Disney, Friendship and Director Independence

Earlier, we wrote about the Disney case and how the Chancery and Supreme Court summarily dismissed a challenge to the disinterested status of Michael Eisner that arose from his close, 25 year friendship with Michael Ovitz. 

In the ordinary course of things, that would have been the end. Plaintiffs' case was dismissed; discovery was not allowed.  To guess what might have been uncovered had discovery proceeded would have been a matter of speculation, not a particularly useful exercise. But, of course, there was nothing ordinary about Disney. It continued, culminating in a lengthy trial with a voluminous record and another appeal. The relationship between the two Michaels also became the subject of a high profile book, DISNEY WARS. From these sources, considerable additional information about the relationship surfaced, including that:

• the two had been “close” friends for nearly a quarter of a century and “were very well acquainted, both socially and professionally;”
• Ovitz was Eisner’s closest friend in Hollywood;
• The wives of the two men were best friends;
• The two families vacationed as a group and spent Christmas together in Aspen in 1995;
• Eisner’s wife called Ovitz when Eisner had unexpected open-heart surgery and Ovitz terminated a planned vacation to come to the hospital;
• Eisner invited Ovitz to be with him and his wife while awaiting the final decision on whether he would be appointed as CEO of Disney;
• Eisner would use effusive terms when writing to Ovitz. A letter written by Eisner in October 1996 included: “You still are the only one who came to my hospital bed – and I do remember; “ and
• Ovitz would use effusive terms when writing to Eisner.

In other words, despite the four dismissive sentences by the Delaware courts, the two had an extraordinarily close relationship over a protracted period of time that encompassed their respective families. An examination of their interlocking business relationships would no doubt have added to the strength of the relationship. Most of the information, however, was not in the public domain, uncovered only by the sleuth of an author and the compulsion of a trial.

In other words, the courts refused to allow discovery or permit examination of a personal friendship in an effort to show that a director was interested or lacked independence.  The law has evolved, and we will talk about that in the next few posts.  Nonetheless, suffice it to say that Delaware courts still do not give adequate weight to allegations that directors lack independence because of close friendship.  The reality is that boards considered independent under Delaware law can be full of close friends and business partners.   You can read more about the case in my article here.

Comments

[Harry Gerla]

My speculation is that courts don't want to make tough calls. One can usually determine who one's close relatives are, or figure out how big a financial stake is. Determining what degree of friendship or feelings of institutional sympathy exists at any particular time is a lot tougher. It also would subject directors and officers to a great deal of questioning on matters most of us would consider personal.

The above is not meant to say that courts shouldn't be making those tough calls or allowing litigants to explore matters of friendship and affinity. My comment is merely meant as an explanation of why Delaware courts are so hostile to claims that friendship creates directorial conflicts of interest.