While the Bush administration has gone for a hands-off approach to hedge funds and private equity, as reported last week in the International Herald Tribune, the Australian regulatory authority has come up with an alternative solution to address potential conflicts of interest in the spate of takeovers by private equity players.

Nothing wrong with private equity takeovers. In its purest form, private equity can address the inefficiencies of public capital markets by temporarily removing, and overhauling, underperforming assets.

But there could be a problem when senior management aligns itself with a bidder. When that happens, managers can give the bidders knowledge not only of the detail of the business but of its strategies and that would give the bidder a privileged insight, not only in relation to potential rivals but also in relation to the non-executives who have to respond to the offer.

In Australia, the Takeovers Panel (which was set up by the Australian Government to resolve the inevitable disputes that flare up during takeovers and avoid litigation [one reason Australian lawyers hate it]) has come up with a discussion paper and draft guidance note on the issue.

The guidance note Insider Participation in Control Transactions puts the onus back on the board of directors which, it says, need to ensure they are informed immediately an insider is approached by a potential bidder and to control the contacts and flow of information between insiders and bidders. This should be done by setting up protocols under the oversight of an independent board committee comprising non-executive directors.

There are still lots of issues to be resolved but the panel's draft paper is a good start.