July 12, 2007
Buyouts and the Delaware Chancery Court
The Delaware Chancery Court has issued recently three opinions critical of private equity buyouts. They involve the buyouts of Topps Co., Lear Corp. and Netsmart Technologies. Vice Chancellor Leo Strine Jr. wrote all three opinions. In the Topps and Lear opinions, Chancellor Strine faulted the target companies with not providing information to their shareholders, asked to ratify the transactions, that may shield light on the incentives and motives of the company managers in recommending the deals. In Netsmart, the Chancellor questioned whether the target company had disclosed adequately its efforts (or lack of efforts) to assess the market for other potential purchasers. Each decision deals with the management conflicts inherent in modern private equity buyouts under the guise of adequate disclosure. At issue will be how strongly management must word an adequate disclosure to meet the legal standards. I am hopeful the legal standard will requirement something akin to a statement, if management is in the buyout group (or collecting a huge golden parachute payment of some form contingent on the deal), that "The managers of your company are on the opposite side of the deal being recommended and have a direct financial reward in paying you too little for your stock."
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