Disney suit altered the legal landscape

Financial Times
August 11, 2005

Just over two years ago, shareholder activists still reeling in the wake of the corporate meltdowns at Enron and WorldCom celebrated a decision by Judge William Chandler that they believed would herald a new era of accountability in US boardrooms.

By ruling that investors could bring a case against Disney's board for approving a $140m severance package for Michael Ovitz, fired after just 14 months as Disney president, Judge Chandler was sending a distinct message: directors could be held personally liable if they failed to live up to their fiduciary responsibilities. The decision was unique, in part, because it did not require directors to have personally benefited from poor decision to hold them financially accountable.

The 2003 ruling reverberated far beyond the Disney case, creating a legal landscape that encouraged investors in companies ranging from Hollinger to AIG, the insurance giant, to mount legal challenges against boards after allegations of corporate malfeasance, and boardroom acquiescence.

But the 2003 shareholder victory, which simply allowed the case to go to trial, hit a snag on Tuesday, after Judge Chandler ruled that the Disney board could not be held liable for approving Mr Ovitz's severance package.

Corporate governance experts yesterday said Judge Chandler's ruling was not, ultimately, as signficant as his decision to allow the case to be heard in the first place. "This affects everything. The issue was the standard of law that [Chandler] created and that he allowed it to go to trial," said Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware. Mr Elson says that the Chandler decision does raise a high bar for monetary liability for directors, but also "opens a door" for shareholders by creating a duty of good faith.

Robert Curry, a member of the Board of Advisors of Columbia Law School's Center on Corporate Governance, said Judge Chandler, in emphasising that his finding that the Disney directors acted in good faith was dependent on the unique facts of the case, made it easier for shareholders in the future to be heard when challenging actions of their directors.

The Disney case also contrasts another lesser-known ruling in Delaware last year, when Judge Jack Jacobs ruled that a director of a US Virgin Islands-based telecoms group, Emerging Communications, was personally financially liable for approving a transaction that was not in the interest of investors because he knew "or at the very least had strong reason to believe" that the price was unfair.

In making his judgment, Judge Jacobs ruled that the director's "specialised financial expertise" he had previously worked as a securities analyst for Lazard and Gabelli & Co meant that he had "consciously and intentionally disregarded" his responsibilities.

Labels: AIG, Enron