The End of Private Equity?

• Author: Cohan, William D.
• Position: BOARDBOOK

If directors can beheld liable for selling a company in a leveraged buyout that leads to bankruptcy, private equity firms could lose their power and influence.

If you were a director or an officer of a public company over the last 35 years and were tasked with choosing a buyer for your company, it was a pretty easy decision: You sold to the highest bidder. Ever since the Delaware Supreme Court decided Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. in 1986, boards of directors figured that, when cashing out the existing shareholders of a public company, sell to the highest bidder and your fiduciary duty will be fulfilled, no questions asked.

However, Judge Jed S. Rakoff in the Southern District of New York could change the Revlon standard in a way that would make directors liable for a decision to sell their company to a buyer who intends to load up the company with debt, thereafter putting the company into a precarious financial situation. If Rakoff's thinking prevails --still a big "if"--when directors sell a company to a private equity firm in a highly...