WILMINGTON, Del. - Walt Disney Co. directors, including Chief Executive Officer Michael Eisner, properly oversaw the ouster of former President Michael Ovitz after his 14 months on the job and don't have to reimburse the company for his $140 million severance package, a Delaware Chancery Court judge ruled yesterday.
Chancellor William Chandler III said that while the directors' conduct "fell significantly short of the best practices of ideal corporate governance," board members did not violate their duties or waste Disney resources.
"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," Chandler wrote.
Although the ruling was a victory for Disney and helps clear the decks as Chief Operating Officer Robert Iger prepares to take over as chief executive on Oct. 1, it was less than flattering to Eisner.
Chandler, who in essence is the court's chief judge, chided Eisner - who leaves as CEO next month - for not adequately involving the board in business matters and having "enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom."
"His lapses were many. He failed to keep the board as informed as he should have," the judge wrote. "He stretched the outer boundaries of his authority as CEO by acting without specific board direction or involvement."
The decision caps an eight-year-old shareholder lawsuit that, at trial, revealed the stormy inner workings of one of the world's largest entertainment companies.
Testimony included details of Ovitz's lavish spending and the enmity he engendered among fellow Disney executives, including Eisner, who described Ovitz in memos as a "psychopath" with a "character problem."
Ovitz contended that he loved Eisner "like a brother," but was micromanaged, undermined by other key executives and "cut out like cancer" before he had time to prove his worth.
Eisner and the company contended that Ovitz wasted money, alienated executives with his arrogance and could not be trusted.
"It would be unfortunate for shareholders and employees of public companies if this decision is read by corporate managers as a license to act in disregard of their duties to engage in the deliberate processes required by fiduciaries," said Melvyn Weiss, a partner with Milberg Weiss Bershad & Schulman.
Ovitz's attorney, Mark Epstein, said that his client was "extremely pleased" and that he is confident the decision will be upheld on appeal.
Last year, Chandler granted Ovitz summary judgment on the shareholders' claim that he violated his fiduciary duties in negotiating the terms of his contract, noting that he was not yet a fiduciary of Disney at the time. However, the judge said there were "genuine issues of material fact" to be resolved regarding Ovitz's no-fault termination.
Lawyers for the shareholders alleged that Ovitz's performance was so poor that he should have been fired for cause and not paid the remainder of his contract. The defendants, including Eisner and Ovitz, said that Ovitz's contract was given careful consideration and that while Ovitz's tenure was stormy from the start, there was no gross negligence or malfeasance that would justify denying him his severance package.
Sanford Litvack, Disney's former chief of corporate operations and chief legal officer, testified that Ovitz's "total failure" as president didn't mean he could be fired for cause.
Litvack said that after Eisner told him he planned to fire Ovitz, he discussed the matter with in-house lawyers and outside counsel, and they agreed Ovitz couldn't be fired for cause.
Eisner said he passed Litvack's legal advice to Disney's nonmanagement directors during an unscheduled executive session after the company's November 1996 board meeting, as Ovitz lingered outside the conference room. The directors didn't adopt any official resolution regarding Ovitz at the executive session, and the full board never adopted a resolution granting Ovitz a no-fault termination before he was fired, Eisner said.
Chandler agreed with Litvack's conclusion that even though Ovitz received a large cash payment and the vesting of 3 million stock options, no formal action by the board was needed because Ovitz reported to the CEO.
Coincidentally, the ruling came on the same day that Disney reported a strong 41 percent increase in second-quarter profit, to $851 million for the period that ended July 2. But the company posted a disappointing 3.3 percent rise in overall revenue to $7.7 billion.
Profit jumped 48 percent to $998 million at the unit that includes the ABC network, thanks to hits such as Desperate Housewives and Lost, and the ESPN cable channel, helping offset a $34 million loss - the first in four years - at the company's movie studios as home-video and DVD sales were disappointing for films, including The Incredibles.
Weaker-than-expected DVD sales have rocked the industry this year. Iger told analysts in a conference call yesterday that DVDs need to be release quicker after movie-theater debuts and possibly even around the time of a theatrical release.
The Associated Press, Bloomberg News and Newsday, a Tribune Publishing newspaper, contributed to this article.