November 15, 2011
Chancellor Chandler and the Working Corporate Lawyer
Posted by Jeff Lipshaw

I will leave to others Chancellor Chandler's contribution to the great body of corporate law, as well as personal felicitations that I will simply second.  As I recall, we met once at a symposium at Ohio State (I believe that's where I met Gordon for the first time - as he was bending Chancellor Chandler's ear about something during a break).  Nevertheless, this is a little personal because I'm going to focus on two opinions that have endeared me (is that too strong?) to Chancellor Chandler's sensibilities regarding the life and work of the lawyer whose job is to get deals done.  I am someone who worked at, and now writes about, those nuanced before-the-fact judgments often required of transactional lawyers and counselors – where the facts are fluid, one's directorial control is limited, and consequences are uncertain. 

The first source of endearment is a small piece of the Disney opinion not often discussed, involving general counsel Sanford Litvack's advice to Michael Eisner about the termination of Ovitz contract for cause rather than the Non-Fault Termination ("NFT") package that engendered the whole litigation shebang.

Litvack, as an officer of the corporation and as its general counsel, consulted with, and gave advice to, Eisner, on two questions relevant to Ovitz's termination. They are, first, whether Ovitz could or should have been terminated for cause and, second, whether a board meeting was required to ratify or effectuate Ovitz's termination or the payment of his NFT benefits. For the reasons I have already stated, Litvack properly concluded that the Company did not have good cause under the OEA to terminate Ovitz.  He also properly concluded that no board action was necessary in connection with the termination.  Litvack was familiar with the relevant factual information and legal standards regarding these decisions.  Litvack made a determination in good faith that a formal opinion from outside counsel would not be helpful and that involving more people in the termination process increased the potential for news of the impending termination to leak out.

In re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 776-77 (2005).

I taught this case in the basic Business Enterprises class at Tulane in the fall of 2006, fresh off my own similar experiences as a general counsel.  After talking about the "big" fiduciary issues in the case, I asked the class to consider Litvack's willingness to conclude it was a "no-brainer" that there was simply no basis for bringing Ovitz's conduct, even if obnoxious or insubordinate, within the "for cause" clause. He didn't do legal research or consult with outside counsel.  And obviously, this was no small decision on his part, because fighting the "non-fault termination" aspect of the contract could well have saved Disney a portion of that $140 million in severance cost.  Was Litvack less than a zealous advocate?  If Litvack concluded that Disney could pass Rule 11 muster (or the straight face test), did he have an obligation, moral or otherwise, to all the uninformed stakeholders (i.e. the shareholders) to pursue the claim, even if as nothing more than bludgeon to knock ten or twenty or thirty million dollars off the pay-out?  But was zealous advocacy his job?  That was always the toughest kind of call for me as a general counsel.  Like Litvack, I would conclude that contesting a particular issue was a "no brainer" because in my judgment we had no case.  But I always wondered in those instances:  was I too nice? too unzealous? or too ethical?  Somebody could cobble together enough of a position to cause some grief for the other side (because it seemed like people were always taking marginally ethical positions against us, and finding lawyers who would sign the pleadings!)  If I reached a legal conclusion and expressed it to the board, it was the rare case that anybody would question it.  In essence, my sense of ethics, my moral judgment, or my business sense, as the GC, became the moral, ethical, and business judgment of the corporation.

Why the general counsel?  Because, as I've written, nobody else other than the GC really stands in the overlap of the Venn diagram between legal judgment and business judgment.  It was no surprise to me that Litvack didn't consult (and didn't need to consult) outside counsel.  Nobody but Litvack could make that judgment, and, to my mind, there was a certain amount of courage in doing so, particularly since it's likely Eisner would have been more than delighted with an opinion to effect that "we've got a case, and he'll have to fight us tooth and nail for the money."

The second source of endearment was his discussion in the Cerberus case of the sometimes convoluted result of negotiated drafting, on which I've posted elsewhere.  Here was the issue.  Section 9.10 of the agreement said that the merger target (i.e. the company whose shareholders were going to walk away with cash – let’s call it the seller for ease of reference) had the right to enforce the agreement by injunctive relief for specific performance for a whole bunch of things, including forcing the deal to close.  But Section 9.10 said it was “subject to” Section 8.2, which said “notwithstanding” any other provsion in the agreement, the seller’s sole remedy if the buyer walks away was a $100 million termination fee.  The buyer walks away, and the issue was simply whether it must close under Section 9.10 or can walk away for a price of $100 million under Section 8.2.  Larry Ribstein, Steve Davidoff, and others lathered over the possibility that otherwise competent M&A lawyers could have let this "left hand - right hand" thing in the contract.  I suppose I was feeling some "there but for the grace of God go I," knowing what it's like to craft a contract in the middle of the night under time pressure.  Here's what I said in part:

I’ve not fully studied the opinion, but it is a fine piece of analysis, even where in very subtle ways I disagree with it. And with all due respect to Larry Ribstein and Steve Davidoff, I think Chancellor Chandler has a better feel for the limitations of law and language. Yes, this could be “sloppy drafting,” but as I alluded in an earlier post, lawyers, for all their pretensions of being at the center of a deal are often flies swarming around the galloping steed that is the deal itself, and the focus on the contract as the source of the problem is merely a fly’s-eye view.

From my viewpoint, you can never have enough judges like Chancellor Chandler.

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