Is Disney about to be reversed?

The Delaware supreme court is taking a long time following oral arguments to decide Disney. I believe this means it's about to reverse.  Assuming I'm right so far, the question is why. Here I'm going to take a stab at predicting the general outlines of the Supreme Court opinion as a kind of followup to my preview of the Chancellor's opinion.

Chancellor Chandler held that there was no gross negligence or bad faith in hiring and terminating Ovitz.

As for gross negligence, I've opined that Van Gorkom is dead. Steve Bainbridge disagreed, but would confine VG's current realm to a case unlike Disney:

Nothing about the Ovitz case changes my mind or suggests to me that Van Gorkom is a dead letter. The $140 million paid to Ovitz was smaller in relation to the total value of Disney than the $200 million was in relation to the value of Trans Union. Moreover, approval of even a large and unusual employment contract is more routine then approval of the sale of the company and the Disney board at least did hire an outside expert.

Although Steve and I disagree on the death of VG, it seems we both agree that Disney shouldn't be reversed on this ground. Now I'm not so sure. I suspect the court might conclude that, in light of SOX and the expansion of federal power, now is not the time for the Delaware courts to wimp out on fiduciary duties. Maybe the court believes that it needs to not only pay lip service to Van Gorkom, but also come up with a holding based on it.

I don't think that the court will reverse on bad faith. The appellant argued in part that the chancellor erred in considering bad faith before determining breach of duty. For the reasons Gordon has expressed, this seems unlikely.

I also doubt the court will hold that the chancellor applied the wrong standard of bad faith. Recall that the chancellor required a showing of conscious and intentional disregard of responsibilities. What's the alternative, unless the court eviscerates 102(b)(7) and go back to something like a gross negligence rule?

As for gross negligence, the court will hold that the chancellor was required to, and clearly did, do a gross negligence analysis. The supreme court is not going to second-guess the court's application of these rules to the facts. So what's left as a basis for reversal?

One possibility is that the chancellor let Poitier and Lozano off the hook essentially on Bainbridge grounds – they spent less time than the TransUnion board, but this was a different kind of transaction. The supreme court might say this transaction was important enough to require the same level of attention.

This would fit in with all the public agitation on executive compensation and the performance of executives and the need for active board supervision of these matters. But such a holding would be problematic because it seems to deny the need for perspective and judgment – just what the feds have lost with the obsession with trivia in the SOX internal controls rule.

Another possible basis for reversal is that the chancellor held that Eisner had the power to terminate Ovitz on his own, and therefore that the board had no duty to act. The supreme court might hold that this was wrong -- the ceo's technical power does not limit the board's duty. This holding would satisfy the need to tell the board to do more, yet on a sufficiently narrow ground that the court can distinguish it in the future. So by taking this tack, the court will have satisfied its need to preserve VG without too great an expansion of the board's duties.

The result of all this would be a remand to apply Van Gorkom in light of the court's holding.

Note that all of this concerns application of the bjr, and might well be mooted eventually by application of good faith on the "back end" of 102(b)(7).  Obviously this would be a lot of running around to get to the same result.  However, as I noted before, the court's interested in making a point, not getting to a result.

Additional thought:  The above analysis leads to the seemingly weird result that Eisner gets off while the board members go down for not controlling him. Of course good faith would ultimately fix that by letting everybody off. Apart from that, I'm not sure how Eisner goes down without questioning his substantive business judgment or finding a breach of a duty of loyalty, and both are stretches here.

Comments

[Elizabeth]

Here we are - the 28th. Curious, the time lag. I remain naively optimistic, and I will hopefully assume that the time lag means that the Del. Supr. Ct. is reversing/vacating. Since I am creating my own little dream world on the topic, I will further assume that the Supr. Ct. is either (1) reversing on the application of the law, holding that, on the facts as presented, the Chancellor erred in concluding that the directors acted in a way that was NOT grossly negligent or (2) vacating with a remand, with instructions to Chancellor Chandler to look for the ABSENCE of good faith as opposed to the affirmative existance of bad faith. Hopefully somewhere in the opinion is a statement congratulating the Chancellor on well-defining good faith initially but suggesting that the Chancellor failed to use his own definition and, instead, resorted to the eaiser (?) option of looking for bad faith.