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For the California lawyers who advise Silicon Valley boards, there’s mixed reaction to a Delaware judge’s decision Tuesday siding with the Walt Disney Co.’s board of directors in a shareholder suit over former President Michael Ovitz’s severance package. While many were relieved that Chancellor William Chandler of Delaware’s Court of Chancery didn’t side with the plaintiffs, lawyers advising their clients on employee benefits and compensation also took note that Chandler said he was not holding the board’s now 10-year-old actions to 21st century standards. “Even if it was not a case that said there was liability, it sets expectations for future conduct by the compensation committees,” said Scott Spector, chair of the executive compensation and employee benefits group at Fenwick & West. “I think people would be foolish not to fully understand what the judge was saying.” Lawyers say the publicity surrounding Ovitz’s 1996 severance agreement, and the very fact the suit was filed, had already affected boardroom decisions. Disney shareholders, represented by Milberg Weiss Bershad & Schulman, claimed the board breached its fiduciary duty when it approved a $140 million severance package for Ovitz after just 14 months on the job. “Even at smaller and mid-sized companies, the directors are focused on the case,” said John Aguirre, a Wilson Sonsini Goodrich & Rosati partner who represented Hewlett-Packard on ex-CEO Carly Fiorina’s severance package as well as the employment package for current CEO Mark Hurd. More than once, Aguirre said, he’s heard directors say, “I don’t want this to be a Disney case,” or “I want backup that this is a reasonable market practice.” Publicity in the Disney case and others have made directors more sensitive in recent years to the size of total compensation packages, Aguirre adds. “It makes the decision makers take the law and their fiduciary obligations more seriously,” he said, adding, “Nobody wants to see their names” in the paper. David Herbst, a partner at Manatt, Phelps & Phillips in Palo Alto, Calif., attributes much of that caution to Enron and its aftermath. And he said Tuesday’s decision could actually alleviate some of the concerns directors have had about pay packages. “I’ve been in a situation recently where a California company was looking to hire a new CEO and others were bidding for his service,” said Herbst. “This guy is head and shoulders above the rest.” In such a scenario, Herbst said, the Disney decision might make directors comfortable going “outside the box.” “It’s more of a victory for folks who want the board making decisions,” agrees Michael Lawson, a partner at Morgan, Lewis & Bockius. Boris Feldman, a litigation partner at Wilson, sees the pro-board decision as having even broader import outside of setting compensation and severance pay. Boards can take comfort in the judge’s affirmation of the principle that courts should give management decisions a wide berth. “It’s a strong reinforcement of the business judgment rule, which has been under attack over the last few years,” said Feldman.

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