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Judge Rules in Favor of Disney in Ovitz Case but Criticizes Eisner

August 10, 2005|Kim Christensen and Richard Verrier | Times Staff Writers

A Delaware judge Tuesday rebuked Walt Disney Co. Chief Executive Michael Eisner for his role in the ill-fated hiring and firing of Michael Ovitz as president, but ruled that he and other directors did not betray their duty to shareholders.

Chancellor William B. Chandler III of the state's Chancery Court ruled that Disney directors acted in good faith when Ovitz was hired in 1995 and then allowed to walk away 15 months later with a severance package shareholder lawyers now value at $130 million. But while relieving directors of legal liability, the judge also scolded them in his 175-page decision, reserving his sharpest comments for Eisner.

"By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz's hiring in particular, Eisner to a large extent is responsible for the failings in the process that infected and handicapped the board's decision-making capabilities," Chandler wrote.

Chandler's decision ended what he called "something of a public spectacle." Set in Delaware, where Disney is incorporated, the three-month trial last year attracted scores of national media to the tiny, 5,000-person community of Georgetown, where Chandler hears cases.

In Hollywood, the trial's webcast turned into popular entertainment, showcasing one of the most embarrassing episodes in the careers of two men who were once among the industry's most powerful and feared executives.

The trial was unusual because most shareholder lawsuits, which carry a high threshold of proof and are difficult to win, are settled before trial. Other corporate executives watched developments closely because they raised the possibility that directors' decisions could be second-guessed. Shareholder activists saw the trial as important in underscoring their argument that too many corporate boards are beholden to management.

Chandler's decision reinforced directors' rights to make decisions -- even bad ones -- if done in good faith. But its criticism of the Disney board and Eisner, who orchestrated the hiring of Ovitz, also is indicative of closer scrutiny for those who guide companies in the post-Enron era, corporate governance experts said.

Although the judge ruled in favor of the directors, shareholder activists did not view the decision as a defeat, noting Chandler's criticism of how the board handled the Ovitz matter. Some suggested the ruling might spur more shareholder activism.

"This is a very loud wake-up call to directors," said Charles Elson, a corporate governance expert at the University of Delaware. "No one here can be proud of what happened."

Lawyers for the shareholders, who sought reimbursement of Ovitz's payout, plus interest, vowed to appeal the decision.

"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," said Melvyn Weiss, a senior partner at plaintiffs' New York firm Milberg Weiss Bershad & Schulman.

Ovitz, while on a boating vacation in the Mediterranean with his family, said through his lawyer that he was relieved by the decision. "Obviously, I'm pleased that the chancellor found the allegations against me to be completely groundless," he said. "I'm looking forward to putting this behind me and moving ahead with my life."

Eisner's attorney, Gary Naftalis, hailed the ruling.

"We always believed that there was no basis for this case," Naftalis said, adding that Chandler's criticism of his client was "more than offset by the court's repeated affirmation of Mr. Eisner's credibility as a witness, its repeated findings that Mr. Eisner at all times acted in good faith consistent with his fiduciary duties, and its explicit recognition of Mr. Eisner's stellar track record as a CEO."

Stephen Alexander, an attorney for former directors Stanley P. Gold and Roy E. Disney, said he was pleased by the judge's decision, as did Jesse Finkelstein, who represented most of the other directors.

Ovitz's 1995 hiring was hailed at the time as a coup for Disney and Eisner, who had just engineered the acquisition of Capital Cities/ABC. Ovitz was a near-mythical figure then, frequently dubbed Hollywood's most powerful executive because he controlled a vast amount of talent as head of Creative Artists Agency.

Despite being one of Eisner's best friends, Ovitz never adapted to Disney's culture or to working at a public company, lasting a little more than a year.

Overshadowing the legal arguments at the trial was often dramatic testimony detailing the unraveling of a friendship between two of the entertainment industry's best-known figures. Ovitz testified Eisner was his "life partner," who shared family vacations in Aspen, and related how he stood vigil when Eisner underwent open-heart surgery.

But, Ovitz said, Eisner betrayed him. "I was cut out like cancer," he said. "I guess you could say I got pushed out the sixth-floor window."

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