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GOLDEN PARCHUTE in an EXECUTIVE EMPLOYMENT AGREEMENT

Experienced legal representation in reviewing, negotiating, drafting, improving executive employment agreements.

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Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A golden parachute is a strategic contractual arrangement in an executive employment agreement that guarantees a substantial compensation package if the executive is terminated due to a change in corporate control, like a merger or hostile takeover. The intention of a golden parachute is to provide a "soft landing" for the executive, ensuring financial security despite a potential job loss.

At its core, a golden parachute facilitates a number of strategic employment objectives for the corporation, including:

  • Attracting and Retaining Talent: These clauses can be a powerful incentive for attracting top-tier executives, especially for roles in industries prone to mergers and acquisitions. They provide a sense of security that makes high-risk positions more appealing.

  • Aligning Interests: A golden parachute can help ensure that an executive's interests are aligned with those of the shareholders. Without one, an executive might oppose a beneficial merger out of fear of losing their job. The parachute removes this conflict of interest, encouraging them to act in the company's best interest.

  • Discouraging Hostile Takeovers: By increasing the cost of an acquisition, a golden parachute can serve as a deterrent to unwanted takeovers. The acquiring company must absorb the financial burden of paying out the executive's lucrative package, which can make the deal less attractive.

There is not a singular format for a golden parachute, such that a corporate employer might make use of various forms of compensation, at their discretion, to create the prospective compensation (and associated legal arrangements) that represents the golden parachute, including:

  • Severance Pay: This is often a lump-sum payment calculated as a multiple of the executive's annual salary and bonus (e.g., two to three times their total compensation).

  • Accelerated Vesting: The executive may immediately gain full ownership of unvested stock options, restricted stock, or other equity awards that would have otherwise vested over time.

  • Continued Benefits: The package can also include continued health insurance coverage, pension contributions, and other perks for a set period after the executive's departure.

Nevertheless, golden parachutes can be highly contentious, in particular with shareholders of publicly-traded companies, due to their perceived excessive payouts, especially when they occur after a corporation performance has been poor. Critics argue that they can reward failure and create a moral hazard where an executive might not be fully motivated to succeed. As such, many golden parachutes have been modernized to utilize a "double trigger" to address some of these concerns. The payout is not triggered solely by a change in control. Instead, it requires two events: (1) a change in company control (the first trigger), and (2) the executive's termination without cause or resignation for a "good reason" (the second trigger), such as a significant reduction in pay, duties, or a required relocation. This dual requirement seeks to ensure that the golden parachute only activates if the change in control directly leads to the executive's departure.

Executive employment agreements deserve considerable scrutiny and legal analysis given the financial implications emanating from the legal employment contract not being consistent with the negotiated specifics of one's intended employment arrangement. The differences in executive employment agreements may not be readily apparent to most people (often being very subtle and driven by legal terminology), yet the long-term financial implications to the executive employee can be staggering. As such, it is important to properly understand all the contractual aspects pertaining to an executive employment and their compensation.

For knowledgeable and experienced legal representation with respect to executive employment agreements, and other legal matters pertaining to one's employment as an executive employee, contact our law firm by email at Chris@NeufeldLegal.com or by telephone at 403-400-4092 / 905-616-8864.

 

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