Golden Parachutes and the Business Judgment Rule: Toward a Proper Standard of Review

The term ''golden parachutes'' applies to special termination agreements that shelter executives from the effects of a corporate takeover. A typical golden parachute contains 3 components: 1. a change-of-control clause, 2. a termination clause, and 3. a compensation clause. Golden parachutes may attract executives to industries with high displacement risks. Golden parachutes also reduce agency costs by shifting risk. The legality of golden parachutes is currently uncertain. Proposed is an approach for analyzing golden parachutes. The approach, which is based on the business judgment rule, is 2-tiered: 1. The court should determine if the entire compensation provided is so excessive that it could not be reasonably related to the executive's effort. 2. The court should determine if the agreement amounts to risk-shifting and if it is properly structured to achieve that goal.