Mickey Loses Round One, DreamWorks Begins Nightmare, Bush Throws Both a Bone

Published June 7, 2005

By C. W. Oberleitner

Legally speaking, it's been a busy seven days for two of the biggest names in feature animation. Lawyers for the Walt Disney Company lost their bid to dismiss a complaint brought by former board members Roy E. Disney and Stanley Gold. During this same period DreamWorks Animation found itself being hauled into federal court by shareholders. And late last week, President Bush signaled that if he has his way this may be the last hurrah for lawsuits like these.

Score One for SaveDisney

As fans of NBC's long running legal drama Law and Order will tell you, the first thing any good criminal, or civil, defense attorney will do, before they ever permit a client to be exposed to the rigors of discovery and a trial, is to place a motion before the court to dismiss the charges or complaint brought against their clients, usually on the grounds that they are entirely baseless in fact.

In Delaware, Chancery Court lawyers for executives of the Walt Disney Company and members of its board of directors tried and failed to do just that last week.

On May 9, Roy E. Disney and fellow dissident shareholder and former Disney Company director Stanley P. Gold filed suit saying, in effect, they had been duped out of their opportunity to run an alternate slate of candidates at this year's Disney Company shareholders' meeting. And, that the search for departing CEO Michael Eisner's replacement, according to Disney and Gold, was a sham.

At a hearing held last Wednesday before Chancellor William Chandler, attorneys for Disney Company directors and executives moved to dismiss the charges against their clients, saying that in the search for a new chief executive for the company, their clients made no false promises to shareholders.

Disney Company lawyer Paul K. Rowe later said that the Disney Company had kept its promise to hire an outside search firm and consider external candidates, and that all board members had committed to participate in the search.

Chancellor Chandler, following arguments on the motion to dismiss, said he would rule promptly on whether to grant the Disney Company's motion or go to trial.

Late yesterday, Chandler made good on his promise telling the parties involved that,

...plaintiffs have alleged facts suggesting that the Company's board did not go about the process of searching for a new CEO with "open minds," without prior determinations and giving "full consideration" to external candidates. The complaint alleges that only one external candidate was interviewed, that Mitchell told that candidate "she was not a serious candidate," and that Eisner's presence at interviews of external candidates, "was intended to chill and did chill full consideration of qualified external candidates for the position of CEO."

Should these allegations be proven, plaintiffs could be entitled to the relief they seek because the board's statements materially misled plaintiffs with respect to the board's intent to conduct a bona fide executive search process.

In a press release dated June 6, 2005, Roy E. Disney and Stanley P. Gold said that they are pleased with the Delaware Chancery Court's ruling allowing their lawsuit to go forward against the Walt Disney Company and certain members of the Board of Directors of the Company with an expedited trial date of August 2005.

Now that the lawsuit can go forward, Disney and Gold hope to void the 2005 election of Disney Company directors and force the Company to hold another election. Before holding that election, they are seeking to compel "full and fair disclosure of all material facts about the CEO selection process." Disney and Gold are also asking the Court to stop the Company and the Board from changing either Eisner's or Iger's compensation or employment contracts.

Through his attorney, Roy Disney said he would go forward and nominate an alternate slate of directors for the Walt Disney Company if the courts grant his request to vacate the company's 2005 election of directors.

Following the hearing, A. Gilchrist Sparks, Disney and Gold's attorney, declined to answer questions from the media as to whether the pair intends to mount a proxy fight to unseat the board if the Disney Company ultimately prevails.

Chandler is the same chancellor who heard last year's lawsuit brought by Disney Company shareholders against Eisner and the Disney Board for what they alleged was a failure to fulfill their duty and responsibilities in the hiring and firing of Eisner's onetime best friend Michael Ovitz. Ovitz was president of the Walt Disney Company for approximately fourteen months between 1995 and 1997. At the time of his departure, he received a severance package worth roughly $140 million.

The Ovitz trial began last fall and concluded early this year. Chandler's ruling on the final outcome of that case is expected later this year.

On the Left Coast

On the day following the Disney Company's appearance in Delaware chancery court, rival toon studio DreamWorks Animation SKG, Inc., found itself being hauled into Los Angeles federal court.

For the first time since being spun off from tightly held DreamWorks SKG and going public, DreamWorks Animation finds itself facing the wrath of shareholders who believe they were duped when it came to sales of the studio's eagerly anticipated Shrek 2 DVDs.

In the proposed class action, shareholders contend DreamWorks Animation CEO Jeffery Katzenberg, along with board chairman Roger Enrico, failed to disclose that first quarter sales of Shrek 2 DVDs were falling off far more than anticipated.

The lawsuit further alleges that DreamWorks Animation continued to ship Shrek 2 DVDs "far in excess of the actual demand" and hid the fact that retailers and other outlets were returning "massive amounts" of unsold units.

DreamWorks Animation did not return calls requesting comment; however, news agency Reuter's reported that,

DreamWorks spokesman Bob Feldman said the company had not seen the lawsuit but called the claims "baseless."

"We believe the suit is completely without merit and we intend to defend ourselves vigorously," Feldman said.

The first indication that DreamWorks Animation might be in trouble with investors came following a first quarter earnings call in early May. During that call, Katzenberg admitted the company had overestimated sales of the Shrek 2 DVD and that sales would fall far short of earlier projections. During the call, analysts were also told the studio would realize no revenue from Shrek 2 in the quarter.

This news sent DreamWorks Animation shares down 12 percent during the following day's trading. Last Tuesday, DreamWorks Animation shares fell another 7 percent following the release of the studio's latest animated feature Madagascar. Wall Street analysts said Madagascar failed to meet expectations.

Yesterday, despite Madagascar's move to the top of this past weekend's box office charts, shares of the Glendale animation studio dropped another 2.63 percent to close at $28.49, down from a high of $42.60 reached shortly after going public late last October.

Feds Ride to the Rescue…Sorta

Thursday, June 2, brought news, that if it had just arrived a few months earlier, might actually cheer executives at firms like Disney and DreamWorks. President Bush announced he would nominate Representative Christopher Cox to be the next head of the Securities and Exchange Commission (SEC).

Cox, a Republican from Orange County, California, is well known as a "pro-business" member of the House of Representatives. In 1995, he sponsored a law directly aimed at limiting the ability of shareholders to sue companies for alleged securities fraud.

However, at one point in his career, Cox, during the height of the Enron scandal, referred to corporate executives who cheat as "bacteria." He also helped lead the efforts in the House to pass the Sarbanes-Oxley antifraud law of 2002.

It is the Sarbanes-Oxley law that has made shareholder suits like those filed against the Disney Company and DreamWorks Animation more prevalent in the post-Enron era. The SEC is responsible for enforcement of Sarbanes-Oxley.

Despite his initial support of Sarbanes-Oxley, Cox's critics have been quick to point to his long term record of what they call "anti-investor" legislative efforts.

Wall Street and other business interests were critical of Cox's predecessor William H. Donaldson for what they deemed his all too aggressive rule-making activities as head of the SEC. Donaldson, also a Republican appointed by the current President Bush, often found himself on the same side of issues with the two Democrat members of the SEC's five-member panel.

Cox's critics fear his "pro-business" stance may lead to his joining with the two Republicans on the panel and the undoing of many of the controversial reforms supported by Donaldson. And, they point once again to laws he helped author in 1995 and 1998 to limit the ability of shareholders to file securities-fraud lawsuits.

Cox is accused of listening to companies, many from California-based industries like technology and entertainment, that argued such suits were abusive and ultimately cost shareholders large amounts of money to defend against. Representatives from these industries said they were being victimized by law firms out to shake them down anytime an earnings target was missed and stock prices fell.

At his nomination, Cox said, "The natural enemies of this economic marvel are fraud and unfair dealing." He added that he looked forward "to carrying out that mandate" of protecting investors.

It will be months before the nomination of Christopher Cox to head the SEC can be approved by the Senate, thereby making it highly unlikely that his appointment will have any direct effect on shareholder lawsuits currently before the courts.

If Cox, however, does begin siding more often than his predecessor with the two Republicans on the SEC panel, suits like those brought recently against the Walt Disney Company and DreamWorks Animation may become increasingly rare in the future.

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Delaware Court of Chancery