Private equity GPs have many things on their minds – their funds, their portfolio companies, their compensation, their personal affairs. Because of these time constraints, many followed with interest the recently closed case against The Walt Disney Company which, had the decision gone the other way would have meant that directors would more easily have been held liable for not being proactive on the boards of public companies.
The case pitted shareholders against the board members of Disney which agreed to pay outgoing president Michael Ovitz a whopping $140 million after he served at the corporation for only one year. The plaintiffs called this gross negligence. In August, a Delaware Chancery Court judge called it ?ordinary negligence that did not prove the board members acting in bad faith when they agreed to Ovitz's compensation package, drawn up by CEO Michael Eisner and his personal lawyer.
The plaintiffs had complained that the board members failed to even read Ovitz's employment agreement or hear a presentation on it by a compensation expert. Chancellor Chandler found that the board members were not required to exercise that extra degree of care so long as they were not ?consciously and intentionally disregard[ing] their responsibilities, adopting a ?we don't care about the risks? attitude concerning a material corporate decision.?
Chandler noted several times in his decision that the employment contract was worthy of criticism, but warned that holding board members liable for merely making good-faith decisions that turned out to be wrong would stifle risk-taking and innovation.
In a memo on the decision, law firm Debevoise & Plimpton wrote that directors should not necessarily ?relax now that Disney's board is off the hook. ?The Disney defendants were absolved, but only after a searching, 37-day trial that concluded a decade after the initial events.?
The case is ?an important reaffirmation of the business judgment rule, but also a sobering reminder of the central importance of good process in board and committee decision making, the memo concludes.
A separate client memo from law firm Weil, Gotshal & Manges notes:?In short, a director's best protection continues to lie in his or her diligent and objective attention to board matters.?
With so much else going on for private equity GPs, attention to board matters is something that legal experts are quick to highlight as a smart lawsuit-avoidance strategy.