January 25, 2006
Additional Initial Thoughts
Posted by Elizabeth Nowicki

Larry, thank you for breaking the ice.  We agree on a few things, so I will focus more on additional observations not raised in Larry’s post.

The points made by appellants’ counsel (as I recall) include:

1.  The directors had the obligation to meet together (as a group) and deliberate together on the decision to fire Ovitz.  By failing to do so, the directors breached some duty, per se.

2.  Eisner never had the authority to fire Ovitz, and therefore. . .  (I am not sure how this sentence would end in counsel’s mind).

3.  Chancellor Chandler erred in placing the officers within the protection of the business judgment rule presumption.

I think point one above is a non-starter.  I am not aware of an absolute obligation of directors to meet together in a situation like this such that the failure to so do would be a per se . . . breach of the duty of care (I am assuming.).

Point two above is no more persuasive to me.  If what appellants’ counsel was arguing was that the board breached its duty of care by failing to follow-up to assess whether THEY (the board) needed to act with respect to Ovitz’s firing, then I am not convinced that counsel pointed to facts that would put the directors outside the BJR protection.  If the directors are not outside of the BJR presumption’s protection, then the appellants’ counsel certainly did not convince me that the directors’ failure to follow-up on the firing was irrational (std of review that would apply).

Setting aside point three and the BJR debate as it pertains to officers (and I agree with Larry that this is a big issue – my inclination is to sidestep the issue for purposes of this post, and instead point readers toward the articles written by Lyman Johnson and Larry Hammermesh), I will summarize by noting that I found it hard to identify the core of any fundamental legal (not factual) argument made by appellants' counsel.  I viewed the bulk of what the appellants’ counsel said at oral argument as factual in nature, and I consider that a hard basis on which to sway a Delaware Supreme Court panel to reverse their trial court brethren. 

Specifically, I fully expected appellants’ counsel to point to a legal definition of gross negligence that would have put the non-officer directors outside the protection of the BJR presumption on the facts as found by the Chancellor. I was disappointed not to hear (or find in a brief) any good legal argument proffered by counsel for the appellants for reversal on the gross negligence point.  I agree that the Disney directors and the Compensation Committee were sloppy.  But at no point in the oral argument did I hear counsel connect the dots to show that the facts lined up with the definition of gross negligence (“reckless indifference to or a complete disregard of the stockholders”).  (This is why I think the appeal should have focused on good faith, but that is another post for later. . . .)  To that end, I considered appellants’ statement that bad faith and gross negligence should not have been discussed at the same point in the opinion a non sequitur.

Moreover, I am astounded that counsel for the appellants did not make the point that whether or not there was good cause for termination was irrelevant - the failure of the directors to even consider the good cause issue, debate it, and see if it would inform the termination package construction was the relevant point under the BJR.

Lastly, I have to ask:  Did I correctly hear appellees' counsel observe that Ovitz "did not perform?"  Now, I am not a litigator, but I can see no good reason for that observation from that side of the courtroom.

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