Suit vs. Disney still alive

Complaint claims board breached duty to stockholders

The long-running shareholder lawsuit against Disney over its compensation package to Michael Ovitz survived a motion to dismiss late last week in a Delaware courthouse.

Suit, mounted by well-known plaintiffs’ firm Milberg, Weiss, Bershad, Hynes & Lerach, charges that the Disney board breached its fiduciary duty to stockholders. According to the suit, the board blindly approved Ovitz’s employment agreement and, when things didn’t work out, ignored Disney CEO Michael Eisner’s efforts to work out the termination agreement.

Disney spokesman John Spelich commented, “This procedural decision simply says plaintiffs get a chance to prove what they asserted, not that what they’ve asserted is true. All the defendants continue to contest the merits of their claims.”

In allowing the case to go forward, Delaware Chancery Court judge William Chandler II reviewed some of the most attention-getting allegations, including the fact that Ovitz received $140 million after departing as Disney’s president after little more than a year. The suit claims that Eisner unilaterally decided to hire Ovitz in 1995 after Frank Wells was killed and Jeffrey Katzenberg left the company. He did so over the objection of three board members. The compensation committee was not told that the stock options being contemplated for Ovitz were far greater than usual and it was not provided with a draft of the employment agreement. The board approved the Ovitz hire with little or no discussion, according to the minutes.

It was quickly obvious that hiring Ovitz was a mistake, and Eisner started to work on putting the best spin on his departure so neither of them would be embarrassed. They decide to treat it as a no-fault termination under his employment contract. As a result, Ovitz collected $38.8 million and his options to 3 million shares of Disney stock vested. According to the complaint, there is no record that the board questioned Ovitz’s no-fault termination and the resulting payout.