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Simple English definitions for legal terms
golden parachute
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A quick definition of golden parachute:
Golden parachute is a fancy term for a special payment agreement that some important people in a company get if they lose their jobs or if the company gets sold. This agreement gives them some security, but some people think it's not fair because it can cost a lot of money and might not be necessary. Sometimes, people even go to court to argue about it. But if the people who own the company agree to it, then it's allowed.
A more thorough explanation:
Golden parachute refers to a payment agreement that provides officers and management with financial security if they lose their jobs or face significant changes to their jobs due to a sale of their company. This payment is usually made in the form of a lump sum or a severance package.
- When a public company faces a hostile takeover, the officers and management may lose their jobs. In such a situation, the golden parachute provides them with financial security.
- Suppose a company wants to hire a skilled officer from another company. In that case, they may offer a golden parachute to the officer to encourage them to join the company.
- Golden parachutes can also be used as part of a poison pill strategy, where a company makes itself less attractive to a hostile bidder by offering a large payout to its executives if the company is taken over.
The examples illustrate how golden parachutes can provide financial security to officers and management in various situations. However, they can also be controversial as they can cost a significant amount of money and may discourage beneficial change.
Overall, golden parachutes are allowed if stockholders agree on the payment packages, but recent litigation has surrounded them as being a breach of fiduciary duties.