In Re Walt Disney Co. Derivative Litigation Case Brief

The case In Re Walt Disney Co. Derivative Litigation is a derivative action by the shareholders of the Walt Disney Company. The suit was filed over objections to the compensation of an executive that was hired and subsequently fired. At issue is whether or not the directors of the company breached their fiduciary duty or committed waste.

Jurisdiction and Citation

Delaware Chancery Court
906 A.2d 27
June 8, 2006

In Re Walt Disney Co. Derivative Litigation – Case Brief

In 1995, Walt Disney Company Chairman Michael Eisner selected Michael Ovitz as his choice to executive president and director of the company. Ovitz demanded large compensation that would increase yearly as well as a healthy exit package should the hiring not work out. While some members of the company’s compensation committee were aware of negotiations between Eisner and Ovitz, the company moved forward with the hiring before he was approved by the committee or completely vetted by outside experts.

Less than a year later, Eisner lost confidence in Ovitz. Eager to make a change, Eisner made the decision to terminate Ovitz’s contract. All parties agree the firing was “no-fault,” meaning that Ovitz was entitled to his full severance package. In total, Ovitz was paid more than $140 million for roughly one year’s work. After news of Ovitz’s firing and compensation broke, Disney shareholders filed a derivative suit arguing both the hiring and firing of Ovitz was done in bad and was wasteful.

Rule of Law

A normal business decision is immune from bad faith claims in a derivative suit unless the directors acted with gross negligence.

Legal Issues

  • Was Ovitz hired or fired in bad faith?
  • Was the hiring Ovitz wasteful?


The court ruled that the directors acted in good faith. It also held that because there was no gross negligence in the hiring or firing of Ovitz, it need not consider claims regarding waste. Under the law, business judgments like the decision to hire and fire Ovitz are protected from these claims. This is the case even when the business decision has a poor result. Once the court decided the hiring and firing were rational business decision, the court affirmed the judgment of the lower court in favor or Disney. In total, there were six main holdings in the case:

  1. Ovitz did not breach any duty he held to Disney during hiring negotiations
  2. Ovitz did not breach any duty during exit negotiations
  3. The compensation committee did not violate a fiduciary duty in approving Ovitz’s hiring
  4. It was not necessary for the board or compensation committee to vote on Ovitz’s firing
  5. Eisner did not violate his fiduciary duty when determining Ovitz could not be fired for cause
  6. The hiring and firing was not legal waste.