Case briefs

CASE BRIEF 17.4

Brehm v. Eisner

746 A.2d 244 (Del. 2000)

FACTS: Michael Eisner, then-CEO and Chairman of Disney, hired Michael Ovitz as his second-

in-command at Disney. Mr. Eisner had a history of not working well with powerful second-in-

commands, and Mr. Ovitz was a powerful Hollywood talent agent and producer. In less than one

year, Mr. Ovitz and Mr. Eisner were at such odds, that Mr. Eisner and the board agreed to pay

Mr. Ovitz over $38,000,000 in cash compensation and 3,000,000 in Disney stock to leave the

company. The shareholders brought suit against the Disney board alleging that the board’s

supervision of Eisner was lax, that the hiring was a poor business decision, and that the amount

paid to end the arrangement constituted waste. The board says it just made a mistake.

The Delaware Court of Chancery dismissed the shareholders’ complaint because of the business

judgment rules. The shareholders appealed

ISSUE ON APPEAL: Was the decision to hire and terminate Mr. Ovitz protected under the

business judgment rule?

DECISION: Yes. The pay-out was outrageous, the processes of the board were not crackerjack,

and the shareholders were justifiably upset, but they had not established that the board did not

have its reasons for just getting rid of Ovitz with the pay-out. There were downsides to litigating

with Ovitz and dragging the company through the process.

Questions:

1. What must the shareholders prove to recover?

2. What does the court say is the relationship between good corporate governance, liability, and

business judgment?

3. What alternatives to litigation do shareholders have?