Judge rules Ovitz dough was no crime

Michael Eisner and George Mitchell don’t have to pay a dime.

A Delaware judge handed Walt Disney’s board, and corporate America, a resounding victory Tuesday, ruling that directors including CEO Eisner and chairman Mitchell don’t have to reimburse the Mouse for a $140 million severance payout to Michael Ovitz.

Judge William B. Chandler’s 180-page decision is particularly sympathetic to former Disney prexy Ovitz. It concludes that Ovitz, Eisner and Disney directors all acted in good faith in his hiring and firing, and that the plaintiffs failed by every measure to show otherwise.

But he delivered Eisner a healthy slap on the wrist, noting that the outgoing CEO’s performance in l’affaire Ovitz “should not serve as a model for fellow executives.”

“By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz’s hiring in particular, Eisner, to a large extent, is responsible for the failings in a process that infected and handicapped the board’s decisionmaking abilities. Eisner stacked his (and I intentionally write ‘his’ as opposed to ‘the company’s’) board of directors with friends and other acquaintances who, though not necessarily beholden to him in a legal sense, were certainly more willing to accede to his wishes and support him unconditionally than truly independent directors.

“A CEO doesn’t have an obligation to continuously inform the board of his actions (but) a reasonably prudent CEO … would not have acted in as unilateral a manner as did Eisner when essentially committing the corporation to hire a second in command, appoint that person to the board and provide him with one of the largest and richest employment contracts ever enjoyed by a non-CEO.”

Chandler said the opinion, which reads like a treatise on the current state and future of corporate boardrooms, is explicitly intended as a guideline for Disney and other major corporations.

He noted that Ovitz was hired and fired a decade ago, and said it would be unfair to apply “21st century notions of best practices” in a post-Enron and WorldCom era to Disney’s then-board.

Good-faith dictum

Chandler championed the argument of U.S. business that holding directors and execs legally liable for good-faith decisions, even if unsuccessful in hindsight, would cripple corporate creativity and energy.

Delaware Chancery Court is a specialized business court.

“It is easy, of course, to fault a decision that ends in a failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk — the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known,” he wrote.

Like a book

Chandler’s opinion reads like a book, complete with chapters, like “Ovitz Seriously Considers Joining the Walt Disney Company,” “Veracity and Agenting” and “The Illusion Dispelled.”

Chandler describes Ovitz’s clash of culture with Eisner and the Walt Disney gang, dismissing out of hand, and point by point, plaintiffs’ claims of Ovitz’s incompetence and dishonesty.

Plaintiffs had argued that Ovitz could have been fired for cause without any payout.

Tried his best

“Based on my personal observations of Ovitz, he possesses such an ego, and enjoyed such a towering reputation before his employment at (Disney), that his is not the type of person that would intentionally perform poorly.

“Nothing in the trial record indicates to me that Ovitz intended to bring anything less than his best efforts to the company.”

Ovitz attorney James Ellis told Daily Variety, “We’re awfully happy with the chancellor’s factual findings as to Mr. Ovitz. The chancellor went through the various allegations and found all of them to be without merit. All the talk about the veracity issue has no facts to back it up. No one could identify a lie the guy told.”

Ellis pointed to sections of Chandler’s opinion citing Ovitz’s contributions to Disney such as recruiting Geraldine Laybourne, retaining animators that Jeffrey Katzenberg was trying to recruit for DreamWorks and keeping Tim Allen from walking off the set of “Home Improvement.”

‘Sell side’

“Ovitz was attempting to use his knowledge and experience, which (by virtue of his experience on the ‘sell side’ as opposed to the ‘buy side’ of the entertainment industry) was fundamentally different from Eisner’s, (CEO-elect Bob) Iger’s and (former studio chief Joe) Roth’s to benefit the company. But different does not mean wrong. Total agreement within an organization is often a far greater threat than diversity of opinion,” wrote Chandler.

“Unfortunately, the philosophical divide between Eisner and Ovitz was greater than both believed and, as two proud and stubborn individuals, neither of them was willing to consider the possibility that their point of view might be incorrect, leading to their inevitable falling out.”

Chandler said he’s convinced Eisner and then-general counsel Sandy Litvack fully explored the possibility of firing Ovitz for cause, given their tremendous professional and personal animus toward the former uber-agent at the time he was let go.

In a statement, Eisner’s jubilant attorney Gary Naftalis said: “Mr. Eisner is very pleased that the court, after hearing all the testimony and seeing the witnesses, has found that he and other directors properly carried out their fiduciary duties to the shareholders. We always believed there was no basis for this case.”

“Hiring the wrong guy is not against the law,” he told Daily Variety.

Appeal pending

Melvyn Weiss, a senior partner at Milberg Weiss Bershad & Schulman, which represented the plaintiffs, said, “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.” The firm said it intends to appeal.

“The decision is a wake-up call,” said Charles Elson of the Weinberg Center for Corporate Governance at the U. of Delaware business school. “The bottom line is there’s no liability, but Chandler doesn’t suggest that what happened is something anyone should feel happy about.”

Nell Minow, the editor of the Corporate Library, an independent research firm specializing in corporate governance, said the ruling was appropriate. “America would have ground to a halt if the decision had gone the other way.”

The suit dates back to 1997, shortly after Ovitz’s exit as Disney president. Shareholders claimed Disney’s board of directors was grossly negligent in allowing Eisner to hire Ovitz, then boot him with a severance package worth $140 million.

Dismissed at first

Chandler dismissed the case in 1998, ruling that the board had not violated its duty of due care.

But on appeal, the Delaware Supreme Court in 2000 noted the “casual, if not sloppy and perfunctory” actions of the Disney board and gave the plaintiffs another chance to file.

Chandler refused to dismiss the complaint the second time around. In a decision that sent chills through corporate boardrooms, he wrote that if the facts alleged prove to be true, they indicate that the board “failed to exercise any business judgment and failed to make any good-faith attempt to fulfill their fiduciary duties to Disney and its shareholders.”

Odd alliances

The litigation made for strange bedfellows.

Eisner and former board members Roy Disney and Stanley Gold briefly put aside their sniping to present a united front at trial. Eisner and Ovitz were forced into a truce of sorts.

The riveting testimony of the two Mikes plus a flood of embarrassing documents kept attention focused on a tiny courtroom in Georgetown, Del., for nearly three months and 24 witnesses.

Ovitz on the stand

Ovitz, during five weirdly emotional days on the stand, relived what he called his betrayal by Eisner and the resistance to his presence by Eisner’s lieutenants. He recounted how then-chief financial officer Steven Bollenbach and Litvack defied him from day one, announcing at a gathering at Eisner’s house that they wouldn’t report to him, and that Eisner didn’t back him. Stunned, he decided to go through with the deal because he already had made plans to sell his interest in CAA.

He told the court that he’d been waiting for years for the trial and the opportunity to defend his record and salvage a reputation irreparably damaged by the fiasco.

“I live with this every day, and it’s not going to go away,” he said. “I have been looking forward to this trial since the day I got fired.”

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