Is There a Disney Case Against Cablevision Over the Larry Brown Contract?

For the last several days, it’s been widely reported that the New York Knicks will buy out the remaining four years of coach Larry Brown’s contract for something like $40 million. See here, here, here, and here. In all, Brown will have earned $50 million for less than 10 months service. In this coverage, James Dolan is often referred to as the “owner” of the Knicks, but the Knicks are actually owned by Madison Square Garden, which is in turn owned by Cablevision, a publicly traded corporation. Dolan may run these various entities, but there are other shareholders to whom the various officers and directors owe fiduciary duties. I wonder whether these other shareholders might be able to sue the board of MSG / Cablevision for a fiduciary duty breach. The leading case on point is Disney.

In addition to sports law, I also teach and write about corporations. The corporate law community is currently waiting with baited breath for the Delaware Supreme Court’s decision in this case, which was argued in January. There’s good commentary on the case (and predictions about it) here, here and here. Here’s a quick summary of that litigation. The Disney saga began when Michael Eisner hired his good buddy Michael Ovitz, a Hollywood talent agent, to be his number #2 at the Disney corporation. Ovitz turned out to be woefully unqualified, and quickly began planning his exit. He departed the company after 14 months service and collected a shocking $140 million. Shareholders sued, claiming corporate “waste.” The initial complaint was dismissed with leave to amend because it failed to plead that Ovitz’s compensation bore no relation to the services rendered (the current Delaware standard for a waste claim in the executive compensation context). Shareholders did a bit more digging, and uncovered evidence that the Disney board(s) had abdicated responsibility for negotiating the terms of Ovitz’s contract and then deliberately ignored its obligations in relation to Ovitz’s departure from the company. The court found that this new complaint stated a cause of action on which relief could be granted under a fiduciary duty breach theory. The new complaint was less about waste than it was about severe procedural defects in the board’s decision-making (reminiscent of the famous corporate law case, Smith v. Van Gorkom). Under the new complaint’s theory, shareholders went to trial and lost; their appeal is what the Delaware Supreme Court is currently considering.

Under the still-good law Disney opinion recognizing severe procedural defects in executive compensation decisions as actionable under a fiduciary duty theory, Cablevision/MSG/Dolan need to tread carefully in solidifying the terms under which Brown will depart. The parallels between Ovitz and Brown should be fairly clear: Subpar performance and tens of millions of dollars in compensation for just a few months work. Of course, there are some differences. While Ovitz had no studio experience when he took the Disney job, Brown has a pretty solid record as a coach. While Ovitz made more money than Brown from the deal, coaches are generally paid a lot less than top executives at multi-national corporations. Dolan might take some solace that the Disney directors won at trial, but I don’t think I’d want to take that risk. Perhaps concern for Disney-type litigation explains the delay in resolution of the Brown matter?

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