What is a 'Sweetheart Deal'

A sweetheart deal is an agreement of any type, including mergers and acquisitions (M&A), in which one party presents another party with very attractive terms and conditions — usually so lucrative that it is difficult to refuse the offer.

Numerous types of business transactions may be termed sweetheart deals. They may occur for a variety of reasons and are subject to different interpretations. For example, the term could describe all manner of insider trading or it could mean a slap-on-the-hand or look-the-other-way from an authority when an entity has done something dishonorable, instead of the authority meeting out due punishment.

In any case, when one uses the term “sweetheart” to describe a deal, it often carries the implication that something unethical or fishy is afoot.

Breaking down 'Sweetheart Deal'

Sweetheart deal can also infer an arrangement in which you get something that is to your advantage, but only by agreeing to give up something else. In yet another interpretation, it could mean an agreement between two organizations that offers advantages to both, but which is unfair to competitors or another third party.

In an M&A deal, or an attempt to lure a new executive with bonuses and perks, for example, the deal might be “sweet” for the key players because they can get very healthy buyout packages. However, a restructuring might result in layoffs for many lower-level employees.

Shareholders Beware

A sweetheart deal often, but not always, can be bad for shareholders. These deals can be very costly to execute, with steep legal fees and the like. If a company does not put its shareholders’ interests first, using its money instead to fund the deal, then shareholders could take a financial hit. But because an issuer has a fiduciary duty to its shareholders, if a sweetheart deal is obviously unethical and not in shareholders' interests, then legal action may be taken. Shareholders also could suffer a loss if the market reacts badly to the deal, and the stock price falls.

A Real-Life 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), which regulates 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 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.

This stock deal famously resurrected concern about powerful public officials being privy to investment opportunities that are not available to the public, including from companies whose profits might be influenced by political decisions.

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