BMBY - כשלים במנגנון ההתמחרות (BMBY - Biases Inherent in the Buy-Sell Agreement)

Abstract

The buy-sell agreement, commonly knows as BMBY (buy me-buy you), is a much-used legal instrument employed when owners-in-common wish to separate without selling their asset to an outside party. The standard example is a firm whose shares are held by two (or more) parties, each wanting to buy the other out. Other common uses include divorcing spouses arguing over "who gets the house/business." The common denominator is that parties disagree over the valuation of their asset, as well as which party will end up as the sole owner.

This article sketches out the main benefits of the buy-sell agreement, only to delve into their inherent failures - the types of circumstances expected to make it inefficient and unfair.

We focus on the corporate arena, showing when a seemingly-balanced buy-sell agreement will lead to unbalanced treatment of its parties. Implications abound both ex-post and ex-ante. Ex post, when such agreements are used during shareholder disputes (or forced upon the parties by an adjucating court). Ex ante, when the BMBY is specified upfront within corporate by-laws, effectively creating "bargaining under the shadow of (a biased) BMBY."

Note: Downloadable document is in Hebrew.

Keywords: buy-sell agreements, shareholder disputes, joint ventures, bargaining

JEL Classification: D21, D74, D82, G33, G34, K22, K41, L14