In Re Walt Disney Co. Derivative Litigation

*696 OPINION

TABLE OF CONTENTS

Introduction. 697

I.FACTS . 699

A. Michael Ovitz Joins The Walt Disney Company. 699

1. Background. 699

2. Ovitz First Contemplates Leaving CAA But His Negotiations With MCA Fail. 701

3. Ovitz Seriously Considers Joining The Walt Disney Company. 702

4. Ovitz’s Contract With Disney Begins to Take Form. 703

5. Crystal is Retained to Assist Russell and Watson in Evaluating the OEA 704

6. Ovitz Accepts Eisner’s Offer. 706

7. Disney’s Board of Directors Hires Michael Ovitz. 708

8. The October 16,1995 Compensation Committee Meeting. 710

B. Ovitz’s Performance as President of the Walt Disney Company. 711

1. Ovitz’s Early Performance. 711

2. A Mismatch of Cultures and Styles . 713

3. Approaching the Endgame. 714

4. Specific Examples of Ovitz’s Performance as President of The Walt Disney Company. 715

5. Veracity and “Agenting”. 719

6. Gifts and Expenses. 722

C. Ovitz’s Termination. 724

1. The Beginning of the End. 724

2. The September 30,1996 Board Meeting. 726

3. Options for Ovitz’s Termination. 728

4. The November 25,1996 Board Meeting. 730

5. The Illusion Dispelled. 732

6. Ovitz’s Bonus and His Termination . 733

D. Expert Witnesses. 740

1. Professor Deborah DeMott. 740

2. Professor John Donohue. 741

3. Professor Kevin Murphy. 742

4. Larry R. Feldman. 743

5. John C. Fox. 744

6. Frederick C. Dunbar. 744

II. LEGAL STANDARDS. 745

A. The Business Judgment Rule. 746

B. Waste. 748

C. The Fiduciary Duty of Due Care. 749

D. The Fiduciary Duty of Loyalty. 750

E. Section 102(b)(7). 751

F. Acting in Good Faith. 753

III. ANALYSIS. 756

A. Ovitz Did Not Breach His Duty of Loyalty. 757

B. Defendants Did Not Commit Waste . 758

C. The Old Board’s Decision to Hire Ovitz and the Compensation Committee’s

Approval of the OEA Was Not Grossly Negligent and Not in Bad Faith 760

1. Eisner. 760

2. Russell. 763

3. Watson. 765

*697 4. Poitier and Lozano. LQ CO

5. The Remaining Members of the Old Board. r-i t>

D. Eisner and Litvaek Did Not Act in Bad Faith in Connection With Ovitz’s Termination, and the Remainder of the New Board Had No Duties in

Connection Therewith. <1 —3 t\D

1. The New Board Was Not Under a Duty to Act. -3 •<! CO

2. Litvaek. -Q —3 O

3. Eisner. <3 •"3 -3

IV. CONCLUSION. . 779

INTRODUCTION

This is the Court’s decision after trial in this long running dispute over an executive compensation and severance package. The stockholder plaintiffs have alleged that the director defendants breached their fiduciary duties in connection with the 1995 hiring and 1996 termination of Michael Ovitz as President of The Walt Disney Company. The trial consumed thirty-seven days (between October 20, 2004 and January 19, 2005) and generated 9,360 pages of transcript from twenty-four witnesses. The Court also reviewed thousands of pages of deposition transcripts and 1,083 trial exhibits that filled more than twenty-two 3y¿-inch binders. Extensive post-trial memoranda also were submitted and considered. After carefully considering all of the evidence and arguments, and for the reasons set forth in this Opinion, I conclude that the director defendants did not breach their fiduciary duties or commit waste. Therefore, I will enter judgment in favor of the defendants as to all claims in the amended complaint.

As I will explain in painful detail hereafter, there are many aspects of defendants’ conduct that fell significantly short of the best practices of ideal corporate governance. Recognizing the protean nature of ideal corporate governance practices, particularly over an era that has included the Enron and WorldCom debacles, and the resulting legislative focus on corporate governance, it is perhaps worth pointing out that the actions (and the failures to act) of the Disney board that gave rise to this lawsuit took place ten years ago, and that applying 21st century notions of best practices in analyzing whether those decisions were actionable would be misplaced.

Unlike ideals of corporate governance, a fiduciary’s duties do not change over time. How we understand those duties may evolve and become refined, but the duties themselves have not changed, except to the extent that fulfilling a fiduciary duty requires obedience to other positive law. This Court strongly encourages directors and officers to employ best practices, as those practices are understood at the time a corporate decision is taken. But Delaware law does not — indeed, the common law cannot — hold fiduciaries liable for a failure to comply with the aspirational ideal of best practices, any more than a common-law court deciding a medical malpractice dispute can impose a standard of liability based on ideal — rather than competent or standard — medical treatment practices, lest the average medical practitioner be found inevitably derelict.

Fiduciaries are held by the common law to a high standard in fulfilling their stewardship over the assets of others, a standard that (depending on the circumstances) may not be the same as that contemplated by ideal corporate governance. Yet therein lies perhaps the greatest strength of Delaware’s corporation law. Fiduciaries who act faithfully and honestly on behalf of those whose interests they *698 represent are indeed granted wide latitude in their efforts to maximize shareholders’ investment. Times may change, but fiduciary duties do not. Indeed, other institutions may develop, pronounce and urge adherence to ideals of corporate best practices. But the development of aspirational ideals, however worthy as goals for human behavior, should not work to distort the legal requirements by which human behavior is actually measured. Nor should the common law of fiduciary duties become a prisoner of narrow definitions or formulaic expressions. It is thus both the province and special duty of this Court to measure, in light of all the facts and circumstances of a particular case, whether an individual who has accepted a position of responsibility over the assets of another has been unremittingly faithful to his or her charge.

Because this matter, by its very nature, has become something of a public spectacle-commencing as it did with the spectacular hiring of one of the entertainment industry’s best-known personalities to help run one of its iconic businesses, and ending with a spectacular failure of that union, with breathtaking amounts of severance pay the consequence — it is, I think, worth noting what the role of this Court must be in evaluating decision-makers’ performance with respect to decisions gone awry, spectacularly or otherwise. It is easy, of course, to fault a decision that ends in a failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk — the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known. The decision-makers entrusted by shareholders must act out of loyalty to those shareholders. They must in good faith act to make informed decisions on behalf of the shareholders, untainted by self-interest. Where they fail to-do so, this Court stands ready to remedy breaches of fiduciary duty.

Even where decision-makers act as faithful servants, however, their ability and the wisdom of their judgments will vary. The redress for failures that arise from faithful management must come from the markets, through the action of shareholders and the free flow of capital, and not from this Court. Should the Court apportion liability based on the ultimate outcome of decisions taken in good faith by faithful directors or officers, those decision-makers would necessarily take decisions that minimize risk, not maximize value. The entire advantage of the risk-taking, innovative, wealth-creating engine that is the Delaware corporation would cease to exist, with disastrous results for shareholders and society alike. That is why, under our corporate law, corporate decision-makers are held strictly to their fiduciary duties, but within the boundaries of those duties are free to act as their judgment and abilities dictate, free of post hoc penalties from a reviewing court using perfect hindsight. Corporate decisions are made, risks are taken, the results become apparent, capital flows accordingly, and shareholder value is increased.

Because of these considerations, I have tried to outline carefully the relevant facts and law, in a detailed manner and with abundant citations to the voluminous record. I do this, in part, because of the possibility that the Opinion may serve as guidance for future officers and directors — not only of The Walt Disney Company, but of other Delaware corporations. And, in part, it is an effort to ensure meaningful appellate review. Ultimately, however, it is for others to judge whether my effort here offers reasonable guidance to corporate directors, in general, on the subject of executive compensation *699 and severance payments. 1 What follows is my judgment on whether each director of The Walt Disney Company fulfilled his or her obligation to act in good faith and with honesty of purpose under the unusual facts of this case.

I. FACTS 2

A. Michael Ovitz Joins The Walt Disney Company

1. Background

The story of Michael Ovitz’s rise and fall at The Walt Disney Company (“Disney” or the “Company”) begins with the unfortunate and untimely demise of Frank Wells. Before his death, Wells served as Disney’s President and Chief Operating Officer, and both he and Michael Eisner, Disney’s Chairman and CEO, enjoyed ten years of remarkable success at the Company’s helm. In April 1994, a fatal helicopter crash ended Wells’ tenure at Disney and forced the company to consider a decision it was not properly prepared or ready to make. 3

Disney’s short list of potential internal successors produced, for one reason or another, no viable candidates. 4 Instead, Eisner assumed Disney’s presidency, and for a brief moment, the Company was able to stave off the need to replace Wells. Within three months, however, misfortune again struck the Company when Eisner was unexpectedly diagnosed with heart disease and underwent quadruple bypass surgery. The unfortunate timing of Eisner’s illness and operation set off an “enormous amount of speculation” concerning Eisner’s health and convinced Eisner of the need to “protect[] the company and get[ ] help.” 5 Over the next year, Eisner and Disney’s board of directors discussed the need to identify Eisner’s successor. These events were the springboard from which Eisner intensified his longstanding desire to bring Michael Ovitz within the Disney fold. 6

By the summer of 1995, Michael Ovitz and Michael Eisner had been friends for nearly twenty-five years. These men were very well acquainted, both socially and professionally. Over time, this relationship engendered numerous overtures, by which Eisner and Ovitz flirted with the idea of joining ranks and doing something *700 together. 7 As Eisner put it: “I had been trying to hire him forever.... I couldn’t do business with him ... he was too tough, so I thought he would be better ... on our side.” 8 But until Eisner had offered Ovitz Disney’s presidency, Ovitz had never seriously considered any of Eisner’s offers and, according to Ovitz, there was good reason.

Michael Ovitz’s interest in the entertainment industry was kindled during his high school years and, from that time through college, Ovitz held different posts at Universal Studios and Twentieth Century Fox. After graduating college, Ovitz left the studios and gained employment in the mailroom of the William Morris Agency. At that time, William Morris was well regarded as the oldest and largest theatrical talent agency in the world. 9 Ovitz worked for William Morris for six years, and had worked his way up to become a talent agent within the agency’s television department. Here, Ovitz began to question the company’s direction and its approach to representing its clients. Despite several colleagues’ attempts to address their discontent with management, their efforts were not well received and, eventually, these philosophical disagreements led to an impasse. Ovitz and four other William Morris agents left, and Creative Artist Agency (“CAA”) was born.

CAA had a modest beginning and, from 1974 to 1979, the company’s revenues were barely sufficient to meet its expenses. 10 During this period, most of CAA’s business focused on the television industry, because CAA was self-financed and television revenues were more certain than revenues from feature films. 11 It was not until late 1979 that CAA branched off into the motion picture industry, and another four or five years later, the company moved into the music and consulting businesses. Ovitz attributes CAA’s rise, in part, to a business model that he dubbed: “packaging.” 12 As Ovitz explained, before CAA, it was Hollywood studios, distributors or networks that controlled the talent “either contractually or by virtue of the fact that they had all of the distribution capability.” 13 CAA revolutionized this system by grouping various talents, whether they were actors, directors or writers. These “packaged” talents could then coordinate their efforts to best exploit their leverage and maximize the economics of any given deal. 14 The effect of Ovitz’s business model was clear. By 1995, CAA had reshaped an entire industry and had grown from five men sitting around a card table to the premier Hollywood talent agency. When Ovitz joined Disney, he left behind 550 employees and an impressive *701 roster of about 1400 of Hollywood’s top actors, directors, writers and musicians — a roster that earned CAA approximately $150 million in annual revenues. In turn, this success translated into an annual income of $20 million for Ovitz and, for his part, he was regarded as one of the most powerful figures in Hollywood.

2. Ovitz First Contemplates Leaving CAA But His Negotiations With MCA Fail

In the spring of 1995, CAA was retained to facilitate negotiations between the Seagram Company and Matsushita where Seagram was to purchase eighty percent of Matsushita’s holdings in Music Corporation of America (“MCA,” now known as Universal Studios). During those negotiations, Edgar Bronfman Jr., Seagram’s Chairman and CEO, who had known Michael Ovitz for a number of years, began to discuss with Ovitz the possibility of leaving CAA and joining MCA.

Bronfman’s deal contemplated MCA purchasing CAA’s consulting business from Ovitz, Ron Meyer and Bill Haber (the three remaining CAA founders and its only shareholders) in exchange for MCA stock. Ovitz, Meyer, and Haber would then sell their remaining CAA interest to a third party and use the proceeds to purchase more MCA stock. 15 If the deal were consummated, Ovitz would take MCA’s reins as Chairman and CEO and would be paid handsomely for the job, including options for an additional 3.5 percent of MCA, $1.5 million in Seagram shares, and a seven-year contract (with a three-year renewal option) that paid a seven-figure salary with performance-based cash bonuses that could reach three to five times the base salary. 16

By June 1995, it was apparent that Ov-itz’s deal with MCA would never materialize. Ovitz attributed this failure to his rising skepticism over his ability to improve “a company that had been flat for five [or more] years” in a culture unlikely “to support the effort of expansion, capital expenses, and changing overhead” that Ov-itz perceived was needed. 17 Fueling Ov-itz’s skepticism was his perception that sudden changes to the terms of the CAA/ MCA deal were not coming from Bronf-man, but, in fact, were instigated at the behest of Bronfman’s father and uncle, who were controlling shareholders in the Seagram Company. In the end, Ovitz remained unconvinced that Bronfman could deliver the things that he was promising to deliver. 18

With the MCA deal falling apart, Ovitz returned to CAA and business continued as usual until Ovitz discovered that his close friend and number two at CAA, Ron Meyer, was leaving for MCA. This revelation devastated Ovitz, who had no idea Meyer was interested in leaving CAA, let alone leaving without Ovitz. Suddenly, the prospect of Ovitz remaining with the company he and Meyer built no longer seemed palatable, and Ovitz became receptive to the idea of joining Disney.

*702 3. Ovitz Seriously Considers Joining The Walt Disney Company

Michael Eisner had been following Ov-itz’s talks with MCA closely and believed that now was the time to either talk to Ovitz seriously about joining Disney or face the possibility of having Ovitz at the helm of a major Disney competitor. 19 Thus, the informal overtures that had spanned the last two decades intensified and Eisner was “on a hunt” 20 to bring Ovitz to Disney.

Eisner’s renewed efforts to recruit Ovitz received support from Sid Bass and Roy Disney (Roy Disney was also a director of the Company), two of the company’s largest individual shareholders. 21 Hoping not to be outdone by MCA, Eisner and Irwin Russell (the chairman of Disney’s compensation committee) reached out to Ovitz and attempted to convince him to join Disney. Both Eisner and Russell knew the basic terms and economics of MCA’s offer and both knew that Disney would not match or exceed those terms. 22 For this reason, the initial talks with Ovitz were unproductive and ended in short order. Eisner could not compete with the rich terms MCA was offering and he settled on the notion that Disney would have “to live with [Ovitz going to] a competitor because [Disney] could not match [MCA’s terms].” 23 Within a few weeks, however, the tides changed and Eisner learned that Meyer was leaving CAA to join MCA. For the first time, Eisner’s desire to hire Ovitz was aligned with Ovitz’s desire to leave CAA.

Eisner’s efforts to hire Ovitz were in full swing by mid-July 1995. Russell, per Eisner’s direction, assumed the lead role in negotiating the financial terms of the contract. These efforts took on significant import in the face of Disney’s recent announcement of the acquisition of CapCities/ABC, a transaction that would double the size of Disney, place even greater demands on Eisner, and exacerbate the need for someone else to shoulder some of the load. Russell, in his negotiations with Bob Goldman, Ovitz’s attorney, learned that Ovitz was making approximately $20 to $25 million a year from CAA and owned fifty-five percent of the company. 24 From the start, Ovitz made it clear that he would not give up his fifty-five percent interest in CAA without downside protection. 25

*703 While Russell and Goldman were in the preliminary stages of negotiating the financial terms of Ovitz’s contract, Eisner and Ovitz continued their talks as well. From these talks, Ovitz gathered that it was his skills and experience that would be brought to bear on Disney’s current weaknesses, which he identified as poor talent relationships and stagnant foreign growth. 26 Remaining cautious, Ovitz wanted assurances from Eisner that Ovitz’s vision was shared and that Eisner was sincere in his desire to reinvent Disney. Apparently, Eisner was able to assuage Ovitz’s concerns, because at some point during these negotiations, Ovitz came to the understanding that he and Eisner would run Disney as partners. Ovitz did recognize that Eisner was Chairman and would be his superior, but he believed that the two would work in unison in a relationship akin to the one that exists between senior and junior partners. 27 As it would turn out, Ovitz was mistaken, for Eisner had a radically different perception of their respective roles at Disney.

4. Ovitz’s Contract With Disney Begins to Take Form

By the beginning of August 1995, the non-contentious terms of Ovitz’s employment agreement (the “OEA”) were $1 million in annual salary and a performance-based, discretionary bonus. 28 The remaining terms were not as easily agreed to and related primarily to stock options and Ov-itz’s insistence for downside protection. 29 Ovitz, using Eisner’s contract as a yardstick, was asking for options on eight million shares of Disney’s stock. Both Russell and Eisner, however, refused to offer eight million options and believed that no options should be offered within the first five years of Ovitz’s contract. 30 This was a non-starter, since Ovitz would not leave CAA without downside protection and Disney had a policy against front-loading contracts with signing bonuses. Using both Eisner’s and Wells’ original employment contracts as a template, the parties reached a compromise. 31 Under the proposed OEA, Ovitz would receive a five-year contract with two tranches of options. The first tranche consisted of three million options vesting in equal parts in the third, fourth and fifth years, and if the value of those options at the end of the five years had not appreciated to $50 million, Disney would make up the difference. The second tranche consisted of two million options that would vest immediately if Disney and Ovitz opted to renew the contract.

The proposed OEA sought to protect both parties in the event that Ovitz’s employment ended prematurely and provided that absent defined causes, neither party could terminate the agreement without *704 penalty. If Ovitz, for example, walked away, for any reason other than those permitted under the OEA, he would forfeit any benefits remaining under the OEA and could be enjoined from working for a competitor. 32 Likewise, if Disney fired Ov-itz for any reason other than gross negligence or malfeasance, Ovitz would be entitled to a non-fault payment (Non-Fault Termination or “NFT”), which consisted of his remaining salary, $7.5 million a year for any unaccrued bonuses, the immediate vesting of his first tranche of options and a $10 million cash out payment for the second tranche of options. 33

5. Crystal is Retained to Assist Russell and Watson in Evaluating the OEA

As the basic terms of the OEA were coming together, Russell authored and provided Eisner and Ovitz with a “Case Study” outlining the OEA parameters and Russell’s commentary on what he believed was an extraordinary level of executive compensation. 34 Specifically, Russell noted that it was appropriate to provide Ovitz with “downside protection and upside opportunity” and to assist Ovitz with “the adjustment in life style resulting from the lower level of cash compensation from a public company in contrast to the availability of cash distributions and perquisites from a privately held enterprise.” 35 According to Russell, Ovitz was an “exceptional corporate executive” 36 who was a “highly successful and unique entrepreneur.” 37 Nevertheless, Russell cautioned that Ovitz’s salary under the OEA was at the top level for any corporate officer and significantly above that of the CEO and that the number of stock options granted under the OEA was far beyond the standards applied within Disney and corporate America “and will raise very strong criticism.” 38 Russell rounded out his analysis by recommending an additional study so that he and Eisner could answer questions should they arise. Russell did not provide this Case Study to any other member of Disney’s board of directors. 39

With the various financial terms of the OEA sufficiently concrete, Russell enlisted the aid of two people who could help with the final financial analysis: Raymond Watson, a current member of Disney’s compensation committee and the past chairman of Disney’s board of directors (and one of the men who designed the original pay structure behind Wells’ and Eisner’s compensation packages); 40 and Graef Crystal, an executive compensation consultant, who is particularly well known within the industry for lambasting the extrava *705 gant compensation paid to America’s top executives. 41 The three men were set to meet on August 10. Before the meeting, Crystal prepared, on a laptop computer, a comprehensive executive compensation database that would accept various inputs and run Black-Scholes 42 analyses to output a range of values for the options. 43 At the meeting, the three men worked with various assumptions and manipulated inputs in order to generate a series of values that could be attributed to the OEA. 44 In addition to Crystal’s work, Watson had prepared several spreadsheets presenting similar assessments, but these spreadsheets did not use the Black-Scholes valuation method. At the end of the day, the men made them conclusions, discussed them, and agreed that Crystal would memorialize his findings and fax the report to Russell.

Two days later, Crystal faxed his memorandum to Russell. In the memo, Crystal concluded that the OEA would provide Ovitz with approximately $23.6 million per year for the first five years of the deal. 45 Crystal estimated that the contract was worth $23.9 million a year, over a seven-year period, if Disney and Ovitz exercised the two-year renewal option. 46 Crystal opined that those figures would approximate Ovitz’s present compensation with CAA. That evening, Russell, Watson and Crystal phoned each other and further discussed Crystal’s conclusions and the assumptions underlying those conclusions. 47 During those discussions some questions surfaced, and Russell asked Crystal to revise his memo to resolve the ambiguities Russell believed existed in the current draft. Instead of addressing the points Russell highlighted, Crystal faxed a new letter to Russell expressing Crystal’s concern over the portion of the OEA that created the $50 million option appreciation guarantee. 48 Crystal contended that the current language of the OEA, if he was reading it correctly, would allow Ovitz to hold the first tranche of options, wait until his five-year term was up, collect the $50 million guarantee and then exercise in-the-money options for an additional windfall. 49 In light of this, Crystal was philosophically opposed to a pay package that would give Ovitz the best of both worlds — i.e., low risk and high return. 50 Crystal’s letter was never circulated to any board member oth *706 er than Eisner. 51 Rather, Russell addressed Crystal’s concerns and clarified that the guarantee would not function in the manner Crystal believed 52 and, on August 18, Crystal augmented his August 12 memo and faxed Russell the revised copy. Again, Crystal opined that the OEA, during the first five years, was, as he originally estimated, worth $23.6 million, but as to the value of the OEA’s renewal option, Crystal revised his estimation and believed that the two additional years would increase the value of the entire OEA to $24.1 million per year. 53 Up until this point, only three members of Disney’s board of directors were in the know concerning the status of the negotiations with Ovitz or the particulars of the OEA — Eisner, Russell and Watson.

6. Ovitz Accepts Eisner’s Offer

While Russell, Watson and Crystal were finalizing their analysis of the OEA, Eisner and Ovitz were coming to terms of their own. Eisner, having recently conferred with Russell concerning his ongoing research, gave Ovitz a take-it-or-leave-it offer: If Ovitz joined Disney as its new President, he would not assume the duties or title of COO. 54 After short deliberation, Ovitz accepted Eisner’s terms, and that evening he, Eisner and Sid Bass (and them families) celebrated Ovitz’s decision.

As it would turn out, the celebratory mood was short lived. The next day, August 13, Eisner called a meeting at his home in Los Angeles to discuss his decision and, in addition to Ovitz and Russell, Sanford Litvack (Disney’s General Counsel) 55 and Stephen Bollenbach (Disney’s Chief Financial Officer) were invited to attend. At the meeting, Litvack and Bol-lenbach, who had just found out the day before that Eisner was negotiating with Ovitz, 56 were not happy with the decision. Their discontent “officially” stemmed from the perception that Ovitz would disrupt the cohesion that existed between Eisner, Lit-vack and Bollenbach, 57 and both Litvack and Bollenbach made it clear that they would not agree to report to Ovitz but would continue to report to Eisner. 58 At trial, the Court was left with the perception that Litvack harbored resentment that he was not selected to be Disney’s President and that this fueled, to some extent, Litvack’s resistance to Ovitz assuming the post he coveted. 59 Bollen-bach’s resistance was more curious. Indeed, Bollenbach had been hired before Ovitz and, at the time, his expectation was that he would report only to Eisner. Still, his testimony seemed disingenuous to the *707 Court when he pinned his resistance on the fact that he had been part of a cohesive trio (ie., Bollenbach, Litvack, and Eisner). After all, Bollenbach had been with the Company for a total of three months before he was informed of the negotiations with Ovitz. 60 Despite this mutiny, Eisner was able to assuage Ovitz’s concern about his shrinking authority in the Company, and Ovitz, with his back against the wall, acceded to Litvack and Bollenbach’s terms.

The next day, August 14, Ovitz and Eisner signed the letter agreement (“OLA”) that outlined the basic terms of Ovitz’s employment. 61 The OLA specified that Ovitz’s hiring was subject to approval of Disney’s compensation committee 62 and board of directors. 63 That same day, Russell contacted Sidney Poitier (for a second time) to inform him that Eisner and Ovitz reached an agreement. 64 At trial, Poitier failed to recount with any specificity his conversation with Russell. He made clear that he was never faxed Crystal’s analysis or the draft of the OLA (which Litvack had prepared for Russell on August 12). 65 Nevertheless, Poitier did testify that Russell had “mention[ed] the terms” of the OEA and that Russell promised to stay in touch with any developments. 66 Poitier believed that hiring Ovitz was a good idea because he knew Ovitz’s reputation in the entertainment business and considered him an innovator who understood the movie business. 67 Poitier also expressed the opinion that Ovitz would adequately adapt to running a public company such as Disney. 68 Watson also contacted Ignacio “Nacho” Lozano by phone. 69 The record is unclear as to exactly when Lozano was called. 70 As with Poitier, relatively little of Lozano’s phone conversation was recounted at trial, except to say that Lozano testified that he felt comfortable with Ovitz’s ability to make the transition from a private company culture to that of a public company. 71 As for communications with the other board members, Eisner contacted each of them by phone to inform them of the impending deal. During these calls, Eisner described his friendship with Ovitz, *708 and Ovitz’s background and qualifications. 72

On the same day that Eisner and Ovitz signed the OLA, the news of Ovitz’s hiring was made public via a press release. Public reaction was extremely positive. Disney was applauded for the decision, and Disney’s stock price increased 4.4 percent in a single day — increasing Disney’s market capitalization by more than $1 billion. 73

7. Disney’s Board of Directors Hires Michael Ovitz

Once the OLA was signed, Joseph San-taniello, who was an in-house attorney within Disney’s legal department, took charge of embodying the terms Russell and Goldman had agreed upon and which were memorialized in the OLA. 74 To that end, Santaniello concluded that the $50 million guarantee presented negative tax implications for the Company, as it might not have been deductible. 75 Concluding that the provision must be eliminated, Russell initiated discussions on how to compensate Ovitz for this change — from this, an amalgamation of amendments to certain terms of the OEA arose in order to replace the back-end guarantee. 76 Russell again worked with Watson and Crystal to consider the possible consequences of the proposed changes. 77 Russell and Crystal applied the Black-Seholes methodology to assess the value of the extended exercisa-bility features of the options and Watson generated his own analysis to the same end. 78

On September 26, 1995, the compensation committee met for one hour to consider (1) the proposed terms of the OEA, (2) the compensation packages for various Disney employees, (3) 121 stock option grants, (4) Iger’s CapCities/ABC employment agreement and (5) Russell’s compensation for negotiating the Ovitz deal. 79 The discussion concerning the OEA focused on a term sheet (the actual draft of the OEA was not distributed), from which Russell and Watson outlined the process they had followed back in August and described Crystal’s analysis. Russell testified that the topics discussed were historical comparables such as Eisner’s and Wells’ option grants, 80 and the factors that *709 he, Watson and Crystal had considered in setting the size of the option grants and the termination provisions of the contract. 81 Watson testified that he provided the committee with the spreadsheet analysis he had performed back in August and discussed his findings. 82 Crystal, however, did not attend the meeting and his work product was not distributed to the Committee. At trial, Crystal testified that he was available via telephone to respond to questions if needed, but no one from the committee in fact called. 83 After Russell’s and Watson’s presentations, Litvack responded to various questions but the substance of those questions was not recounted in any detail at trial. 84 Poitier and Lozano testified that they believed they had received sufficient information from Russell’s and Watson’s presentations 85 to enable them to exercise their judgment in the best interest of the Company. 86 When the discussions concluded, the Committee unanimously voted to approve the terms of the OEA subject to “reasonable further negotiations within the framework of the terms and conditions” 87 described in the OEA. 88

*710 An executive meeting of Disney’s board immediately followed the compensation committee’s meeting. 89 In executive session, the board was informed of the reporting structure that Eisner and Ovitz agreed to, but no discussion of the discontent Lit-vack or Bollenbach expressed at Eisner’s home was recounted. 90 Eisner led the discussion regarding Ovitz, and Watson then explained his analysis and both he and Russell responded to questions by the board. 91 Upon resuming the regular session, the board deliberated further, then voted unanimously to elect Ovitz as President. 92

8. The October 16, 1995 Compensation Committee Meeting

In accordance with the compensation committee’s resolution roughly three weeks before, 93 the compensation committee convened again on October 16, 1995, in a special meeting to discuss several issues relating to stock options. 94 After a presentation by Litvack, during which he responded to questions from the members of the committee, the compensation committee unanimously approved amendments to The Walt Disney Company 1990 Stock Incentive Plan, thereafter titled The Walt Disney Company Amended and Restated 1990 Stock Incentive Plan (the “1990 Plan”), and also approved a new plan, known as The Walt Disney Company 1995 Stock Incentive Plan (the “1995 Plan”). 95 Both plans were subject to further approval by the full board of directors and by shareholders. 96

Following approval of these plans, Lit-vack reviewed the terms of the proposed OEA with the compensation committee, 97 *711 after which the committee unanimously approved the terms of the OEA and the award of Ovitz’s options pursuant to the 1990 Plan. 98 Ovitz’s options were priced at market as of the date of the meeting. 99 As a final wrap-up before adjourning, the compensation committee passed a resolution “that all of the actions heretofore taken by the officers of the Corporation in connection with the foregoing resolutions [relating to the OEA] be, and they hereby are, confirmed and ratified.” 100

The amendment to the 1990 Plan (consistent with the provisions of the new 1995 Plan), together with the terms of the Stock Option Agreement, 101 provided that, in the event of an NFT, Ovitz’s options would be exercisable until the later of September 30, 2002, or twenty-four months after termination, but in no event later than October 16, 2005 (ten years from the date of grant). 102

B. Ovitz’s Performance as President of The Walt Disney Company

1. Ovitz’s Early Performance

Ovitz’s tenure as President of The Walt Disney Company officially began on October 1, 1995. 103 Eisner authored three documents shortly after Ovitz began work that shed light on his early performance on the job. The first is a letter written to Ovitz dated October 10, 1995. 104 Eisner lauded Ovitz’s initial performance, 105 and also provided Ovitz with some written guidance with respect to Eisner’s management philosophies. 106 Ovitz testified that this letter was a continuation of conversa *712 tions he had already had with Eisner, and that the letter was “incredibly helpful and very supportive,” 107 especially in light of the fact that Ovitz was adjusting to working at a publicly-traded company. 108

The second document is a letter Eisner wrote to the board of directors, the Bass family, and his wife on October 20, 1995. 109 In it, Eisner called Ovitz’s hiring “a great coup for us and a saving grace for me.... Everybody is excited being with him, doing business with him.... He has already run a private company, and being a quick study, has quickly adapted to the public institution.” 110 Eisner testified that the October 20 letter accurately reflected his views of Ovitz at the time it was written. 111 Eisner also used the October 20 letter to reiterate his views regarding the appropriateness of acquisitions for the Company. 112

The third document is dated November 10, 1995, and is a memo addressed to Tony Schwartz, Eisner’s biographer. 113 In it, Eisner says that Ovitz has had a difficult time accepting Bollenbach and Litvack as his equals, but that Ovitz was adjusting, realizing that he need not “prove to himself, to the group, to the world, that he is in charge.” 114 Eisner also reaffirmed that “Michael Ovitz is the right choice. He will, in short order, be up to speed in the areas we have discussed endlessly — brand management, corporate direction, moral compass and all those difficult areas, especially for Disney, to define.” 115 Eisner described the already-existing tension between Ovitz and Litvack as attributable to Litvack by saying, “Sandy Litvack may never settle in because of his basic annoyance with the style of Michael Ovitz, but he may. Time may make it work, if he will let it.”