Golden Parachutes and the Business Judgment Rule: Toward a Proper Standard of Review
![handle is hein.journals/ylr94 and id is 927 raw text is: Golden Parachutes and the Business
Judgment Rule: Toward a Proper
Standard of Review
Golden parachutes are special termination agreements that shelter
executives from the effects of a corporate takeover.' Typically, golden
parachutes are triggered by a change in control of the corporation.2
Once operative, they provide executives who are dismissed or who, under
certain circumstances, resign as a result of a takeover with either contin-
ued compensation for a specified period following the executives' depar-
ture or with a lump-sum payment.3
Although relatively new,4 golden parachutes are rapidly becoming com-
monplace. Notwithstanding the recent popularity of golden parachutes,
however, their legality and desirability as a form of executive compensa-
tion have been challenged by many who believe that golden parachutes
are nothing more than corporate looting. Stockholders have mounted court
challenges but have not yet obtained any definitive decision on the merits;'
1. For a more detailed description of golden parachutes, see R. WINTER, M. STUMPF & G.
HAWKINS, SHARK REPELLENTS AND GOLDEN PARACHUTES 425-28 (1983) [hereinafter cited as R.
WINTER]; see also infra pp. 910-12.
2. Definitions of the change of control that triggers a golden parachute or makes operative the
change-of-control provisions of a regular employment contract fall into two basic categories: those
defining a change in the company's status (often called change-of-control clauses), and those defining
a change in the protected executive's status (often called termination clauses). These two types of
triggering mechanisms often are used in combination. Ward Howell International, Inc., Survey of
Employment Contracts and Golden Parachutes Among the Fortune 1,000, at 2, 3 (Dec. 29, 1983)
(on file with the Yale Law Journal) [hereinafter cited as Ward Howell Survey].
3. According to Ward Howell's survey of Fortune 1,000 companies using golden parachutes,
44.8% offered golden parachutes consisting of lump-sum payments. There were no lump-sum pay-
ments at 46.2% of the companies, and at 9.1% payment form was not specified. Of the contracts
providing lump-sum payments, 39% did so only if the company terminated the executive, while 21.8%
did so simply if the executive left because of the change, including resignation as well as termination.
Ward Howell Survey, supra note 2, at 4.
Compensation components of the golden parachutes surveyed typically included base salary (76.9%
of contracts), bonus (53.8% of contracts), and stock option acceleration (39.2% of contracts). Lump-
sum payments were usually some multiple of a year's compensation. At 11.9% of the companies,
compensation was not measured in years of pay because it consisted only of bonuses or of stock
options. Id.
4. Until recently, only a few management compensation contracts contained the takeover clauses
characteristic of golden parachutes. McLaughlin, The Myth of the Golden Parachute, MERGERS &
ACQuISIIONS, Summer 1982, at 47.
5. At the beginning of 1984, 48% of the American corporations in the Fortune 1,000 protected
their top officers with employment contracts, an increase of 20% over 1982. Of those employment
contracts, 49% contained some change-of-control clause. At that time, 29% of all employment contracts
contained specific change-of-control triggers and thus could be considered golden parachutes. Ward
Howell Survey, supra note 2, at 1.
6. No case involving golden parachutes has dealt directly with their legality. See, e.g., Schreiber v.
Burlington Northern, Inc., 731 F.2d 163, 167 (3d Cir. 1984) (issue of whether management breached](ViewImageLocal?handle=hein.journals/ylr94&div=40&collection=&method=preview&ext=.png&size=3)
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Golden Parachutes and the Business Judgment Rule: Toward a Proper Standard of Review
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