Thanks to Francis Pileggi, the new Disney opinion is now sitting on my desktop. Some pre-opinion speculations by the Conglomerate gang are here and here. Larry and Steve also have pre-opinion speculations, and Larry already has an update. I assume that Steve will follow shortly, on West Coast time. Steve has added a short post here.

First the punchline: this opinion is a bit hard to read, but it both confirms my analysis that the "open mind" representation is misleading only if Iger's appointment was a done deal and suggests that the plaintiffs' case going forward depends on a finding that Michael Eisner's involvement undermined the selection process. Read on if you want the details.

This is an opinion on a motion to dismiss, so the Court is reading the allegations in favor of the plaintiff. For the non-lawyers in the crowd, the Court uses the following standard of review: "I am required to assume the truthfulness of all well-pleaded allegations of the complaint.... Under this analysis, I cannot order dismissal unless it is reasonably certain that plaintiffs could not prevail under any set of facts that can be inferred from the complaint."

The Court frames the question in this way:

In the face of a threatened proxy contest in an election of directors, what are the potential consequences of a board of directors not keeping dissident shareholders fully and accurately informed regarding the selection of the company’s new CEO?

Again, it is worth emphasizing that the Court has not concluded that the dissidents were not fully and accurately informed. It assumes that they weren't for purposes of this motion. More specifically, the Court assumes the truth of seven so-called "troubling facts" (the plaintiff's words) about the CEO selection process:

(1) [Former Senator George] Mitchell[, who is Chairman of the Disney board of directors,] did not publicly reveal how many external candidates were considered, with plaintiffs noting that it is widely reported that the board interviewed only one external candidate; (2) Eisner was present at or expected to be present at the interviews of external candidates in an effort to chill full consideration of qualified external candidates; (3) certain external candidates declined to be interviewed with Eisner present; (4) Meg Whitman, an external candidate requested a prompt decision following her interview, and when the Company failed to provide such a decision, she chose to withdraw her candidacy; (5) when Whitman informed Mitchell that she intended to withdraw her name from consideration, Mitchell did not attempt to dissuade her and confirmed that she was not a serious candidate; (6) Eisner and Iger mounted a public relations campaign with Company funds designed to promote Iger’s candidacy for the CEO position; and (7)the board declined plaintiffs’ invitation to investigate the Fox Family Channel acquisition.

The main claim of interest here is based on the duty of disclosure. Delaware boards are required to "communicate honestly" with the shareholders. In this case, the Court looked at the collective effect of the foregoing facts and concluded that, if true, they would suggest that the board did not have an "open mind." Interestingly, however, the two facts about Eisner's involvement (#2 and #3) seem to be the difference makers for Chancellor Chandler. He writes:

With respect to many of the “troubling facts” listed in the complaint, I cannot conclude that they of themselves, or together with any reasonable inferences drawn from those facts, demonstrate that the Company’s board went about the process of searching for a new CEO in a manner inconsistent with the board’s September 21, 2004 statement and Mitchell’s February 1, 2005 statements.

Among the "troubling facts" that are insufficient to create a reasonable inference that the board breached its duty of disclosure are ## 1, 4, 5, 6, and 7. That leaves facts #2 and #3 as the primary basis for the plainfiffs claim. Both of those facts relate to Eisner's involvement in the selection process. All of this suggests that the Court has a narrow view of what is required when the board claims to have an "open mind." As I suggested in my prior post, the plaintiffs probably need to prove that Iger's selection was a done deal, and Eisner's involvement might lead to such a conclusion.

How strong is the plaintiff's case? Beyond the fact that it hinges entirely on the notion that Eisner's involvement undermined the selection process, the strength of the plaintiff's case will depend on whether the board was "seeking shareholder action." Under Delaware law, if the board is seeking shareholder action, it is required to "disclose fully and fairly all material information within the board’s control." Such a claim does not require proof of scienter (roughly, evil intent). On the other hand, if the board was not seeking shareholder action, the plaintiffs are required to show that directors are "deliberately misinforming shareholders about the business of the corporation, either directly or by a public statement." In other words, these claims require proof of intent. Obviously, the first sort of claim is easier to sustain.

Chancellor Chandler seems to believe that the plaintiffs easily state a claim if the board were "seeking shareholder action," but he writes that they "barely" state a claim for deliberate misstatements. As for the plaintiff's likelihood of success at the next stage, Chancellor Chandler observes that the key issue will be whether the search process was a sham.

[update: I did a little tweaking here to avoid confusion] The case also includes a claim for equitable fraud, which requires proof of intent intent to induce the plaintiff to act or refrain from acting." On the issue of whether the board was seeking shareholder action in this case, I will defer to a future post.

UPDATE: Larry writes: "I still think the big news in this case is the fact that Chancellor Chandler was so willing to let the reliance element go forward." I agree that this is big news. The Court barely glanced at reliance, and did nothing to suggest that it would be a big part of the case at the next stage.

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