The Walt Disney Company

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 50882 / December 20, 2004

ADMINISTRATIVE PROCEEDING
File No. 3-11777

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against The Walt Disney Company ("Disney" or "Respondent").

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, which Respondent admits, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934, as set forth below.

III.

On the basis of this Order and Respondent's Offer, the Commission finds that:

Respondent

Respondent Disney is a Delaware corporation with its principal executive offices located in Burbank, California. Disney is an international entertainment company that owns and operates theme parks and resorts, media networks, and movie studios, and sells various consumer products. Disney's common stock is registered with the Commission under section 12(b) of the Exchange Act.

Summary

Disclosure of information concerning the compensation, remuneration and other benefits that corporate insiders such as directors receive from the corporation helps shareholders to evaluate the motives and objectivity of these individuals. Such disclosure also assists shareholders in assessing how well corporate directors fulfill the obligations they bear to the shareholders. To this end, the federal securities laws require the disclosure of certain information concerning these matters. Item 402 of Regulation S-K requires disclosure of compensation paid by the issuers to its officers and directors. Item 404 of Regulation S-K requires disclosure of transactions and relationships in which directors, officers, director nominees and their family members have a direct or indirect material interest. Item 404 disclosure sheds light on relationships that may present actual or potential conflicts of interest that may affect officers', directors' and director nominees' execution of their duties.

In this case, Disney, for the first time, disclosed information about certain director relationships in a Form 10-K/A filing in August 2002 and in a Form 10-K filing in December 2002. The disclosed information was required by Items 402 and 404 of Regulation S-K concerning the compensation of directors and the employment of members of their families by Disney. That disclosure was not timely. Prior to these filings, Disney had failed to disclose such information in the time periods covered by prior reports. The Commission reminds public companies and other issuers of securities registered with the Commission of the need for scrupulous adherence to the disclosure requirements of the Commission's regulations.

Failure to Disclose Director Relationships

From 1999 through 2001, three adult children of Disney board members (Reveta Bowers, Stanley Gold, and Raymond Watson), who were employed by Disney in nonexecutive positions, received compensation in excess of $60,000 annually from Disney, the threshold amount requiring disclosure under Item 404(a) of Regulation S-K of the Exchange Act. These three children received compensation from Disney ranging from slightly above $60,000 to more than $150,000 per year. Disney failed to disclose the employment of these directors' children in its periodic filings made with the Commission pursuant to the Exchange Act until August 9, 2002, when Disney filed its Form 10-K/A.

In addition, a company in which Disney owned a 50 percent interest, employed the wife of a Disney director, John Bryson. Bryson's wife began working at the company in September 1999, approximately one year before Bryson joined the Disney board in late-September 2000. In the fiscal years ending September 30, 2000 and September 30, 2001, she earned more than $1,000,000 annually, in excess of the threshold amount requiring disclosure under Item 404(a) of Regulation S-K of the Exchange Act.¹ Members of the Disney board were notified of his wife's employment when Bryson joined the Disney board in September 2000. Disney failed to disclose her employment in its periodic filings made with the Commission pursuant to the Exchange Act until August 9, 2002, when Disney filed its Form 10-K/A.

Also during this time period, Disney maintained a business relationship with Air Shamrock, Inc., a corporation that was owned by Roy E. Disney, who was then a director, Vice-Chairman of the board, and an officer of Disney, and managed by then-Disney director, Stanley Gold. Air Shamrock, Inc. owned and operated airplanes that were used by Roy Disney for his business and personal travel. From 1984 through 2003, Roy Disney regularly traveled on planes owned by his corporation when traveling for Disney-related business purposes. Disney paid the corporation fixed hourly amounts plus expenses when the director used his corporation's planes for Disney business.² The payments that Disney made to the corporation, which exceeded 5% of Air Shamrock, Inc.'s gross revenues, were required to be disclosed under Item 404(b)(2) of Regulation S-K of the Exchange Act. Frank Wells, then-Disney's president, approved this arrangement in 1984. After Wells' death in 1994, requests for payment were received by then-Chairman and CEO Michael Eisner's office and forwarded for processing. Disney failed to disclose these payments in its periodic filings made with the Commission pursuant to the Exchange Act until December 4, 2002, when Disney disclosed the information in its Form 10-K filing.

In addition, when Disney acquired Capital Cities/ABC, Inc., Thomas Murphy, the former Chairman of the Board of Capital Cities/ABC, Inc., became a member of the Disney board. At that time, Disney agreed to provide Murphy with secretarial services, a leased car, and a driver pursuant to an oral agreement between Murphy and Eisner. This was the same type of arrangement that Murphy had agreed to provide his predecessor at Capital Cities/ABC, Inc. when the predecessor retired. Disney's provision of these services, as well as the value of the services provided, were required to be disclosed under Item 402(g) of Regulation S-K of the Exchange Act as additional compensation for the director's services as a Disney director. Disney failed to disclose the provision or value of these services in its periodic filings made with the Commission pursuant to the Exchange Act until December 4, 2002, when Disney disclosed the information in its Form 10-K filing.

The importance of complete and accurate disclosure about the employment of the adult children of Bowers, Gold and Watson had added significance in light of other information Disney disseminated about the independence of its directors. On April 22, 2002, Disney announced that it had revised its Corporate Governance Guidelines as part of its efforts to reform its corporate governance. The revised guidelines, among other things, included a stricter definition of director independence than the prior version of the guidelines. This revised definition of director independence provided:

The definition of director independence in the revised Guidelines rendered the three Disney directors previously considered independent not independent in April 2002 because Disney had employed an adult child of each of them within the previous five years.³

The revised guidelines were disseminated publicly in a letter to shareholders dated April 22, 2002, that was posted to Disney's website. The letter 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 the accurate number was 10.⁴

On August 9, 2002, Disney filed an amendment to its fiscal year 2001 Annual Report on Form 10-K, which disclosed the fiscal year 2001 employment and compensation, described above, of the three directors' adult children employed by Disney and the director's spouse employed by the company in which Disney owned a 50 percent interest. Disney's 10-K/A was filed more than eight months after Disney filed its 2001 10-K, which should have disclosed these employment relationships. Disney did not amend its 10-K for fiscal year 2000, which failed to disclose the fiscal year 2000 employment and compensation of these directors' children and the director's spouse. Nor did Disney amend its 10-K for fiscal year 1999, which failed to disclose the fiscal year 1999 employment and compensation of two of the directors' children.

There were two Disney director relationships required to be disclosed under Regulation S-K of the Exchange Act that Disney failed to disclose in its fiscal year 2001 10-K or 10-K/A, or its fiscal year 2001 proxy statement. These relationships were not disclosed by Disney until it filed its fiscal year 2002 10-K on December 4, 2002. As described above, these two director relationships were: (1) Disney's regular payments to Air Shamrock, Inc., a corporation owned by then-director Roy Disney, to pay the corporation for the cost of his air travel when traveling for Disney-related business purposes; and (2) Disney's provision of services, including office space, secretarial services, a leased car, and a driver to then-director Murphy.

Legal Analysis

Form 10-K and Schedule 14A Proxy Statements require disclosure of certain information under Regulation S-K. Item 402 of Regulation S-K requires the disclosure of compensation paid by the corporation to directors and officers. Such information assists shareholders in evaluating the performance of management and in making voting decisions. Item 404 of Regulation S-K requires disclosure of transactions with a value exceeding $60,000 to which the registrant is a party in which the registrant's officers, directors, significant shareholders, or their immediate family members had a direct or indirect material interest. It is intended to enhance the information available to investors concerning the extent to which these persons are directly or indirectly benefiting from relationships with the corporation. As stated in the Commission's proposing release for Item 404, this item is intended to provide "information about transactions and relationships that is important to both investment and voting decisions." See Release No. 33-6416, 25 S.E.C. Docket 924 (July 9, 1982). Such information improves the ability of investors to assess matters that could influence the judgments and decisions of the persons most centrally involved in the management and governance of the corporation. The benefits directly and indirectly provided by the corporation to such persons could affect their motives and objectivity, as well as their fulfillment of the fiduciary and other obligations they bear to the corporation and its shareholders.

Item 404 extends to transactions and relationships involving members of the families of directors and executive officers because shareholders should have information concerning transactions and arrangements that might appeal to the natural human inclination to look favorably upon a family member's employer. Such information is intended to help a shareholder to assess the director's or officer's performance and suitability to hold his or her position.

In addition, Item 404 disclosures can inform a shareholder's evaluation of the independence of a director. The independence of directors is a linchpin of sound corporate governance, and is crucial to the objective oversight of management. The interests of the shareholders should be the paramount concern of the board of directors, and maintaining the independence of directors allows the board to fulfill its fiduciary responsibilities objectively and candidly. The Commission's disclosure program endeavors to illuminate the information that would allow a shareholder to evaluate the independence of the directors and vote on a more fully informed basis with respect to the election of directors.

As described above, Disney failed to disclose the employment and compensation of the three directors' children and the director's spouse in any Form 10-K until Disney made this disclosure in its 10-K/A filing on August 9, 2002. Therefore, Disney failed to comply with the Commission's disclosure requirements in that it failed to set forth the employment and compensation of the directors' family members in 1999 and 2000. Furthermore, Disney failed to disclose its payments to the corporation owned by a Disney director that provided air transportation to that director for Disney-related business purposes, and the office, secretarial services, leased car, and driver Disney provided to another Disney director in any Form 10-K until Disney filed its fiscal year 2002 10-K filing on December 4, 2002. Disney failed to disclose this director compensation or any of these director relationships in any Schedule 14A proxy statement until January 28, 2003, when Disney filed its proxy statement for its 2003 annual meeting.⁵

As a result of the conduct described above, Disney violated Sections 13(a) and 14(a) of the Exchange Act and Rules 13a-1, 12b-20 and 14a-3(a) thereunder. Section 13(a) and Rule 13a-1 require issuers of registered securities to file periodic reports with the Commission, including annual reports on Form 10-K, containing information prescribed by specific Commission rules and regulations. Section 14(a) and Rule 14a-3(a) require persons soliciting proxies to file with the Commission and provide to shareholders being solicited a proxy statement containing the information required by Schedule 14A. As previously discussed, Disney violated these provisions by failing to disclose in its Forms 10-K or Schedule 14A proxy statements for fiscal years 1999, 2000, and 2001, certain director relationships required to be disclosed under Item 404 of Regulation S-K of the Exchange Act.

IV.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent's Offer.

Accordingly, it is hereby ORDERED:

Pursuant to Section 21C of the Exchange Act, that Respondent Disney cease and desist from committing or causing any violations and any future violations of Sections 13(a) and 14(a) of the Exchange Act and Rules 13a-1, 12b-20 and 14a-3(a) thereunder.

By the Commission.

¹ Disney had no control over the salary that she received from the 50 percent-owned company.

² In 2002, Disney commissioned an independent analysis of the fixed-hourly rate charged to Disney by Air Shamrock, Inc., 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 by Air Shamrock, Inc.

³ However, Bryson, whose wife was employed by the company in which Disney owned a 50 percent interest, was still considered independent under Disney's revised independence definition. This was because the revised definition did not consider a director to be non-independent unless a member of the director's family worked for a company controlled by Disney as evidenced by Disney's power to elect a majority of the board of directors or otherwise direct its management and operation.

⁴ On December 3, 2002, Disney announced changes in its definition of director independence, which eliminated the employment of children (except as executive officers) as a criterion for determining the independence of directors. As a result, two of the three non-independent directors whose children were employed by the company were deemed to be independent. The third continued to be non-independent for another reason, but ceased to serve on any board committees. However, the April 22, 2002 letter continued to be inaccurate, in that 12 directors, not 13 as stated in the letter, were independent under the December 2002 revision.

⁵ Prior to fiscal year 2002, Disney typically disclosed in its Schedule 14A proxy statement information pursuant to Item 404, and incorporated that same information by reference in its Form 10-K. While Disney did disclose certain director relationships in its Form 10-K and Schedule 14A in years prior to 2002, Disney did not disclose the director compensation or the five director relationships discussed in this Order.