Earlier this year, I looked at how an Australian regulatory authority, the Takeovers Panel, was moving to address conflicts of interest that occur in private equity takeovers where managers and boards of directors align themselves with the bidder.

The Takeovers Panel has now issued a guidance note that subjects company boards to more stringent controls. The key is that it requires boards to establish protocols for executives, directors and external advisers. If they stand to benefit from a successful takeover, they would need to be quarantined from deliberations on whether a bid should be accepted. The document doesn't spell out what the protocols should be - sensible really because every bid is different - but it makes the point that meetings between bidders and a target's conflicted executives need to be supervised. It also says that in some cases executives must stand down or resign.

Will it stop conflicts? Probably not completely. The Takeovers Panel itself admits that the rules aren't bullet-proof and implicitly suggests that if some managers and directors want to find a way around them, they will.

"Market participants should note that solely complying with the example protocols discussed above may not necessarily be adequate or sufficient in terms of their duties and responsibilities to manage all conflicts of interests faced by participating insiders."

The panel has a point. Private equity firms don't like hostile takeovers which means they are dependent on getting a recommendation from management. And also, managers and boards of directors these days like getting some skin in the game.

As a result, conflicts might be inevitable, regardless of the rules.

8 Jun 2007