Brehm v. Eisner
Name and Citation
Brehm v. Eisner (In re Walt Disney Co. Derivative Litigation.), [906 A.2d 27]
Court
Supreme Court of Delaware
Judicial History
Plaintiff stockholders brought derivative suit alleging that corporate directors breached their fiduciary duties in connection with the 1995 hiring and 1996 termination of a corporation's president. Shareholders are appealing a ruling by the Court of Chancery of Delaware which ruled in favor of appellees and found that the director defendants did not breach fiduciary duty to company.
Facts
· Disney Corporate directors hired Ovitz to be president of the Corporation in 1995 and entered into a five-year employment agreement that, among other things provided for very large severance package in the event of a no-fault termination of Ovitz.
· No draft of the employment agreement was given to the compensation committee for review, and the only information about the agreement recorded in the minutes was an incomplete summary.
· After 14 months, Ovitz was terminated using the "no fault" method, which triggered the severance package.
· The shareholders charged the employment agreement and the no-fault termination constituted breaches of fiduciary duty and corporate waste by the directors.
· Plaintiffs alleged that the directors had acted without due care and in bad faith, because they made a material decision to hire Ovitz under the employment agreement without adequate information and adequate deliberation shown.
· Chancery court held that even though the corporate minutes were not sufficiently detailed to satisfy the business judgment rule, the plaintiff’s complaints were not particularized enough for the court to rule that the corporate board of directors acted in bad faith.
Issue #1
Does the business judgment rule shield the decisions of a Board of Directors if the directors are unable to show that they had adequate information and adequate deliberation for a material decision?
Holding
Yes. If the board's decision at the time it was made was not clearly made in bad faith, the business judgment rule is a complete defense to any claim that the board violated its fiduciary duty. Even if ex post facto, the decision is found to be excessively risky.
Reasoning
Neither Eisner’s nor any member of the board’s actions with respect to the employment agreement and the termination were inconsistent with fiduciary duty. Although the corporations business practices were not necessarily model practices, there is no evidence that Eisner’s decision was in bad faith; and yet, Eisner had a track record of making good company decisions, which shows that he most probably made a decision that he thought was best for the company.
Issue #2
What must be presented in a shareholder complaint to show that the board of directors acted in bad faith?
Holding
The complaint must show particularized facts that if proven, would show by a preponderance of evidence that the board acted in bad faith, or lacked independence relative to the decision, or acted irrationally by the standards of a rational business person, or did not consider all material facts reasonably available.
Reasoning
The plaintiff’s complaint fails to allege any particularized facts that show that the board or any one of its members acted in bad faith. They do show by a preponderance of evidence that the board was negligent in its decision making, but mere negligence is not enough to constitute conduct in bad faith.
Decision
Affirmed.
Opinion by:
William B. Chandler III, Chancellor
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