Sweetheart Deal

What Is a Sweetheart Deal?

A sweetheart deal is an agreement of any type that generally consists of one party presenting another party with a proposal so attractive and potentially lucrative that it is difficult to turn down.

Sweetheart deals tend to be secretive in nature and controversial. In many cases, they can be unethical and disadvantage those not privy to it.

Understanding a Sweetheart Deal

Numerous types of business transactions can be termed sweetheart deals. They may occur for a variety of reasons and are subject to different interpretations.

When one uses the term “sweetheart” to describe a deal, it often carries the implication that something unethical or fishy is afoot. For example, it could refer to all manner of insider trading: the buying or selling of a publicly-traded company's stock by someone who has non-public, material information about it. Alternatively, it may describe an authority responding to an entity that has done something dishonorable with a slap-on-the-hand or look-the-other-way approach, rather than dishing out due punishment.

In other cases, a sweetheart deal can denote an arrangement in which someone gets something that’s to their advantage only after agreeing to give something else up. The term may also convey an agreement between two organizations that offers advantages to both, but which is unfair to competitors or another third party.

A mergers and acquisitions (M&A) transaction, or an attempt to lure a new executive with bonuses and perks, for example, might be “sweet” for the key players because they can get a substantial buyout packages. However, other interested parties could suffer in the process, including many lower-level employees, if the deal were to lead to a restructuring program and the laying off of staff.

Criticism of a Sweetheart Deal

A sweetheart deal often, but not always, can be bad for shareholders.

These arrangements can be very costly to execute, with steep legal fees and the like. In other words, that means if a company does not put its shareholders’ interests first, using its money instead to fund the deal, then the investors it has a fiduciary duty to represent and protect could take a financial hit.

Other than discovering that the company they're invested in has been spending money on questionable endeavors without a reasonable explanation and full disclosure, shareholders also could suffer a loss if the market reacts badly to the deal, and the stock price falls.

Such developments can lead things to turn nasty. The board of directors (B of D) is obliged to act in the best interest of their shareholders, so if a sweetheart deal that it helped to orchestrate, or at least voted in favor for, is clearly unethical and not in the interests of the majority of investors, legal action may be taken. 

Real-Life Example of a Sweetheart Deal

Early in 2017, the press learned that then-President Donald Trump’s nominee for secretary of the United States Department of Health and Human Services (HHS), the nation’s regulator of pharmaceuticals, got a discounted deal on stock from an Australian biotechnology firm seeking U.S. Food and Drug Administration (FDA) approval for its new drug.

Innate Immunotherapeutics (Innate Immuno) needed to raise money. But instead of issuing stock in the open market, it offered a sweetheart deal to a couple of “sophisticated” U.S. investors, selling nearly $1 million in discounted shares to two American congressmen who had the potential to advance Innate Immuno’s interests. 

One of these congressmen was the HHS nominee cited above; the second — who also happened to own about 20 percent of Innate Immuno — sat on a key health subcommittee. These congressmen investors paid 18 cents per share for a stake in a company whose value at the time had risen rapidly to more than 90 cents and was climbing higher. Ultimately, on paper, these buyers realized a greater than 400 percent profit!

The “sweetheart” portion of this deal is obvious: It 1) skirted normal procedures; 2) contained grave conflicts of interest; 3) solicited industry insiders, who also were well-placed politicians; and 4) benefited (greatly) only a handful of people at the top.