Lessons from the Disney Decision

• Posted by Geoffrey G. Gussis on August 20th, 2005


• Filed in Risk Management & Compliance

Dennis J. Block and Martin Seidel (of the venerable Cadwalader, Wickersham & Taft firm) give their take on the lessons to be learned from the Disney decision:

"First, directors must take an active interest in the management of the business. They should not permit the CEO to "enthrone himself as the omnipotent and infallible monarch of his [own] personal Magic Kingdom." The board should also not permit the CEO to act unilaterally (or with a small inner circle) to make significant decisions, only bringing them to the board for ratification when they are "as a practical matter . . . a ‘done deal’". While the court acknowledges that the Board should not attempt to manage the "everyday governance" of a corporation, and logically must delegate responsibility to management, the Disney decision indicates that "blank check" delegation and "sycophantic" deference to even a successful CEO is not appropriate. Thus, while the board may delegate power to the CEO, it must define carefully the limits of that delegated power and should insist on being kept informed by management, especially concerning actions that approach the limits of that delegated authority. The board also must be prepared to "think for itself and assert itself against the CEO when necessary." In other words, it must learn to say "no." Indeed, the Court warns that it is "precisely in this context – the imperial CEO or controlling shareholder with a supine or passive board — that concepts of good faith may prove highly meaningful. . . . Good faith may serve to fill [the] gap and ensure that the persons entrusted by shareholders to govern Delaware corporations do so with an honesty of purpose and with an understanding of whose interests they are there to protect.

Second, directors should use all the resources available to them to
obtain and verify information critical to significant decisions.
Directors should actively question management and regularly seek from
them any information that seems pertinent to their oversight of the
business or the specific decisions before the board. Similarly, the
board should avail itself of the right to retain its own independent
experts (including, where appropriate, legal counsel) to provide advice
and analysis. It should be noted that the board can rely on the advice
of such experts, but that the recommendations of an expert need not be
followed if the board in its business judgment determines not to do so.
Moreover, while the law allows directors to rely upon management and
experts, where it is possible easily to confirm the information
provided by these experts or by management or request supporting backup
materials, directors should do so. Similarly, where the underlying
documents for a proposed transaction are available, directors should
review them rather than rely upon on term sheets or summary
descriptions, and experts should be asked to make formal presentations
to the board or relevant committee where directors can question them
directly, rather than rely upon management’s summary of their
conclusions.

Finally, the Court’s opinion suggests the importance of
well-prepared minutes and legal opinions. The absence of any
documentation that Disney’s legal counsel (inside or outside) had
considered whether Ovitz could be terminated for cause thereby avoiding
the massive termination payment and the vague and unclear minutes of
the meeting approving Ovitz’s employment agreement contributed to the
uncertainty surrounding whether the directors fulfilled their fiduciary
duties. In contrast, well-prepared minutes and memoranda presented to
the board by management and the board’s advisors may demonstrate
(without a costly trial) that the directors carefully considered their
options before embarking upon approving a challenged course of action."

Link: Cadwalader,
Wickersham & Taft LLP - United States - The Disney Decision
(18/08/2005) from Mondaq (free registration required).