Predatory Management Buyouts

Abstract

In a management buyout (MBO), the managers of a company typically partner with a financing source, such as a private equity firm, to acquire the firm that employs them. MBOs raise an important corporate governance concern not present in other corporate acquisitions: managers act as fiduciaries to target shareholders at the same time that they act as acquirors. According to corporate law fiduciary duty principles, managers must always privilege the interests of the corporation and its shareholders over their own personal interests. In direct opposition to those fiduciary duties are managers’ incentives to acquire the company on the best terms possible. Corporate law’s prevailing answer to questions of conflicts of interest, including in MBOs, is to rely on procedural safeguards to sanitize otherwise tainted transactions. Federal securities law further applies special disclosure requirements to MBOs. This article demonstrates that neither body of law produces the desired equivalent outcome of arm’s-length bargaining and suggests mechanisms for protecting shareholders from predatory managerial behavior in MBOs, in which managers underpay for their targets.

Keywords: MBOs, management buy-outs, mergers and acquisitions, conflicts of interest, self-dealing, fiduciary duties