Q&a 6.12 Mbo

[asbes]

This question asks what the difference is between a MBO and normal takeover.

One of the points made is that the Directors should demonstrate to shareholders that the MBO is in the company's best interest.

When the shareholders get bought out, they will not have an interest in the company anymore. Why would they need it to be in the company's best interest?

However, I would rather think the Directors should demonstrate to shareholders that the price offered is reasonable (i.e. it should be in the shareholders' best interest).

Please let me know what you think.

 

[Colin McKee]

Thoughts on Q&A 6.12

I see your point, that the shareholders would need to be convinved that the price being paid for a subsidiary would need to be deemed sufficient. However, the comment in the solutions is contained in a sentence that brings in the concept of "conflicts of interest". The idea is that, since MBOs are often small affairs, where deals are negotiated between the directors that are buying the subsidiary out, and the directors that remain with the holding company, there is scope for deals to be influenced by relationships between the various directors. (A takeover which takes place in the stock market and is open to scrutiny is less likely to be affected by such relationships). The sentence therefore says that shareholders would need to be convinced that it was in their interests (and not a deal made between friends). This means that the price paid is adequate and that assets transferred, employees transferred and contracts taken by the subsidiary are reasonable given the price.