In re Walt Disney Co. Derivative Litigation (Del. 2006)

After Smith v. Van Gorkom, Disney is the closest Delaware courts have come to imposing monetary liability on disinterested directors, after trial on the merits. The litigation was heavily colored by Disney's 102(b)(7) waiver, which Disney and most other large corporations had adopted after Van Gorkom. The Delaware Supreme Court, however, chose first to make an affirmative finding that the defendants met even the default standard of due care.

Questions:

As you read that part of the opinion (chiefly IV.A.1), ask yourself why the court reached the opposite result from Van Gorkom:

1. Did the court apply different law, i.e., did it overrule Van Gorkom, explicitly or implicitly?
2. Did the case present materially different facts? The Disney court certainly paints a more favorable picture of the board process than the Van Gorkom court. But were the processes substantively different? Imagine you are the plaintiffs' lawyer (or a judge in the Van Gorkom majority) and try to recast the Disney facts in a light less favorable to the defendants.

In answering the last question, consider the following questions about executive compensation, which is at issue in Disney:

1. Executive pay is high. In particular, the median CEO of an S&P 500 company is paid around $15 million per year, over 250 times the median wage in the United States. Why?
2. Much of executive pay is in the form of restricted stock (i.e., stock that the executive is not allowed to sell for a number of years) and stock options (i.e., the right to acquire the corporation’s stock in the future at a specified price). Why?
3. Why did Disney’s board offer even more than this to Ovitz (which alternatives did it consider)? And what incentives were generated by the structure of Ovitz’s compensation package?

The Disney court next addresses “good faith,” which is a necessary condition for liability protection under DGCL 102(b)(7) (as well as for indemnification under DGCL 145(a) and (b)).

1. How does the court interpret “good faith”?
2. How does “good faith” relate to the duty of care and the duty of loyalty?
3. Was addressing both “good faith” and the default standard of due care necessary for the court’s decision of the case? If not, why did it?