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News Brief

By: Cydney Posner

The SEC announced today that it had settled an action against The Walt Disney Company in connection with Disney's failures to disclose both compensation paid to directors as well as related transactions with directors.  For press release, click here.

The SEC found that, between 1999 and 2001, Disney failed to disclose relationships between the company and its directors that were required to be disclosed in its proxy statements and annual reports. In particular, Disney failed to disclose that the company employed three children of its directors, who received annual compensation ranging from $60,000 to more than $150,000. In addition, Disney did not disclose that the spouse of another director was employed by a subsidiary 50% owned by Disney and received compensation in excess of $1 million annually. Further, Disney failed to disclose that it made regular payments to a corporation owned by a Disney director that provided air transportation to that director for Disney-related business purposes. (In a footnote, the release notes that, in 2002, Disney commissioned an independent analysis of the fixed-hourly rate charged to Disney by that corporation, which found that a lower rate should have been charged. Based on this review, Disney sought and received a rebate of approximately $725,000 based on the prior rate charged.) Finally, Disney failed to disclose that it provided office space, secretarial services, a leased car and a driver to another Disney director, services valued by the company at over $200,000 annually. Some of these relationships and compensation matters were not disclosed until August 2002, when the company filed an amendment to its 2001 10-K, and some were not disclosed until filing of Disney's 10-K for 2002.

The SEC noted that complete and accurate disclosure about the employment of the adult children of three directors was especially significant in light of other information Disney disseminated about the independence of its directors. In 2002, Disney announced that it had revised its Corporate Governance Guidelines as part of its efforts to reform its corporate governance. The revised guidelines included a stricter definition of director independence, which precluded independence where the director or a member of his or her immediate family had been employed by Disney within the previous five years. (In December 2002, Disney announced changes in the definition of director independence eliminating the employment of children (except as executive officers) as a criterion for determining the independence of directors.) Although the children of three Disney directors were employed by Disney, a publicly disseminated letter to shareholders incorrectly stated that Disney’s key board committees were "now restricted to independent directors," when each committee had at least one member who was not independent as a result of the employment by Disney of a child of that director. In addition, the letter incorrectly stated that Disney had 13 independent directors under the recently revised guidelines, when only 10 were actually independent under the guidelines.

The SEC concluded that Disney’s disclosures (or lack thereof) violated Sections 13(a) and 14(a) of the Exchange Act and issued a cease-and-desist order against Disney.

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