Caremark’s recent merger with CVS triggered a golden parachute for Caremark CEO Edwin Crawford. Golden parachutes supposedly are provided to CEOs so they will not have to worry about their jobs in weighing takeover offers.[1] However, golden parachute critics point out that they also give executives an incentive to propose mergers that are not in the best interests of shareholders.

Crawford initially accepted the CVS offer though the deal offered no premium to investors and included provisions that deterred other bidders,[2] raising the question of whether Caremark’s executives and board were acting in the best interest of shareholders. It turns out that executives of Caremark who are in favor of the merger also have severance benefit arrangements that provide them with interests that may differ from shareholders.[3] A detailed look at Edwin Crawford’s parachute shows why. 

Under his employment agreement, Crawford is entitled to receive a severance payment that ranges from $36 million to $40 million.[4] Although Crawford has agreed to limit his cash severance to $26 million, he also will benefit from accelerated vesting of his stock options. This amount comes out to $22 million. In total, Caremark has estimated that Crawford will receive $56 million resulting from the merger.[5] 

The actual amount Crawford will receive from the merger most likely will be much larger. Caremark’s estimate only includes the incremental value of Crawford’s pension benefit of $2,931,000,[6] and not the aggregate amount. Though Crawford is not old enough to qualify for his full pension, the terms of his Supplemental Executive Retirement Plan allows him to receive it in monthly payments due to the merger,[7] even though he will continue as the chairman of the combined company.

Caremark’s estimate also does not include the full value of an insurance policy that will transfer to Crawford’s ownership. The policy’s actual value is $17 million, though only $3,666,256 was counted.[8] Finally, Caremark’s estimate does not include the $248 million in stock options that are already exercisable.[9] According to The Corporate Library, Crawford could walk away with a total of $287 million,[10] not including the health and welfare benefits he will receive for the remaining eight years of his employment agreement. 

Considering that large sum, it’s surprising to read that Caremark may have to “expend additional sums” to continue his services,[11] considering that no employee of Caremark will get any bonus, retirement, benefit or severance due to the merger.[12] 

Investors have questioned also whether another issue might have played a role in the decision to accept CVS’ deal.[13] In May 2006, Caremark disclosed that it was being investigated in regards to whether executives received backdated stock options.[14] This past year, companies involved in backdating have seen CEO’s depart and even be charged with fraud.[15]      

If Caremark officials had been involved in the backdating, then the merger would provide perfect cover. In addition to the generous severance packages, the merger would indemnify and “hold harmless all past and present officers and directors of Caremark” for any actions occurring at or prior to the time of merger.[16]