Disney Litigants Fault Judge Over Ovitz Case

DOVER, Delaware A lawyer for Walt Disney shareholders has told the Delaware Supreme Court that a lower court judge erred when he absolved Disney directors in the firing of Michael Ovitz as president, a dismissal that cost the company $130 million in severance pay.

At a hearing Wednesday before all five justices, the lawyer, Steven Schulman, said that the trial court erred in its 174-page decision in August by failing to conclude that the board acted with gross negligence in the 1996 firing or that its abdication of duty was "conscious and in bad faith."

The pivotal legal issue in the appeal is the esoteric "business judgment rule." In its simplest form, the rule says directors are free to make unwise decisions without court interference, but not uninformed ones.

Schulman also criticized the trial judge, William Chandler III, for having accepted the "self-serving testimony" of the directors as evidence of their good faith.

"The trial court's decision shows that even a board that decides to take an 'ostrich-like' approach to making a business decision is immune from monetary damages if the director defendants testify that they acted in that manner in 'good faith,"' Schulman said in court papers.

The lawyer offered as an example of the board's gross negligence its decision to fire Ovitz after one year without cause, a move that made Ovitz eligible for his severance deal.

Schulman said there was adequate cause in the testimony of the former chief executive, Michael Eisner, who had hired Ovitz as president. Eisner testified that Ovitz "lacked veracity, he was a liar, there were morale problems," Schulman told the court.

But a lawyer for a group of directors, Greg Williams, defended the ruling, saying that the fact-finding process in Chandler's court was "meticulous and fair."

His comments prompted questions from the bench. Chief Justice Myron Steele asked, "Should we ignore the rule of law," no matter how "careful the fact-finding?"

Justice Henry duPont Ridgely asked whether the directors "could have been a little tougher in negotiations."

And Justice Jack Jacobs questioned the failure of the Disney compensation committee to fully inform the board about the consequences of a nonfault termination of Ovitz.

Eisner's lawyer, Gary Naftalis, rejected the plaintiffs' argument that the business judgment rule did not apply to nondirectors, citing legal scholars who believed it did.

Lawrence Hamermesh, a visiting professor at the University of Pennsylvania, said in an interview: "The courts have regularly invoked the business judgment rule in evaluating claims against officers.

And the courts have applied it and defendant officers have won because of it. But on the other hand, the analysis in those cases is not that deep, and the Delaware Supreme Court has never squarely ruled on it."