August 10, 2005
Holding v. Dicta: Primer for the Media
Posted by Christine Hurt

This morning I was struck between the disconnect between law professor bloggers' headlines (i.e., Bainbridge -- Disney Board Wins) and newspaper headlines (NYT -- Big Pay Packages May Fade After Ruling on Ex-President of Disney).  Yes, the court gave Eisner quite a tongue-lashing about his ego and his governing style, but I'm sure the sting has faded by now.  The result of the case is that the Disney board, with its Keystone Cop style of governance, was held not to have breached any fiduciary duty or have committed waste.  And, NYT headline writer, the court in distinguishing precedent basically said, "We care about extraordinary events like mergers, but we are not going to get excited about pay packages."  So, my question is why did the court spend so much time criticizing the actions of the board and its CEO if the end result is that the board wins?

For example, when I first read this section, I began having Van Gorkum flashbacks:

Thus, as of December 12, Ovitz was officially terminated without cause. Up to this point, however, the Disney board had never met in order to vote on, or even discuss, the term at a full session, and few if any directors did an independent investigation of whether Ovitz could be terminated for cause. As a result, the Disney directors had been taken for a wild ride, and most of it was in the dark.

However, this passage turns out to be less foreshadowing and more judicial head fake, as the court concludes that these actions, while not "best practices," do not consitute breaches of the duty of care. So, the "wild ride" turns out to be not a Van Gorkum ride, but a Disney theme park ride where you can twist and turn, but you still end up where you started, safe and sound.

My other favorite line from the opinon was "For the future, many lessons of what not to do can be learned from the defendants' conduct here." Yes. Dont' do anything differently.  The lesson is that board members can be just as clueless as these board members and still fulfill there duties. This case gives boards a license to act just as Eisner's board did, which the court concedes was truly "Eisner's board." The court is not interested in boards that don't engage in "best practices," but only boards that act below what is really a low floor. The court did rule differently in Van Gorkum, but that case is basically an outlier and would have a different outcome today; however, we're not going to overrule it just yet (see Larry R. below for the distinguishing argument). These antics, however, fall under the protective Superman's cape of the Business Judgment Rule, which is still alive and kicking in Delaware. So, if you as a shareholder want best practices, or anything in between, then rely on the markets to get you there.

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