A Review on LBO(Leveraged Buyout) and Creditor Protection

This article analyzes the argument favoring the establishment of a fiduciary duty of the directors and officers to creditors or bondholders in connection with the leveraged buyout. Leveraged buyout(LBO) occurs when an acquirer, typically a financial sponsor, acquires a controlling interest in a target company's equity and where a significant percentage of the purchase price is financed through the highly percentage leverage. The assets of the acquired company are provided as collateral for the borrowed capital. It could make harm to interests of creditors. The protection of the independence of corporate legal entity and what the company’s losses should be treated as a separate issue. It is not appropriate to simply make a legal decision on LBO transactions considering only the increment or diminution of company’s property. With the same purpose, in deciding the adequacy or rationality of LBO transactions, all relevant factors should be considered, including the target company’s cash flow, future increase in yield, decrease in debt, or legal or economic effects of the LBO, etc. This article deals with whether the directors have a fiduciary duty to creditors in the leveraged buyout. The interests of creditors may be protected by complying procedural requirements set by the law. If the company has losses from the LBO transaction, it will ultimately be potential harm to creditors because the company’s losses means a reduction of the company’s assets. Therefore, it is better to operate a device for protecting the interests of shareholder, and so it will result in the protection of stakeholders.