Managers and the Legal Environment 7th Edition by David Madsen, Constance Bagley

Exercise 10

In 1995, Walt Disney Company hired Michael Ovitz, a longtime friend of Disney's CEO Michael Eisner, as president. Ovitz lacked experience managing a diversified public company, although he was being considered for high-level executive positions in other companies. Ovitz's five-year employment agreement, which was negotiated solely by Eisner and the board of directors, gave Ovitz a base salary of $1 million a year, a discretionary bonus, and two sets of stock options. The agreement included a provision stating that termination without cause would entitle Ovitz to his remaining salary through September 30, 2000, a $10 million severance payment, an additional $7.5 million for each fiscal year remaining under the agreement, and the immediate vesting of the first 3 million stock options. Soon after Ovitz took office, problems arose. In 1996, Eisner and Ovitz arranged for Ovitz to leave Disney on a no-fault basis with $130 million in termination compensation pursuant to the employment agreement. Did the board of directors breach its fiduciary duty when it agreed to the no-fault termination provisions in Ovitz's employment agreement? Did Ovitz violate his fiduciary duty as an officer when he accepted the no-fault termination payment? [In re Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006).]