## Facts

- The Walt Disney Company hired Michael Ovitz as President in 1995 under a five-year employment agreement that included a non-fault termination severance provision.
- In December 1996, after roughly fourteen months, Ovitz’s employment was terminated “without cause,” triggering severance benefits valued at approximately $130–140 million.
- Disney shareholders filed derivative actions alleging that directors and officers breached fiduciary duties in approving Ovitz’s employment agreement and later allowing the non-fault termination payout, and that the payout constituted corporate waste.
- After extensive pretrial proceedings, the Court of Chancery held a 37-day trial and entered judgment for all defendants, finding no breach of fiduciary duty and no waste.
- The shareholders appealed from the post-trial judgment to the Delaware Supreme Court.

## Issues

1. Whether Ovitz breached fiduciary duties as an officer by negotiating and accepting the non-fault termination provisions and by receiving the resulting severance payment.
2. Whether Disney’s directors and compensation committee breached fiduciary duties of care or loyalty (including good faith) in approving Ovitz’s employment agreement and in connection with his non-fault termination and severance.
3. Whether the severance payment constituted corporate waste.
4. Whether the CEO had authority to effect Ovitz’s termination without additional board action, and whether the board’s level of approval and oversight was legally sufficient.
5. How DGCL § 102(b)(7) director exculpation interacts with claims framed as lack of due care versus bad faith.

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s judgment for all defendants.
- Ovitz did not breach fiduciary duties by negotiating his employment agreement or by accepting severance payable under a valid, board-approved contract.
- The directors and compensation committee did not breach the duty of care; their conduct, though imperfect, did not amount to gross negligence.
- The directors did not act in bad faith; the record did not show intentional dereliction of duty or conscious disregard of responsibilities.
- The severance payment did not constitute corporate waste because a rational business purpose supported the compensation arrangement.
- The Court upheld findings that the CEO acted within delegated authority and that the board’s involvement and ratification were sufficient under Disney’s governance practices.
- DGCL § 102(b)(7) reinforced the absence of monetary liability because plaintiffs failed to prove non-exculpated misconduct (such as bad faith or disloyalty).

## Legal Principles

- Appellate courts defer to the trial court’s factual findings and credibility determinations unless clearly erroneous.
- The duty of care is violated only by grossly negligent decision-making; Delaware law does not require ideal corporate governance practices to avoid liability.
- “Good faith” is treated as part of the duty of loyalty; bad faith requires more than poor process, such as intentional dereliction of duty or conscious disregard.
- Acceptance of benefits under a valid, board-approved contract, without additional wrongful conduct, does not by itself establish an officer’s fiduciary breach.
- Corporate waste requires an exchange so one-sided that no person of ordinary, sound judgment could view the corporation as receiving adequate consideration; a rational business purpose defeats a waste claim even if the outcome later appears imprudent.
- DGCL § 102(b)(7) permits charter provisions exculpating directors from monetary liability for duty of care violations but not for bad faith, disloyalty, or other non-exculpated conduct; plaintiffs must prove non-exculpated wrongdoing to obtain damages.

## Conclusion

The Delaware Supreme Court held that Disney’s handling of Ovitz’s employment agreement and non-fault termination, while reflecting flawed process, remained within the business judgment rule and did not constitute gross negligence, bad faith, or corporate waste; accordingly, it affirmed judgment for the defendants and confirmed the high evidentiary burden for imposing liability for executive compensation decisions absent non-exculpated misconduct.


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