School of Law Professor’s Scholarship at Center of Walt Disney Lawsuit

Lexington, VA • Monday, February 13, 2006

The scholarship of Professor Lyman Johnson, the Robert O. Bentley Professor of Law at Washington and Lee University School of Law, has emerged as central to the most important corporate law case in America in many years. Shareholders of the Walt Disney Company have sued directors and officers of Disney for the way they handled the hiring and firing of Michael Ovitz. Ovitz served as President of Disney for only 14 months, yet when he left under a cloud, he received a severance package worth over $140 million. Shareholders have argued that the directors and officers, who include such luminaries as Sidney Poitier and Michael Eisner, breached their fiduciary duties in the way they handled the Ovitz matter and should personally pay $140 million plus interest to the Disney Company.

The Delaware Chancery Court, where most of the important corporate law cases in this country are tried, handed down its long-awaited decision in the Disney case in August 2005. In his ruling, Chancellor William Chandler prominently cited two articles written by Professor Johnson. The Chancellor relied on one article to help fashion his treatment of the fiduciary duty of “good faith,” a notion that in recent years has garnered wide interest in corporate law. Chandler also cited another article by Johnson toward the end of his opinion. It is this work of scholarship that recently has emerged as central to the ultimate resolution of the case, now on appeal to the Delaware Supreme Court. 

Professor Johnson’s article was written in early 2005 and immediately generated broad discussion among corporate law scholars and corporate lawyers. He argues that courts should scrutinize the conduct of high-level corporate officers, such as Disney’s Michael Eisner, more closely than the conduct of directors. Professor Johnson, noting the dearth of law on this point but citing several policy considerations, contends that the central “business judgment rule” doctrine in corporate law, under which courts review corporate conduct very deferentially, should not apply to protect executive officers but should only apply to directors. This issue, oddly, has never been squarely addressed in corporate law but it is crucial to resolving the Disney case. 

On appeal, attorneys for the Disney shareholders rely heavily on Johnson’s article. They cite it in their brief and explicitly referred to it in oral argument before the Delaware Supreme Court on January 25, 2006. Attorneys for Michael Eisner and the other defendants, although disagreeing with Johnson’s analysis, agree with him that this important issue has not been faced before. 

The Supreme Court’s decision in the Disney case, expected in May of this year, is eagerly awaited by corporate lawyers and business people all across America as it will establish the law applicable to executive officers of most of this country’s leading corporations. Delaware is the corporate home of a majority of the largest, most significant corporations in the United States. In addition, many other states typically look to the Delaware courts for guidance in fashioning their own corporate law rules.
Professor Johnson has taught corporate and securities law at the School of Law since 1985, and writes and lectures on those subjects frequently. More detailed biographical information is available here.

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