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In defence of golden parachutes

USA
14 Aug 2014

The reaction to the heavy criticism leveled at ‘golden parachute’ agreements over the last decade has been to continue the trend towards either eliminating them or reducing the amount payable under them. Taxand USA explains how golden parachutes can actually act to protect or even enhance shareholder value in certain circumstances.

The late 1970s and early 1980s was the era of hostile tender offers by one public company for another. In this climate 2 simultaneous worries arose: the worry of chief executive officers that an acquirer would have no need for them after the transaction was consummated and the worry of boards of directors that CEOs who were concerned about losing their positions would not act effectively to complete a favorable transaction. Agreements that provided the executives with a golden parachute in the event of a sale were the answer. These agreements provided executives with a specified level of compensation in 1 of 2 circumstances:there was a change in control of their company even if the executives did not lose their position (a single trigger agreement), or change in control occurred followed by their termination of employment (a double trigger).

Eventually a third alternative, a modified single trigger, came into play. This required an executive to remain employed for a specified period following a change in control after which he or she was free to terminate and receive the promised compensation. In most cases the amounts promised were a significant multiple of the executive’s compensation in the years preceding the change in control. Critics contended that these agreements provided executives with excessive benefits, and Congress responded by enacting Section 280G of the Internal Revenue Code of 1986. This provision imposed a 20% excise tax on executives who received an excess parachute payment and denied the payor corporation a deduction for that amount. However even though the day of hostile tenders has passed, the concern that prompted the creation of golden parachutes has not and should not be ignored. 

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Your Taxand contacts for further queries are:
Brian Cumberland
T. +1 214 438 1013
E. bcumberland@alvarezandmarsal.com

Arthur Woodard
T. +1 212 763 1967
E. awoodard@alvarezandmarsal.com

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Taxand's Take

Public company boards should not be afraid to assert their authority and use the provision they believe will bring about the best result for the company’s shareholders, even if the magnitude of the payment may cause some controversy.

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