Editor: Mr. Seidman, would you tell our readers something about your background?
Seidman: I grew up in the New York area, in Scarsdale in Westchester County. I went to Yale for my undergraduate degree and to the University of Virginia for my law degree. Following law school, I clerked in the Delaware Chancery Court with then Vice Chancellor Jack Jacobs (and currently Justice Jacobs of the Delaware Supreme Court), where I gained a familiarity with Delaware corporate law.
Editor: How did you come to Willkie? What were the things that attracted you to the firm?
Seidman: I was attracted by the firm's broad corporate practice, and in particular the extremely interesting M&A work that the firm handles. In addition, I thought that I would like the people who work here, that they were both talented lawyers and good people. I certainly have not been disappointed and look forward to many more years here.
Editor: Please describe your practice. How has it evolved over the course of your career?
Seidman: Much of what we do on the corporate side is market-driven. In the early 1990s, I focused on M&A work, governance issues, and the work of special committees. As a consequence of the firm's practice, I also did some venture capital and capital markets work. Toward the late 1990s, as the Internet boom started and M&A declined, I became more of a venture capital Internet lawyer. But at the same time I kept my M&A work going, and in that arena I continued to represent investment banks and buyers and sellers of companies. At present, I do a fair bit of M&A work on both the transactional and governance side. One of the really positive things about Willkie is its breadth of practice. The partners here work on a variety of matters and in a number of different areas. Hence, I also do offering work and am currently representing the underwriters in an initial public offering.
Editor: Did the period of time you spent clerking for the Delaware Chancery Court have an impact on the course your career has taken?
Seidman: Absolutely. Clerking for the Delaware Chancery Court was an intense and valuable learning experience because the Court consisted of a few judges working back then in close confines in a concentrated area of the law. One was able to interact with all the judges, which allowed the clerks to dive into Delaware law in some depth and gain an experience that has real rewards later in your career. My clerkship provided me with a basis in Delaware corporate law that has been crucial in advising clients at the board level for both governance and transactional issues.
Editor: You have commented on the recent decision of the Delaware Chancery Court in In re Walt Disney Co. Derivative Litigation. For starters, would you provide us with the background on this case? How did Ovitz come to be hired by Disney?
Delanoy: Michael Eisner and Michael Ovitz had been close friends and business associates for over 20 years. They were well acquainted before Mr. Eisner approached Mr. Ovitz to come to Disney as president. Eisner initiated the meetings, and he also worked with Irwin Russell, the chairman of Disney's compensation committee. It was Mr. Russell who did the direct negotiating with Mr. Ovitz.
Seidman: Eisner, however, was the one who was calling the shots. He did not have formal board meetings to discuss the Ovitz matter, but rather held individual conversations with each of the directors. One issue here I believe concerns Delaware's view of how boards should operate. While the directors were found not liable in the end, the opinion of the court is important for addressing what Eisner and the board did wrong. A corporation's governing board should make its decisions when every member is present and can hear what other members have to say.
Editor: What did Ovitz's contract say about termination?
Delanoy: The contract provided that if Mr. Ovitz was terminated for cause - which was defined as acting with gross negligence or malfeasance - he would forfeit any remaining benefits under the contract. If he was terminated without cause, however, he was entitled to a sizeable termination payment. The precise value of the termination payment depended on the value of Disney's stock at the time of termination. In the end, when he was terminated without cause, the value of his termination package exceeded $100 million.
Editor: Did the Disney board play any role in the hiring of Ovitz and approving his contract of employment?
Delanoy: The board's compensation committee and then the full board voted to approve the hiring of Ovitz. This, however, was without the benefit of any but the most cursory involvement in the negotiations with him.
Editor: What about the board's role in his termination?
Delanoy: They did not play a role in his termination. Mr. Eisner terminated him and informed the board after the fact.
Editor: The court found that none of the directors was liable under Delaware law. Can you take us through the reasoning behind this decision?
Seidman: In the past, most practitioners spoke of the fiduciary duties of care and loyalty and, in connection with communications to shareholders, the duty of candor. The duty of care requires directors to be informed and act in a prudent manner when making a decision. The duty of loyalty requires the directors to act in the best interests of the corporation and its shareholders and not in their own interests. As a general matter, the "business judgment" rule is a standard of review that is often outcome-determinative. That is, if the business judgment rule applies, it is generally difficult for plaintiffs to demonstrate a breach of fiduciary duties. The underlying concept is that the court is not qualified to evaluate a business decision that has been made by an experienced and sophisticated governing board, and courts recognize that even well-intentioned and informed directors make inadvisable decisions and that that is okay. The key is that the people making the decision are independent, disinterested and analyzing what they should be analyzing. In such circumstances, the court allows the board considerable discretion.
Editor: And the fiduciary duty of good faith - is this something new, or is it a gloss on the other two duties?
Seidman: The duty of good faith has been an evolving concept and is part and parcel of the other two duties. Under most corporations' charters, and as permitted by Delaware law, duty of care violations do not result in personal liability for a director because directors are exculpated from liability for such breaches. This has led to situations where directors who have been grossly negligent will face no economic consequence. This somewhat undercuts the rationale for the business judgment rule and the notion that the right decision-making process leads to the right decision since shareholders have no remedy even where there is a grossly-negligent process. Delaware statutory law specifically does not permit exculpation where there is an improper personal benefit such as in a duty of loyalty claim and for actions not in good faith. The importance of the Disney decision thus is that a court is saying that a director will be held personally accountable in situations other than where there is self-interest involved - that is, in a case where a director does not act in good faith. For lawyers practicing in this area, it is essential that they now advise boards of directors that even if there is no conflict of interest involved, a violation of their good faith obligations will raise the prospect of personal liability.
Editor: What is meant, in this context, of an "intentional dereliction of duty"?
Seidman: While I think I have a feel based on common law precedent, it is difficult to articulate with exact precision at this time, and that is a concern for me. The Disney case is the first attempt to analyze the duty of good faith in depth. Where there is no duty of loyalty or self-dealing claim, it is difficult to come up with many real-world examples of a failure to act in good faith that should lead to liability. An intentional dereliction of duty - where the directors know what the law is and ignore it or where a fiduciary purposely does not do something that he knows he should do - is something that has a basis in prior decisions and has just been characterized a bit differently. The fact is, however, at the moment we do not know how broad this duty of good faith is, nor whether it is, indeed, the third full-fledged fiduciary duty recognized under Delaware law. The Delaware Supreme Court may have the next round of guidance on this issue.
Editor: The court indicated that the absence of an adequate process - presumably the advance circulation of relevant meeting materials, careful deliberation and memorialization - may be indicative of a lack of good faith on the part of the directors. Some commentators have noted that, since the corporate scandals, the emphasis on the process of corporate governance is trumping the substance of governance, i.e. overseeing the business with an eye to providing long-term strategic vision and operational oversight. Is this a fair comment?
Seidman: I am an advocate of process. I believe that a board's process does matter and that it materially affects the ultimate substantive decisions of a governing board. In my view, a good process leads to good substance. If you have the right people sitting down to deliberate together, with the right information as background and the right advisors sitting with them, the result is almost certainly going to be better informed than one resulting from a series of ad-hoc individual encounters or an uninformed or rushed group meeting. And process does entail advance circulation of meeting materials, careful and sufficient deliberation and the taking of minutes for future board reflection.
Editor: Does the decision of the Delaware Chancery Court serve to modify the business judgment rule?
Seidman: Going forward, I believe we must add another paragraph to the advice we give corporate boards. The business judgment rule and the duties of care and loyalty are somewhat established and serve Delaware corporations well by having ample precedent to be used to advise boards on their future behavior. Practitioners must now address the duty of good faith and how a failure to act in good faith might, under certain circumstances and even without the involvement of personal interest, lead to personal liability for directors. I look forward to further judicial precedent regarding the parameters of a duty of good faith violation for purposes of guidance to other boards of directors. For now, the issue is flagged and I have a feel for its parameters, but more judicial guidance would be terrific.
Editor: Is it likely that the Delaware Supreme Court may overrule Chancery on appeal? What do you think is the most likely outcome?
Seidman: I have no idea. I think Chancellor Chandler was very careful in crafting his decision, and it has all the markings of dispassionate and thoughtful deliberation. He did not come up with the concept of good faith on his own. It has been referred to in case law and in the literature for some time, but no one has really attempted to articulate it. Is the Delaware Supreme Court likely to overrule him, or at least modify his decision? I do not have the answer. I do know that the decision has generated a great deal of interest, which leads me to speculate that the Delaware Supreme Court is going to take its time and analyze this matter with great care.
Editor: Is there anything you would like to add?
Seidman: I think this is an important decision, one that is going to influence the ways in which we think about board decisions. It is crucial that corporate directors understand their duties, and this decision serves to bring some light into an area where that understanding might not have been as precise as it needed to be. Whatever the final outcome at the Delaware Supreme Court, that light is of great benefit to both legal practitioners and directors.
Published November 1, 2005.
