Director Independence and the Duty of Loyalty: Race, Gender, Class and the Disney-Ovitz Litigation

93 Pages Posted: 18 Aug 2005

See all articles by Larry Catá Backer

Larry Catá Backer

The Pennsylvania State University (University Park) – Penn State Law


Director independence rules are an important component of the duty of loyalty as both a substantive standard and a standard of review. To apply the director independence standards, courts necessarily invest relationships with legal consequence beyond the actual relationship itself. Messiness, for example, can be tidied by taking refuge in formal structural economic analysis. Analysis can also be simplified by taking refuge in stock stories and assumptions. Both, it seems, is what the Court of Chancery did in the Disney litigation in which shareholders challenged both the very lucrative employment agreement awarded to Michael Ovitz to become president of the Walt Disney Company in 1995 and the even more generous terms under which that contract was terminated in 1996. The Disney litigation, however, ought to have provided a rich vehicle for the examination of reality beyond formality and stock assumptions. This Article focuses on the application of the independent director standard to one director in particular: Reveta Bowers, an African-American female and the principal of the school that Michael Eisner's children attended. What makes Ms. Bowers particularly interesting is the peculiar way in which the Chancery Court sought to apply the director independence standards to her: the Court of Chancery effectively rejected plaintiffs' attacks on her independence on public policy grounds, that is, were Ms. Bowers' independence effectively challenged, 'regular folks' would be unable to serve on boards of directors of corporations like Disney. Though that analysis has attracted little attention among legal academics, the Chancery Court's application of a peculiar construction of the director independence rules for Ms. Bower's benefit opens a window to the way corporate law intersects with social assumptions of race and class expressed as public policy. The inherent difficulties arising from that intersection and the resulting contradictions of the current Delaware approach to directorial independence in the face of competing policies - often unwritten, and not necessarily derived from legislative pronouncements - suggest that the current Delaware independence standard is of limited value in duty of loyalty cases. These deficiencies, however, might be overcome by incorporating into the narrow formalism of the current standard some of the relational insights of critical race and feminist theory. Relational analysis exposes the subtle ways in which class, gender, and race affect the application of standards in fact driven contexts-like determinations of director independence - and may help courts and litigants strive for fairer and more realistic results. Emerging from this analytical approach is a fundamental notion: subordination and dependence tend to be the critical factors in determining the independence of relationships, even those considered primarily economic relationships. This is a very different analysis from that of Vice Chancellor Strine in Oracle, an approach criticized by the Delaware Supreme Court. In place of the current Delaware analysis, this Article suggests an alternative approach, the touchstone of which is subordination and burden shifting. Subordination would encompass all hierarchical and affective relationships. Subordination should serve as both a substantive rule-subordination destroys all claims of independence. Subordination should also serve as a procedural rule-establishment of a relationship of subordination ought to shift the burden of proving independence from the plaintiff to the director seeking to establish independence for purposes of validating board of directors' actions. The Article ends by assessing the utility of the proposed subordination-relational standard. Application of the standard to the facts of the Disney litigation demonstrates the ways in which the alternative standard yields different results. Had the Chancery Court applied a subordination based relational standard it would have been far more likely that a greater number of directors, perhaps even more than a majority of directors, might have been found not to be independent. Application of such a standard might have avoided the approval of the Ovitz Employment Agreement as ultimately signed, the invocation of the termination provisions as ultimately approved, or the litigation over that agreement that sapped the resources of the corporation from 1997 through 2005. And the price to be paid would have been small enough: ensuring that directors actually approving the transactions could meet the more rigorous and legitimating standards of a subordination based relational approach to independence.

Keywords: Duty of loyalty, director independence, fiduciary duty

JEL Classification: A12, K22, K41

Suggested Citation

Backer, Larry Catá, Director Independence and the Duty of Loyalty: Race, Gender, Class and the Disney-Ovitz Litigation. St. John's Law Review, Vol. 79, 2005, Available at SSRN:

Larry Catá Backer (Contact Author)

The Pennsylvania State University (University Park) – Penn State Law ( email )

Lewis Katz Building
University Park, PA 16802
United States

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