This article is reprinted with permission from the
March 25, 2004
edition of
New York Law Journal.
© 2003 NLP IP Company.


Disney/Ovitz and NYSE/Grasso Compared

By Joseph E. Bachelder


The debate continues over what to do about the $140 million payment by the New York Stock Exchange [NYSE] to Richard A. Grasso in 2003 [NYSE/Grasso Matter]. In Delaware, the case of In Re The Walt Disney Company Derivative Litigation, 825 A2d 275 [Del. Ch. 2003] [Disney/Ovitz Case], is approaching trial in the Delaware Court of Chancery. There are some interesting parallels between the two matters [albeit the NYSE/Grasso dispute has not as yet reached the stage of arbitration or litigation].1

This column focuses primarily on issues of fiduciary responsibility raised in these two matters.


Disney/Ovitz, NYSE/Grasso Compared

1. Amounts involved.

§  Disney/Ovitz Case: Approximately $140 million.

§  NYSE/Grasso Matter: Approximately $140 million.

2. Immediate circumstances associated with the amounts involved.

§  Disney/Ovitz Case: A forced termination due to Mr. Ovitz's apparent failure to perform satisfactorily [after 14 months of employment].

§  NYSE/Grasso Matter: An apparent forced termination due to Mr. Grasso's receiving the lump-sum payment of approximately $140 million [after many years of employment by the NYSE, including approximately eight years as CEO].

3. Significant role of another fiduciary.

§  Disney/Ovitz Case: Michael D. Eisner, a close personal friend of Mr. Ovitz, is alleged to have had direct and substantial involvement in the hiring and firing of Mr. Ovitz.

§  NYSE/Grasso Matter: Kenneth G. Langone, a close personal friend of Mr. Grasso, was appointed by Mr. Grasso to the compensation committee in 1998 and as chairman from 1999 to June 2003.2 Mr. Langone was actively involved in the compensation committee process during 2002 and early 2003 leading up to the August 2003 $140 million payout [although Mr. Langone had stepped down as a member and chairman of the compensation committee in June 2003].3

4. "Elephant-in-the-living-room" issue.

In both Disney/Ovitz and NYSE/Grasso, the directors involved apparently did not see the "elephant-in-the-living-room" issue that resulted in a huge corporate mistake and public relations disaster for each institution.

§  Disney/Ovitz Case: The "elephant" overlooked was the enormous size of the severance package if Mr. Ovitz's employment as president and a director of Disney did not work out. After only 14 months of employment Mr. Ovitz left Disney.

§  NYSE/Grasso Matter: The "elephant" overlooked was the public outcry and huge repercussions of the enormous lump-sum payment to Mr. Grasso. Within weeks of the payment to him of $140 million Mr. Grasso left the NYSE.

At an earlier stage of the Disney/Ovitz case, the Delaware Supreme Court noted, among other things, that

the Board failed to realize that the contract gave Ovitz an incentive to find a way to exit the Company via a non-fault termination as soon as possible because doing so would permit him to earn more than he could by fulfilling his contract. Brehm v. Eisner, 746 A2d 244, 252 [Del. 2000].

Although it is possible that a person of Mr. Grasso's apparent dedication would stay on notwithstanding receipt of an enormous lump-sum payment like $140 million, the NYSE directors apparently failed to take into account that a direct consequence of the huge payout could include Mr. Grasso's forced termination of employment.

It must be noted that the allegations in the Disney/Ovitz complaint go far beyond the public "allegations" made thus far in the NYSE/Grasso Matter. For example, the Court of Chancery stated in the Disney/Ovitz Case:

[A]ll of the alleged facts, if true, imply that the defendant directors knew that they were making material decisions without adequate information and without adequate deliberation, and that they simply did not care if the decisions caused the corporation and its stockholders to suffer injury or loss. 825 A2d at 290.

If one contrasts [a] the allegations in the Disney/Ovitz Case with [b] what is publicly known about the NYSE/Grasso Matter, one must conclude that the alleged circumstances in the Disney/Ovitz Case, if true, are much more egregious than what thus far has surfaced in the NYSE/Grasso Matter. For example, the NYSE Compensation Committee received advice on the lump-sum distribution of approximately $140 million from at least two expert consultants at a meeting in October 2002 and again received advice at a February 2003 meeting before recommending the lump-sum payment to the full board.

Nonetheless, there are legitimate questions regarding the handling of the NYSE/Grasso payout.


Role of Directors Other Than Mr. Grasso

1. Was the compensation committee sufficiently independent of Mr. Grasso in reaching its decision? As noted above, the chairman of the NYSE Compensation Committee during the fall of 2002 and into the spring of 2003 [when the lump-sum payment was being deliberated], Mr. Langone, has been described as a long-time close personal friend of Mr. Grasso. As also noted above, Mr. Langone had served since 1999 as chairman of the committee. Several members of the compensation committee during the deliberations on the lump-sum payment were heads of investment firms which, in certain matters, were subject to regulation by the NYSE.

Mr. Grasso has stated that he made no effort to influence the compensation committee in its decisions as to his own compensation. Yet one of the outside consultants to the compensation committee repeatedly indicated in written reports to the committee in 2002 and 2003 that Mr. Grasso wanted accelerated payment of elements of his accrued package making up the $140 million. The reports include statements such as "the CEO would like the Exchange to accelerate and pay approximately $51.5 million of the projected July 2006 pension benefit to CEO's SESP on Jan. 1, 2003." See Vedder Price, "Report to the Human Resources Policy and Compensation Committee of the NYSE," 8 [Oct. 3, 2002]. Was the committee taking a hard, objective and independent look at whether it was in the best interests of the NYSE to pay out $140 million in a lump sum to Mr. Grasso? Or was it approving payout because of its loyalty to Mr. Grasso?

2. On what basis did the compensation committee, and the board as a whole, conclude that the payout of the $140 million was in the best interests of the NYSE? A major purpose of compensation is to retain and motivate someone in the employer's service, not to encourage him to leave. For most people [albeit Mr. Grasso does not appear to be "most people"], the receipt of $140 million, whether in the lottery or from an employer, would not seem designed as an incentive to render future services to the employer. Even if Mr. Grasso were vested in the entire $140 million, it is a safe bet that had the committee decided not to authorize payout of a lump-sum $140 million, Mr. Grasso would have been inclined to stay around to receive payment of the $140 million at a later date.4

Minutes of the compensation committee suggest various benefits to the NYSE including cost savings in making a lump-sum payment. Did the committee carefully weigh these benefits against the potential harm and public relations disaster that could result if the payment backfired [which, in fact, it did]?5

3. Why was Mr. Grasso's request for a lump-sum payment of $140 million not a red flag to the compensation committee? Why did the enormous build-up in earlier years not represent a series of red flags? One wonders how compensation committee members over the several years preceding 2003 failed to see where they were heading [or, if they saw it, failed to "stem the tide"], with huge awards in each year. Please see Table 1 for a comparison of Mr. Grasso's compensation awards and the NYSE net income for the four most recent years for which data was obtained in connection with the preparation of this column.

Table 1


Mr. Grasso’s

Net Income


$11.3 million

$75.2 million


$21.8 million

$72.9 million


$31.3 million

$31.8 million


$12.0 million

$28.1 million

*Note: the compensation figures do not include the very substantial pension accruals that occurred each year.

Why didn't compensation committee members along the way see red flags building up year after year? The ultimate red flag was Mr. Grasso's request in 2002 for the lump-sum payment of $140 million.

Just months after Mr. Grasso's departure, with $140 million, someone independent of what went on, the new chairman, John S. Reed, asked Mr. Grasso to pay back $120 million of the $140 million. Which raises the point, why didn't someone sit down with Mr. Grasso and say, simply, "we seem to have 'overshot the mark' on your compensation and perhaps you might be willing to reduce the amount, in consideration for a lump-sum payment ahead of schedule?"


Mr. Grasso's Fiduciary Role

1. Did Mr. Grasso, as chairman of the board and chief executive officer of the NYSE, actually consider that it was in the best interest of the NYSE to pay out to him in a lump sum an amount that greatly exceeded the net income in the aggregate of the NYSE for the three years preceding the lump-sum payment?

2. Did Mr. Grasso ever question whether the amounts being awarded to him over the years were a "good fit" with the nature of the NYSE as a not-for-profit institution? In 2001, for example, Mr. Grasso's pay equaled approximately 100 percent of the net income of the NYSE.

3. Did Mr. Grasso consider the lump-sum payment of $140 million to himself to be an appropriate example to set for other senior executives at the NYSE with deferred compensation and pension arrangements?

4. Finally, did Mr. Grasso, as chairman of the board, gave adequate consideration to the difficult fiduciary situation his proposal created for the NYSE Compensation Committee that took the initial steps leading to the $140 million payout? Should Mr. Grasso, as chairman of the board, have refrained from making his proposal in 2002-2003 to members of a committee who must have felt, along with other considerations, the weight of their loyalty to the person who had appointed them and, in some cases, governed them?


Delaware Court of Chancery

The Delaware Court of Chancery, in its May 2003 decision, spoke of Mr. Ovitz's responsibility as president and a director of Disney in being sure his own pay was reasonable.

[O]nce Ovitz became a fiduciary of Disney on Oct. 1, 1995, according to the new complaint, he also had a duty to negotiate honestly and in good faith so as not to advantage himself at the expense of the Disney shareholders. 825 A2d at 291.

* * * *

... Because Ovitz was a fiduciary during both the negotiation of his employment agreement and the non-fault termination, he had an obligation to ensure the process of his contract negotiation and termination was both impartial and fair. The facts, as plead[ed], give rise to a reasonable inference that, assisted by Eisner, he ignored that obligation. Id. at 292.

In its conclusion in the Disney/Ovitz Case, the Court of Chancery made the following observation:

[O]ur corporation law's theoretical justification for disregarding honest errors simply does not apply to intentional misconduct or to egregious process failures that implicate the foundational directoral obligation to act honestly and in good faith to advance corporate interests. Because the facts alleged here, if true, portray directors consciously indifferent to a material issue facing the corporation, the law must be strong enough to intervene against abuse of trust. Id.

As noted above, the egregious actions and omissions alleged in the Disney/Ovitz Case do not appear to represent the circumstances in the NYSE/Grasso Matter. This column is not implying that. However, the observations as to corporate governance and fiduciary responsibility made by the Delaware courts in the Disney/Ovitz Case do carry a resonance in examining the NYSE/Grasso Matter.

NYSE/Grasso and the Not-for-Profit Corporation Law. In contrast to the Disney/Ovitz Case, the NYSE/Grasso Matter involves a not-for-profit corporation. Section 719[a] of the New York Not-for-Profit Corporation Law [Not-for-Profit Law] provides that, except for certain payments and distributions permitted under § [515, a director who votes for, or concurs in, a payment or distribution of cash or property to a member, director or officer shall be liable for injury resulting to the corporation from such payment or distribution. Section 515[b] permits payment of "compensation in a reasonable amount." Distributions are also permitted under § [515[c] "as authorized by this article" but there does not appear to be any other clearly applicable exception to warrant the $140 million payment to Mr. Grasso.

A director otherwise liable under § [719[a] for such a distribution is not to be held liable if, under Not-for-Profit Law § [717[a], he has otherwise discharged his responsibility in the matter "in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances" in a like position. This exculpation from the liability imposed by § [719[a] is provided in § [719[e].

The initial question under the Not-for-Profit Law would seem to be whether the directors involved in the NYSE/Grasso Matter [including Mr. Grasso] were satisfied, in good faith, after diligent inquiry, and applying due care and skill, that the lump-sum payment was in the best interests of the NYSE and its members. If the directors satisfied this general fiduciary test, § [719[e] would protect them. If they did not satisfy this test, the question then would become whether the payment of $140 million [and/or the year-by-year awards as they built up prior to 2003] represented "compensation in a reasonable amount."


[1] Observations in the column on the NYSE/Grasso Matter are based on statements in the press and other media and on materials released by the NYSE including minutes of meetings of the compensation committee and reports of consultants to the compensation committee. Observations in the column on the Disney/Ovitz Matter are based largely on observations by the Delaware Court of Chancery in In Re The Walt Disney Company Derivative Litigation, 825 A2d 275 [Del. Ch. 2003] and the Delaware Supreme Court in Brehm v. Eisner, 746 A2d 244 [Del. 2000]. Each court is addressing allegations contained in a complaint, not established facts.

[2] The Charter of the Human Resources Policy and Compensation Committee during the period starting in 1998 [when the first charter provision was examined in preparing the column] until a new charter was adopted on Aug. 7, 2003 contained the following provision:

RESOLVED, that the HUMAN RESOURCES POLICY AND COMPENSATION COMMITTEE shall consist of such number of Directors as shall be appointed by the Chairman and approved by the Board, one of whom shall be selected by the Chairman to serve as presiding member ...

[3] During most of the year-long process of deliberations over Mr. Grasso's employment agreement, including the proposed lump-sum payment, the compensation committee received reports regarding Mr. Grasso's compensation arrangements from at least three consultants. In summer 2003, a new committee, with a new chairman, was appointed. H. Carl McCall, presumably with Mr. Grasso's approval, became chairman and four of the remaining five members of the committee carried over from the committee that served for the 2002-2003 period. The new committee under Mr. McCall met on July 14, 2003 to review the new employment agreement for Mr. Grasso [which included provision for the lump-sum payout of $140 million]. The committee approved the agreement [with the lump-sum payout provision] and, following another meeting of the committee on Aug. 7, the agreement, including the lump-sum payout, was approved by the full board.

[4] Mr. Grasso's then-current contract was scheduled to expire May 31, 2005, approximately two years subsequent to the period of the compensation committee's deliberations in 2003. The new agreement extended the term two more years, to May 31, 2007.

[5] The minutes suggest cost savings for the NYSE by "freezing" Mr. Grasso's covered compensation at the level of his compensation for the years 1999, 2000 and 2001. This particular saving seems unlikely since Mr. Grasso's covered compensation [salary plus bonus] for 2000 and 2001 was by far the highest in the history of his career and from the perspective of 2002/2003 not likely to be repeated in the foreseeable future. Another justification given was the "removal of an unfunded liability" from the financial statements.

[6] The NYSE Compensation Committee chose, in establishing Mr. Grasso's compensation, a "comparator group" made up of very large financial institutions, such as American Express Company, Citigroup Inc. and Merrill Lynch & Co. In doing that, it would seem to have subordinated, in its determination of appropriate pay for the NYSE CEO, the fact that the NYSE is not a large, for-profit financial institution but is, rather, a privately owned self-regulatory body organized under the New York Not-for-Profit Corporation Law. It would appear that the NYSE's objective is not to maximize profits for shareholders but to maintain a well-regulated, efficient and effective stock exchange for its members.