Andrew Reyes is the president, founder and majority owner of Safe Medical Corporation, an emerging medical technology products company. Safe Medical urgently needs additional capital to keep operating and to bring several promising products to final development, testing, and production. Reyes, as owner of 51% of the outstanding stock, manages the company’s operations. He places heavy emphasis on research and development and long-term growth. The other principal stockholder is Tim Santos who, as a nonemployee investor, owns 40% of the stock. Tim would like to deemphasize the R & D functions and emphasize the marketing function to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Safe Medical’s stock. All of Andrew’s personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won’t be able to participate in such an issuance. But, Tim has money and would likely buy enough shares to gain control of Safe Medical. She then would dictate the company’s future direction, even if it meant replacing Andrew as president and CEO. The company already has considerable debt. Raising additional debt will be costly, will adversely affect Safe Medical’s credit rating, and will increase the company’s reported losses due to the growth in interest expense. Tim and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of “his” company, Andrew is doing everything to avoid a stock issuance and is contemplating a large issuance of bonds, even if it means the bonds are issued with high effective interest rate. Instructions: (a) Who are the stakeholders in this situation? (b) What are the ethical issues in this case? (c) What would you do if you were Andrew?
Andrew Reyes is the president, founder and majority owner of Safe Medical Corporation, an
emerging medical technology products company. Safe Medical urgently needs additional capital to keep
operating and to bring several promising products to final development, testing, and production. Reyes, as
owner of 51% of the outstanding stock, manages the company’s operations. He places heavy emphasis on
research and development and long-term growth. The other principal stockholder is Tim Santos who, as a
nonemployee investor, owns 40% of the stock. Tim would like to deemphasize the R & D functions and
emphasize the
believes this strategy would raise the market price of Safe Medical’s stock. All of Andrew’s personal
capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional
shares of stock will dilute his controlling interest because he won’t be able to participate in such an issuance.
But, Tim has money and would likely buy enough shares to gain control of Safe Medical. She then would
dictate the company’s future direction, even if it meant replacing Andrew as president and CEO. The
company already has considerable debt. Raising additional debt will be costly, will adversely affect Safe
Medical’s credit rating, and will increase the company’s reported losses due to the growth in interest
expense. Tim and the other minority stockholders express opposition to the assumption of additional debt,
fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to
preserve the direction of “his” company, Andrew is doing everything to avoid a stock issuance and is
contemplating a large issuance of bonds, even if it means the bonds are issued with high effective interest
rate.
Instructions:
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues in this case?
(c) What would you do if you were Andrew?
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