Deal Process Design in Management Buyouts

Abstract

Management buyouts (MBOs) are an economically and legally significant class of transaction: not only do they account for more than $10 billion in deal volume per year, on average, they also play an important role in defining the relationship between inside and outside shareholders in every public company. Delaware courts and lawyers in transactional practice rely heavily on “market check” processes to ensure that exiting shareholders receive fair value in MBOs. However, this Article identifies four factors that create an unlevel playing field in that market check: information asymmetries, valuable management, management financial incentives to discourage overbids, and the “ticking clock” problem. Because this taxonomy of four factors is mutually exclusive and collectively exhaustive, it allows special committees and their advisors to assess the degree to which the playing field is unlevel in an MBO. This Article then identifies more potent deal process tools that special committees can use to level the playing field: e.g., contractual commitments from management that allow the board to run the process; pre-signing rather than post-signing market checks; information rights rather than match rights; ex ante inducement fees; and approval from a majority of the disinterested shares. This Article also identifies ways that the Delaware courts can encourage the use of these more potent devices when appropriate, through the threat of entire fairness review and the application of Revlon duties. The result would be improved deal process design in MBOs and improved capital formation in the economy overall.

Keywords: management buyouts, Revlon duties, takeovers, private equity

JEL Classification: D44, G14, G32, G34, K22, L14