Thank you for joining us here at Conglomerate for a discussion of the Disney opinion, the full text of which has been posted by the Wall Street Journal. Over the next few days, we will hear from many leading experts on the Disney case, and we encourage you to engage us in the comments. Participants in the Conglomerate Forum include the following (with links to some of the stories in which they have been quoted in connection with the Disney case):

Steve Bainbridge of the UCLA School of Law
Victor Fleischer of the UCLA School of Law
Sean Griffith of the University of Connecticut School of Law (Slate)
Larry Hamermesh of the Widener University School of Law (W$J, News Journal)
Christine Hurt of Marquette University Law School
Lyman Johnson of Washington & Lee University School of Law
Elizabeth Nowicki of the University of Richmond School of Law
Larry Ribstein of the University of Illinois College of Law (NYT, Today, LA Daily News)
David Skeel of the University of Pennsylvania Law School (Marketplace)
Gordon Smith of the University of Wisconin Law School (Orlando Sentinel, Marketplace, W$J)

If you would like some background on the case, keep reading. Otherwise, I recommend that you dive into our participant's posts, which will appear immediately below this entry.

By now you certainly know that the directors of Disney prevailed on all of the claims. Chancellor Chandler composed a lengthy opinion (174 pages and 591 footnotes, and he describes the opinion as going into "painful detail"), about half of which describes the underlying facts, and the remainder of which contains his legal discussion and analysis. Of course, this opinion is not the last word on the Disney case, as the plaintiffs have promised to appeal the ruling to the Delaware Supreme Court. Nevertheless, Chancellor Chandler's views carry tremendous weight, as his 2003 Disney opinion gave us the most thorough judicial discussion to date of the role of good faith in fiduciary law.

If you have been reading the news reports, you will be familiar with the basic facts of the case. Michael Ovitz was hired by Disney in August 1995 and terminated in December 1996. Under the terms of his employment agreement, his "non-fault termination" resulted in several important benefits to Ovitz: the balance of his contract salary, an imputed amount of bonuses, a $10 million termination fee, and immediate vesting of 3 million stock options. In the end, Ovitz received approximately $140 million in compensation for his 15 or so months of employment.

The legal claims focused on whether Disney's directors fulfilled their fiduciary obligations in connection with the hiring and termination of Ovitz. According to Chancellor Chandler, "The fiduciary duties owed by directors of a Delaware corporation are the duties of due care and loyalty," but the reason all of us are paying such close attention to this case is that we are wondering about the third duty in Delaware's triad: the duty of good faith. With regard to this duty, Chancellor Chandler observes, "Decisions from the Delaware Supreme Court and the Court of Chancery are far from clear with respect to whether there is a separate fiduciary duty of good faith." In this case, Chancellor Chandler comes down firmly in favor of such a duty, though that duty is closely related to the traditional duties of care and loyalty:

Upon long and careful consideration, I am of the opinion that the concept of intentional dereliction of duty, a conscious disregard for one’s responsibilities, is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith. Deliberate indifference and inaction in the face of a duty to act is, in my mind, conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct....

To create a definitive and categorical definition of the universe of acts that would constitute bad faith would be difficult, if not impossible. And it would misconceive how, in my judgment, the concept of good faith operates in our common law of corporations. Fundamentally, the duties traditionally analyzed as belonging to corporate fiduciaries, loyalty and care, are but constituent elements of the overarching concepts of allegiance, devotion and faithfulness that must guide the conduct of every fiduciary. The good faith required of a corporate fiduciary includes not simply the duties of care and loyalty, in the narrow sense that I have discussed them above, but all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient.

The duty of good faith is at the heart of this case because the plaintiffs could not make out a claim based on the duty of loyalty (although they attempted to make that claim against Michael Ovitz) and claims based on the duty of care are largely ineffectual in Delaware because of an important statutory provision adopted almost 20 years ago. In 1985, the Delaware Supreme Court famously held in Smith v. Van Gorkom that the directors of Trans Union Corporation breached their duty of care in approving a merger agreement. In the wake of that decision, the Delaware legislature added Section 102(b)(7) to the Delaware code, which allows shareholders (via charter provision) to "exculpate" directors from liability for monetary damages for breach of the duty of care. Almost every Delaware corporation, including Disney, now includes such an exculpatory provision in its corporate charter, thus ensuring that the duty of care will not lead to director liability. Interestingly, Section 102(b)(7) expressly provides that that corporate charters may not eliminate or limit director liability for "acts or omissions not in good faith." Thus, the plaintiffs in the Disney case could not obtain money damages by proving that the Disney directors breached their duty of care, but the shareholders might have obtained money damages by proving that the Disney directors acted in bad faith.

Unfortunately for those plaintiffs, Chancellor Chandler held that the conduct in this case did not constitute bad faith. The Chancellor made three references to "ideals" -- (1) "ideals of corporate governance"; (2) "ideals of corporate best practices"; and (3) "aspirational ideals" -- and noted that the Disney directors fell well short of these ideals. But the standard of liability ("bad faith") does not require directors to achieve their ideals. In a moment of comparative institutional analysis, Chancellor Chandler meaningfully concluded, "The redress for failures that arise from faithful management must come from the markets, through the action of shareholders and the free flow of capital, and not from this Court."

In my view, this was a close case, and like Steve Bainbridge, I would not have been shocked to see this come out the other way, even though I found Larry Ribstein's prediction very persuasive. Some are not happy about the result. However you feel about it, I am certain that this Conglomerate Forum will offer new insights into the import and implications of the case. Welcome!

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