November 15, 2011
Chancellor Chandler and the Disney decisions
Posted by Matt Bodie

Just to begin a theme sure to be repeated throughout the day: Chancellor Chandler is a terrific person.  Like Gordon, my wife and I had the chance to visit the Court of Chancery in Georgetown, and we were treated to a tour as well as a wonderful chat with our host.  He could not have been more gracious.  It is often said that the strength of the Delaware corporate law lies as much (if not more) in its judges as in its statutes, and Chancellor Chandler has exemplified the combination of corporate savvy with down-to-earth sense that makes the court so successful.

The Disney case was an extraordinary event, even for the Delaware Chancery.  However, when the case was first presented to Chancellor Chandler, he found that "the issues presented by this litigation, while larger in scale, are not unfamiliar to this Court."  In granting the motion to dismiss, he began his opinion with the following analogy:

Just as the 85,000–ton cruise ships Disney Magic and Disney Wonder are forced by science to obey the same laws of buoyancy as Disneyland's significantly smaller Jungle Cruise ships, so is a corporate board's extraordinary decision to award a $140 million severance package governed by the same corporate law principles as its everyday decision to authorize a loan. Legal rules that govern corporate boards, as well as the managers of day-to-day operations, are resilient, irrespective of context. When the laws of buoyancy are followed, the Disney Magic can stay afloat as well as the Jungle Cruise vessels. When the Delaware General Corporation Law is followed, a large severance package is just as valid as an authorization to borrow. Nature does not sink a ship merely because of its size, and neither do courts overrule a board's decision to approve and later honor a severance package, merely because of its size.

 In re Walt Disney Derivative Litigation, 731 A.2d 342, 350 (Del. Ch. 1998).  This comparison has always fascinated me.  Just to give you the visuals, here's the Jungle Cruise ship:

And here's the Disney Magic:

Compare that language to this language, seven years later:

. . . Eisner's actions in connection with Ovitz's hiring should not serve as a model for fellow executives and fiduciaries to follow. His lapses were many. He failed to keep the board as informed as he should have. He stretched the outer boundaries of his authority as CEO by acting without specific board direction or involvement. He prematurely issued a press release that placed significant pressure on the board to accept Ovitz and approve his compensation package in accordance with the press release. To my mind, these actions fall far short of what shareholders expect and demand from those entrusted with a fiduciary position. Eisner's failure to better involve the board in the process of Ovitz's hiring, usurping that role for himself, although not in violation of law, does not comport with how fiduciaries of Delaware corporations are expected to act.
Despite all of the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom, I nonetheless conclude, after carefully considering and weighing all the evidence, that Eisner's actions were taken in good faith.

In re Walt Disney Derivative Litigation, 907 A.2d 693, 762-63 (Del. Ch. 2005).

To be certain, the evidence available to Chancellor Chandler in 1998 was much more limited than it was after the trial, due in part to the plaintiffs' initial failure to request corporate records.  In fact, the chancellor showed a remarkable openness to seeing the case afresh once the minutes of the board meetings came to light.  The Disney case was our transition from the Internet boom to the post-Enron era.  And Chancellor Chandler was our Virgil.

One ongoing question about the Delaware Chancery Court is its responsivness to the prevailing corporate and political winds.  Is the Chancery successful, at least in part, because it tempers its judgment with a sense of the national mood?  And if so, is that an appropriate role for the judiciary?  In this regard, I think the Disney case is instructive.  Chancellor Chandler had this to say about the role of corporate governance norms within the law:

. . . [T]here are many aspects of defendants' conduct that fell significantly short of the best practices of ideal corporate governance. Recognizing the protean nature of ideal corporate governance practices, particularly over an era that has included the Enron and WorldCom debacles, and the resulting legislative focus on corporate governance, it is perhaps worth pointing out that the actions (and the failures to act) of the Disney board that gave rise to this lawsuit took place ten years ago, and that applying 21st century notions of best practices in analyzing whether those decisions were actionable would be misplaced.

    Unlike ideals of corporate governance, a fiduciary's duties do not change over time. How we understand those duties may evolve and become refined, but the duties themselves have not changed, except to the extent that fulfilling a fiduciary duty requires obedience to other positive law. This Court strongly encourages directors and officers to employ best practices, as those practices are understood at the time a corporate decision is taken. But Delaware law does not --indeed, the common law cannot -- hold fiduciaries liable for a failure to comply with the aspirational ideal of best practices, any more than a common-law court deciding a medical malpractice dispute can impose a standard of liability based on ideal-rather than competent or standard-medical treatment practices, lest the average medical practitioner be found inevitably derelict.

    Fiduciaries are held by the common law to a high standard in fulfilling their stewardship over the assets of others, a standard that (depending on the circumstances) may not be the same as that contemplated by ideal corporate governance. Yet therein lies perhaps the greatest strength of Delaware's corporation law. Fiduciaries who act faithfully and honestly on behalf of those whose interests they represent are indeed granted wide latitude in their efforts to maximize shareholders' investment. Times may change, but fiduciary duties do not. Indeed, other institutions may develop, pronounce and urge adherence to ideals of corporate best practices. But the development of aspirational ideals, however worthy as goals for human behavior, should not work to distort the legal requirements by which human behavior is actually measured. Nor should the common law of fiduciary duties become a prisoner of narrow definitions or formulaic expressions. It is thus both the province and special duty of this Court to measure, in light of all the facts and circumstances of a particular case, whether an individual who has accepted a position of responsibility over the assets of another has been unremittingly faithful to his or her charge.

Id. at 697-98.  The Enron era and the 2008 Financial Crisis have given us many opportunities to see failures of those in a position of responsibility to remain unremittingly faithful to their charges.  As we grapple with how to address that faithlessness, and how to minimize it in the future, we will miss having Chancellor Chandler as our guide.

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