Golden parachute
Golden Parachutes are one of the varieties of so-called poison pills. It is a method of defense devised in the 80s of the twentieth century aimed at preventing a hostile takeover in the capital market.
Application means
The use of golden parachutes was aimed at reducing short-term attractiveness of the company being the subject of a hostile takeover. They consisted of the top management company providing a very high clearance operations in the event of a successful takeover and loss of their previously occupied position.
With the development of mergers and acquisitions market, mainly in the United States, golden parachutes losing in importance, giving way to an increasingly complex and innovative varieties of poison pills. It turned out that even high (tens of millions of dollars) clearance for the company's authorities do not interfere in mergers worth the amount counted in the hundreds of millions or even billions of dollars.
Examples of application
The best known example of an unsuccessful application of the golden parachute is taking over Revlon in 1986 by Pantry Pride. The result is that a former director of Revlon received compensation of $35 million. However, the value of operations of about $1.8 billion removed golden parachute effectiveness and the company was successfully took over.
Currently, quite often, the principle of the golden parachutes for CEOs of largest companies and financial institutions are used both in Poland and worldwide. Examples: compensation for Kenneth Lewis, former president of Bank of America in the amount of $120 million, compensation for former presidents of the Orlen (Polish Oil Concern) Walczykowski Jacek (about 6 million), Igor Chalupiec (1.5 million) and Piotr Kownacki (about 1.44 million)
Advantages of Golden parachute
Golden parachutes are a type of poison pill that is used to defend a corporation from hostile takeovers. They offer a variety of advantages, including:
- Providing incentives for executives to remain with the company: Golden parachutes are often used to provide executives with large payout packages if they are removed from their position due to a takeover. This can incentivize them to stay with the company, instead of seeking employment elsewhere.
- Creating a moral hazard: Golden parachutes can also create a moral hazard, as they provide executives with an incentive to take risks in order to increase the value of their golden parachute package.
- Delaying a hostile takeover: Golden parachutes can also be used to delay a hostile takeover, as the package may be costly enough to discourage potential buyers.
- Providing protection to shareholders: Golden parachutes can also provide protection to shareholders, as they can ensure that executives will not be able to benefit from a hostile takeover at their expense.
Limitations of Golden parachute
Golden parachutes are a popular form of poison pill defense, but they have some inherent limitations. * Firstly, golden parachutes are generally unable to prevent a hostile takeover if the hostile entity is able to acquire a majority of the company’s shares. * Secondly, golden parachutes can be expensive for shareholders and are often seen as an unjustifiable expense. * Thirdly, the size of the golden parachute payments can often be so large that they actually attract hostile bids. * Fourthly, golden parachutes can also be used to entrench existing management, which may not be in the best interests of the shareholders. * Lastly, golden parachutes can also be seen as a sign of weakness, which may make the company more vulnerable to hostile takeover attempts.
One of the other approaches related to Golden Parachutes is incentivizing managers to remain with the company. This is done by offering them a severance package with a generous compensation, stock options and other benefits that are only available if they stay with the company. Additionally, companies may use financial incentives for executives such as golden parachutes, golden handcuffs, and stock options to entice them to stay with the company even in the face of a hostile takeover. Other defensive mechanisms include defensive tactics such as greenmail, which is the practice of buying shares at a premium price to dissuade a potential acquirer, and the issuance of additional shares on the market to dilute the shares of the potential acquirer. Finally, companies may also establish various takeover defense plans, such as classified boards and staggered boards, which can make a hostile takeover more difficult and time consuming.
In summary, golden parachutes are one of the many defensive mechanisms that companies may use to discourage hostile takeovers. Other defensive tactics include financial incentives, defensive tactics like greenmail, issuing additional shares, and establishing takeover defense plans.
| Golden parachute — recommended articles |
| Poison pill — Phoenix company — Full Ratchet — Financial pyramid — Authorized Stock — External sources of finance — Equity capital market — Premining — Equity Participation |
References
- Choi, A. (2004). Golden parachute as a compensation-shifting mechanism. Journal of Law, Economics, and Organization, 20(1), 170-191.
