Management Buyouts and Managerial Ethics

Management buyouts, which have played an important role in the recent wave of corporate restructurings, have been criticized from several directions. This article addresses the problems created by management9s conflict of interest. As members of the buyout team, managers have strong incentives to act in their own self-interest, yet they have a fiduciary duty to promote shareholders9 interests. The conflict of interest inherent in management buyouts can be dealt with through a system of disclosure and review provided that management, board members, shareholders, and judges apply an appropriate standard of fair price. The authors propose a standard of fairness, the synthetic MBO standard, based on the implications of management9s fiduciary duties in the buyout context. They recommend that the disclosure requirements of the federal securities laws be modified to include disclosure of a company9s value under this standard.