At the UCLA Conference, Bill Bratton predicted no liability for the Disney directors. I disagree. Bill is looking at the case from a distance, thinking about Delaware's interest in preserving its dominant position in the charter market. Under this view, Delaware would prefer to scold directors without holding them liable. When it has deviated from this approach -- as in Smith v. Van Gorkom -- the consequences for Delaware have been negative.
This is a nice summary of Bill's thinking from his paper:
Delaware judges use their cases’ complex fact patterns to make moral pronouncements about management behavior. The culpable manger is not, however, necessarily hit with an injunction against his or her deal; a money judgment is still less likely. Instead, the court announces its dissatisfaction with the manager’s conduct in the course of denying an injunction against the transaction or dismissing the complaint. It is the actor in the next deal who replicates the disapproved conduct that faces a litigation risk.... The Delaware courts learned to take this kid gloves approach the hard way. The Delaware Supreme Court’s innovative and aggressive application of the duty of care in Smith v. Van Gorkom did hold out an immediate prospect of a money judgment against independent directors. The result was nervousness in boardrooms, a substantial increase in insurance premiums, and much criticism of Delaware. The legislature had to intervene to undo the result of the strategic misfire. Prompted by the corporate committee of the state bar, it amended Delaware’s code to permit firms to opt out of the duty of care by charter amendment. The courts would not make the same mistake again.
While I generally agree with Bill's reading of the macro-trends in Delaware corporate law, those trends do not dictate the outcome in any particular case. The Delaware courts have been signaling their disgust with the Disney board in every opinion written in the case, and I think they will continue to beat up on the board. At a minimum, Ovitz and Eisner look to be in serious trouble.
It is also worth remembering that the Court of Chancery has long been more aggressive at imposing liability than the Supreme Court. While Chancellor Chandler is generally more expansive than Vice-Chancellor Strine in his understanding of board power, I suspect both of them would have problems will a board as passive and unengaged as Disney's had become.
UPDATE: When I composed this post, I didn't realize that James Stewart was publishing a book about Disney. See here. Stewart is the author of the excellent insider trading book Den of Thieves. This looks like a must read.
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