CEO Side-Payments in Mergers and Acquisitions

50 Pages Posted: 25 Mar 2015 Last revised: 29 Feb 2016

Brian J. Broughman

Indiana University Maurer School of Law

Date Written: February 27, 2016

Abstract

In addition to golden parachutes, CEOs often negotiate for personal side-payments in connection with the sale of their firm. Side-payments differ from golden parachutes in that they are negotiated ex post in connection with a specific acquisition proposal, whereas golden parachutes are part of the executive’s employment agreement negotiated when she is hired. While side-payments may benefit shareholders by countering managerial resistance to an efficient sale, they can also be used to redistribute merger proceeds to management. The current article highlights an overlooked distinction between pre-merger golden parachutes and merger side-payments. Similar to a legislative rider attached to a popular bill, management can bundle a side-payment with an acquisition that is desired by target shareholders. Thus, even if shareholders would not have approved the side-payment for purposes of ex ante incentives, it may receive shareholder support as part of a take-it-or-leave-it merger vote. Because side-payments are bundled into a merger transaction, voting rights cannot adequately protect shareholders against rent extraction. My analysis helps explain empirical results which show that target CEOs sometimes bargain away shareholder returns in exchange for personal side-payments. I conclude with legal reforms to help unbundle side-payments from the broader merger vote.

Keywords: Mergers & acquisitions, side-payments, corporate governance

JEL Classification: K22, G34

Suggested Citation

Broughman, Brian J., CEO Side-Payments in Mergers and Acquisitions (February 27, 2016). Indiana Legal Studies Research Paper No. 313. Available at SSRN: https://ssrn.com/abstract=2584699 or http://dx.doi.org/10.2139/ssrn.2584699

Brian J. Broughman (Contact Author)

Indiana University Maurer School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States

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