendants complied with their fiduciary duties in connection with the hiring and termination of Michael Ovitz. At the outset, the Court emphasizes that the best practices of corporate governance include compliance with fiduciary duties. ³⁹⁹ Compliance with fiduciary duties, however, is not always enough to meet or to satisfy what is expected by the best practices of corporate governance.

The fiduciary duties owed by directors of a Delaware corporation are the duties of due care and loyalty. ⁴⁰⁰ Of late, much discussion among the bench, bar, and academics alike, has surrounded a so-called third fiduciary duty, that of good faith. Of primary importance in this case are the fiduciary duty of due care and the duty of a director to act in good faith. Other than to the extent that the duty of loyalty is implicated by a lack of good faith, the only remaining issues to be decided herein with respect to the duty of loyalty are those relating to Ovitz’s actions in connection with his own termination. ⁴⁰¹ These considerations will be addressed seriatim, although issues of good faith are (to a certain degree) inseparably and necessarily intertwined with the duties of care and loyalty, as well as a principal reason the distinctness of these duties make a difference—namely § 102(b)(7) of the Delaware General Corporation Law. ⁴⁰²

A. The Business Judgment Rule

A comprehensive review of the history of the business judgment rule is not necessary here, but a brief discussion of its boundaries and proper use is appropriate. Delaware law is clear that the business and affairs of a corporation are managed by or under the direction of its board of directors. ⁴⁰³ The business judgment rule serves to protect and promote the role of the board as the ultimate manager of the corporation. ⁴⁰⁴ Because courts are ill equipped to engage in post hoc substantive review of business decisions, the business judgment rule “operates to preclude a court from imposing itself unreasonably on the business and affairs of a corporation.” ⁴⁰⁵

The business judgment rule is not actually a substantive rule of law, ⁴⁰⁶ but instead it is a presumption that “in making a business decision the directors of a corporation acted on an informed basis, … and in the honest belief that the action taken was in the best interests of the company [and its shareholders].” ⁴⁰⁷ This presumption applies when there is no evidence of “fraud, bad faith, or self-dealing in the usual sense of personal profit or betterment” on the part of the directors. ⁴⁰⁸ In the absence of this evidence, the board’s decision will be upheld unless it cannot be “attributed to any rational business purpose.” ⁴⁰⁹ When a plaintiff fails to rebut the presumption of the business judgment rule, she is not entitled to any remedy, be it legal or equitable, unless the transaction constitutes waste. ⁴¹⁰

This presumption can be rebutted by a showing that the board violated one of its fiduciary duties in connection with the challenged transaction. ⁴¹¹ In that event, the burden shifts to the director defendants to demonstrate that the challenged transaction was “entirely fair” to the corporation and its shareholders. ⁴¹²

In Van Gorkom, the Delaware Supreme Court analyzed the Trans Union board of directors as a whole in determining whether the protections of the business judgment rule applied. ⁴¹³ More recent cases understand that liability determinations must be on a director-by-director basis. In Emerging Communications, Justice Jacobs wrote (while sitting as a Vice Chancellor) that the “liability of the directors must be determined on an individual basis because the nature of their breach of duty (if any), and whether they are exculpated from liability for that breach, can vary for each director.” ⁴¹⁴ There is a not insignificant degree of tension between these two positions, notwithstanding the procedural differences between the two cases.

Even if the directors have exercised their business judgment, the protections of the business judgment rule will not apply if the directors have made an “unintelligent or unadvised judgment.” ⁴¹⁵ Furthermore, in instances where directors have not exercised business judgment, that is, in the event of director inaction, the protections of the business judgment rule do not apply. ⁴¹⁶ Under those circumstances, the appropriate standard for determining liability is widely believed to be gross negligence, ⁴¹⁷ but a single Delaware case has held that ordinary negligence would be the appropriate standard. ⁴¹⁸

B. Waste

Corporate waste is very rarely found in Delaware courts because the applicable test imposes such an onerous burden upon a plaintiff—proving “an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” ⁴¹⁹ In other words, waste is a rare, “unconscionable case[] where directors irrationally squander or give away corporate assets.” ⁴²⁰

The Delaware Supreme Court has implicitly held that committing waste is an act of bad faith. ⁴²¹ It is not necessarily true, however, that every act of bad faith by a director constitutes waste. For example, if a director acts in bad faith (for whatever reason), but the transaction is one in which a businessperson of ordinary, sound judgment concludes that the corporation received adequate consideration, the transaction would not constitute⁴²² waste.

C. The Fiduciary Duty of Due Care

The fiduciary duty of due care requires that directors of a Delaware corporation “use that amount of care which ordinarily careful and prudent men would use in similar circumstances,” ⁴²³ and “consider all material information reasonably available” in making business decisions, and that deficiencies in the directors’ process are actionable only if the directors actions are grossly negligent. ⁴²⁴ Chancellor Allen described the two contexts in which liability for a breach of the duty of care can arise:

First, such liability may be said to follow from a board decision that results in a loss because that decision was ill advised or “negligent”. Second, liability to the corporation for a loss may be said to arise from an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss. ⁴²⁵

Chancellor Allen then explained with respect to board decisions:

…[These] cases will typically be subject to review under the director-protective business judgment rule, assuming the decision made was the product of a process that was either deliberately considered in good faith or was otherwise rational. What should be understood, but may not widely be understood by courts or commentators who are not often required to face such questions, is that compliance with a director’s duty of care can never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate loss, apart from consideration of the good faith or rationality of the process employed. That is, whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through “stupid” to “egregious” or “irrational”, provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests. To employ a different rule—one that permitted an “objective” evaluation of the decision—would expose directors to substantive second guessing by ill-equipped judges or juries, which would, in the long-run, be injurious to investor interests. Thus, the business judgment rule is process oriented and informed by a deep respect for all good faith board decisions.

Indeed, one wonders on what moral basis might shareholders attack a good faith business decision of a director as “unreasonable” or “irrational”. Where a director in fact exercises a good faith effort to be informed and to exercise appropriate judgment, he or she should be deemed to satisfy fully the duty of attention. ⁴²⁶

With respect to liability for director inaction, Chancellor Allen wrote that in order for the inaction to be so great as to constitute a breach of the director’s duty of care, a plaintiff must show a “lack of good faith as evidenced by sustained or systematic failure of a director to exercise reasonable oversight.” ⁴²⁷ The Chancellor rationalized this extremely high standard of liability for violations of the duty of care through inaction by concluding that:

[A] demanding test of liability in the oversight context is probably beneficial to corporate shareholders as a class, as it is in the board decision context, since it makes board service by qualified persons more likely, while continuing to act as a stimulus to good faith performance of duty by such directors. ⁴²⁸

In the duty of care context with respect to corporate fiduciaries, gross negligence has been defined as a “‘reckless indifference to or a deliberate disregard of the whole body of stockholders’ or actions which are ‘without the bounds of reason.’” ⁴²⁹ Because duty of care violations are actionable only if the directors acted with gross negligence, ⁴³⁰ and because in most instances money damages are unavailable to a plaintiff who could theoretically prove a duty of care violation, ⁴³¹ duty of care violations are rarely found.

D. The Fiduciary Duty of Loyalty

The fiduciary duty of loyalty was described in the seminal case of Guth v. Loft, Inc., in these strict and unyielding terms:

Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests…. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there be no conflict between duty and self-interest. ⁴³²

More recently, the Delaware Supreme Court stated that there is no safe-harbor for divided loyalties in Delaware, ⁴³³ and that the duty of loyalty, in essence, “mandates that the best interest of the corporation and its shareholders take[] precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally.” ⁴³⁴ The classic example that implicates the duty of loyalty is when a fiduciary either appears on both sides of a transaction or receives a personal benefit not shared by all shareholders. ⁴³⁵

In the specific context at issue here with respect to a classic duty of loyalty claim, Ovitz, as a fiduciary of Disney, was required to act in an “adversarial and arms-length manner” when negotiating his termination and not abuse or manipulate the corporate process by which that termination was granted. ⁴³⁶ He was obligated to act in good faith and “not advantage himself at the expense of the Disney shareholders.” ⁴³⁷

E. Section 102(b)(7)

Following the Delaware Supreme Court’s landmark decision in Van Gorkom, ⁴³⁸ the Delaware General Assembly acted swiftly to enact 8 Del. C. § 102(b)(7). ⁴³⁹ Section 102(b)(7) states that a corporation may include in its certificate of incorporation:

(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer (x) to a member of the governing body of a corporation which is not authorized to issue capital stock, and (y) to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

The purpose of Section 102(b)(7) was explained by the Delaware Supreme Court in this manner:

The purpose of Section 102(b)(7) was to permit shareholders— who are entitled to rely upon directors to discharge their fiduciary duties at all times—to adopt a provision in the certificate of incorporation to exculpate directors from any personal liability for the payment of monetary damages for breaches of their duty of care, but not for duty of loyalty violations, good faith violations and certain other conduct. ⁴⁴⁰

Recently, Vice Chancellor Strine wrote that, “[o]ne of the primary purposes of § 102(b)(7) is to encourage directors to undertake risky, but potentially value-maximizing, business strategies, so long as they do so in good faith.” ⁴⁴¹ Or in other words, § 102(b)(7) is most useful “when, despite the directors’ good intentions, [the challenged transaction] did not generate financial success and … the possibility of hindsight bias about the directors’ prior ability to foresee that their business plans would not pan out” could improperly influence a post hoc judicial evaluation of the directors’ actions. ⁴⁴²

The vast majority of Delaware corporations have a provision in their certificate of incorporation that permits exculpation to the extent provided for by § 102(b)(7). This provision prohibits recovery of monetary damages from directors for a successful shareholder claim, either direct or derivative, that is exclusively based upon establishing a violation of the duty of due care. ⁴⁴³ The existence of an exculpation provision authorized by § 102(b)(7)does not, however, eliminate a director’s fiduciary duty of care, because a court may still grant injunctive relief for violations of that duty. ⁴⁴⁴

An exculpation provision such as that authorized by § 102(b)(7) is in the nature of an affirmative defense. ⁴⁴⁵ As a result, it is the burden of the director defendants to demonstrate that they are entitled to the protections of the relevant charter provision. ⁴⁴⁶

F. Acting in Good Faith

Decisions from the Delaware Supreme Court and the Court of Chancery are far from clear with respect to whether there is a separate fiduciary duty of good faith. ⁴⁴⁷ Good faith has been said to require an “honesty of purpose,” and a genuine care for the fiduciary’s constituents, ⁴⁴⁸ but, at least in the corporate fiduciary context, it is probably easier to define bad faith rather than good faith. ⁴⁴⁹ This may be so because Delaware law presumes that directors act in good faith when making business judgments. ⁴⁵⁰ Bad faith has been defined as authorizing a transaction “for some purpose other than a genuine attempt to advance corporate welfare or [when the transaction] is known to constitute a violation of applicable positive law.” ⁴⁵¹ In other words, an action taken with the intent to harm the corporation is a disloyal act in bad faith. A similar definition was used seven years earlier, when Chancellor Allen wrote that bad faith (or lack of good faith) is when a director acts in a manner “unrelated to a pursuit of the corporation’s best interests.” ⁴⁵² It makes no difference the reason why the director intentionally fails to pursue the best interests of the corporation. ⁴⁵³

Bad faith can be the result of “any emotion [that] may cause a director to [intentionally] place his own interests, preferences or appetites before the welfare of the corporation,” including greed, “hatred, lust, envy, revenge, … shame or pride.” ⁴⁵⁴ Sloth could certainly be an appropriate addition to that incomplete list if it constitutes a systematic or sustained shirking of duty. ⁴⁵⁵ Ignorance, in and of itself, probably does not belong on the list, but ignorance attributable to any of the moral failings previously listed could constitute bad faith. It is unclear, based upon existing jurisprudence, whether motive is a necessary element for a successful claim that a director has acted in bad faith, ⁴⁵⁶ and, if so, whether that motive must be shown explicitly or whether it can be inferred from the directors’ conduct. ⁴⁵⁷

Shrouded in the fog of this hazy jurisprudence, the defendants’ motion to dismiss this action was denied because I concluded that the complaint, together with all reasonable inferences drawn from the well-plead allegations contained therein, could be held to state a non-exculpated breach of fiduciary duty claim, insofar as it alleged that Disney’s directors “consciously and intentionally disregarded their responsibilities, adopting a ‘we don’t care about the risks’ attitude concerning a material corporate decision.” ⁴⁵⁸

Upon long and careful consideration, I am of the opinion that the concept of intentional dereliction of duty, a conscious disregard for one’s responsibilities, is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith. ⁴⁵⁹ Deliberate indifference and inaction in the face of a duty to act is, in my mind, conduct that is clearly disloyal to the corporation. ⁴⁶⁰ It is the epitome of faithless conduct.

To act in good faith, a director must act at all times with an honesty of purpose and in the best interests and welfare of the corporation. The presumption of the business judgment rule creates a presumption that a director acted in good faith. In order to overcome that presumption, a plaintiff must prove an act of bad faith by a preponderance of the evidence. To create a definitive and categorical definition of the universe of acts that would constitute bad faith would be difficult, if not impossible. And it would misconceive how, in my judgment, the concept of good faith operates in our common law of corporations. Fundamentally, the duties traditionally analyzed as belonging to corporate fiduciaries, loyalty and care, are but constituent elements of the overarching concepts of allegiance, devotion and faithfulness that must guide the conduct of every fiduciary. The good faith required of a corporate fiduciary includes not simply the duties of care and loyalty, in the narrow sense that I have discussed them above, but all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, ⁴⁶¹ where the fiduciary acts with the intent to violate applicable positive law, ⁴⁶² or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. ⁴⁶³ There may be other examples of bad faith yet to be proven or alleged, ⁴⁶⁴ but these three are the most salient. As evidenced by previous rulings in this case both from this Court and the Delaware Supreme Court, issues of the Disney directors’ good faith (or lack thereof) are central to the outcome of this action. With this background, I now turn to applying the appropriate standards to defendants’ conduct.

III. ANALYSIS

Stripped of the presumptions in their favor that have carried them to trial, ⁴⁶⁵ plaintiffs must now rely on the evidence presented at trial to demonstrate by a preponderance of the evidence that the defendants violated their fiduciary duties and/or committed waste. More specifically, in the area of director action, plaintiffs must prove by a preponderance of the evidence that the presumption of the business judgment rule does not apply either because the directors breached their fiduciary duties, acted in bad faith or that the directors made an “unintelligent or unadvised judgment,” ⁴⁶⁶ by failing to inform themselves of all material information reasonably available to them before making a business decision. ⁴⁶⁷

If plaintiffs cannot rebut the presumption of the business judgment rule, the defendants will prevail. If plaintiffs succeed in rebutting the presumption of the business judgment rule, the burden then shifts to the defendants to prove by a preponderance of the evidence that the challenged transactions were entirely fair to the corporation. ⁴⁶⁸

As it relates to director inaction, plaintiffs will prevail upon proving by a preponderance of the evidence that the defendants breached their fiduciary duties by not acting. In order to invoke the protections of the provision in the Company’s certificate of incorporation authorized by 8 Del. C. §102(b)(7), the defendants must prove by a preponderance of the evidence that they are entitled to the protections of that provision. ⁴⁶⁹

A. Ovitz Did Not Breach His Duty of Loyalty

As previously mentioned, the only issue remaining in this case with respect to the traditional duty of loyalty (aside from whether there is an overlap between loyalty and good faith) is whether Ovitz breached his fiduciary duty of loyalty in the course of his termination. ⁴⁷⁰ Before trial, Ovitz moved for summary judgment on this claim, a motion I denied on the  ground that genuine issues of material fact existed which prevented entry of summary judgment in favor of Ovitz at that time. ⁴⁷¹ More specifically, I recognized:

… if Ovitz received a[n] NFT, [then] he had a contractual right to receive the payout he did receive. But Ovitz did not have a contractual right to receive a[n] NFT…. Instead, Ovitz’s receipt of a[n] NFT was conditioned upon a one-time determination (to be made by [the Company]) that was not guaranteed by his contract, and Ovitz appears to have actively engaged in negotiations and decisionmaking that affected [the Company]’s determination to grant the NFT.

Ovitz negotiated his exit from [the Company] with Eisner, Russell, and others. He made a conscious decision not to resign and to seek the benefits that his contract made available to him only under certain prescribed circumstances. Ovitz allegedly colluded with those on the other side of the bargaining table … in bringing about the circumstances that would entitle him to his NFT benefits. In so doing, he allegedly manipulated corporate processes and thereby violated his fiduciary duties to [the Company]. ⁴⁷²

Now, upon consideration of the evidence presented at trial, and based upon the findings of fact made above, it is clear that plaintiffs have failed to demonstrate by a preponderance of the evidence that Ovitz breached his duty of loyalty.

Ovitz did not breach his fiduciary duty of loyalty by receiving the NFT payment because he played no part in the decisions: ⁴⁷³ (1) to be terminated and (2) that the termination would not be for cause under the OEA. ⁴⁷⁴ Ovitz did possess fiduciary duties as a director and officer while these decisions were made, but by not improperly interjecting himself into the corporation’s decisionmaking process nor manipulating that process, he did not breach the fiduciary duties he possessed in that unique circumstance. Furthermore, Ovitz did not “engage” in a transaction with the corporation— rather, the corporation imposed an unwanted transaction upon him. ⁴⁷⁵

Once Ovitz was terminated without cause (as a result of decisions made entirely without input or influence from Ovitz), he was contractually entitled, without any negotiation or action on his part, to receive the benefits provided by the OEA for a termination without cause, benefits for which he negotiated at arms-length before becoming a fiduciary. ⁴⁷⁶ No reasonably prudent fiduciary in Ovitz’s position would have unilaterally determined to call a board meeting to force the corporation’s chief executive officer to reconsider his termination and the terms thereof, ⁴⁷⁷ with that reconsideration for the benefit of shareholders and potentially to Ovitz’s detriment. ⁴⁷⁸

Furthermore, having just been terminated, no reasonably prudent fiduciary in Ovitz’s shoes would have insisted on a board meeting to discuss and ratify his termination after being terminated by the corporation’s chief executive officer (with guidance and assistance from the Company’s general counsel). Just as Delaware law does not require directors-to-be to comply with their fiduciary duties, ⁴⁷⁹ former directors owe no fiduciary duties, and after December 27, 1996, Ovitz could not breach a duty he no longer had.

Having found that Ovitz did not play a part in the decision to terminate himself, and that ordinary officers and directors of reasonable prudence in the same position would not have acted with more care, I conclude that Ovitz did not breach his fiduciary duty of loyalty in connection with his termination.

B. Defendants Did Not Commit Waste

Plaintiffs pursued a claim for waste at trial and argued in their briefs that they have proven this claim. ⁴⁸⁰ As stated above, the standard for waste is a very high one that is difficult to meet. ⁴⁸¹ Plaintiffs refer to Professor Murphy’s opinion that the OEA improperly incentivized Ovitz to leave the Company and receive an NFT, rather than complete the term of the OEA, to support their argument for waste. ⁴⁸² Of course, Professor Murphy’s opinion relies on the assumptions that either Ovitz would be able to procure for himself an NFT, or that Eisner had agreed to terminate him even before Ovitz was hired.

The record does not support these assertions in any conceivable way. Apart from his job performance, Ovitz was never in a position to determine if he would be terminated, and if so, whether it would be with or without cause. As it relates to job performance, I find it patently unreasonable to assume that Ovitz intended to perform just poorly enough to be fired quickly, but not so poorly that he could be terminated for cause. First, based upon my personal observations of Ovitz, he possesses such an ego, and enjoyed such a towering reputation before his employment at the Company, that he is not the type of person that would intentionally perform poorly. Ovitz did not build Hollywood’s premier talent agency by performing poorly. Second, nothing in the trial record indicates to me that Ovitz intended to bring anything less than his best efforts to the Company. Additionally, I have found and concluded above that Eisner believed Ovitz would be an excellent addition to the company throughout 1995, ⁴⁸³ a far cry from plaintiffs’ accusations of deciding to hire him for the purpose of firing him shortly thereafter with a spectacular severance payoff.

More importantly, however, I conclude that given his performance, Ovitz could not have been fired for cause under the OEA. Any early termination of his employment, therefore, had to be in the form of an NFT. In reaching this conclusion, I rely on the expert reports of both Feldman and Fox, whose factual assumptions are generally consonant with my factual findings above. Nevertheless, by applying the myriad of definitions for gross negligence and malfeasance discussed by Donohue, Feldman and Fox, I also independently conclude, based upon the facts as I have found them, that Ovitz did not commit gross negligence or malfeasance while serving as the Company’s President.

As a result, terminating Ovitz and paying the NFT did not constitute waste because he could not be terminated for cause and because many of the defendants gave credible testimony that the Company would be better off without Ovitz, ⁴⁸⁴ meaning that it would be impossible for me to conclude that the termination and receipt of NFT benefits resulted in “an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration,” ⁴⁸⁵ or a situation where the defendants have “irrationally squander[ed] or give[n] away corporate assets.” ⁴⁸⁶ In other words, defendants did not commit waste.

C. The Old Board’s Decision to Hire Ovitz and the Compensation Committee’s Approval of the OEA Was Not Grossly Negligent and Not in Bad Faith

The members of the “Old Board” (Eisner, Bollenbach, Litvack, Russell, Roy Disney, Gold, Nunis, Poitier, Stern, Walker, Watson, Wilson, Bowers, Lozano and Mitchell) were required to comply with their fiduciary duties on behalf of the Company’s shareholders while taking the actions that brought Ovitz to the Company. For the future, many lessons of what not to do can be learned from defendants’ conduct here. Nevertheless, I conclude that the only reasonable application of the law to the facts as I have found them, is that the defendants did not act in bad faith, and were at most ordinarily negligent, in connection with the hiring of Ovitz and the approval of the OEA. In accordance with the business judgment rule (because, as it turns out, business judgment was exercised), ordinary negligence is insufficient to constitute a violation of the fiduciary duty of care. I shall elaborate upon this conclusion as to each defendant.

1. Eisner

Eisner was clearly the person most heavily involved in bringing Ovitz to the Company and negotiating the OEA. He was a long-time friend of Ovitz and the instigator and mastermind behind the machinations that resulted in Ovitz’s hiring and the concomitant approval of the OEA. In that aspect, Eisner is the most culpable of the defendants. He was pulling the strings; he knew what was going on. On the other hand, at least as the duty of care is typically defined in the context of a business judgment (such as a decision to select and hire a corporate president), of all the defendants, he was certainly the most informed of all reasonably available material information, making him the least culpable in that regard. This dichotomy places the Court in a somewhat awkward position. By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz’s hiring in particular, Eisner to a large extent is responsible for the failings in process that infected and handicapped the board’s decisionmaking abilities. ⁴⁸⁷ Eisner stacked his (and I intentionally write “his” as opposed to “the Company’s”) board of directors with friends and other acquaintances who, though not necessarily beholden to him in a legal sense, were certainly more willing to accede to his wishes and support him unconditionally than truly independent directors. ⁴⁸⁸ On the other hand, I do not believe that the evidence, considered fairly, demonstrates that Eisner actively took steps to defeat or short-circuit a decisionmaking process that would otherwise have occurred.

Eisner had demonstrated a desire to bring Ovitz to the Company before mid-1995. His efforts to actually hire Ovitz became more intense in the summer of 1995, culminating in the signing of the OLA on August 14 of that year, together with the press release issued that same day. Eisner obtained no consent or authorization from the board before agreeing to hire Ovitz, before agreeing to the substantive terms of the OLA, or before issuing the press release. ⁴⁸⁹ Indeed, outside of his small circle of confidantes, it appears that Eisner made no effort to inform the board of his discussions with Ovitz until after they were essentially completed and an agreement in principle had been reached.

As a general rule, a CEO has no obligation to continuously inform the board of his actions as CEO, or to receive prior authorization for those actions. ⁴⁹⁰ Nevertheless, a reasonably prudent CEO (that is to say, a reasonably prudent CEO with a board willing to think for itself and assert itself against the CEO when necessary) would not have acted in as unilateral a manner as did Eisner when essentially committing the corporation to hire a second-in-command, appoint that person to the board, and provide him with one of the largest and richest employment contracts ever enjoyed by a non-CEO. I write, “essentially committing,” because although I conclude that legally, Ovitz’s hiring was not a “done deal” as of the August 14 OLA, ⁴⁹¹ it was clear to Eisner, Ovitz, and the directors who were informed, that as a practical matter, it certainly was a “done deal.” ⁴⁹²

After August 14, the record seems to indicate that Eisner’s role in Ovitz’s hiring lessened, as Russell continued the substantive negotiations with Ovitz while Santaniello worked on drafting the OEA. Eisner did not attend the portion of the compensation committee meeting on September 26 where Ovitz’s hiring and the key terms of the OEA were discussed and voted upon, ⁴⁹³ but he did lead the discussion in the full board meeting that same day with respect to Ovitz’s election as President of the Company. ⁴⁹⁴

Eisner’s involvement in the final stages of drafting and executing the OEA were minimal.

Because considerations of improper motive are no longer present in this case, ⁴⁹⁵ the decision to hire Ovitz and enter into the OEA is one of business judgment, to which the presumptions of the business judgment rule apply. In order to prevail, therefore, plaintiffs must demonstrate by a preponderance of the evidence that Eisner was either grossly negligent or acted in bad faith in connection with Ovitz’s hiring and the approval of the OEA.

As I mentioned earlier, Eisner was very much aware of what was going on as the situation developed. In the limited instances where he was not the primary source of information relating to Ovitz, Russell kept Eisner informed of negotiations with Ovitz. Eisner knew Ovitz; he was familiar with the career Ovitz had built at CAA and he knew that the Company was in need of a senior executive, especially in light of the upcoming CapCities/ABC merger. In light of this knowledge, I cannot find that plaintiffs have demonstrated by a preponderance of the evidence that Eisner failed to inform himself of all material information reasonably available or that he acted in a grossly negligent manner.

Notwithstanding the foregoing, Eisner’s actions in connection with Ovitz’s hiring should not serve as a model for fellow executives and fiduciaries to follow. His lapses were many. He failed to keep the board as informed as he should have. He stretched the outer boundaries of his authority as CEO by acting without specific board direction or involvement. He prematurely issued a press release that placed significant pressure on the board to accept Ovitz and approve his compensation package in accordance with the press release. To my mind, these actions fall far short of what shareholders expect and demand from those entrusted with a fiduciary position. Eisner’s failure to better involve the board in the process of Ovitz’s hiring, usurping that role for himself, although not in violation of law, ⁴⁹⁶ does not comport with how fiduciaries of Delaware corporations are expected to act.

Despite all of the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom, I nonetheless conclude, after carefully considering and weighing all the evidence, that Eisner’s actions were taken in good faith. That is, Eisner’s actions were taken with the subjective belief that those actions were in the best interests of the Company—he believed that his taking charge and acting swiftly and decisively to hire Ovitz would serve the best interests of the Company notwithstanding the high cost of Ovitz’s hiring and notwithstanding that two experienced executives who had arguably been passed over for the position (Litvack and Bollenbach) were not completely supportive. ⁴⁹⁷ Those actions do not represent a knowing violation of law or evidence a conscious and intentional disregard of duty. In conclusion, Eisner acted in good faith and did not breach his fiduciary duty of care because he was not grossly negligent.

2. Russell

Apart from Eisner, Russell, who was familiar with the Company’s compensation policies and practices from his service as chairman of the Company’s compensation committee, was the next most heavily involved director in hiring Ovitz, as he was the main negotiator on behalf of the Company. ⁴⁹⁸ Russell was also closely involved with Watson and Crystal in shaping and extensively analyzing Ovitz’s proposed compensation. ⁴⁹⁹ Russell spoke to Poitier on two occasions in mid-August 1995 to discuss the terms of Ovitz’s compensation, and he knew that Watson would speak with Lozano. ⁵⁰⁰ Additionally, on September 26, 1995, Russell led the discussion at the compensation committee meeting regarding the proposed terms for the OEA, and then reported on that meeting during the full board meeting shortly thereafter. ⁵⁰¹

The compensation committee’s charter indicates that the committee has the power to “establish the salaries” of the Company’s CEO and COO/President, together with benefits and incentive compensation, including stock options, for those same individuals. ⁵⁰² In addition to this power, the committee’s charter charges it with the duty to “approve employment contracts, or contracts at will,” for “all corporate officers who are members of the Board of Directors regardless of salary.” ⁵⁰³

Plaintiffs have argued that Russell exceeded the scope of his authority as chairman of the compensation committee by negotiating with Ovitz on behalf of the Company. ⁵⁰⁴ Although it is true that nothing in the compensation committee’s charter specifically grants authority to the committee to negotiate (as opposed to simply approve) employment contracts, there is no language in the charter that would indicate that the committee does not have this power. Indeed, the contrary appears to be the case. The charter distinguishes between “establish[ing]” salaries for the CEO and COO/President and “approv[ing]” salaries for those individuals, together with many others. ⁵⁰⁵

In negotiating with Ovitz, Russell became privy to a great deal of information with respect to Ovitz. Ovitz’s representatives relayed some of that information to Russell. General information about Ovitz also was common knowledge to those in the entertainment industry. Russell did not independently and objectively verify the representations made by Ovitz’s negotiators that his income from CAA was $20 to $25 million annually because Russell, based upon his pre-existing knowledge, believed that representation to be accurate. ⁵⁰⁶ Nonetheless, I conclude that Russell negotiated with Ovitz at arms’ length.

Would the better course of action have been for Russell to have objectively verified Ovitz’s income from CAA? Undoubtedly, yes. Would it have been better if Russell had more rigorously investigated Ovitz’s background in order to uncover his past troubles with the Department of Labor? ⁵⁰⁷ Yes. Would the better course of action have been for someone other than Eisner’s personal attorney to represent the Company in the negotiations with Ovitz? Again, yes. Have plaintiffs shown by a preponderance of the evidence that Russell’s actions on behalf of the

Company were grossly negligent (in that he failed to inform himself of all material information reasonably available in making decisions) or that he acted in bad faith? No. I conclude that Russell for the most part knew what he needed to know, did for the most part what he was required to do, and that he was doing the best he thought he could to advance the interests of the Company by facilitating a transaction that would provide a legitimate potential successor to Eisner and provide the Company with one of the entertainment industry’s most influential individuals.

3. Watson

Watson’s main role in Ovitz’s hiring and his election as President of the Company was helping Russell evaluate the financial ramifications of the OEA. ⁵⁰⁸ Watson is a past Chairman of the Company’s board, and served in that position when Eisner and Wells were hired in 1984. ⁵⁰⁹ Watson was familiar with Crystal, having worked with him on Eisner’s and Wells’ contracts in 1984 and again in 1989. ⁵¹⁰

Watson conducted extensive analyses of Ovitz’s proposed compensation package, sharing those analyses with Crystal and Russell at their meeting on August 10, and in their later discussions stemming from that meeting. ⁵¹¹ He was also involved in determining how to replace the proposed option guarantee with the extended exercisability of Ovitz’s options (together with other features). ⁵¹² He also spoke with Lozano (although the date is unclear) sometime before the September 26, 1995 compensation committee meeting in order to inform him somewhat of his and Russell’s analyses and discussions. ⁵¹³ Watson attended the September 26, 1995 compensation committee meeting and voted in favor of the resolution approving the terms of the OEA. ⁵¹⁴

Watson was familiar with making executive compensation decisions at the Company. Nothing in his conduct leads me to believe that he took an “ostrich-like” approach to considering and approving the OEA. Nothing in his conduct leads me to believe that Watson consciously and intentionally disregarded his duties to the Company. Nothing in his conduct leads me to believe that Watson had anything in mind other than the best interests of the Company when evaluating and consenting to Ovitz’s compensation package. Finally, nothing in his conduct leads me to believe that Watson failed to inform himself of all material information reasonably available before making these decisions. In short, I conclude that plaintiffs have not demonstrated by a preponderance of the evidence that Watson either breached his fiduciary duty of care or acted in anything other than good faith in connection with the hiring of Ovitz and the approval of the economic terms of the OEA.

4. Poitier and Lozano

Poitier and Lozano were the remaining members of the compensation committee that considered the economic terms of the OEA. It is not disputed that they were far less involved in the genesis of the OEA than were Russell, and to a lesser extent, Watson. The question in dispute is whether their level of involvement in the OEA was so low as to constitute gross negligence and, therefore, a breach of their fiduciary duty of care, or whether their actions evidence a lack of good faith. As will be shown, I conclude that neither of these men acted in a grossly negligent manner or in bad faith.

Poitier is a man celebrated for his work both within and outside the entertainment industry. ⁵¹⁵ Poitier was elected to the Company’s board of directors in 1994, and attended his first board meeting during January of 1995. ⁵¹⁶ Lozano was the publisher of the nation’s largest Spanish language daily newspaper, is the former chairman of the board of that entity, and also served as the United States’ ambassador to El Salvador. ⁵¹⁷ Lozano had a long tenure on the Company’s board of directors, serving from the early 1980s until 2001. ⁵¹⁸ Lozano also has experience on the compensation committees of other corporations. ⁵¹⁹

There is no question that Poitier and Lozano’s involvement in the process of Ovitz’s hiring came very late in the game. As found above, Poitier received a call from Russell on August 13 (and another the next day), during which they discussed the terms of the proposed OLA. ⁵²⁰ Lozano spoke with Watson regarding this same subject. It appears that neither Poitier nor Lozano had any further involvement with the hiring process, apart from these phone calls, until the September 26, 1995 compensation committee meeting.

At that meeting, both Poitier and Lozano received the term sheet that explained the key terms of Ovitz’s contract, and they were present for and participated in the discussion that occurred. Both then voted to approve the terms of the OEA, and both credibly testified that they believed they possessed sufficient information at that time to make an informed decision. ⁵²¹ Plaintiffs largely point to two perceived inadequacies in this meeting (and in Poitier and Lozano’s business judgment) ⁵²²—first, that insufficient time was spent reviewing the terms of Ovitz’s contract and, second, that Poitier and Lozano were not provided with sufficient documentation, including Crystal’s correspondence, Watson’s calculations, and a draft of the OEA. ⁵²³ These arguments understandably hearken back to Van Gorkom, where the Supreme Court condemned the Trans Union board for agreeing to a material transaction after a board meeting of about two hours and without so much as a term sheet of the transaction as contemplated. ⁵²⁴ Although the parallels between Van Gorkom and this case at first appear striking, a more careful consideration will reveal several important distinctions between the two.

First and foremost, the nature of the transaction in Van Gorkom is fundamentally different, and orders of magnitude more important, than the transaction at issue here. In Van Gorkom, the Trans Union board was called into a special meeting on less than a day’s notice, without notice of the reason for the meeting, to consider a merger agreement that would result in the sale of the entire company. ⁵²⁵ As footnoted above, ⁵²⁶ Delaware law, as a matter of statute, requires directors to take certain actions in connection with a merger of the corporation, as was being contemplated by Trans Union. ⁵²⁷ No statute required the Company’s board to take action in connection with Ovitz’s hiring. The Company’s governing documents provide that the officers of the corporation will be selected by the board of directors, ⁵²⁸ and the charter of the compensation committee states that the committee is responsible for establishing and approving the salary of the Company’s President. ⁵²⁹ That is exactly what happened. ⁵³⁰ The board meeting was not called on short notice, and the directors were well aware that Ovitz’s hiring would be discussed at the meeting as a result of the August 14 press release more than a month before. ⁵³¹ Furthermore, analyzing the transactions in terms of monetary value, and even accepting plaintiffs’ experts’ bloated valuations for comparison purposes, it is beyond question that the $734 million sale ⁵³² of Trans Union was material and significantly larger than the financial ramifications to the Company of Ovitz’s hiring. ⁵³³

Second, the Trans Union board met for about two hours to discuss and deliberate on this monumental transaction in the life of Trans Union. A precise amount of time for the length of the compensation committee meeting, and more specifically, the length of the discussion regarding the OEA, is difficult to establish. The minutes of the compensation committee’s meeting and the full board’s meeting indicate that the compensation committee meeting convened at 9:00 a.m., and that the full board’s meeting convened at 10:00 a.m., leaving no more than an hour for the compensation committee to meet. ⁵³⁴ Lozano, although he had little recollection of the meeting, believed that the compensation committee meeting ran long—until 10:30 a.m. ⁵³⁵ As I found above, the meeting lasted about an hour. Russell testified that the discussion of the OEA took about 25-30 minutes, ⁵³⁶ significantly more time than the brief discussion reflected in the minutes would seem to indicate. ⁵³⁷ Lozano believed that the committee spent “perhaps four times as much time on Mr. Ovitz’s contract than we did on Mr. Russell’s compensation.” ⁵³⁸

I am persuaded by Russell and Lozano’s recollection that the OEA was discussed for a not insignificant length of time. ⁵³⁹ Is that length of time markedly less than the attention given by the Trans Union board to the merger agreement they were statutorily charged with approving or rejecting? Yes. Is that difference probative on the issue of whether the compensation committee adequately discussed the OEA? Not in the least. When the Trans Union board met for those two hours, it was the very first time any of those directors had discussed a sale of the company. ⁵⁴⁰ Here, all the members of the committee were aware in advance that Ovitz’s hiring would be discussed, and the members of the committee had also previously had more than minimal informal discussions amongst themselves as to the bona fides of the OEA before the meeting ever occurred. Furthermore, as mentioned above, the nature and scope of the transactions are fundamentally different.

Third, the Trans Union board had absolutely no documentation before it when it considered the merger agreement. ⁵⁴¹ The board was completely reliant on the misleading and uninformed presentations given by Trans Union’s officers (Van Gorkom and Romans). ⁵⁴² In contrast, the compensation committee was provided with a term sheet of the key terms of the OEA and a presentation was made by Russell (assisted by Watson), who had personal knowledge of the relevant information by virtue of his negotiations with Ovitz and discussions with Crystal. Additionally, the testimony and documentary evidence support this conclusion. ⁵⁴³ It is true that the compensation committee did not review and discuss the then-existing draft of the full text of the OEA. This, however, is not required. ⁵⁴⁴ Nor is it necessary for an expert to make a formal presentation at the committee meeting in order for the board to rely on that expert’s analysis, although that certainly would have been the better course of action. ⁵⁴⁵

Furthermore, the Company’s compensation committee reasonably and wisely left the task of negotiating and drafting the actual text of the OEA in the hands of the Company’s counsel. ⁵⁴⁶

Fourth, Trans Union’s senior management completely opposed the merger. ⁵⁴⁷ In contrast, the Company’s senior management generally saw Ovitz’s hiring as a boon for the Company, notwithstanding Litvack and Bollenbach’s initial personal feelings. ⁵⁴⁸ In sum, although Poitier and Lozano did very little in connection with Ovitz’s hiring and the compensation committee’s approval of the OEA, they did not breach their fiduciary duties. I conclude that they were informed by Russell and Watson of all material information reasonably available, even though they were not privy to every conversation or document exchanged amongst Russell, Watson, Crystal and Ovitz’s representatives.

Much has been made throughout the various procedural iterations of this case about Crystal’s involvement (or lack thereof) in the compensation committee’s deliberations and decisionmaking. ⁵⁴⁹ Although there are many criticisms that could and have been made (including by Crystal himself) regarding Crystal’s failure to calculate ex ante the cost of a potential NFT, nothing in the record leads me to conclude that any member of the compensation committee had actual knowledge that would lead them to believe (as to Poitier and Lozano, their understanding of Crystal’s advice was based on information relayed by Russell and Watson) that Crystal’s analysis was inaccurate or incomplete. Without that knowledge, I conclude that the compensation committee acted in good faith and relied on Crystal in good faith, and that the fault for errors or omissions in Crystal’s analysis must be laid at his feet, and not upon the compensation committee.

The compensation committee reasonably believed that the analysis of the terms of the OEA was within Crystal’s professional or expert competence, and together with Russell and Watson’s professional competence in those same areas, the committee relied on the information, opinions, reports and statements made by Crystal, even if Crystal did not relay the information, opinions, reports and statements in person to the committee as a whole. Crystal’s analysis was not so deficient that the compensation committee would have reason to question it. ⁵⁵⁰ Furthermore, Crystal appears to have been selected with reasonable care, especially in light of his previous engagements with the Company in connection with past executive compensation contracts that were structurally, at least, similar to the OEA. For all these reasons, the compensation committee also is entitled to the protections of 8 Del. C. § 141(e) in relying upon Crystal.

Viewed objectively, the compensation committee was asked to make a decision knowing that: ⁵⁵¹ 1) Ovitz was a third party with whom Russell negotiated at arms’ length; ⁵⁵² 2) regardless of whether Ovitz truly was “the most powerful man in Hollywood,” he was a highly-regarded industry figure; ⁵⁵³ 3) Ovitz was widely believed to possess skills and experience that would be very valuable to the Company, especially in light of the CapCities/ABC acquisition, Wells’ death, and Eisner’s medical problems; ⁵⁵⁴ 4) in order to accept the Company’s presidency, Ovitz was leaving and giving up his very successful business, ⁵⁵⁵ which would lead a reasonable person to believe that he would likely be highly successful in similar pursuits elsewhere in the industry; ⁵⁵⁶ 5) the CEO and others in senior management were supporting the hiring; ⁵⁵⁷ and 6) the potential compensation was not economically material to the Company. ⁵⁵⁸

Poitier and Lozano did not intentionally disregard a duty to act, nor did they bury their heads in the sand knowing a decision had to be made. They acted in a manner that they believed was in the best interests of the corporation. Delaware law does not require (nor does it prohibit) directors to take as active a role as Russell and Watson took in connection with Ovitz’s hiring. There is no question that in comparison to those two, the actions of Poitier and Lozano may appear casual or uninformed, but I conclude that they did not breach their fiduciary duties and that they acted in good faith in connection with Ovitz’s hiring. ⁵⁵⁹

5. The Remaining Members of the Old Board ⁵⁶⁰

In accordance with the compensation committee’s charter, it was that committee’s responsibility to establish and approve Ovitz’s compensation arrangements. ⁵⁶¹ In accordance with the OLA and the Company’s certificate of incorporation, ⁵⁶² it was the full board’s responsibility to elect (or reject) Ovitz as President of the Company. ⁵⁶³ Plaintiffs’ argument that the full board had a duty and responsibility to independently analyze and approve the OEA is simply not supported by the record. As a result, the directors’ actions must be analyzed in the context of whether they properly exercised their business judgment and acted in accordance with their fiduciary duties when they elected Ovitz to the Company’s presidency.

The record gives adequate support to my conclusion that the directors, before voting, were informed of who Ovitz was, the reporting structure that Ovitz had agreed to and the key terms of the OEA. Again, plaintiffs have failed to meet their burden to demonstrate that the directors acted in a grossly negligent manner or that they failed to inform themselves of all material information reasonably available when making a decision. They did not intentionally shirk or ignore their duty, but acted in good faith, believing they were acting in the best interests of the Company.

Are there many aspects of Ovitz’s hiring that reflect the absence of ideal corporate governance? Certainly, and I hope that this case will serve to inform stockholders, directors and officers of how the Company’s fiduciaries underperformed. As I stated earlier, however, the standards used to measure the conduct of fiduciaries under Delaware law are not the same standards used in determining good corporate governance. For all the foregoing reasons, I conclude that none of the defendants breached their fiduciary duties or acted in anything other than good faith in connection with Ovitz’s hiring, the approval of the OEA, or his election to the Company’s presidency.

D. Eisner and Litvack Did Not Act in Bad Faith in Connection With Ovitz’s Termination, and the Remainder of the New Board Had No Duties in Connection Therewith

The New Board ⁵⁶⁴ was likewise charged with complying with their fiduciary duties in connection with any actions taken, or required to be taken, in connection with Ovitz’s termination. The key question here becomes whether the board was under a duty to act in connection with

Ovitz’s termination, because if the directors were under no duty to act, then they could not have acted in bad faith by not acting, nor would they have failed to inform themselves of all material information reasonably available before making a decision, because no decision was required to be made. Furthermore, the actions taken by the Company’s officers (namely Eisner and Litvack) in connection with Ovitz’s termination must be viewed through the lens of whether the board was under a duty to act. If the board was under no such duty, then the officers are justified in acting alone. If the board was under a duty to act and the officers improperly usurped that authority, the analysis would obviously be different.

1. The New Board Was Not Under a Duty to Act

Determining whether the New Board was required to discuss and approve Ovitz’s termination requires careful consideration of the Company’s governing instruments. The parties largely agree on the relevant language from the Company’s certificate of incorporation and bylaws, but as would be expected, they disagree as to the meaning of that language. ⁵⁶⁵ Article Tenth of the Company’s certificate of incorporation states:

The officers of the Corporation shall be chosen in such a manner, shall hold their offices for such terms and shall carry out such duties as are determined solely by the Board of Directors, subject to the right of the Board of Directors to remove any officer or officers at any time with or without cause. ⁵⁶⁶

The Company’s bylaws state at Article IV:

Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board of Directors (who must be a director), a President, a Secretary and a Treasurer.

….

Section 2. Election. The Board of Directors at its first meeting held after each Annual Meeting of stockholders shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time solely by the Board of Directors, which determination may be by resolution of the Board of Directors or in any bylaw provision duly adopted or approved by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the Board of Directors with or without cause. Any vacancy occurring in any office of the Corporation may be filled only by the Board of Directors.

Section 3. Chairman of the Board of Directors. The

Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation, shall preside at all meetings of the Board of Directors and of stockholders and shall, subject to the provisions of the Bylaws and the control of the Board of Directors, have general and active management, direction, and supervision over the business of the Corporation and over its officers. … He shall perform all duties incident to the office of chief executive and such other duties as from time to time may be assigned to him by the Board of Directors. He shall have the right to delegate any of his powers to any other officer or employee.

Section 4. President. The President shall report and be responsible to the Chairman of the Board. The President shall have such powers and perform such duties as from time to time may be assigned or delegated to him by the Board of Directors or are incident to the office [of] President. ⁵⁶⁷

Other relevant language comes from the board resolution that elected Ovitz as President, which states: “RESOLVED, that Michael S. Ovitz be, and hereby is, elected President of the Corporation, effective October 1, 1995, to serve in such capacity at the pleasure of this Board of Directors.” ⁵⁶⁸

Having considered these documents, I come to the following conclusions: 1) the board of directors has the sole power to elect the officers of the Company; 2) the board of directors has the sole power to determine the “duties” of the officers of the Company (either through board resolutions or bylaws); 3) the Chairman/CEO has “general and active management, direction, and supervision over the business of the Corporation and over its officers,” ⁵⁶⁹ and that such management, direction and supervision is subject to the control of the board of directors; 4) the Chairman/CEO has the power to manage, direct and supervise the lesser officers and employees of the Company; 5) the board has the right, but not the duty to remove the officers of the Company with or without cause, and that right is non-exclusive; and 6) because that right is non-exclusive, and because the Chairman/CEO is affirmatively charged with the management, direction and supervision of the officers of the Company, together with the powers and duties incident to the office of chief executive, the Chairman/CEO, subject to the control of the board of directors, ⁵⁷⁰ also possesses the right to remove the inferior officers and employees of the corporation. ⁵⁷¹

The New Board unanimously believed that Eisner, as Chairman and CEO, possessed the power to terminate Ovitz without board approval or intervention. ⁵⁷² Nonetheless, the board was informed of and supported Eisner’s decision. ⁵⁷³ The board’s simultaneous power to terminate Ovitz, reserved to the board by the certificate of incorporation, did not divest Eisner of the authority to do so, or vice-versa. ⁵⁷⁴ Eisner used that authority, and terminated Ovitz—a decision, coupled with the decision to honor the OEA, that resulted in the Company’s obligation to pay the NFT. ⁵⁷⁵ Because Eisner unilaterally terminated Ovitz, as was his right, ⁵⁷⁶ the New Board was not required to act in connection with Ovitz’s termination.

Therefore, the fact that no formal board action was taken with respect to Ovitz’s termination is of no import. This is true regardless of the fact that Ovitz received a large cash payment and the vesting of three million options in connection with his termination. ⁵⁷⁷ The board had delegated to the compensation committee ex ante the responsibility to establish and approve compensation for Eisner, Ovitz and other applicable Company executives and high-paid employees. ⁵⁷⁸ The approval of Ovitz’s compensation arrangements by the compensation committee on September 26, 1995 included approval for the termination provisions of the OEA, obviating any need to meet and approve the payment of the NFT upon Ovitz’s termination. ⁵⁷⁹ Because the board was under no duty to act, they did not violate their fiduciary duty of care, and they also individually acted in good faith. ⁵⁸⁰ For these reasons, the members of the New Board (other than Eisner and Litvack, who will be discussed individually below) did not breach their fiduciary duties and did not act in bad faith in connection with Ovitz’s termination and his receipt of the NFT benefits included in the OEA.

2. Litvack

Litvack, as an officer of the corporation and as its general counsel, consulted with, and gave advice to, Eisner, on two questions relevant to Ovitz’s termination. They are, first, whether Ovitz could or should have been terminated for cause and, second, whether a board meeting was required to ratify or effectuate Ovitz’s termination or the payment of his NFT benefits. For the reasons I have already stated, Litvack properly concluded that the Company did not have good cause under the OEA to terminate Ovitz. ⁵⁸¹ He also properly concluded that no board action was necessary in connection with the termination. ⁵⁸² Litvack was familiar with the relevant factual information and legal standards regarding these decisions. ⁵⁸³ Litvack made a determination in good faith that a formal opinion from outside counsel would not be helpful and that involving more people in the termination process increased the potential for news of the impending termination to leak out. ⁵⁸⁴

I do not intend to imply by these conclusions that Litvack was an infallible source of legal knowledge. Nevertheless, Litvack’s less astute moments as a legal counsel do not impugn his good faith or preparedness in reaching his conclusions with respect to whether Ovitz could have been terminated for cause and whether board action was necessary to effectuate Ovitz’s termination, as I have independently analyzed the record and conclude that Litvack’s decisions as to those questions were correct. First, Litvack’s silence at the December 10, 1996 EPPC meeting, when Russell informed the committee that Ovitz’s bonus was contractually required, was unquestionably curious, and some might even call it irresponsible. ⁵⁸⁵ His excuse that he did not want to embarrass Russell in front of the committee is, in a word, pathetic. Litvack should have exercised better judgment than to allow Russell to convince the committee that a $7.5 million bonus was contractually required. Luckily for Litvack, no harm was done because in the end Ovitz’s bonus was rescinded.

Second, Litvack’s (and Santaniello’s) conclusion regarding the potential conflict between the OEA and the terms of the 1990 Plan is certainly questionable, but reasonable in light of the circumstances and not the product of an uninformed decision or bad faith. ⁵⁸⁶ The language in the 1990 Plan is sufficiently ambiguous—as to whether action by the compensation committee is required in all terminations (both with and without cause) of employees who possess options—to, in my opinion, absolve Litvack and Santaniello for their advice, and the compensation committee for not acting with respect to Ovitz’s termination. ⁵⁸⁷

In conclusion, Litvack gave the proper advice and came to the proper conclusions when it was necessary. He was adequately informed in his decisions, and he acted in good faith for what he believed were the best interests of the Company.

3. Eisner

Having concluded that Eisner alone possessed the authority to terminate Ovitz and grant him the NFT, I turn to whether Eisner acted in accordance with his fiduciary duties and in good faith when he terminated

Ovitz. ⁵⁸⁸ As will be shown hereafter, I conclude that Eisner did not breach his fiduciary duties and did act in good faith in connection with Ovitz’s termination and concomitant receipt of the NFT.

When Eisner hired Ovitz in 1995, he did so with an eye to preparing the Company for the challenges that lay ahead, especially in light of the CapCities/ABC acquisition and the need for a legitimate potential successor to Eisner. To everyone’s regret, including Ovitz, ⁵⁸⁹ things did not work out as blissfully as anticipated. Eisner was unable to work well with Ovitz, and Eisner refused to let Ovitz work without close and constant supervision. Faced with that situation, Eisner essentially had three options: 1) keep Ovitz as President and continue trying to make things work; 2) keep Ovitz at Disney, but in a role other than President; or 3) terminate Ovitz.

In deciding which route to take, Eisner, consistent with his discretion as CEO, considered keeping Ovitz as the Company’s President an unacceptable solution. Shunting Ovitz to a different role within the

Company would have almost certainly entitled Ovitz to the NFT, or at the very least, a costly lawsuit to determine whether Ovitz was so entitled. ⁵⁹⁰ Eisner would have also rightly questioned whether there was another position within the Company where Ovitz could be of use. Eisner was then left with the only alternative he considered feasible—termination. Faced with the knowledge that termination was the best alternative and knowing that Ovitz had not performed to the high expectations placed upon him when he was hired, Eisner inquired of Litvack on several occasions as to whether a for-cause termination was possible such that the NFT payment could be avoided, and then relied in good faith on the opinion of the Company’s general counsel. ⁵⁹¹ Eisner also considered the novel alternative of whether a “trade” of Ovitz to Sony would solve the problem by both getting rid of Ovitz and simultaneously relieving the Company of the financial obligations of the OEA. In the end, however, he bit the bullet and decided that the best decision would be to terminate Ovitz and pay the NFT.

After reflection on the more than ample record in this case, I conclude that Eisner’s actions in connection with the termination are, for the most part, consistent with what is expected of a faithful fiduciary. Eisner unexpectedly found himself confronted with a situation that did not have an easy solution. He weighed the alternatives, received advice from counsel and then exercised his business judgment in the manner he thought best for the corporation. Eisner knew all the material information reasonably available when making the decision, he did not neglect an affirmative duty to act (or fail to cause the board to act) and he acted in what he believed were the best interests of the Company, taking into account the cost to the Company of the decision and the potential alternatives. Eisner was not personally interested in the transaction in any way that would make him incapable of exercising business judgment, and I conclude that plaintiffs have not demonstrated by a preponderance of the evidence that Eisner breached his fiduciary duties or acted in bad faith in connection with Ovitz’s termination and receipt of the NFT.

IV. CONCLUSION

Based on the findings of fact and conclusions of law made herein, judgment is hereby entered in favor of the defendants on all counts.

ORDER

For the reasons set forth in the Court’s Opinion of this date, judgment is hereby entered in the above captioned action against plaintiffs and in favor of defendants on all counts. The parties shall bear their own costs.

IT IS SO ORDERED.

s/ William B. Chandler III

Chancellor

Dated: August 9, 2005

Footnotes