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September 17, 2004

Eisner's Disney Contract: Can Boards Fire Middle Executives

Professor Bainbridge of professorbainbridge.com was here today to present a scholarly paper, about which I might or might not blog separately. Before his talk, we were discussing whether a corporation's board of directors could take the unusual action of firing a low-level employee directly, bypassing the corporation's president, rather than having to get the president to do it by threatening to fire him (or actually firing him). Think about Viacom firing Dan Rather. Or, think about how Nixon first needed the resignation of his Attorney-General then his Number Two, before Number Three finally fired the Special Prosecutor in the Saturday Night Massacre. (Number Three was Bork, who also considered resigning but was told not to by Number One and Number Two, who thought enough protest had been registered.)

Ordinarily, corporate boards can fire employees if they want to, even though it would be highly unusual to bypass the usual chain of command and micromanage. There might be contracts in the way, though. What if the president's contract says he has sole right to hire and fire lower employees? Professor Bainbridge had, on March 2, 2004, blogged on Eisner's contract with Disney. The "duties" section makes Eisner CEO....


2. Duties

Executive shall be employed by Company as its Chairman and Chief Executive Officer. Executive shall report directly and solely to the Company's Board of Directors ("Board"). Executive shall devote his full time and best efforts to the Company. Company agrees to nominate Executive for election to the Board as a member of the management slate at each annual meeting of stockholders during his employment hereunder at which Executive's director class comes up for election. Executive agrees to serve on the Board if elected.

A judge would have to decide whether Disney would have breached if it had fired one of Eisner's employees, deciding whether Disney was not really employing Eisner as its CEO. It looks to me like Eisner would lose if there was just one incident, but if the board took away *all* his hiring and firing powers, that would be breach by Disney.

Another section is relevant though:

10. Termination by Executive

Executive shall have the right to terminate his employment under this Agreement upon 30 days' notice to Company given within 60 days following the occurrence of any of the following events, each of which shall constitute "good reason" for such termination:

(i) Executive is not elected or retained as Chairman and Chief Executive Officer and a director of Company.

(ii) Company acts to materially reduce Executive's duties and responsibilities hereunder. Executive's duties and responsibilities shall not be deemed materially reduced for purposes hereof solely by virtue of the fact that Company is (or substantially all of its assets are) sold to, or is combined with, another entity provided that (a) Executive shall continue to have the same duties, responsibilities and authority with respect to Company's businesses as he has as of the date hereof and as Executive may have with respect to businesses added hereafter, including but not limited to, entertainment and recreation, broadcasting, cable, direct broadcast satellite, filmed entertainment, consumer products, music, the internet, parks and resorts, etc., (b) Executive shall report solely and directly to the board of directors (and not to the chief executive officer or chairman of the board of directors) of the entity (or to the individual) that acquires Company or its assets or, if there shall be an ultimate parent of such entity, then to the board of directors of such ultimate parent and (c) Executive shall be elected and retained as a member of the board of directors of such entity or ultimate parent (if there shall be one).

(iii) Company acts to change the geographic location of the performance of Executive's duties from Los Angeles California metropolitan area.

Section 10 says that if the company "materially reduces" Eisner's responsibilities, then he is free to quit without penalty. Firing one of his major subordinates probably counts for that.

That is a sensible way to write the contract. Simply saying that the company is in breach if it fires a subordinate leads to the mess of a court having to decide what level of damages would be appropriate for the company to pay Eisner (and specifying liquidated damages is completely impractical here). Instead, the contract gives Eisner a simpler remedy-- he can quit.

Posted by erasmuse at September 17, 2004 04:52 PM

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