Conflicts of Interest with Directors and Officers in Management Buyouts (MBOs) and their Regulations

Author Name KITAGAWA Toru  (Research Assistant, RIETI)
Creation Date/NO. July 2007 07-P-001
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Management buyouts (MBOs), in one respect, involve a profound conflict of interest because they entail the acquisition of a company by its own managers, yet they can also give management the incentive to pursue efficient reorganization. Generally speaking, the problem of conflicts of interest between management and shareholders has, until now, been argued from the point of minority shareholder protection. This paper will try to solve this problem from the standpoint of management's incentive in terms of effectively using deal protection provisions.

This paper divides management buyouts into four categories; from the objective perspective of whether or not a there is place for price negotiations between buyers and sellers, and from the subjective perspective of what management's motivations and objectives are for implementing MBOs. Then the paper proposes optimal regulations for each category of management buyout by referring to the MBO rules of conduct in the United States.