Brehm v. Eisner

Disney’s compensation committee (Defendant) approved an employment agreement for Ovitz to serve as Disney’s president. This Ovitz Employment Agreement (OEA) contained No Fault Termination (NFT) terms that provided, inter alia, that in the event of a non-fault termination, Ovitz would receive: (1) the present value of his salary ($1 million per year) for the balance of the contract term, (2) the present value of his annual bonus payments (computed at $7.5 million) for the balance of the contract term, (3) a $10 million fee for termination, and (4) the acceleration of his options for 3 million shares, which would immediately become exercisable at market price. In approving OEA with the NTF terms, the committee (Defendant) met two times. At he first meeting, the directors (Defendant) on the committee considered a “term sheet” that summarized all the OEA’s material terms. The committee members (Defendant) were informed that the value of the option component of the severance package could reach the $92 million order of magnitude if they terminated Ovitz without cause after one year. Their sources of information were the value of benchmark options granted to Disney employees previously, valuations of the proposed Ovitz options that were explained to them, and the amount of downside protection Ovitz was demanding to leave a job that would have paid him between $150 million and $200 million in commissions over five years. This meant that if Ovitz was terminated without cause, the earlier in the contract term the termination occurred the larger the severance amount would be to replace the lost commissions. Ovitz was terminated without cause after about a year, and he was paid the severance package provided by the OEA. Disney shareholders (Plaintiff) brought suit claiming that the compensation committee members (Defendant) had breached their duty of care by failing to properly inform themselves of material facts and hence were grossly negligent in approving the NFT provisions; that the compensation committee (Defendant) and the remaining Disney directors (Defendant) had beached their duty of care when they approved the hiring of O; and that even if the approval of the OEA was protected by the business judgment rule, the payment of the severance constituted corporate waste. The Chancery Court rendered judgment for the directors (Defendant) on all claims, finding that even though the committee’s (Defendant) decision-making process did not nearly measure up to corporate governance “best practices,” the committee members (Defendant) breached no duty of care when they considered and approved the NFT terms of the OEA; that the business judgment rule presumptions protected the decisions of the compensation committee (Defendant) and the remaining directors (Defendant), not only because they had acted with due care but also because they had not acted in bad faith; and that the record did not support the claim that the NFT provisions of the OEA were wasteful because they incentivized Ovitz to perform poorly in order to receive payment of the NFT provisions. The state’s highest court granted review.