Conglomerate Blog: Business, Law, Economics & Society

What a show! My M&A class watched the webcast with me this morning, and I am definitely glad to have the opportunity to share this glimpse into the world of Delaware law with my students.

As the arguments proceeded, I was somewhat hopeful for the appellants because the court only asked appellants' counsel two questions but then peppered appellees' counsel with questions. But then I realized that the questions posed to appellees' counsel were really softballs designed to foreclose all further discussion and make appellants' arguments seem absurd. So, I am not hopeful for the appellants. However, several issues were raised that I think are worthy of discussion.

1. Does the BJR apply to officers? I think if you polled corporate law scholars and business people, the overwhelming majority would say yes. But they might not be able to back it up with law on their fingertips. A quick perusal of the casebooks and treatises in my offices results in the same proof that appellees' counsel offered: myriad cases from Delaware and elsewhere that assume that the BJR applies to officers as well as directors. These cases and treatises that I have use the terms "directors," "directors and officers," and "corporate officers" interchangeably. The various briefs cite to Business Lawyer articles by Lyman P.Q. Johnson on the one hand and Disney guest blogger Larry Hammermesh (with A. Gilchrist Sparks, an attorney in the proceeding). I suppose this issue rarely comes up because plaintiffs rarely go after the isolated action of an officer that was sufficiently non-extraordinary to not need approval of the board of directors. However, in the Disney opinion, Chancellor Chandler characterized the firing of Michael Ovitz by Michael Eisner as an action Eisner took unilaterally as CEO, not as Chairman of the Board.

2. Was the firing of Ovitz subject to board control? Appellants said yes because of words in the charter, but Appellees claimed that Appellants were misreading the charter. Larry Ribstein explains below that the board could have delegated that duty to Eisner, but we don't have a corporate resolution. The Chancery Court said no, so the failure of the board to have a meeting or to order an audit or to have documentation regarding the no-fault termination package was irrelevant. If the Supreme Court disagrees, we may have more proceedings, but I doubt that will happen. As a rhetorical point, I liked the way Appellees' counsel (Gregory P. Williams, I think) referred to the decision to terminate Ovitz as a "question of contract administration." That phrase makes the decision seem very ministerial and immaterial.

Also, the court pointed out that Eisner as CEO was authorized to settle disputes and lawsuits, so couldn't that authority allow him to fire Ovitz under the NFT. If so, then the charter and bylaws don't work very well together if one gives the board the ability to fire officers but the CEO the ability to fire them to "settle disputes."

3. Can a board commit gross negligence if acting in good faith? When I read the August opinion, the part that struck me was Chancellor Chandler seeming to say that a director does not violate the duty of care if the director does not act in good faith. He quotes Chancellor Allen in Caremark as saying "Indeed, one wonders on what moral basis might shareholders attack a good faith business decision of a director as "unreasonable" or "irrational." Where a director in fact exercises a good faith effort to be informed and to exercise appropriate judgment, he or she should be deemed to satisfy fully the duty of attention." Chandler then quotes Allen again to define lack of good faith as "sustained or systematic failure of a director to exercise reasonable oversight." This conflation could be seen to narrow what is gross negligence (must be in bad faith) or expand what is bad faith (includes sustained inattention). Either way, let's have some explanation!

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"Go read the Disney posts at Conglomerate. Gordon Smith, Christine Hurt, Larry Ribstein, Steve Bainbr ..." [more] (Tracked on January 26, 2006 @ 10:10)

What a show! My M&A class watched the webcast with me this morning, and I am definitely glad to have the opportunity to share this glimpse into the world of Delaware law with my students.

As the arguments proceeded, I was somewhat hopeful for the appellants because the court only asked appellants' counsel two questions but then peppered appellees' counsel with questions. But then I realized that the questions posed to appellees' counsel were really softballs designed to foreclose all further discussion and make appellants' arguments seem absurd. So, I am not hopeful for the appellants. However, several issues were raised that I think are worthy of discussion.

1. Does the BJR apply to officers? I think if you polled corporate law scholars and business people, the overwhelming majority would say yes. But they might not be able to back it up with law on their fingertips. A quick perusal of the casebooks and treatises in my offices results in the same proof that appellees' counsel offered: myriad cases from Delaware and elsewhere that assume that the BJR applies to officers as well as directors. These cases and treatises that I have use the terms "directors," "directors and officers," and "corporate officers" interchangeably. The various briefs cite to Business Lawyer articles by Lyman P.Q. Johnson on the one hand and Disney guest blogger Larry Hammermesh (with A. Gilchrist Sparks, an attorney in the proceeding). I suppose this issue rarely comes up because plaintiffs rarely go after the isolated action of an officer that was sufficiently non-extraordinary to not need approval of the board of directors. However, in the Disney opinion, Chancellor Chandler characterized the firing of Michael Ovitz by Michael Eisner as an action Eisner took unilaterally as CEO, not as Chairman of the Board.

2. Was the firing of Ovitz subject to board control? Appellants said yes because of words in the charter, but Appellees claimed that Appellants were misreading the charter. Larry Ribstein explains below that the board could have delegated that duty to Eisner, but we don't have a corporate resolution. The Chancery Court said no, so the failure of the board to have a meeting or to order an audit or to have documentation regarding the no-fault termination package was irrelevant. If the Supreme Court disagrees, we may have more proceedings, but I doubt that will happen. As a rhetorical point, I liked the way Appellees' counsel (Gregory P. Williams, I think) referred to the decision to terminate Ovitz as a "question of contract administration." That phrase makes the decision seem very ministerial and immaterial.

Also, the court pointed out that Eisner as CEO was authorized to settle disputes and lawsuits, so couldn't that authority allow him to fire Ovitz under the NFT. If so, then the charter and bylaws don't work very well together if one gives the board the ability to fire officers but the CEO the ability to fire them to "settle disputes."

3. Can a board commit gross negligence if acting in good faith? When I read the August opinion, the part that struck me was Chancellor Chandler seeming to say that a director does not violate the duty of care if the director does not act in good faith. He quotes Chancellor Allen in Caremark as saying "Indeed, one wonders on what moral basis might shareholders attack a good faith business decision of a director as "unreasonable" or "irrational." Where a director in fact exercises a good faith effort to be informed and to exercise appropriate judgment, he or she should be deemed to satisfy fully the duty of attention." Chandler then quotes Allen again to define lack of good faith as "sustained or systematic failure of a director to exercise reasonable oversight." This conflation could be seen to narrow what is gross negligence (must be in bad faith) or expand what is bad faith (includes sustained inattention). Either way, let's have some explanation!

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