Pixar and Disney originally had a seven film distribution agreement that gave Disney full ownership of Pixar's feature films and characters, as well as sequel rights. With the success of Toy Story 2 in the end of 1999, then Disney CEO Michael Eisner and then owner of Pixar, Steve Jobs, began to disagree on how Pixar should be run and the terms of a continued relationship. Eisner claimed that Toy Story 2, as it was a sequel, did not count towards the "original" film count of the agreement, though Jobs disagreed. Jobs announced in January 2004 — after ten months of negotiations — that Pixar would not renew their agreement with Disney, and would seek out other distributors for releases starting in 2006. Jobs wanted Pixar to receive most of the profits that their films made as well as full ownership of any future films and characters that the studio would create after Cars. Eisner found these terms unacceptable. Pixar executive producer John Lasseter, who had personally directed Toy Story, A Bug's Life, and Toy Story 2, was distraught over the breakdown of the relationship of Disney:Pixar, as he was worried about what Disney might do with the characters Pixar had created. When he had to announce what had happened at a meeting of Pixar's eight hundred employees, Lasseter reportedly said, through tears, "It's like you have these dear children and you have to give them up to be adopted by convicted child molesters."
History
In March 2005, Disney Circle 7 Animation was formed as a CGI animation studio to create sequels to the Disney owned Pixar properties, and the studio began to hire staff shortly after. It was seen as a bargaining chip by people within both Pixar and Disney, but also as a backup plan by Eisner in the event that negotiations fell through. The first projects that the studio worked on were early drafts of Toy Story 3, Monsters, Inc. 2: Lost in Scaradise, and Finding Nemo 2. Bob Iger succeeded Eisner as the new CEO of Disney in September 2005. While viewing a parade at Hong Kong Disneyland that fall, Iger realized how badly Disney needed Pixar, because all characters less than ten years old in the parade were from Pixar films. In the end of January 2006, Iger and Jobs agreed to a deal in which Disney would purchase Pixar for $7.4 billion, with Pixar's leadership taking control of Disney's animation group. Under this new deal, Pixar would make Toy Story 3 with an all new script; director Andrew Stanton stated that Pixar purposely avoided looking at Circle 7's script. On May 26, 2006, Disney officially closed Circle 7 Animation, and transferred about 80% of the studio's employees to Walt Disney Feature Animation, which was soon renamed Walt Disney Animation Studios. Catmull later disclosed in his book of 2014, Creativity, Inc., that although Pixar had been frustrated with Disney's decision to create Circle 7 Animation in order to create sequels to Pixar's own films, they did not hold that against Circle 7's employees, who had no part in that decision. This was why Catmull and Lasseter were willing to absorb most of the workforce of Circle 7 directly into Walt Disney Animation Studios. Indeed, they eventually appointed Andrew Millstein, the former head of Circle 7, as the general manager of Walt Disney Animation Studios to handle day to day business affairs on their behalf.
