A sweetheart deal is most commonly discussed in mergers and when one company buys or takes over another company. It refers to a deal that is too good to pass up or extremely advantageous to the company being bought. Sometimes sweetheart deals can be viewed as unethical, although this is not always the case and it depends on the situation.
When one company wants to buy another company, there are several ways it could go about doing so. It could negotiate with the company, consulting with the president and the chief executive officer or with others in a position to sell. It could also attempt to acquire a controlling share of stock on the public stock exchange in order to take control of the board and management decisions.
If a company decides to negotiate with the current board or management of the company, it will normally have to make an offer or a deal. This deal can be objective and based on the fair market price of the company. The buying company could also offer a sweetheart deal, in which it perhaps pays more for the company than it is truly worth or in which it offers benefits to the officers or board members making the decision.
Potential benefits offered could include golden parachutes, which are large sums of money paid to departing chief executive officers. It could also include stock options or other forms of compensation that result in large sums of money. If the offer is good enough to be considered a sweetheart deal, it usually means that the management, board and/or CEO are unlikely to pass it off as a result of how beneficial the terms are.
If the corporate officers or board takes the sweetheart deal as a result of the benefits to them, this could adversely impact shareholders. As a result, it may be looked upon as an unethical or improper business decision. This could trigger investigations by the Securities and Exchange Committee or other corporate regulatory boards who want to ensure that companies maintain a fiduciary duty to shareholders, putting the shareholders' interests first.
Sweetheart deals aren't always illegal, immoral or unethical, however. A sweetheart deal could potentially be offered to shareholders as well. This might occur if the buying company offers the shareholders more than the shares are actually worth in order to gain a controlling interest and make changes to management or to the board, resulting in a hostile takeover of the company.