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After the trial: a free-for-all?

Shareholder victory would provoke board infighting

The trial isn’t over, even though the two Mikes have testified and left the stand.

But what may happen in the wake of the trial is even more intriguing than their courtroom revelations.

If the shareholders win their suit against the Disney board members who approved the hiring and firing of Michael Ovitz as Mouse House president, a legal free-for-all could be in the offing.

It would then be just a matter of time until Eisner and Ovitz turn against each other.

Eisner, Ovitz and Eisner’s enemies, Roy Disney and Stanley Gold, have been forced into the same camp because they have to defend the hiring and firing of Ovitz as a proper exercise of business judgment to avoid being held personally liable for the judgment.

But if Chancery Court Judge William Chandler issues an opinion in favor of the plaintiffs, the board members are jointly responsible for an amount that could exceed $200 million.

At that point, none of the defendants — including Sidney Poitier, Disney or Gold — are on the same side.

“Eisner v. Ovitz” could be the next big Hollywood lawsuit. Ditto “Roy Disney v. Eisner.”

‘Contribution suits’

In brief, these erstwhile strange bedfellows could wake up and decide to sue each other by means of so-called contribution suits.

These are a staple of auto accident suits and other forms of tort litigation in which the defendants need to assign degrees of blame. It’s never happened before in a corporate setting, UCLA law professor Lynn Stout told Daily Variety, so no one knows how these cases would spin out.

In this case, there’s also the question of ability to pay.

The entire judgment would be just a drop in the bucket for Roy Disney, a little more than that for Eisner, a substantial amount for Ovitz and a bankrupting amount for low-profile board members like Reveta Bowers. Latter is the head of a prestigious elementary school in Los Angeles where Eisner sent his kids. (Board member is a good gig until you’re staring at a $200 million judgment.)

Insurance would not necessarily cover the judgment.

Steve Shappell, director of insurance conglom Aon’s Financial Services Group, said there are two big exclusions in directors & officers liability insurance. The policy doesn’t cover deliberate fraud, but there is no sign the trial is going in that direction.

Even if Chandler finds the board was more than negligent, perhaps grossly negligent, Shappell explained, D&O insurance should cover it.

More litigation looms

But, cautioned Stout, “If the plaintiffs prevail, I will give you long odds that there will be litigation over whether insurance will pay.”

The other exclusion is receiving an unfair advantage, said Shappell, whose company helped arrange Disney’s insurance coverage by a group of companies, including American Intl. That category only applies to Ovitz because he’s the only one who benefited.

The insurer has a number of excuses for denying coverage.

When the remedy is disgorgement or returning the money, as in this case, the insurer can decide it’s not a loss and not cover it. The insurer can also refuse to pay on the ground that coverage is against public policy.

There’s even a scenario in which Ovitz would have to pay all.

The former uber-agent is clearly in a different position from the rest of the board because he got the money.

Chandler could simply find in favor of the plaintiffs and let the board members sort out their degrees of liability. But he also has the discretion to apportion blame.

The judge could find that most of the responsibility lies with Ovitz, or Eisner, or the compensation committee.

An opinion that places most of the blame on Ovitz, coupled with the fact that the former Disney prexy received the benefit, could lead the insurer to sever Ovitz’s coverage and still cover the rest of the board members. If Ovitz gets stuck with some, most or all of the judgment, expect years of litigation.

A more likely problem is that insurance won’t cover the entire judgment, which could exceed $200 million with interest, attorneys’ fees and the costs of defense. Shappell declined to say what the policy limit is in this case but said that for a company Disney’s size, policy limits run the gamut from $15 million to $300 million. Stout said $100 million is typical.

But are the plaintiffs really likely to win?

Most pundits say the shareholders have a tough hill to climb but a possible trail has been blazed.

Consider this: Chandler shook up boardrooms two years ago when he refused to dismiss the complaint brought on behalf of Disney shareholders, claiming it was corporate waste to give Ovitz a $140 million severance package.

New corporate rules

Until then, board members could be confident that as long as they didn’t engage in fraud, they were free of liability. But in a post-Enron world, that won’t necessarily fly.

In allowing the case to go forward, Chandler said the conduct alleged by the board was so lax that it could be considered reckless or in conscious disregard of the welfare of the corporation and therefore not protected by the business judgment rule.

Working against the plaintiffs, Stout pointed out, is that judges know that anyone on the board faces a catastrophic downside far out of proportion to the benefits of serving.

“Disney has been held out as the poster child for poor corporate governance,” Stout said. “So the court has to be sensitive to the fact that any rule they impose will apply not only to Disney but to 10,000 other companies that don’t have these corporate governance problems.”

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