Disney paid Ovitz $138m to leave after 16 months — 'breathtaking', said the court

Before approving any executive package, price the failure case: what does the contract pay if the hire does not work out, and who signs that number? Disney's board approved unanimously; ten years and 37 trial days later, the severance still stood.

In 1995 Michael Eisner brought his long-time friend Michael Ovitz, co-founder of Creative Artists Agency, to Disney as president; the board elected him unanimously on 26 September and his tenure began on 1 October. The contract carried a clause that would decide everything: if Disney fired Ovitz for anything short of gross negligence or malfeasance, the Non-Fault Termination paid his remaining salary, 7.5 million dollars a year of unaccrued bonuses, the immediate vesting of his first tranche of three million options, and a 10-million-dollar cash-out of the second.

The presidency lasted sixteen months. The union ended, as the court later put it, in spectacular failure; once a deal Ovitz had been negotiating with Sony failed to produce the result Eisner wanted, Eisner decided that Ovitz must be gone by the end of the year. He was dismissed in January 1997 — and the no-fault clause fired with him: 38 million dollars in cash and an estimated 100 million dollars in stock, roughly 138 million in all for sixteen months' work.

The shareholders sued. The trial consumed thirty-seven days between October 2004 and January 2005 — 9,360 pages of transcript from twenty-four witnesses. Chancellor Chandler found no breach of fiduciary duty and no waste: the payment stood. But the opinion said there were many aspects of the defendants' conduct that fell significantly short of the best practices of ideal corporate governance.

The case is still told in the court's own words — a spectacular failure of that union, with breathtaking amounts of severance pay the consequence — and in James B. Stewart's DisneyWar (Simon & Schuster, 2005), the account of Eisner's wars that publishers rushed out three weeks early because accounts were clamoring for it; some Los Angeles bookstores sold their stock in a day. It remains the governance casebook's favorite example of a board paying for a hiring decision it never managed.

The no-fault clause priced the divorce before the marriage: $38m cash plus ~$100m stock for sixteen months' work, upheld by the court.

The contract written on day one fixed the price of failure: the no-fault clause paid out whatever happened, so the board had priced the divorce before the marriage.

The hire was approved unanimously, package and all — and it took a 37-day trial, 24 witnesses and 9,360 pages of transcript to examine what a board meeting had approved in an afternoon.

No one was found liable. The court upheld the payment in full; the cost of the mistake was carried by the shareholders, not by the directors who made it.

Write the exit clause as if the exit will happen — it is the one term the other side reads twice. Disney's no-fault clause turned a failed hiring into a nine-figure invoice.