A Comparative Study On Management Buyout Financing From The Legal Perspective

Management buyout firstly appeared in the USA in the1970s when many of thepublic companies, which went public from the private companies in the merger andacquisition tide in the1950s and1960s, seeking to return to the private companies.The management usually finances the MBO in various ways to purchase the shares ofthe companies from the public shareholders.The first management buyout case in China was found in a case where themanagement of a state-owned enterprise buyout the shares of the state-ownedenterprise. Soon it spread to many other companies, both state-owned and private,whose management tried to purchase them. This trend was reinforced by Chinesegovernment policy on the state-owned enterprises, to privatize those that are not ofmuch importance to the state economy.In the MBO transaction, the management needs to devote much on the financing,for the transaction need a huge amount of capital and the management’s privatemoney is far from enough for it. In the western market economy developed countries,the management has lots of financing vehicles that help them raise capital for theMBO transaction, such as bank debt, bridge financing, mezzanine financing, sellerfinancing, private equity financing, cooperate bonds and junk bonds, exchangeablepreferred stock, venture capitals, pension funds and many other sorts of financing.However, because of the under-development of the Chinese economy and capitalmarket, the management has very limited sources of financing in China, which isdirectly attributed to many legal barriers on the financing market in the Chinese lawsand administrative regulations. In this article, we will analyze the legal barriers on theChinese financing market and suggest possible solutions on these barriers. Last butnot the least, we will discuss the possible financing sources for the MBO transactionsin China under the current Chinese legal regime, hoping that readers understand thepractical MBO financing methods in China which are acceptable by the existingChinese laws and regulations. The above mentioned is also the purpose of this article.I have divided this article into six chapters: The introduction part generally introduces this topic and provides thebackground information on how the topic of management buyout comes into being.Chapter1, we will generally introduce the topic of management buyout and itsfinancing, and their present situations in China will also be analyzed in this chapter.We will talk about the Chinese social and economic background concerning the MBO,particularly that China is not an absolute market economy country whose majorityeconomy are in the form of state-owned enterprises and who is trying to search muchof their privatization. In the final part of the chapter, we will show the reader the lawsand administrative regulations concerning the financing of MBOs.Chapter2, in this chapter, we will talk about the MBO financing methods inUSA and in Europe. Most of these countries are capitalism whose market economy isvery developed. Thus their capital market is also developed with various financingmethods which China should learn.Chapter3, case study is very important to solve the financing topics andproblems. Several cases of the MBO and its financing from the USA, Europe andChina will be studied comparatively in this chapter. By studying these cases, we willcompare the MBO financing methods in these countries, with the acknowledgementthat China needs much improvement in these respects.Chapter4, this is the most important chapter. Here we will study the legalenvironment on the Chinese M&A market. The legal barriers concerning MBOs willanalyzed, with the vision and expectation that proper and reasonable revision on theseChinese laws and regulations regarding the MBOs shall be conducted. Among them,we will suggest possible financing methods for the MBO transactions in China whichare acceptable by the current Chinese laws and administrative regulations.In the final part of this article, we will conclude our ideas thereof. The authorwill present his thinking and expectation of the MBO financing as well as the MBOmarket in China, hoping that with the development of the Chinese economy andcapital market more financing methods that now forbidden in China become available.