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The Disney Case: Sharpening Up a Premise



In June 2006 the Supreme Court of the State of Delaware handed down a decision on the duties that members of a board of directors owe to the stockholders. Because of the high-profile boardroom fighting behind the decision, and of course the famous name of the company, this decision is better known than are many equally-important corporate and securities law decisions: Yet In re Walt Disney Co. Derivative Litigation has a good deal of significance even aside from all that.

A major New York corporate-law firm, Wachtell Lipton, recently mailed its various corporate clients a "Compensation Committee Guide," explaining how they can determine the salaries, perqs, etc., of their Big Shot executives with minimal litigation blowback. It intrigues me that in a 2013 pamphlet prepared for this purpose, a 7-year-old Disney case, something that happened before the great financial crisis, before Dodd-Frank, before the recent say-on-pay litigation, still has to be given and is given a good deal of expository space.

Shareholders sued the board on the grounds that it had violated the duty of loyalty in approving a $140 million employment and termination package for company President Michael Ovitz. The defendants lost an early effort to get the complaint dismissed, and had to contest the facts, but eventually they prevailed.

After the directors/defendants victory, the plaintiffs appealed on a number of grounds. They alleged, for example, that as a matter of law the Disney defendants shouldn't have had the benefit of the "business judgment rule" at trial, and that the Court of Chancery committed reversible error by allowing them the extent of business discretion that rule suggests.

The state Supreme Court said that, sorry, but the business judgment rule did apply and the Court of Chancery was right.   The significance of the decision, then, is that the court expounded on this rule and its consequences more than it usually does.

The lesson for today?: When we take something for granted, we're allowed to be vague about it. In the face of a challenge to our premises, we have to sharpen them up.

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