insider leveraged buyouts, corporate buyouts, ethics, federal securities regulation, fiduciary duty, minority shareholders
According to one commentator, a particularly troublesome form of insider trading abuse has developed in the past decade without full public discussion of its ethics or its legality. This abuse has spurred significant commentary. Corporate control transactions of this type, known as "insider leveraged buyouts," management buyouts, and going private, have totaled billions of dollars. On their face, these deals, regardless of their specifics, raise the most basic questions of whether security holders are getting the legal and ethical protection they require and, by law, deserve. It is a fundamental precept of the theory of going private that different groups of security holders of the same class will be treated differently. Furthermore, the arm's-length bargaining that is present in the majority of intercorporate transactions is absent. Accordingly, going private transactions are often attended by uncertainty and legal risks. For these reasons, among others, substantive and administrative law are beginning to place limitations on the ability of corporations to engage in going private transactions. For example, under recent federal securities regulations, management must publicize its opinion as to the "fairness" or "unfairness" of certain going private transactions. Yet, there are those who question the effectiveness of these limitations. One commentator argues that persons who participate in a leveraged buyout have better knowledge of the true value of a parcel of real estate, an invention, a pending contract, or a competitor's problems than do the security holders to whom they make their leveraged buyout offer." This commentator concludes that those who initiate leveraged buyout, management buyout, and going private transactions are inevitably acting on inside information for profit. This Note first examines the historical development and modern application of judicial decisions and statutes concerning insider trading. This Note then discusses the phenomena of leveraged buyout, management buyout, and going private transactions with emphasis on their structure, fairness to security holders, and a possible breach of fiduciary duty to shareholders in the case of management buyouts. Following a discussion of recommendations and policy arguments proferred by other commentators and scholars, this Note recommends that a remedy be afforded to minority security holder who feel they are being grossly undercompensated, while allowing leveraged buyout, management buyout, and going private transactions to continue in such a way that the principle of fiduciary duty remains untarnished.
Patrick S. Dunleavy,
Leveraged Buyout, Management Buyout, and Going Private Corporate Control Transactions: Insider Trading or Efficient Market Economics?,
14 Fordham Urb. L.J. 685
Available at: https://ir.lawnet.fordham.edu/ulj/vol14/iss3/5