Login

Login

To access this feature, please Log In or Register for your Casebriefs Account.

Add to Library

Add

Search

Login
Register

Brehm v. Eisner

    Brief Fact Summary.

    Brehm (Plaintiff) sued Eisner (Defendant) for approving an employment agreement and subsequent non-fault termination of Disney’s president, Ovitz.

    Synopsis of Rule of Law.

    A complaint that is mostly conclusory does not meet the rules required for a stockholder to pursue a derivative remedy.

    Facts.

    Disney hired Ovitz as its president although he lacked experience managing a diversified public company.  He was a friend of Eisner (Defendant), Disney’s Chairman, who alone negotiated Ovitz’s Employment Agreement with Disney, which was approved by Disney’s Board of Directors (Defendant).  The initial term of the agreement was five years and required Ovitz to devote himself and his best efforts exclusively to the Company full time.  In return he received a base salary of $1 million, a discretionary bonus, and options to purchase 5 million shares of Disney’s common stock.  Certain options would vest immediately upon termination.  According to the Agreement, Ovitz’s employment could end by his contract not being renewed in five years; Disney’s terminating him for good cause before the five-year expiration; or if Ovitz resigned voluntarily.  Non-fault termination would entitle Ovitz to the present value of his remaining salary payments through September 2000, a $20 million severance payment, an additional $7.5 million for each fiscal year remaining under the agreement, and the immediate vesting of the first $3 million stock options.  Soon after Ovitz began to work problems arose, and Brehm (Plaintiff) claims that these problems were sufficient to let Orvitz go for cause.  Eisner (Defendant) and Ovitz, however, agreed to arrange for Ovitz to leave Disney on the non-fault basis provided in the Agreement, a New Disney Board (Defendant) approved his decision.  Plaintiff alleges that the Old Disney Board (Defendant) approved his decision.  Plaintiff alleges that the Old Disney Board of Directors (Defendant) breached its fiduciary duty by approving the wasteful Agreement; that the New Disney Board (Defendant) breached its fiduciary duty by agreeing to a non-fault termination of the Agreement, and that the Directors (Defendant) were not disinterested and independent.  Plaintiff claimed that the Old Disney Board (Defendant) failed to properly inform itself regarding the total costs and incentives of the Agreement, especially the severance package.  The Board (Defendant) had relied on a corporate compensation expert in connection with its decision to approve the Agreement.  However, the expert had not quantified for the Board (Defendant) the maximum payout to Ovitz under the non-fault termination scenario.  The expert later stated that he should have done so at the time.  Brehm (Plaintiff) also alleges the Board with waste in that the severance package was over $140 million when Disney really owed Ovitz nothing as he either resigned or could have been fired for cause.

    Issue.

    Do the particularized facts alleged in the Complaint provide a reason to believe that the conduct of the New and Old Disney Boards (Defendant) constituted a violation of their fiduciary duties?

    Held.

    (Veasey, C.J.)  No.  The particularized facts as alleged in the Complaint do not provide a reason to believe that the conduct of the New and Old Disney Boards (Defendant) constituted a violation of their fiduciary duties.  Although the Boards’ (Defendant) actions probably did not demonstrate good business judgment of directors since the compensation and termination payout to Ovitz were lucrative compared to his value to Disney, and the Boards’ (Defendant) handling of the termination of the Agreement was sloppy, the 88-page Complaint is conclusory, it was not artfully drafted, and was properly dismissed because it did not meet the standards for pleading derivative suits.  The pleading standards required are particularized factual statements that are essential to the claim, and they must be concise, simple, and direct.  The plaintiff must allege with particularity facts that raise a reasonable doubt regarding whether the corporate action being questioned was properly the product of business judgment.  Conclusory allegations are not considered as specifically pleaded facts or factual assumptions.  Here, the Complaint does not comply with these fundamental pleading mandates as it is full of conclusory language.  First, Brehm’s (Plaintiff) theory that the New Disney Board (Defendant) was not disinterested because it was obligated to Eisner (Defendant), and a excessive contract to Ovitz would result in Eisner’s (Defendant) own compensation increasing, is not supported by facts that are well-plead, only conclusory allegations that are illogical and counterintuitive.  No reasonable doubt can exist about Eisner’s (Defendant) disinterest in the approval of the Agreement, and Brehm (Plaintiff) therefore has not demonstrated a reasonable doubt that Eisner (Defendant) was disinterested in granting a non-fault termination to Ovitz.  A majority of the New Disney Board (Defendant) was therefore disinterested and independent.  Second, the Complaint does not present particularized facts to create a reasonable doubt that the decisions of the Boards (Defendant) were not protected by the business judgment rule.  Brehm (Plaintiff) argues that the Directors (Defendant) did not avail themselves of all material information reasonably available in approving the Agreement and therefore, that they violated their fiduciary duty of care.  The particularized facts in the complaint must create a reasonable doubt that the informational component of the directors’ (Defendant) decision-making, measured by concepts of gross negligence, included consideration of all material information reasonably available.  The economic exposure of Disney to the payout scenarios of the Agreement was material for purposes of the Directors’ (Defendant) decision-making and the dollar exposure numbers were reasonably available.  The complaint charges that neither he nor the Directors (Defendant) made the calculation, although all the necessary information was available to do so.  The trial court’s reading of the Complaint, that only the expert and not the Board (Defendant) itself failed to bring to bear all the necessary information, was too restrictive, but nevertheless harmless.  The Directors (Defendant) relied in good faith on a qualified expert and therefore have presumption that they exercised proper business judgment.  Brehm (Plaintiff) must rebut the presumption that the Directors (Defendant) properly exercised their business judgment, including their good faith reliance on his expertise.  The trial court’s error is harmless since it is not a sufficient rebuttal to say what the expert now believes in hindsight as to what he and the Board (Defendant) should have done in 1995.  Therefore the Complaint was subject to dismissal.  Brehm (Plaintiff), however, should be provided the opportunity to properly replead this issue.  Third, the Complaint failed to set forth particularized facts to create a reasonable doubt that the decision of the Directors (Defendant) to enter into the Agreement was a product of the proper exercise of business judgment.  The agreement was not a wasteful transaction for Disney.  It was not such a one-sided exchange that no businessperson of ordinary, sound judgment could conclude that the corporation has received adequate consideration.  The Boards’ (Defendant) decision on executive compensation is entitled to great deference.  There are outer limits, but those are confined to unconscionable cases when directors irrationally squander or give away corporate assets.  Fourth, the Complaint as currently pled does not set forth particularized facts that Ovitz resigned or unarguable breached his Agreement.  There are no facts that show he actually resigned before the Board (Defendant) acted on his non-fault termination.  In addition, the Complaint is inconsistent because it states that Ovitz would not actually resign before he could achieve a lucrative payout under the generous terms of his Agreement.  Fifth, the Complaint also alleges that it was waste to pay Ovitz under non-fault termination when the Boards could have fired him for cause.  The facts in the Complaint show Ovitz’s performance as president was disappointing at best and arguable grounds existed to fire him for cause.  However, what is claimed is only an argument that his conduct constituted negligence or malfeasance.  Disney would have had to persuade a trier of fact in litigation which would have been expensive, distracted executives, company resources, caused lost opportunity costs, bad publicity, and an uncertain outcome.  The Complaint does not show that no reasonable businessperson would have made the decision that the New Disney Board (Defendant) made under these circumstances.  Brehm (Plaintiff) therefore will have another opportunity on remand to replead.  The lower court’s ruling is reversed, only as to its ruling of dismissal with prejudice as to claims for breach of fiduciary duty and waste which shall now be dismissed without prejudice.  Remanded.

    Discussion.

    The case makes evident, that without properly pled seriously egregious conduct on a board’s behalf, it is unlikely that a court will hold a board liable for approving an employment agreement, and subsequent termination agreement, which costs the company a great amount of money.



    Create New Group

      Casebriefs is concerned with your security, please complete the following