Origin of the Golden Parachute clause
The concept of the golden parachute originates from the wave of hostile takeovers of companies during the 1980s. This period was marked by so‑called ‘corporate raiders’, who imposed takeovers of companies by acquiring large blocks of shares, often accompanied by the removal of existing management. The rationale behind the golden parachute rests on the idea that if the financial future of executives is secured regardless of the outcome of the takeover, they can perform their duties without interference and evaluate the proposed transaction solely on the basis of its value to shareholders. This practice soon became a standard provision in agreements between companies and senior management.
Within the same legal and business environment in which this instrument emerged, the first criticisms also appeared. Certain authors and practitioners pointed out that golden parachutes were used to entrench management positions and reward executives even in cases of poor corporate performance. In the United States, these criticisms led to amendments to the Internal Revenue Code through the introduction of Sections 280G and 4999, which did not prohibit golden parachutes but introduced significant tax consequences for payments considered ‘excessive’. Regulatory development continued with the enactment of the Dodd‑Frank Act of 2010, which introduced the ‘say‑on‑pay’ rule, i.e., the right of shareholders to cast a non‑binding vote on executive compensation packages, including golden parachute provisions.
How do we define a Golden Parachute clause?
Golden parachutes are defined as contractually determined compensation for members of a company’s management. The role of golden parachutes may be twofold: their historical role places them among measures for defense against hostile takeovers, while their other purpose relates to attracting senior management. In both cases, the provision of high compensation indicates that the executives’ ‘fall’ will be financially secure, whether in the event of a company takeover or termination of employment for another reason.
A golden parachute clause is most commonly found in employment contracts or management agreements between a company and the individual who is granted the right to substantial financial compensation in the event of a change of control in the company or termination of the relationship for another reason. It is also possible for such a concept to be provided for in a company’s general acts, although in practice this occurs less frequently.
Do we encounter it in domestic case law?
This clause originates from Anglo‑American practice, and it is entirely reasonable to ask whether it exists in our legal system. It is also mentioned in domestic case law, specifically in the Supreme Court judgment Rev2 3989/2023 of 31 January 2024. In that case, the court examined the merits of a claim for payment of contractually agreed compensation in the event of removal from office, as well as unpaid salary, and a counterclaim seeking a declaration of nullity of the contractual provision governing such compensation. As stated in the first‑instance judgment, the disputed contractual provision is, according to the claimant, known in the business world as a golden parachute clause, intended to protect the director from the lack of receptiveness of members of the management and supervisory boards to his ideas in a situation where he was prevented from applying his expertise, knowledge, and strategy within the company.
In this case, the appellate court upheld the application of substantive law concerning the declaration of nullity of the golden parachute provision, finding that the agreement constituted a bilateral contract in which the claimant’s performance of obligations was correlated with the obligations of the defendant.
We now arrive at the position of the Supreme Court. This represents an excellent example of the importance of interpreting contractual relationships and of the fact that in contract law not everything is black and white. Specifically, the Supreme Court, taking into account the assertion that this clause is referred to in the business community as a golden parachute and that its purpose is to protect the director from the lack of receptiveness of members of the management and supervisory boards to his ideas, considered that the results of the claimant’s work and business decisions were verifiable over the relevant period of approximately five years. After establishing the economic effects of the company’s operations, the Supreme Court held that the first‑instance court would be able to reach a valid conclusion as to whether the contractual provisions governing mutual rights and obligations were aligned with the results achieved through the claimant’s work and decisions. The Supreme Court further emphasized that it was necessary to compare business performance and the agreed compensation on a year‑by‑year basis. If it were established that the economic effects of the claimant’s work were contrary to the interests of the defendant, and that the golden parachute provision had been agreed to the detriment of the defendant without justification in the achieved results, such a provision would be contrary to good morals and the principle of good faith and fair dealing and would therefore be incapable of producing legal effects within the meaning of the Law on Obligations.
A brief author’s comment
This conclusion answers several important questions. First, the golden parachute clause is permissible under our legal system. This follows from the principle of party autonomy, which allows contracting parties to arrange their relationships in accordance with their own interests, provided that contractual provisions are not contrary to mandatory rules, public policy, or good morals.
However, party autonomy also has its limits and at the same time represents the reason why contract law must be approached with particular care, expertise, and precision. Although it has been established that the clause is permissible and that contractual obligations are mutually correlated, in practice it may be demonstrated, if so determined by the court in a specific case, that such a contractual obligation is contrary to one of the fundamental principles of the law of obligations, namely the principle of good faith and fair dealing. In such a case, the golden parachute clause would not produce legal effects.
Examples from foreign case law
Foreign judicial approaches share a common starting point but often lead to different outcomes, as courts differ in their assessment of permissibility and proportionality.
In the UK case Murray v Leisureplay PLC (2005) EWCA Civ 963, the Court of Appeal showed restraint in intervening in the contractual relationships of senior management. In assessing a clause that guaranteed the chief executive one year’s salary and benefits in the event of dismissal, the court emphasized that the provision was not impermissible. The court further stated that the nature of the clause must be assessed at the time of contract formation rather than with hindsight as to its consequences, and that judicial intervention is justified only where the agreed amount is ‘extravagant and unconscionable’. The court highlighted that in the context of executive contractual arrangements, a legitimate business objective lies in ensuring stability and avoiding litigation. Emphasizing party autonomy and the business objectives of the relevant market, the court confirmed that ‘generous’ severance payments may constitute a permissible contractual assumption of risk.
By contrast, the French Court of Cassation adopted a more restrictive approach in judgment no. 18‑20.531 of 4 March 2020, concerning a chief executive’s contract providing for a lump‑sum payment equal to three years’ average net salary in the event of termination at the employer’s initiative. This provision, informally referred to as a golden parachute, was recharacterized by French courts as a penalty clause based on its purpose and effect. The Court of Cassation upheld the appellate court’s finding that the clause aimed to guarantee job security and to sanction the employer in the event of termination. The court assessed the claimed amount of EUR 981,100 as excessive and reduced it to a symbolic EUR 1,000. The court effectively indicated that the contractual label assigned by the parties is not decisive where the actual economic effects reveal a punitive nature. In this instance, the French court demonstrated a strong corrective role in safeguarding proportionality.
Accordingly, the golden parachute clause is not prohibited and is applicable in any legal system, but its fate in litigation largely depends on the interpretation of the limits of party autonomy and the fundamental principles of the law of obligations under the applicable law. The acceptability of such a clause depends not only on its structure, but also on its function, effect, and the context in which it is applied.
We may now return to a review of comparative case law in the jurisdiction where the golden parachute clause originated. U.S. courts have analyzed this clause through the prism of the fiduciary duties of the board of directors, the quality of the decision‑making process, and the proportionality of the agreed benefits. In Tele‑Communications Inc. Shareholders Litigation, Consol C.A. No. 16470‑NC, 2003 WL 21543427 (Del. Ch. July 7, 2003), the court held that contractual arrangements providing senior management with financial protection in the context of a change of control may be consistent with fiduciary duties if approved by the board of directors and adopted in good faith, on an informed basis, and in the interest of corporate stability. A similar position was taken in Moran v. Household International Inc., 500 A.2d 1436 (Del. 1985), where the Delaware Supreme Court recognized the authority of boards of directors to adopt protective mechanisms, including financial arrangements for executives, provided such arrangements do not constitute corporate waste or self‑interested conduct and result from informed decision‑making under the business judgment rule. In the absence of adequate information and analysis, such arrangements would be deemed contrary to the company’s interests, as held in Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). At that time, a general standard applicable to golden parachute clauses was established.
In 2007, in Netsmart Technologies, Inc. Shareholders Litigation, C.A. No. 2563‑VCS, 924 A.2d 171 (Del. Ch. 2007), the court emphasized that the fairness of executive severance arrangements should be assessed in light of their reasonableness and proportionality in relation to market standards and executive contributions, while exercising judicial restraint and refraining from substituting the board’s business judgment with hindsight evaluation. In Trados Inc. Shareholder Litigation, C.A. No. 1512‑VCL, 73 A.3d 17 (Del. Ch. 2013), although a stricter standard of review was applied due to conflicts of interest, the court stressed that payments to senior management, including incentives and severance, do not constitute a breach of duty where shareholders did not possess actual economic value prior to the transaction that would have been diminished by such payments.
Similarly to Europe, a golden parachute clause constitutes a permissible contractual and corporate instrument in the United States, provided it results from diligent and informed decision‑making by the board of directors and serves the company’s interests.
What other golden clauses exist?
We often encounter contractual clauses with distinctive names. In practice, related concepts include golden handcuffs clauses and golden handshake clauses. Although these clauses sound similar, they serve different purposes and are triggered in different situations, and therefore cannot be considered mere variations of the golden parachute. Nevertheless, they relate to the same category of persons – senior management.
A golden handcuffs clause, as its name suggests, aims to incentivize executives or other employees to remain with the company for as long as possible and includes benefits in the form of share‑based compensation or rights to equity interests in a limited liability company. These benefits vest over the course of employment. While a golden parachute provides financial protection in the event of contract termination or a change of control, golden handcuffs seek to make departure from the company a less attractive option.
A golden handshake clause refers to a generous severance package usually granted to senior management upon retirement or departure from the company. It is similar to a golden parachute clause, but generally has no direct connection to changes in ownership structure and may be applied in a wider range of situations and for different strategic purposes.
Although it has been noted that a golden parachute clause need not be linked exclusively to a change of control, it should not be overlooked that it genuinely originated in such circumstances and is most commonly used in that context.
In lieu of a conclusion
Above, only the problematic situations in which a golden parachute clause has become the subject of litigation are discussed. There are numerous examples in which such a clause was entirely valid and financially advantageous for the individual whose contract contained it. The purpose of analyzing case law is to understand the global standards that render this clause valid. Since the issue must be approached from multiple perspectives, any decision to include a golden parachute clause requires consideration of the statutory provisions of the applicable law governing the employment or management agreement, relevant case law in the applicable jurisdiction, and the relevant tax regulations.
Note: This text expresses the author’s personal opinion solely and does not constitute legal advice.
