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, but 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. 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. This taxonomy of four factors allows special committees and their advisors to assess the degree to which the playing field is level in an MBO, and (by extension) the extent to which a market canvass can provide a meaningful check on the buyout price. This Article then identifies more potent deal process tools that special committees can use to level the playing field: for example, 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, the application of Revlon duties, and the weight given to the deal price in appraisal proceedings. The result would be improved deal process design in MBOs and improved capital formation in the economy overall.
* Joseph Flom Professor of Law and Business, Harvard Law School; H. Douglas Weaver Professor of Business Law, Harvard Business School. I served as an expert witness for the petitioners in the appraisal proceeding for the Dell MBO, which is described in this Article. The framework developed in Part III is derived from my report in that matter. I thank Jonathan Conrad, Charlotte Krontiris, Katherine Shonk, Shefali Tandon, and Raaj Zutshi for excellent research assistance; and John Coates, Eduardo Gallardo, Mark Gordon, Louis Kaplow, Michael Klausner, Fernàn Restrepo, Dorothy Shapiro, Carl Stine, and workshop participants at Harvard Law School for helpful discussions and comments on earlier drafts. All views expressed in this Article are my own. Comments are welcomed at [email protected].