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Last week, I blogged about how Chancellor Chandler denied Disney’s motion to dismiss in a lawsuit – Shamrock v. Iger – that challenges the company’s CEO succession process. Now, a trial is slated for August in the Delaware Chancery Court. In our “Disney’s CEO Succession Lawsuit” section, I have posted the novel opinion in this case, as well as the complaint and the motion to expedite the trial.

As this article notes, Stanley Gold and Roy Disney sued the company – seeking invalidation of this year’s board election – because they allege they would have run a competing slate, but for the fact that the company had previously disclosed that it would conduct a CEO search and consider external candidates. The board ultimately selected COO Robert Iger to succeed CEO Michael Eisner when he steps down later this year.

Here are some things to consider about this lawsuit and the court opinion:

1. How Did This Case Get Beyond Dismissal? – Based on the 20-page opinion, it looks like this was just a standard motion to dismiss decision – where Chancellor Chandler was reviewing the pleadings only, taking it all in the light most favorable to plaintiffs, as noted on page 10 of the court opinion.

The expedition of the case can be explained by the fact that validity of an election of directors is at issue. The court will almost always expedite this type of case, because it puts in question the authority of the sitting directors. So the expedited schedule is not unusual, and does not necessarily signal that the court has made a judgment that the case is significant or that the claims have merit beyond the motion to dismiss standard.

2. What is the Duty of Disclosure?– However, as John Olson recently noted to the ABA Corporate Governance Subcommittee, the opinion is quite interesting for its discussion of the “duty of disclosure” under Delaware law which, Chancellor Chandler notes, is not an independent fiduciary duty but rather “stems from, and is an application of, the general fiduciary duties of care and loyalty.” See note 30 on page 11 of the court opinion. There has been an ongoing debate as to whether the duty to disclose is a separate duty in Delaware – and the Chancellor indicates that it is not.

3. What’s Behind Curtain #3? – The Chancellor applied generic disclosure law in his opinion, but I am not aware of any precedent for this result. This theoretically could have broad ramifications for boards, as they could now be saddled with even greater responsibility to oversee what their companies disclose. As the SEC becomes more involved with regulating governance in the wake of Sarbanes-Oxley, some might view this as the Delaware judiciary inching its way into the SEC’s province of disclosure regulation (but I think this probably is a stretch).

4. How the Case Highlights CEO Succession Practices – This case also does implicate what constitutes good CEO succession practices (listen to last week’s webcast for some nice pointers in this area). Basically, the Chancellor has given plaintiffs the chance to show the company’s succession process was a sham intended to keep Roy Disney and Stanley Gold from running a competing slate. For starters, having an outgoing CEO involved in the interviews of the successor candidates in not a hot idea- see the “troubling seven facts” alleged by the plaintiffs, noted on page 8 of the court opinion.

5. Possible Intersection of the Duty to Update – Perhaps the most interesting item in the opinion is how far Chancellor Chandler seems willing to take the concept of a “duty to update” statements that were truthful when made. This could be chilling in terms of voluntary disclosures – why say anything not required if that gives you a duty to update?And who can even remember or track all statements made – and constantly evaluate whether need to be updated? This hopefully is an overstatement of concern about the opinion, but still something to keep an eye on.

6. A Slippery Slope Revealed? – Along the same lines, this lawsuit might encourage the plaintiffs’ bar to flyspeck proxies for statements that later turned out differently than what the proxy disclosed. For example, compensation committee reports could be fodder if the committee says it is committed to pay-for-performance, but the CEO nonetheless gets a raise after a down year (which happens more than it should!). But bear in mind that Disney is a relatively unique situation in which the plaintiffs had threatened a proxy fight and backed off in reliance on statements they now allege were intentionally false when made.

7. Potential Ramifications for Majority Vote Movement – The invalidation of a board election would be an overwhelming consequence (but possible for misleading proxy disclosure, as noted in footnote 37 of the court opinion). I personally think it very unlikely that the election would be invalidated based on these claims – and the Chancellor’s statements on pages 15-16 of the court opinion – but that is at least nominally what the plaintiffs are seeking. But just the spectre of this type of relief has to play some role in the ongoing debate over majority vote elections and shareholder access.

The Art of Private Equity M&A

On DealLawyers.com, tune in for tomorrow’s webcast, Tuesday, June 14th – “The Art of the Private Equity Deal” – to learn from leading outside counsel and a top private equity manager how these deal practices are evolving and how they differ from other public and private deals. This program will cover:

– Why are private equity funds engaged in so many deals? What type of edge do they have over public company acquirors?

– What do private equity funds look for in a potential target? How should targets react when a private equity fund approaches?

– What fundamentals of the M&A process are different when a private equity fund is the acquiror? How do negotiations differ?

– How to handle multiple LBO firms that are in the same deal (and analysis of the shareholder agreement issues that arise)?

Special Deal Now Available! No registration is necessary – and there is no cost – for DealLawyers.com members. So try a no-risk trial to DealLawyers.com today! And we just launched our half-price “Rest of 2005” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!

Last Congressman to Serve as a SEC Commissioner?

In Friday’s Washington Post, this article noted that the last Congressman to serve as a SEC Commissioner was 40 years ago. In the 1960s, President Lyndon Johnson appointed former Rep. Hamer Budge (R-Idaho) at the urging of the Republican House leader after Budge lost a congressional race. A few years later, President Nixon promoted Budge as SEC Chair.

M&A Boot Camp Begins Today!

Also on DealLawyers.com, starting today, we are providing the first of these five programs over the summer as part of our “M&A Boot Camp”:

– Starts Today! The Basics of M&A – Diligence, Structure and Beyond (6/13)
– Delaware Law Considerations (6/20)
– Disclosure Issues (7/11)
– Accounting Issues (7/18)
– Negotiating Tactics (7/25)

The DealLawyers.com “M&A Boot Camp” is for anyone new to M&A, as well as anyone that seeks a refresher on one or more of the areas that are integral to getting a deal done – perfect for summer associates, young associates or paralegals. Catch any of the following valuable programs either the day they are posted – or afterwards! Each program will run between a half hour and an hour – and is in a podcast format (in other words, there is no specific time for you to listen-in; just check it out anytime on the date indicated above).

Special Deal Now Available! No registration is necessary – and there is no cost – for DealLawyers.com members. So try a no-risk trial to DealLawyers.com today! And we just launched our half-price “Rest of 2005” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!