906 A.2d 27 (Del. 2006), aff'g 907 A.2d 693 (Del. Ch. 2005)
In re Walt Disney Co. Derivative Litigation is a leading Delaware case on the boundaries of directors' fiduciary duties—especially the meaning of bad faith—in the sensitive context of executive hiring and termination.
Did Disney's directors act in bad faith or commit waste in approving Michael Ovitz's employment contract and later authorizing a non-fault termination that yielded a very large severance payment, thereby breaching their fiduciary duties and incurring personal liability despite a § 102(b)(7) exculpation clause?
Under Delaware law, directors owe fiduciary duties of care and loyalty, and the obligation to act in good faith operates as a subsidiary element of the duty of loyalty. Bad faith involves either (1) conduct motivated by an actual intent to do harm (subjective bad faith), or (2) an intentional dereliction of duty, a conscious disregard for one's responsibilities—i.e., knowingly failing to act in the face of a known duty to act. Gross negligence alone (a due care violation) does not constitute bad faith. Where a corporation has a DGCL § 102(b)(7) charter provision, monetary liability for duty of care breaches is exculpated; only non-exculpated claims—loyalty, bad faith, or improper personal benefit—remain. Directors may rely in good faith on officers, employees, and experts under DGCL § 141(e). A claim of waste requires a showing that the consideration received was so inadequate that no person of ordinary, sound business judgment could conclude the corporation received adequate value.
The Delaware Supreme Court affirmed judgment for the defendants: the Disney directors did not act in bad faith, did not breach their fiduciary duties, and did not commit waste in connection with the approval of the Ovitz employment agreement or the subsequent non-fault termination. At most, any shortcomings implicated due care, which was exculpated by Disney's § 102(b)(7) charter provision.
Disney is a cornerstone of Delaware fiduciary law for three reasons. First, it sharply delineates bad faith from gross negligence, setting a demanding standard for non-exculpated liability: plaintiffs must prove intentional dereliction or disloyal motive, not merely flawed process. Second, it shows the powerful effect of § 102(b)(7) provisions—most public Delaware corporations have them—channeling derivative plaintiffs into loyalty/bad-faith theories. Third, it guides boards on executive compensation: while courts expect robust process and documentation, judicial review remains highly deferential so long as directors are informed in a basic sense, rely on qualified advisors, and act with a rational corporate purpose. The case also foreshadows Stone v. Ritter's framing of good faith within the duty of loyalty and continues to influence Caremark and compensation-related litigation.