CEO Side Payments in Mergers and Acquisitions

In addition to golden parachutes, CEOs often negotiate for personal side payments in connection with the sale of their firms. 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. This 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, they may support the payment as part of a take-it-orleave-it merger vote. Because side payments are bundled into merger transactions, 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