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return on investment. Reflecting the change in composition of their shareholder base, target boards come under intense pressure to sell. However, the fiduciary responsibility of boards is to ensure that any bids are in the best interests of their shareholders; takeover defenses in the view of the board give them more time to evaluate the initial offer and to hold out for higher bids. The Air Gas/Air Products court ruling in 2010 mentioned in Chapter 3 upholds Delaware’s long tradition of respecting managerial discretion as long as the board is found to be acting in good faith and abiding by its fiduciary responsibilities to the firm’s shareholders.2.In your opinion, did the Dell Inc. board of directors act in the best interests of the Dell shareholders? Cite examples to support your position.Answer: It is very difficult to determine if a board is acting in the best interests of shareholders since it requires being able to assess the value of alternatives to the decision the board ultimately made. While the board clearly took appropriate action in setting up a special committee consisting of independent directors and including a “go shop” provision in the merger agreement, it can never be known with certainty whether they made the appropriate decision. However, as independent directors, they could not be part of the management buyout and at least in principle were in a position to assess accurately which of the alternatives (including the management buyout) was most appropriate. Nor is it true that if another option to the management buyout had been selected based on its perceived higher value per share that it would have been preferable on a risk adjusted basis. That is, each of the alternatives considered would have added greatly to the amount of time before it could be realized. Consequently, each alternative would have further traumatized the firm’s stakeholders including customers, employees, suppliers, lenders, and shareholders. The additional uncertainty could have increased the likelihood that the higher value per share would never have been realized. These factors had to be taken into account when comparing the potential value of the alternatives versus the certain value ($13.88 per share) of the Michael Dell/Silver Lake Partners proposal.3.A buyout involving the target firm’s current management is called a management buyout. In what way do these types of deals represent agency conflicts between managers and shareholders? What board procedures can be put in place to mitigate such conflicts? How can activist investors help mitigate such conflicts?17
Answer: Managers involved in a management buyout at least in theory have access to better information than shareholders (so-called information asymmetry) and are in a better position to assess the proper value of the firm.