Labor Logic

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John D. Finerty, Jr.

A jury in New York federal court convicted Martha Stewart of multiple felonies that involved an investigation into her sale of ImClone company stock. Disney’s Chairman and Chief Executive Officer, Michael Eisner, recently lost the confidence of company shareholders and has been called upon to resign.

What do these two embattled corporate executives have in common? They both have employment contracts and the ramifications of their troubles can teach employees and employers a few lessons about employment contracts.

Martha Stewart

Martha Stewart was the President and Chief Executive Officer of Martha Stewart Living Omnimedia, Inc., a media empire she built from a home catering business. She was convicted last week for lying to federal investigators about why she sold 4,000 shares of ImClone stock on Dec. 27, 2001. The day after she sold, the price of ImClone stock fell significantly after the federal government declined to approve one of its cancer fighting drugs.

ImClone is a biotech company whose founder, Sam Waksal, was a close friend of Stewart. At issue was approximately $52,000 that Stewart saved by selling ImClone stock ahead of the FDA’s announcement.

According to filings at the Securities and Exchange Commission, Martha Stewart and her company entered into a five-year employment agreement in 1999. Stewart was the Chairman of the Board of Directors and Chief Executive Officer of the company. Her employment contract, however, provided that she may be terminated by the company for "cause." Importantly, Stewart’s employment agreement defined cause, in part, as follows:

"For purposes of this Agreement, the Company shall have ‘Cause’ to terminate the Executive’s employment only upon the Executive’s: Conviction of a felony or willful gross misconduct that, in either case, results in material and demonstrable damage to the business or reputation of the Company …"

Shares of Martha Stewart Living Omnimedia dropped approximately $3.50 after the jury announced its verdict. The company may terminate Stewart as a result of her conviction. Stewart is entitled, however, to 30 days advance notice of her termination and the opportunity to be heard, together with her counsel, before the Board of Directors. She then has the right to seek court review of the Board’s determination.

If terminated, Stewart stands to lose significant amounts in compensation and benefits. For example, the salary called for in her employment agreement was $900,000 per year, with a yearly bonus of no less than $300,000. The bonus could be adjusted upward by the Board of Directors based on company performance. Stewart was also entitled to six weeks paid vacation, a company car and driver, reimbursement of business expenses and all other welfare, pension and incentive bonus plan benefits available to other executives to the company.

Michael Eisner

Eisner joined Disney after serving as President of Paramount Pictures and as head of prime-time programming for ABC. He successfully turned around a struggling company by increasing attendance at theme parks and with the hit series "Who Wants To Be A Millionaire?" In 2000, the Disney Board of Directors awarded Eisner with a six-year employment contract.

Eisner’s employment contract calls for an annual base salary of $1 million. Salary, however, is only a small part of his compensation. According to a 2001 article in FORBES magazine, Eisner’s 2000 bonus was $11.5 million. In addition, he received more than 15 million stock options that vested over the course of his employment contract, an executive life insurance policy with an after tax value of $3 million, reimbursement for business expenses and a promise of severance benefits that continued his bonus for up to 2 years after termination.

As with Stewart’s employment agreement, Disney may terminate Eisner’s employment for "good cause." Unlike Stewart’s agreement, however, good cause does not include conviction of a felony, but rather it is limited to "gross negligence or malfeasance" by Eisner in the performance of his duties under the agreement.

Eisner, on the other hand, has the right to terminate his own employment for "good reason" and retain much of his compensation and benefits.

Interestingly, "good reason" exists if the "executive is not elected or retained as chairman and chief executive officer and a director of the company." If Eisner is voted out of the company, therefore, Disney must pay him the present value of his base salary for the remaining term of the agreement, within 30 days; it must also pay yearly bonuses and immediately vest any outstanding stock options.

In other words, unless Eisner is guilty of gross negligence or malfeasance, he stands to recover the entire amount of his employment contract if he is terminated or voted off Disney’s Board of Directors.

For more information on employment contracts or for assistance in drafting executive compensation agreements, contact John D. Finerty, Jr. at Michael Best & Friedrich at (414) 225-8269 or on the Internet at [email protected].