At Disney, Grumpy Isn't Just A Dwarf

It's the mood of shareholders as the annual meeting nears

No company puts more effort into its annual meeting than Walt Disney Co. Mickey Mouse and Minnie usually cavort in the halls outside, while clips of upcoming Disney movies flicker on a screen above the stage. And for the 14,000 or so shareholders who come by car and motor home to the meetings, which alternate between Orlando and Anaheim, Calif., there's an added bonus: a free ticket to Disneyland or Walt Disney World.

This year, when the Disney faithful gather on Feb. 25 at Arrowhead Pond in Anaheim, there may be something new on the program--and not scripted by Disney. Questions from the floor are likely to turn uncharacteristically sharp. Questions such as what is the company doing to boost lackluster ratings at its ABC unit? And why was former President Michael Ovitz allowed to collect an estimated $93 million in cash and stock options for walking away after only a year on the job? Then there's Chief Executive Michael D. Eisner's new 10-year employment deal, which awards the 54-year-old executive options on 8 million shares on top of his salary and bonus (table). The company says the shares have a hypothetical current value of $195.4 million.

Suddenly, Disney shareholders are asking tough questions about how the Magic Kingdom is being run. In the aftermath of Ovitz' Dec. 27 resignation, a shareholder rights group urged stockholders to voice their displeasure by withholding their vote for the five Disney nominees, including Roy E. Disney, Walt's nephew, for board election at the meeting. Suits have been filed in both California and Delaware as dissident shareholders seek the return of some of the Ovitz package. In mid-February, the $108 billion California Public Employees' Retirement System, which holds 3.5 million Disney shares, is expected to join the California suit. "We are looking at the Disney situation very closely," says CalPERS CEO James E. Burton.

The lawsuits allege that Ovitz, who they claim was negotiating with other companies last year to leave Disney, should have been terminated "for cause." As a result, they argue, he should not qualify for the severance package he negotiated when he was hired, which included immediate vesting of 3 million shares and $38 million in salary, bonuses, and a "contract termination payment." Says San Diego lawyer William S. Lerach, who filed the California suit against Disney: "It is too much Hollywood, too much aggrandizement of power."

COURT ALLY. Eisner's own severance deal could also become a contentious issue. Under terms of the contract, which he signed on Jan. 8, if Eisner is forced out, or fired "without good cause," he will immediately receive 8 million new Disney shares. If he stays on, they vest in annual installments through 2006. Compensation expert Graef Crystal advised the Disney board on Eisner's pay. But even Crystal, who says he never saw Eisner's final contract, says: "If I could have tied him down to a tree and made him accept one thing, it would be a smaller severance package."

Both CalPERS and the Lerach shareholder group are said to be considering filing suit on the Eisner pay package as well. Winning either suit won't be easy. Courts traditionally give companies wide latitude when it comes to hiring and retaining key executives. On Jan. 28, Disney asked the Delaware court to dismiss one of the suits, arguing that "since Mr. Ovitz was one of the industry's hottest commodities, it is hardly surprising that his employment could be secured only at a steep price."

Indeed, an outright shareholder revolt isn't likely at Disney's annual meeting, or anywhere else. Eisner, after all, has forged quite a record in his 12 years as CEO--sales are up 12-fold, to $21.2 billion, and the share price is up 19-fold to around $77. But that won't stop the annual meeting being almost as loud as the Mighty Ducks games that are played in that arena.

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