Wednesday, September 22, 2010
Matthew Cain and Steven Davidoff (The Deal Professor) have a new paper, Form Over Substance? The Value of Corporate Process and Management Buy-Outs, over at SSRN. This area of the law is one where there is a lot of interest and I suspect is ripe for some change, particularly with respect to challenges to cash-out mergers. So this paper is a welcome addition to the mix.
We examine management buy-out (MBO) transactions announced from 2003-2009 in order to study the wealth effects of MBOs and the role of process. We find that there is “value” in corporate process. MBO offer premiums are positively associated with competitive contracts and the existence of special committees. Among transactions with low initial offer premiums, bid failures are more likely when target shareholders benefit from competitive contracts. Our results allow for a cautious approach and more rigorous application of current Delaware law to provide that courts more vigorously scrutinize MBO transactions. They also inform the proper standard for review of other forms of takeovers with explicit agency/principal conflicts, including freeze-outs.