June 07, 2005
New Disney Case to Proceed
Posted by Gordon Smith

Delaware will have another injection of "tourism" dollars as Chancellor Chandler ruled yesterday that the new lawsuit by Roy Disney and Stanley Gold could proceed. Steve Bainbridge is surprised by the result. Even though I wrote in May that "this lawsuit looks frivolous," not much that happens in Delaware is a surprise to me anymore.

If you don't remember here is a refresher course on the lawsuit: Roy Disney and Stanley Gold are claiming that the board of directors of Disney lied when they claimed to have "open minds" about the CEO search. As a result of this alleged misrepresentation, Disney/Gold claim that they refrained from running a slate against the incumbent directors on the strength of this "open minds" representation. After the board picked Iger to succeed Eisner, Disney/Gold concluded that the board had been lying.

I am anxious to read Chancellor Chandler's opinion, which is not yet available. In the meantime, here are some more thoughts about why the case looked weak to me.

If Disney/Gold had wanted to influence the selection of the next CEO, perhaps they should have run an alternative slate, but to suggest they didn't because the directors -- the same directors against whom they had waged the Just Say No campaign -- promised to proceed with "open minds" sounds implausible to me. What could Disney/Gold reasonably expect from such a promise? At a minimum, they could expect that the selection of Iger was not a done deal.

Should they be entitled to infer that none of the Disney directors had pre-existing preferences? Surely the promise of an "open mind" cannot reasonably be interpreted as a promise that the directors have no priors, especially in this instance, when Disney/Gold knew that some of the directors were leaning toward Iger.

What if a majority of the board favored Iger, but a majority of directors were willing to be swayed by a superior candidate? Could that be described as a board with an open mind? If so, then the promise to conduct the search with an open mind is really nothing more than a promise that the decision is not yet final.

It is worth noting that Disney/Gold didn't sue everyone on the Disney board. Does that mean that some of the directors wanted to conduct a real search, but others did not?

The bottom line is that Larry Ribstein is right when he writes that the "open minds" statement could be a material misstatement of fact, but in my view, it is only materially misleading if Iger's ascension was a done deal when Disney board made those statements. If the decision had not been made -- for example, if Meg Whitman were still a possibility, even if a longshot -- then I think the claim of fraud must fail.

I suspect that Disney/Gold didn't run an alternative slate because they realized that the tide had changed dramatically at Disney. Disney/Gold ran a very effective campaign in 2004, and there was a lot of latent shareholder discontent. At this year's election, by contrast, shareholder support for incumbents was strong. Obviously, a proxy contest might have eroded some of that support, but the company was in a much different position this year than last.

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"Roy Disney and Stanley Gold are suing the Disney board in connection with the CEO search that ended ..." [more] (Tracked on June 7, 2005 @ 8:08)
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