Document Type

Article

Publication Date

8-2025

Abstract

This Article argues that the corporate governance regime in the United States has produced a level of mergers and acquisition activity greater than the social optimum because of the current version of the “golden parachute,” a super-bonus payoff to a target CEO. In the late nineteenth through the twentieth century, M&A activity was characterized by “waves” that reflected adaptations to changing external environment, whether the efficient production frontier, regulatory constraints, or capital market developments. Economically-motivated parties saw the opportunities in changing the boundaries of the firm; successful first-movers spawned imitators, hence a wave, which eventually subsided, often alongside deteriorating capital market conditions.

The twenty-first century is different. There is a persistently high level of M&A. Yes, there are fluctuations, but not “waves.” This pattern can be explained at least in part by an important internal governance change, the transformation of the golden parachute into a high-powered driver of M&A activity. Golden parachutes were introduced as a corporate governance innovation in the 1980s to overcome managerial hostility to an unsolicited premium bid. Over time, especially as executive compensation radically shifted toward stock-based pay, golden parachutes have become increasingly lucrative. They now provide a CEO with a high-powered incentive to become a target CEO, compensating the CEO like a deal-hunting investment banker, and thus have changed the pattern of M&A activity. Historically M&A activity has been a response to changes in the external environment. Without reflective intentionality, golden parachutes have become an independent (and internal) driver of M&A activity. The distortive effects of golden parachutes result in efficiency losses at the firm level, produce social losses because of excessive layoffs, and because of the resultant “inequality with privity,” will exacerbate social resentments that may have political consequences.

This incentives mismatch can be addressed by shareholders as part of the annual Say-on- Pay vote. The simplest adjustment would be the elimination of the acceleration of unvested equity awards for target CEOs triggered by M&A.

Disciplines

Business Organizations Law | Corporate Finance | Law

Center/Program

Ira M. Millstein Center for Global Markets and Corporate Ownership

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