Perpetual Thrones in M&A Transactions

Abstract:     
Amidst a public outrage at grants of golden parachutes to failed executives, the award of "perpetual thrones" to directors of distressed companies has gone unnoticed. Several merger agreements provide for an undertaking by the acquirer to increase the size of its own board and include a few of the target's board-members on the expanded board. This arrangement is attractive to the target's directors who will be nominated to the acquirer's board. Rather than losing a board seat as a result of the merger, these target directors will be promoted to a board of an even bigger corporation. The increase in the board size may also serve the acquirer's management, as the inflated board size may decrease the monitoring of the board. This arrangement, however, may not serve the best interests of the shareholders of either corporation. There is evidence that suggests that board size is negatively correlated with firm performance. And the potential offer of a perpetual throne further erodes the deterrence effect of the market for corporate control. The possibility of a perpetual throne, which benefits the director in case of a merger, diminishes the director's incentives to maximize the value of the firm as a stand-alone entity. Yet, the tying of perpetual throne provisions with the merger agreement renders shareholder approval (to the extent it is required) useless. The Article puts forward a proposal aimed at restraining perpetual thrones from adversely affecting the market for corporate control and distorting managerial incentives.

Keywords: Director, board, anti-takeover, golden parachutes, takeover, mergers and acquisitions, takeover bids, takeover defense, corporate governance, compensation

JEL Classifications: G30, G34, G35, G38, K22

Working Paper Series