Canada: The Walt Disney Decision — Confirming the Business Judgment Rule and a Guide to Board Decision-Making

Last Updated: April 11 2006

Edited by Julie-Martine Loranger

Published in Above Board @ Gowlings, April 2006.

In August 2005, a Delaware Court issued the widely anticipated Disney decision, dismissing an action brought by shareholders against the directors of the Walt Disney Company.

After all the corporate scandals, class actions and prison sentences, the Disney decision comes to the rescue of directors.

Pursuant to the business judgment rule, directors are protected from personal liability against someone challenging their decisions taken in good faith, on an informed basis, in the best interests of the corporation. Consequently, the courts should not impose their decision on the business and affairs of a corporation.

The essential facts:

  • Disney's shareholders alleged various breaches of fiduciary duty by Disney's directors in connection with the hiring and termination of Michael Ovitz as President of the Walt Disney Company.
  • Mr. Ovitz was hired as President of Disney in 1995 with a salary of $23 million a year.
  • Mr. Ovitz had been personally selected by Michael Eisner, the CEO of Disney. Mr. Ovitz had been a personal friend of Mr. Eisner for nearly twenty-five years. These men were very well acquainted, both socially and professionally. Mr. Eisner had been trying to hire him for years. When Ovitz joined Disney, he had put in place "Creative Artist Agency" (CAA), a corporation with over 550 employees and about 1,400 of Hollywood's top actors, directors, writers and musicians — a roster that earned CAA approximately $150 million in annual revenues and an annual income of $20 million for Ovitz who was regarded as one of the most powerful figures in Hollywood.
  • Mr. Ovitz's Disney employment contract also provided him with a non-fault termination clause, pursuant to which Mr. Ovitz stood substantial compensation.
  • He was terminated 14 months later on a without cause basis and with a termination package of over $140 million in cash and vested stock options.

The Delaware Court noted that:

  • There were many aspects of the directors' conduct that fell significantly short of the best practices of ideal corporate governance.
  • Disney's board had virtually no role in the decision to hire Ovitz, and minimal input into his employment agreements: this material decision was taken in the course of one Compensation Committee meeting that lasted one hour and was based only on a term sheet.
  • The board had almost no choice in approving the decision to terminate Ovitz without cause: once it was determined by CEO Michael Eisner that he was unable to work well with Ovitz, the only alternative was Ovitz's termination.

The Court on Corporate Governance

The Court emphasized the distinction between compliance with fiduciary duties, which are legal obligations, and corporate governance best practices. It stated that:

Corporate governance best practices can be nothing more than an aspirational ideal as opposed to a template for a legal standard of care.

The Court also noted that the events in the Disney case took place in 1995-1996, before the corporate scandals and subsequent legislative focus on corporate governance, and therefore applying twenty-first century notions of best practices in analyzing the decisions of Disney's directors would be misplaced.

A guide to Board decision-making

In its decision, although the Court found that Eisner and the board had met the legal requirement, it definitely criticized the process followed. The Court also made it fairly apparent that the actions of both Eisner and the board would be unlikely to withstand scrutiny in the current corporate context.

A new mantra: process, process, process

Following the Disney decision, the courts will, more than ever, scrutinize the process by which the board reaches a decision.

Directors should therefore follow the next ten best practice rules:

a) Material / Information

  1. Directors shall receive the material well in advance of board meetings;
  2. Directors have to read and understand all the material received before the meeting — they must be prepared;
  3. Directors shall attend and participate at all meetings.

b) Time and number of meetings

In the Disney decision, the Court emphasized the importance of board and committees meeting minutes in determining what was discussed and not discussed at meetings, and whether questions were asked, and the nature of those questions.

The evidentiary value of meeting minutes strongly militates in favour of comprehensive minutes being prepared in order to demonstrate informed and good faith board participation, and consideration of actions of material importance to the corporation.

Therefore directors should:

  1. Not get caught in the rush of time; directors must take time to think;
  2. Not be afraid to ask the tough questions;
  3. Ask an expert's advice, if necessary;
  4. Have more than one meeting on material issues, if necessary;
  5. Insist on receiving and reviewing minutes of meetings.

c) Liability on a director-by-director basis

The Court stressed that liability determinations must be made on a director-by-director basis. Accordingly, the Court conducted a separate review of the actions of each of Disney's directors at each critical stage of the Ovitz employment and termination process.

Therefore directors should:

  1. Be proactive and diligent in providing oversight of management — they cannot just defer to the CEO;
  2. Always have a comprehensive understanding of the business and goals of the corporation.

In conclusion — The nature of business is risk and risk assessment

The Disney decision confirms the business judgment rule and the fact that courts should not discourage risk taking by second-guessing decisions of directors taken in good faith and on an informed basis.

If the courts start assessing liability based on ultimate outcome — directors may start taking decisions that minimize risk rather than maximize value; an outcome antithetical to a corporation's economic growth.

So yes, directors are protected by the business judgment rule against courts' scrutiny but provided the decision is taken in good faith, in the best interests of the corporation and on an informed basis.

Therefore make sure you follow process and remember Gowlings can guide you through this process.

Note: The Disney decision is currently under appeal before the Supreme Court of Delaware, where oral arguments were heard on January 25, 2006; a decision is now expected in about three months. Once it is known, we will update you on the impact it may have on your rights and responsibilities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions