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The Walt Disney Co.’s board did not breach its fiscal responsibilities by agreeing to hire Hollywood superagent Michael Ovitz as president in 1995, then granting him a $140 million severance package when he left just 14 months later, a judge ruled Tuesday. Chancellor William Chandler III said that while the directors’ conduct “fell significantly short of the best practices of ideal corporate governance,” board members did not violate their duties or waste Disney resources. “It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk — the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known,” Chandler wrote in a 175-page decision. The ruling closes a shareholder derivative trial that revealed the stormy inner workings of one of the world’s largest entertainment companies. Trial testimony included details of Ovitz’s lavish spending and the enmity he engendered among fellow Disney executives, including CEO Michael Eisner, who described Ovitz in company memos as a “psychopath” with a “character problem.” Ovitz contended that he loved Eisner “like a brother” but was micromanaged, undermined by other key executives and “cut out like cancer” before he had time to prove his worth. Eisner and the company contended Ovitz wasted money, alienated executives with his arrogance and could not be trusted. Attorneys for the plaintiffs said they will appeal Chandler’s decision to the Delaware Supreme Court. “It would be unfortunate for shareholders and employees of public companies if this decision is read by corporate managers as a license to act in disregard of their duties to engage in the deliberate processes required by fiduciaries,” said Melvyn Weiss, a partner with Milberg Weiss Bershad & Schulman. The lawsuit claimed that current and former members of Disney’s board did not properly scrutinize Ovitz’s employment contract after Eisner tapped him as president, then wrongly granted Ovitz a non-fault termination entitling him to a $140 million severance package just over a year later. Chandler last year granted Ovitz summary judgment on the claim that he violated his fiduciary duties in negotiating the terms of his contract, noting that he was not yet a fiduciary of Disney at the time. The judge said, however, that there were “genuine issues of material fact” to be resolved regarding Ovitz’s non-fault termination. Lawyers for the shareholders alleged that Ovitz’s performance was so poor that he should have been fired for cause and not paid the remainder of his contract. The defendants, including Eisner and Ovitz, said Ovitz’s contract was given careful consideration, and that while Ovitz’s tenure was stormy from the start, there was no gross negligence or malfeasance that would justify denying him his severance package. Sanford Litvack, Disney’s former chief of corporate operations and chief legal officer, testified that Ovitz’s “total failure” as president didn’t mean he could be fired for cause. Litvack said that after Eisner told him he planned to fire Ovitz, he discussed the matter with in-house lawyers and outside counsel, and that they agreed Ovitz couldn’t be fired for cause. Eisner said he passed Litvack’s legal advice to Disney’s non-management directors during an unscheduled executive session after the company’s November 1996 board meeting, as Ovitz lingered outside the conference room. The directors didn’t adopt any official resolution regarding Ovitz at the executive session, and the full board never adopted a resolution granting Ovitz a no-fault termination before he was fired, Eisner said. Chandler agreed with Litvack’s conclusion that even though Ovitz received a large cash payment and the vesting of 3 million stock options, no formal action by the board was needed because Ovitz reported to the CEO. “Because the board was under no duty to act, they did not violate their fiduciary duty of care, and they also individually acted in good faith,” Chandler wrote. While ruling for plaintiffs, Chandler still chided Eisner — who leaves as CEO next month — for not adequately involving the board in business matters and having “enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom.” “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,” the judge wrote. “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 the law, does not comport with how fiduciaries of Delaware corporations are expected to act.” Eisner’s attorney, Gary Naftalis, said the CEO was “very pleased that the court, after hearing all the testimony and seeing the witnesses, has found that he and the other directors properly carried out their fiduciary duties to the shareholders. “This was a case where the evidence didn’t support any claims, and the judge after hearing it agreed,” Naftalis said. “We’re pretty happy.” Copyright 2005 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.

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