## Facts

- Disney stockholders brought a derivative action challenging the board’s approval of Michael D. Eisner’s hiring of Michael S. Ovitz as Disney’s President in 1995 and the later decision that led to Ovitz’s large severance.
- Ovitz’s employment agreement included a “non-fault termination” (NFT) provision that could trigger substantial payments and accelerated equity vesting if he was terminated without cause after a specified period.
- The compensation committee and board approved the employment arrangement; plaintiffs alleged the approval process was hurried and insufficiently informed.
- After roughly 14 months, Ovitz’s relationship with Disney deteriorated and he was terminated on a non-fault basis rather than “for cause.”
- Ovitz received severance valued at approximately $130–$140 million under the NFT terms.
- Plaintiffs alleged breaches of fiduciary duty of care and loyalty (through bad faith) and claimed the severance constituted corporate waste.
- After trial, the Court of Chancery entered judgment for all defendants; the Delaware Supreme Court affirmed.

## Issues

1. Whether Disney’s directors breached the duty of care in approving Ovitz’s employment agreement and in permitting an NFT termination rather than a for-cause termination.
2. Whether the directors and officers acted in bad faith—i.e., with intentional dereliction of duty or conscious disregard of responsibilities—such that business judgment deference and DGCL § 102(b)(7) exculpation would not apply.
3. Whether the NFT severance payment constituted corporate waste under Delaware’s “no rational business purpose/adequate consideration” standard.

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s post-trial judgment for all defendants.
- The Court held the directors did not breach the duty of care in approving the employment agreement or in the termination-related decisions.
- The Court upheld the finding that plaintiffs failed to prove bad faith; imperfect process did not equal intentional dereliction or conscious disregard.
- The Court agreed the severance did not constitute corporate waste because it arose from an ex ante negotiated contract and fell within a rational range of business judgment.

## Legal Principles

- Business judgment rule protects board decisions if made on an informed basis, in good faith, and without disabling conflicts; courts do not second-guess the substance of executive compensation decisions absent actionable fiduciary misconduct.
- Duty-of-care liability requires at least gross negligence; process flaws that fall short of gross negligence do not overcome business judgment deference.
- “Bad faith” requires a showing of intentional dereliction of duty or conscious disregard for responsibilities; highly negligent decision-making, without the required state of mind, is not bad faith.
- DGCL § 102(b)(7) can exculpate directors from monetary liability for duty-of-care violations, but not for loyalty breaches, bad faith, intentional misconduct, or knowing legal violations; plaintiffs must prove non-exculpable conduct to obtain monetary relief.
- Corporate waste is an extreme standard, satisfied only when no person of ordinary, sound business judgment could view the transaction as providing adequate consideration or a rational corporate purpose; negotiated severance terms with plausible rationale generally defeat waste claims.

## Conclusion

The Delaware Supreme Court held that Disney’s board’s handling of Ovitz’s hiring and NFT termination, though criticized as suboptimal, did not amount to gross negligence, bad faith, or waste, and therefore remained protected by the business judgment rule and Disney’s § 102(b)(7) exculpatory provision.


In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006)