Series 79 practice questionmediumManagement Buyouts
The board of a public company is evaluating an MBO proposal from its CEO backed by a PE firm. What is the primary governance concern?
- AThe CEO may lack the financial resources to complete the buyout
- BManagement is informed and on both deal sides✓ Correct answer
- CMBOs always result in lower valuations for the company
- DPE firms cannot legally participate in MBO transactions
Explanation
Why B — Management is informed and on both deal sides
The primary concern in an MBO is the inherent conflict of interest: management has a fiduciary duty to maximize value for shareholders while simultaneously acting as the buyer seeking the lowest possible price. Management also possesses asymmetric information about the company's true value and prospects. To mitigate these conflicts, best practice requires the formation of an independent special committee of disinterested directors to evaluate and negotiate the transaction on behalf of public shareholders.
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