Here at the DiligenceEngine Blog, we ususally restrict ourselves to discusssing (1) legal tech and efficiency and (2) what we're up to. But our business is largely about helping lawyers find and organize information from contracts. Accordingly, it seemed appropriate to contribute to the discussion on contractual issues around Yahoo's termination of its CEO Carol Bartz, including the non-disparagement and board seat issues.
In an interview with Fortune, just over 24 hours after being terminated by phone by Yahoo's chairman Roy Bostock, Bartz recounted how the firing occured:
On Tuesday, Bartz was in New York, to speak at Citigroup's (C) technology conference the next day, when she was supposed to call Bostock at 6 p.m. "I called him at 6:06," she recalls. When he got on the line, she says, he started reading a lawyer's prepared statement to dismiss her.
"I said, 'Roy, I think that's a script,'" adding, "'Why don't you have the balls to tell me yourself?'"
When Bostock finished reading, Bartz didn't argue—"I got it. I got it," she told the Yahoo chairman. "I thought you were classier," she added.
Bartz also stated, "The board was so spooked by being cast as the worst board in the country ... Now they're trying to show that they're not the doofuses that they are" and "These people f---ed me over" along with some enthusiastic statements about the company and its people, including describing her successor Tim Morse as a "great guy" and "I wish the Yahoo people the best because it's a fantastic franchise."
And when I ask her if she's on any other public company boards besides Cisco (CSCO), where she is lead independent director, she says, "I'm on Yahoo's board." She tells me that she plans to remain a Yahoo director—which might be unlikely since she has now called her fellow directors "doofuses."
"I want to make sure that the employees don't believe that I've abandoned them. I would never abandon them," Bartz says. Besides, she adds, "I have way too many purple clothes."
She's referring to the color of Yahoo's logo.
The relevant portion of Bartz' employment contract (Exhibit 10.1 to the Yahoo Form 8-K filed January 15, 2009 (available easily here)) reads:
16. Non-Disparagement. You agree, other than with regard to employees in the good faith performance of your duties with the Company while employed by the Company, both during and for five (5) years after your employment with the Company terminates, not to knowingly disparage the Company or its officers, directors, employees or agents in any manner likely to be harmful to it or them or its or their business, business reputation or personal reputation. The Company will direct its Chairman, the Chief Yahoos and the named executive officers of the Company, other than in the good faith performance of their duties to the Company or in connection with their fiduciary duties to the Company and applicable law, both during and for five (5) years after your employment with the Company terminates, not to knowingly disparage you in any manner likely to be harmful to you or your business reputation or personal reputation. The foregoing shall not be violated by statements which are truthful, complete and made in good faith in response to any question, inquiry or request for information required by legal process or governmental inquiry.
To summarize, for five years post-employment, Bartz may not knowingly disparage Yahoo or its directors in a manner likely to be harmful to it or them or its or their business, business reputation or personal reputation.
Fortune has suggested that Bartz's comment may have cost her her contractual "without cause termination" severance payments (of some $10 million). This is unlikely, at least on the basis of Bartz's employment contract: the non-disparagement clause does not list any penalty for violation. So unless more specific consequences of violation are contained in another Bartz/Yahoo agreement, Bartz could be liable for breach of contract, with damages to be determined through trial but not loss of her termination payment.
Section 6 ("Termination of Employment") of Bartz's employment contract includes the sentence "Upon any termination of employment, you shall promptly resign from the Board and all officerships, directorships or fiduciary positions with the Company and its affiliates." In addition, the Form of Release Agreement (Exhibit A to Bartz's employment contract) reads:
To the extent you have not previously done so as of the Separation Date, you hereby resign from your position as the Chief Executive Officer of the Company and from any and all offices you have with the Company’s subsidiaries and/or affiliates, including the Company’s Board of Directors or any fiduciary or other committee with respect to any benefit plan of the Company or any of the Company’s subsidiaries and/or affiliates. You shall execute such additional documents as requested by the Company to evidence the foregoing. After the Separation Date, you shall not represent yourself as being an officer, director or employee of the Company or a fiduciary of any such benefit plan for any purpose.
Bartz does not have to sign the Release Agreement, but only gets her "termination without cause" severance payments if she does. Arguably Bartz's Fortune interview violates the last sentence of the above quoted Release Agreement provision (assuming Bartz's "Separation Date" was the day she had the firing call), in that she stated she is on Yahoo's board. Since this was literally true at the time, it is unlikely Yahoo would be able to successfully press against Bartz on this point (assuming Bartz signs the Release Agreement at all).
Corporate governance expert (and shareholder activist) Nell Minow, according to Fox Business, feels that Bartz may have some wiggle room, in that Bartz has been elected to the board by Yahoo's shareholders, but that Bartz is probably just using this issue as a negotiating tactic. I agree that this is probably a negotiating tactic but do not see any wiggle room. This is very clear language; Bartz is contractually obligated to resign from Yahoo's board. She can, of course, attempt to stand for election to Yahoo's board at its next annual meeting, but this is unlikely to work (and Bartz is unlikely to desire it). If Bartz does not resign from the board, Yahoo can sue her for breach of contract with a court order for her to resign and money damages against Bartz on this point the likely outcome.
My guess is that Bartz will sign a release agreement with Yahoo, under which (1) she gets paid amounts owing to her for termination without cause, (2) she resigns from the board, (3) Yahoo releases her from all claims for breach of contract for breach of contract regarding (i) non-disparagement and (ii) failure to resign from Yahoo's board and (4) she agrees to a new, prospective non-disparagement clause, possibly strengthened by holding back part of her termination payment for the term of the clause to ensure compliance.
Both Bartz's employment contract and the Form of Release Agreement are governed by California law. I am not a California lawyer, and so none of the opinions written above should be taken as legal advice on these points. The good news: both Bartz and Yahoo should be able to afford their own California-qualified employment lawyer(s).