In wake of the Disney-Ovitz feud that has dominated the business pages the past few months, and has been on the lips of directors at board meetings, we have had some calls inquiring: What’s a “non-fault” termination?
Here’s the essence of the termination clause that appeared in Ovitz’s employment contract, which has been characterized in business publications and articles as “non-fault”:
Ovitz could only be terminated when one of three events occurred:
1. He was not elected or retained as president and a director of Disney;
2. He was assigned duties materially inconsistent with his role as president; or
3. Disney reduced his annual salary or failed to grant his stock options, pay him discretionary bonuses, or make any required compensation payment.
Directors, read it carefully. Soon this clause – without performance criteria or other carefully crafted employment conditions and opportunities to terminate an executive’s employment for cause and without cost or penalty (to the shareholders) – will be a dinosaur, never to be seen again, except in a court of law in an action against directors for breach of their duty of care to their corporation for approving such a clause in an executive’s employment contract.