January 25, 2006
Initial thoughts on the Disney argument
Posted by Account Deleted

I was called away for a couple of minutes, but heard just about all the rest -- if I missed something, I'm sure Gordon and Elizabeth or others can fill me in. I won't try to be precise about identifying lawyers or specific questioning justices.

The appellant's main argument is that the bjr was rebutted here by gross negligence in deciding on the termination.  In answer to a court question, any ratification by the board wouldn't be enough to save that breach. 

Appellant claims that the sole power to terminate was in the board, per the charter.  (I'm not sure how this deals with the question of whether the board could delegate the decision to the ceo (Eisner) as long as it properly supervised.)

Appellant claims that the Chancellor's bad faith test was contrary to Delaware law.  As a matter of policy, his test was so subjective that it would always be met by "pure heart" testimony. (Not necessarily -- there can be circumstantial evidence of bad faith.)

Appellee responds that the Chancellor looked both at bad faith and gross negligence. There was some argument about whether the Chancellor should have accepted some of the testimony. A court question made it clear that the question comes down to whether the Chancellor applied the wrong standard -- which here would boil down to gross negligence vs. some version of bad faith.

(I wonder if the Court might hold that the Chancellor erroneously applied bad faith, even if bad faith is ultimately determinative under 102(b)(7).  In other words, the court has to go through all the hoops whether or not one of them determines the result. This would be comparable to what the Court did in Van Gorkom -- due care no matter what, even if it doesn't control liability. Then we're just back to the wheel-spinning of entire fairness in Cede, etc.)

Appellant raises what might be a big issue here:  were the non-director officers protected by the bjr? It relies on Lyman Johnson's article and some authority in other states, and emphasizes that the bjr should depend on how the extent to which the protected party was compensated.

Appellee responds that the point of the bjr is to encourage risk-taking, and doesn't rest on compensation. (This would seem to me to be the much better argument. I may discuss this further later).

There was a lot of discussion on whether the board could have terminated for cause.  How is this relevant? Even if Ovitz clearly could have been terminated for cause, the question would still be whether it appropriately did not do so.

More later. . . .

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