Form Over Substance? The Value of Corporate Process and Management Buy-Outs

Abstract

We examine management buy-out (MBO) transactions announced from 2003-2009 in order to study the wealth effects of MBOs and the role of process. We find that there is “value” in corporate process. MBO offer premiums are positively associated with competitive contracts and the existence of special committees. Among transactions with low initial offer premiums, bid failures are more likely when target shareholders benefit from competitive contracts. Our results allow for a cautious approach and more rigorous application of current Delaware law to provide that courts more vigorously scrutinize MBO transactions. They also inform the proper standard for review of other forms of takeovers with explicit agency/principal conflicts, including freeze-outs.

Keywords: management buy-outs, MBOs, freeze-outs, takeovers, conflict transactions, special committees, corporate process, Delaware