Have we forgotten the lessons of the Delaware cases that arose from the heyday of big-ticket LBOs by private equity preceding the financial crisis of 2007-2008? And to the extent we have, who is bearing the cost, how are plaintiffs uncovering these recent deviations from best practices, and what is to be done?
In these cases from the mid-2000s, courts consistently viewed LBOs as transactions marred by the conflicts of target company executives. Notwithstanding the presence of supermajority independent boards at the target companies, the courts regularly denied motions to dismiss breach of fiduciary duty claims in connection with LBOs. The focus was the absence of safeguards to neutralize the interests of these executives in working for the financial sponsor buyer after the closing and in having access thereafter to, as one case from that era described it, “a second bite at the apple” when the private equity firm would inevitably flip or IPO the company. [1]
A number of useful protocols grew out of these cases from the 2000s. [2] But the 2000s are now a long time ago and a new generation of gatekeepers (lawyers, bankers, and independent directors, not to mention private equity professionals and their friends in senior management of target companies) for whom those cases may be distant memories at best, are now in prominent roles. In the second half of 2020, two of the most important M&A cases involved alleged missteps that adherence to the protocols arising from the 2000s would have prevented.