University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

127

Pages:

2
Author:

bratrochanter

The Brehm v. Eisner case examined whether Disney’s board of directors acted in accordance with their fiduciary duties when they approved the hiring, compensation, and termination of Michael Ovitz, Disney’s former president, who left the company with a significant severance package. Disney shareholders alleged that the board, especially Eisner and the compensation committee, breached their duty of care by failing to inform themselves properly about Ovitz's employment terms, particularly the costly Non-Fault Termination (NFT) clause in his contract. The Delaware Supreme Court ruled that the board’s decision to hire Ovitz and approve his compensation package was protected under the business judgment rule. Here are the main findings and principles from the ruling: 1. Application of the Business Judgment Rule: o The court held that directors' decisions are generally protected by the business judgment rule if they are made in good faith, are informed, and free of conflicts of interest. The shareholders failed to prove any of the directors’ actions were grossly negligent or in bad faith, which would be required to rebut this presumption. 2. Delegation to the Compensation Committee: o Disney’s governing documents allowed the compensation committee to make decisions about executive pay and employment contracts. The committee’s actions were deemed appropriate, and the court confirmed that such delegation of authority was lawful under Delaware law. 3. Duty of Care and Informed Decision-Making: o Although the court noted that the compensation committee’s process was not aligned with best practices (such as preparing a detailed projection of severance payments), it still determined the board members did not violate the duty of care. The committee had access to relevant information and expertise, which supported the reasonableness of their decisions. o The court acknowledged that “best practices” would have entailed more comprehensive documentation, but it maintained that falling short of these did not constitute a breach of duty, so long as the board’s actions were not grossly negligent. 4. Standard for Gross Negligence: o To lose the protection of the business judgment rule, directors’ actions must amount to gross negligence—a higher threshold than mere poor decision-making. In this case, although costly, the board’s decision to approve Ovitz’s contract was seen as a rational business decision made in an uncertain hiring context. 5. Practical Takeaway for Corporate Governance: o While “best practices” in corporate governance can prevent misunderstandings and enhance decision-making, they are not strictly required by law. Boards should seek thorough advice, document their processes, and maintain transparency, particularly in high-stakes decisions, to reinforce the presumption of good faith. The case underscored the business judgment rule’s flexibility and emphasized that while courts will examine the processes behind board decisions, they generally defer to directors’ judgment unless there is clear evidence of gross negligence or bad faith.