Disney and the Dismal Standard for the Duty of Care

In In re the Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006), the Delaware Supreme Court wrote what was probably the final chapter in the long running dispute over the $130 million paid to Michael Ovitz upon his departure from Disney.  The Court of Chancery dismissed the original complaint in 1997, only to be reversed three years later. 

The Court established dismally low standards necessary for directors of public companies to meet their obligations under the duty of care.  Succinctly stated, the court found that “best practices” did not necessarily equal “due care,” and that the Disney directors were adequately informed in making the decisions in question.  It was enough that the compensation committee had a term sheet without any quantification of the payout that would occur upon termination. 

The court also found sufficient factual support that the Disney defendants did not act in bad faith. Most interestingly, plaintiffs’ efforts to treat a failure to exercise due care as a failure to act in good faith was not only rebuffed by the court, but also served as a point of departure for the court’s analysis of what constituted “bad faith” (“Although the chancellor found, and we agree, that the appellants failed to establish gross negligence, to afford guidance we address the issue of whether gross negligence [including a failure to inform one’s self of available material facts], without more, can also constitute bad faith. The answer is clearly no.”). Thus, while the court concluded that the Chancellor’s definition of bad faith – intentional dereliction of duty, a conscious disregard for one’s responsibilities—was a legally appropriate terminology, “bad faith” could not be categorically defined and operates somewhere between subjective bad intent and conduct resulting from gross negligence.

Primary materials on this case can be found at the DU Corporate Governance website.