Management Buyouts and Managerial Ethics

News release, Doremus & Company, Chicago, January 12, 1984, p. 2.

“1987 Profile,” Mergers & Acquisitions (May/June 1986), p. 71.

Lowenstein Louis , “No More Cozy Management Buyouts,” Harvard Business Review (January/February 1986), pp. 147–156.

Stein Benjamin J. , “Going Private is Unethical,” Fortune, November 11, 1985, p. 169.

Sommer A. , “Going Private: A Lesson in Corporate Responsibility” (address at Notre Dame Law School), reprinted in Sec. Reg. & L. Rep. (BNA) No. 278, D-1, November 20, 1974.

For example: Brudney Victor Chirelstein Marvin A. , “A Restatement of Corporate Freezeouts,” The Yale Law Journal, 87 (1978): 1365–1370; Kaplan Stuart , “Corporate Morality and Management Buyouts,” Washington and Lee Law Review, 41 (Summer 1984): 1015–1043; Lowenstein Louis , “Management Buyouts,” Columbia Law Review, 85 (1985): 730–784; Schwartz Gregory J. , “Regulation of Leveraged Buyouts to Protect the Public Shareholder and Enhance the Corporate Image,” Catholic University Law Review, 35 (1986): 489–544; Stein Benjamin J. , “Shooting Fish in a Barrel: Why Management Always Makes a Bundle in an LBO,” Barrons, January 12, 1987, p. 6.

Buyouts frequently take the form of a negotiated merger of the publicly held corporation into a shell corporation wholly owned by the buyout group. A common alternative is a two-tiered transaction: A tender offer followed by a merger.

The repeal of the so-called “General Utilities” doctrine is probably the most significant change, although lengthened depreciation periods have also diminished the tax savings available from MBOs. See Internal Revenue Code §336 (1987).

See e.g., DeAngelo H. DeAngelo L. Rice E.M. , “Going Private: Minority Freezeouts and Stockholder Wealth,” Journal of Law and Economics, 27 (1984): 367; Easterbrook Frank H. Fischel Daniel R. , “Corporate Control Transactions,” The Yale Law Journal, 91 (1982): 698–737.

E.g., Lowenstein , (1986), op. cit.

Bruner Robert F. , “Management Buyouts and Shareholder Welfare: Self-Dealing Versus Financial Signaling,” Working Paper, University of Virginia, 1986, p. 26.

Baker Marci , “Buyouts Seek Public Entry,” Pensions and Investment Age, October 28, 1985, p. 31; Lowenstein , (1986), op. cit., pp. 147–148.

Wallner Nicholas , “Leveraged Buyouts: A Review of the State of the Art, Part II,” Mergers & Acquisitions (Winter 1980), p. 24.

DeAngelo DeAngelo Rice , op. cit., p. 388.

E.g., Durfee v. Durfee & Canning, Inc., 323 Mass. 187 (1948). See generally, Brudney Victor Clark Robert Charles , “A New Look at Corporate Opportunities,” Harvard Law Review, 94 (1981): 997–1062.

Guth v. Loft, 5A.2d 503, 510 (Del. Supr. 1939).

For instance, employees at Weirton Steel saved it from imminent closing, then took a 19% pay cut, and raised $300 million to buy the assets in 1983. Since then, Weirton has embarked on a significant modernization program.

For instance, in April 1987, Dart Group, Inc., made an unsolicited takeover bid for Supermarkets General Corporation for $1.75 billion. Two weeks later, management offered to take the company private for $1.8 billion.

This view was forcefully expressed by Justice Davies who spoke, in 1859, of “our great moral obligation to refrain from placing ourselves in relations which excite a conflict between self interest and integrity.” Cumberland Coal and Iron Co. v. Sherman, 30 Barb. 553, at 578–79 (N.Y. Sup. Ct. 1859). Quoted in Marsh Harold Jr. , “Are Directors Trustees?” The Business Lawyer (November 1966), pp. 35–76, at 39.

Marsh , op. cit.

Bank loan officers, for example, may not lend money to themselves, their families, or organizations in which they have a financial interest. Procurement officials, to take another case, are frequently forbidden to purchase from suppliers in which they have a financial interest.

E.g., Brudney Chirelstein , op. cit.

There are instances of going-private transactions in which senior management changed (e.g., Beatrice Foods, 1986), but these remain relatively rare.

In an important case involving a parent buyout of a subsidiary, the court suggested appointing an independent negotiating committee of outside directors. Weinberger v. UOP, Inc., 457 A.2d 701, 709, n. 7 (Del. Supr. 1983).

For example, one court found that approval of a leveraged buyout by a special committee of outside directors did not protect participants when the committee gave their colleagues an inside track and did not foster a real bidding process. Edelman v. Fruehauf Corp., 758 F.2d 882, 885 (6th Cir. 1986).

17 C.F.R. §§240.13e-3, 13e-100.

17 C.F.R. §240.13e-100, Item 8.

Ibid.

See Weinberger v. UOP, Inc., at 710.

See generally, Herzel Leo Colling Dale E. , “Establishing Procedural Fairness in Squeeze-out Mergers After Weinberger v. UOP,” The Business Lawyer, 39 (August 1984): 1525–1539. See also Joseph v. Shell Oil Co., 482 A.2d 335 (Del. Ch. 1984) on required disclosure.

DeAngelo DeAngelo Rice , op. cit.

For example, competitive bidders intervened in response to J.B. Fuqua's 1981 attempt to buy out Fuqua Industries and in response to Chairman David Mahoney's 1983 proposal to take Norton Simon, Inc., private.

E.g., Lowenstein (1986), op. cit., p. 155.

Formally, the benefits of depreciation belong to the lessor, but as a practical matter, these benefits are shared with lessees.

The argument for prohibition can be found in Brudney Chirelstein , op. cit.

17 C.F.R. §§240. 13e-3, 13e-100 (Rule 13e transaction statement pursuant to section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3 thereunder).