What’s a golden parachute?

On Behalf of | Jul 11, 2024 | BUSINESS & COMMERCIAL LAW - Contract Disputes

When companies hope to attract or keep key players in their industry, they may offer those executives something known as a “golden parachute.” 

A golden parachute is a group of benefits that executives are guaranteed if their positions are terminated when another company takes over. They are, in a phrase, designed to give high-level executives a “soft landing” when they lose their jobs.

Why are they so important?

Golden parachutes help companies lure and retain high-caliber executive talent by offering them financial security. They also help align the executive’s interests with those of the company’s shareholders, since the executives have less fear of losing their own financial security when a merger or acquisition is actually in the company’s favor.

In a business environment where mergers and acquisitions are common, golden parachutes can also serve as a deterrent to any “hostile” takeovers, since they can impose a significant financial burden on the new or emerging corporate entity. That can further stabilize and protect the company from harm.

What can you negotiate?

Both executives and their employers need to negotiate golden parachute clauses in an employment contract very carefully. Some of the areas that can be negotiated include:

  • The total severance amount, which can sometimes equate to several years of an executive’s salary
  • The payment structure, whether that will be in a lump sum or through periodic payments
  • Whether performance-based bonuses or unpaid annual bonuses will be included
  • How the vesting of stock options will be handled, including whether there is an acceleration agreement
  • What benefits and perks, such as health insurance, that the employee will retain – and for how long
  • Whether the employee will be subject to any restrictive covenants, such as non-solicitation clauses
  • Whether the employee will remain for any length of time in a consulting or advisory role during the transition period, and at what rate of pay

If you’re about to negotiate a contract that has an eye toward a possible merger and acquisition, thorough preparation and experienced legal guidance can help you create an agreement that’s fair to both sides.