Brehm v. Eisner was a shareholder derivative lawsuit challenging the roughly $140 million severance package that The Walt Disney Company paid to Michael Ovitz after about 14 months as president. The Delaware courts dismissed the case, holding that the board’s decisions were shielded by the business judgment rule and that the shareholders had not pleaded particularized facts sufficient to excuse a pre-suit demand on the board.1Justia. Brehm v. Eisner
The Ovitz Hire and Severance
Michael Eisner, Disney’s CEO, recruited Michael Ovitz to serve as president in 1995. Ovitz was a highly successful Hollywood agent, and Disney offered an extraordinarily lucrative employment agreement to secure him. The relationship did not work. After roughly 14 months, the board ended it under a non-fault termination clause built into the original contract.2Justia. In re Walt Disney Co. Derivative Litigation
That clause triggered a large payout: nearly $39 million in cash plus the immediate vesting of options for three million shares of stock. Shareholders valued the total package at approximately $140 million and sued derivatively, arguing that the directors had let a departing executive walk away with a windfall the company received nothing for.1Justia. Brehm v. Eisner
Why the Business Judgment Rule Protected the Board
Delaware evaluates board decisions through the business judgment rule. The rule presumes that directors act on an informed basis, in good faith, and in the honest belief their choices serve the corporation’s best interests. When a majority of the directors have no personal conflict and act with due care, courts will not second-guess the wisdom of the decision, even one that later looks unwise.3Delaware Corporate Law. The Delaware Way: Business Judgment Rule
On the duty of care, Delaware courts apply a gross negligence standard. A plaintiff has to show that the board drastically departed from the conduct expected of a careful fiduciary, not merely that the outcome was bad. The rule exists so directors can take business risks without personal liability for results that judges, working with hindsight, might view differently.3Delaware Corporate Law. The Delaware Way: Business Judgment Rule
Why the Waste Claim Failed
The shareholders’ main theory was corporate waste. To prove waste, a plaintiff has to show a transaction so one-sided that it serves no corporate purpose, one that no person of ordinary sound business judgment would have agreed to. It’s an extremely high bar, reserved for transfers that are effectively gifts of corporate assets.4Justia. Criden v. Steinberg – Section: Corporate Waste Claim
The Ovitz payout did not meet that standard. However large the number, it was a contractual obligation the board had agreed to when it hired him, and paying it out under the non-fault clause ended a failing employment relationship without the cost and risk of litigation. The company received the benefit of honoring its contract and closing the matter, so the payment was not an irrational gift.2Justia. In re Walt Disney Co. Derivative Litigation
The Demand Futility Hurdle
Because this was a derivative action, the shareholders had to satisfy Court of Chancery Rule 23.1. That rule requires particularized facts showing that a pre-suit demand on the board to bring the lawsuit itself would be futile. The court asks whether there is reason to doubt the directors could bring their impartial business judgment to bear on such a demand.2Justia. In re Walt Disney Co. Derivative Litigation
Pointing to a large payout and a bad outcome was not enough. The shareholders needed specific allegations showing the board was incapable of acting in the corporation’s best interests, and they did not clear that threshold. The case became a defining example of how difficult it is to plead around the business judgment rule in Delaware, and its demand-futility analysis has continued to shape derivative practice in the years since.5Justia. United Food v. Zuckerberg