An issue that should always be addressed in relation to any management buy-out is the potential conflict of interest between the personal interests of the directors as members of the management team and their duties as directors of the target company.
English law imposes on directors a fiduciary duty to the company, which requires them to act honestly and in good faith in the exercise of their powers, and in the best interests of the company as a whole.
By virtue of their position, the directors will have access to inside information relating to the company.
Such information could be used intentionally in an attempt to reduce the price or could be used in a manner which accidentally damages the value of the business. In addition, if the company (or its parent company) is quoted, this could result in the management team falling foul of its obligations not to create a false market in the company's shares.
In a buy-out situation it is imperative that the directors observe proper procedures in order to avoid any issues of conflict.
These issues become particularly acute in a proposed management led buy-out of a listed company where there are competing offers.
Questions may arise as to whether the management team has information that assists it in making a successful offer.
In such situations, the role of the independent non-executive directors on the board of the target company and their advisers is vitally important.
The City Code on Take-Overs and Mergers (City Code) requires the board of the target company to obtain competent and strictly independent advice as soon as possible after becoming aware that an offer may be made.
Independent directors (those not taking part in the buy-out) must be fully and competently advised by a third party.
Although there are no set guidelines when considering whether a conflict arises, the directors of the management team should consider the following.
Their ability to objectively demonstrate commercial logic and the fairness of the price offered to ensure that there can be no criticism that the buy-out team is seeking to acquire an opportunity for itself which should be made available to benefit all shareholders.
Their ability clearly and publicly to define their positions as members of the buy-out team as separate and distinct from their positions as directors of the target company. If they are unable to do this they could be leaving themselves open to accusations at a later date of lining their own pockets;
Whether those directors who are not members of the buy-out team should form a separate committee of the board - the buy-out team should be proactive in ensuring that this happens to avoid allegations of breach of fiduciary duty.
The need for the buy-out team and the sellers to obtain separate independent professional advice from the outset.
The implementation and observance of proper procedures at all times and compliance with the provisions of all relevant statutes and the articles of association.
In addition to his or her common law fiduciary duties, a director will usually have a service agreement that will often extend his or her duty to act bona fide in the interests of the company. …