Series 79 practice questioneasyManagement Buyouts
When a management buyout (MBO) is proposed, what is the best way for a board to manage potential conflicts of interest?
- AAllow the management team to negotiate terms directly with shareholders
- BForm a special committee of independent directors to evaluate the transaction✓ Correct answer
- CPermit interested directors to vote, with full disclosure
- DRely on management's recommendation about fairness
Explanation
Why B — Form a special committee of independent directors to evaluate the transaction
Forming an independent committee is the preferred method to mitigate conflicts in MBOs. The trap is believing management can remain unbiased in negotiating their own buyout.
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