The trial of a lawsuit by Walt Disney Co. shareholders who accuse the board of directors of rubberstamping a deal to hire Michael Ovitz in 1995 and then giving him $140 million in severance pay will open on Wednesday, putting a spotlight on standards for corporate responsibility.
Disney Chief Executive Michael Eisner engineered the deal to hire his friend Ovitz, one of Hollywood’s most powerful talent agents and co-founder of Creative Artists Agency, as president. The class-action lawsuit, which seeks $200 million from Ovitz and the board, claims Ovitz should have been fired, rather than awarded the severance package.
“We think the trial should be a textbook on how corporations should not be run,” said Steven Schulman, the head Milberg Weiss attorney representing shareholders.
Schulman says directors gave the deal a cosmetic glance and approved it, including the severance package.
Scheduled to last four weeks in Delaware’s Court of Chancery, a closely watched business court, the case will center on the so-called business judgment rule, essentially a test of whether the board’s decisions were made in good faith and with the interests of the company in mind.
Courts are suddenly taking a tougher stance on the rule, largely due to recent corporate scandals at Enron, Tyco and WorldCom in which shareholders lost billions of dollars.
“Whereas before courts used to hide behind the business judgment rule, now they are applying it,” said attorney Peter Miller, chair of the employee benefits practice at Seyfarth Shaw.
“Delaware may be the last bastion of corporate refuge, but I think they are recognizing this change as well.”
The trick for Disney’s board members will be convincing the judge that they were on the ball when the approved the contract, and that is exactly what they will do, according to Eisner’s lawyer, Gary Naftalis.
“We plan to show that the board was fully involved in all matters concerning Michael Ovitz’s employment contract and dismissal and that upon termination Mr. Ovitz received not one penny more than his contract required,” he said in a statement.
Eisner and Ovitz repeatedly clashed during Ovitz’s short tenure, and Schulman argues that Ovitz was untrustworthy, unethical and unable to delegate. His evidence ranges from Ovitz giving free Disneyland tickets to a friend’s child’s birthday party to allegations Ovitz had financial interests in conflict with his job at Disney.