Legal Highway Robbery: The MBO Strategy

Abstract

There is need for changed rules protecting shareholders from arbitrary decisions that require that they sell when they would rather hold in a MBO (managerial buyout). A conflict of interests occurs when a private equity firm and the top management of a firm decide that the firm's stock equity would be more valuable if the firm were taken private, rather than continuing as a public entity, and they take the firm private. It is well understood that all the shareholders of the common stock of a firm think the stock's value is equal to or larger than the market price. Shareholders who think the value is less than the market price have sold or shortly will sell. There may be tax effects that affect the marginal values that are required for sale, but the basic fact is that most shareholders of a firm expect the stock's future value to exceed the current market price. If a majority of a firm's shareholders vote to accept a buyout offer from management, then the minority shareholders are sold out at a price that might be less than they think the shares are worth. It is far from clear that the present procedure for a MBO is fair to the reluctant to sell shareholders. The situation is in need for change of some type to prevent the exploitation of the minority shareholders (those not wanting to sell) at the hands of private equity and top management of a firm going private.