SEU Business Substituting Diethylene Glycol for Glycerin Discussion

Action Items

In Brazil, the export industry always finds ways to cut costs. The international community expressed its dismay at the manufacturers’ latest cost-cutting decision to replace flouride with diethylene glycol in toothpaste. Flouride is designed to strengthen teeth enamel. Diethylene glycol is a poisonous substance used to make chemicals that are widely used by the automobile industry.

The end product exported from Brazil was poisonous toothpaste that was not labeled to indicate that it contained diethylene glycol. When the poisonous chemical was found in the toothpaste, Costa Rican government officials issued a warning telling consumers to discard the toothpaste. In 2019, a study found that toothpaste containing diethylene glycol was harmless if the chemical concentration was below 15.6 percent. The contaminated toothpaste found in Costa Rica contained levels as high as 5 percent. Costa Rican government officials warned that it was unsafe in any concentration. It is especially harmful for children, as well as those suffering from weakened kidneys.

In July 2020, due to growing concern about the safety of the imported toothpaste, the Costa Rican government banned all manufacturers from using diethylene glycol in toothpaste. Investigators believed that the toothpaste originated from two small manufacturers in the Brazil but the manufacturers denied any wrongdoing.

The contaminated toothpaste was found in five shipping containers but there have not been any confirmed illnesses or deaths from using the contaminated toothpaste.

If you were manufacturing toothpaste and decided to substitute diethylene glycol for glycerin, would you consider it your ethical obligation to tell the consumer?

  Chapter 38
Corporations:
Formation and
Financing
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 38 Case Hypothetical
Phoebe Main and Franklin Kilbride, best friends, love to cook. The two are so
inseparable that some time ago, those who knew them began to jokingly refer to
Phoebe and Franklin as “Ma and Pa.” One of their kitchen concoctions, kettle
corn, became so popular (Phoebe and Franklin loved to share their caloric
creations) that others have encouraged them go into business and sell their kettle
corn as a product. Phoebe and Franklin agree. They have decided to form a
traditional corporation as co-owners, and they have agreed on a name for their
company: Ma and Pa Kettle Corn Company, Inc.
In the articles of incorporation (the document Phoebe and Franklin will send to
the Kansas Secretary of State’s office for approval of corporate status), the two are
required to indicate the total number of stock shares the company is authorized to
issue. “Ma and Pa” are perplexed. Both have always considered themselves
“good with numbers,” but they cannot decide what number of shares of stock to
indicate in the articles of incorporation.
What is your recommendation to Phoebe Main and Franklin Kilbride?
(Access the video clip at
http://video.google.com/videoplay?docid=7106559846794044495# to see part of
the inspiration for this case study!)
38-2
Chapter 38 Case Hypothetical and Ethical Dilemma
Clyde Monett has been operating an art restoration business since 1998, specializing in the refurbishment
of portraits and paintings. He operated the enterprise as a sole proprietorship (called Monett’s Art
Restoration Services) until 2006, when he attended a “Business Structures, Licenses and Permits”
workshop at the local community college, at which time the presenting attorney suggested he convert his
business to a corporation, in order to “shield” Monett’s personal property and real estate from liability for
his business’ financial obligations (Monett’s personal net worth is approximately $150,000.) Through the
incorporation process, the only change to the business name was the addition of the word “Incorporated.”
Monett was the only incorporator of the business. He serves as the president, vice-president and treasurer
of the corporation; his sister, Georgette O’Keeffe, is the secretary. Since the corporation was formed in
2006, Clyde and Georgette have only convened one “official” corporate meeting; the meeting lasted
approximately one hour, and the two shared family gossip for forty-five minutes of that hour. Monett’s Art
Restoration Services, Incorporated has maintained an average daily balance of $45.22 in the corporate
checking account at Homeland National Bank.
Yesterday, Monett inadvertently purchased the wrong art refurbishment materials (the cleaning solution
was too acidic,) and the oversight resulted in irreparable damage to a painting conservatively valued at
$75,000. The owner of the painting, Paul Picasso, demands $75,000 in damages from Monett; Monett
apologizes, offers two free coupons for future restoration services, and refuses to pay the $75,000. The
current corporate checking account balance is $52.84.
Is Clyde Monett personally liable for the $75,000 damage claim? Is he ethically obligated to pay Paul
$75,000?
38-3
Characteristics of Corporations
◼
Legal entity
◼
Rights as person and citizen
◼
◼
◼
Unrestricted transferability of
corporate shares
◼
Perpetual existence
◼
Centralized management
◼
Corporate taxation
Creature of state
Limited liability of
shareholders
38-4
Corporate Powers
◼
Corporations have both “express” and “implied” powers
◼ Express Powers:
Perpetual existence; right to litigate; right to
make contracts; right to borrow/loan money; right to make
charitable donations; ability to establish rules for managing
corporation
◼ Implied Powers: Whatever actions necessary (within the law)
to execute express powers
38-5
Classifications of Corporations
◼
Public/Private
◼
For-Profit/Non-Profit
◼
Domestic/Foreign/Alien
◼
Publicly Held/Closely Held
◼
S-Corporation
◼
Professional Corporation
38-6
Public Versus Private Corporation
◼
Public Corporation: Corporation created by government to
administer law, with specific government duties to fulfill
◼ Example:
◼
Federal Deposit Insurance Corporation (FDIC)
Private Corporation: Corporation create for private purposes
38-7
For-Profit Versus Non-Profit Corporations
◼
For-Profit Corporation: Objective is to operate for profit;
shareholders seeking to make profit purchase stock these
corporations issue
◼
Non-Profit Corporation: May earn profits, but they do not
distribute these profits to shareholders (non-profit corporation
does not issue stock, nor does it have shareholders); instead,
corporation reinvests profits in business
38-8
Domestic, Foreign, and Alien Corporations
◼
Domestic Corporation: Doing business within state of
incorporation
◼
Foreign Corporation: Doing business in states other than state
of incorporation
◼
Alien Corporation: Doing business country other than country
of incorporation
38-9
Publicly Held Versus Closely Held
Corporation
◼ Publicly Held Corporation:
◼ Stock available to public
◼ Closely Held Corporation (a.k.a. “Close”, “Family”,
“Privately Held” Corporation):
◼ Generally does not offer stock to public
38-10
“Subchapter S” Corporation
◼ Named after provision of Internal Revenue Service
(IRS) code that provides for it
◼ Particular type of closely held corporation (no more
than one hundred shareholders)
◼ Combines advantages of limited liability and single
taxation
38-11
Formation of Corporation
◼ Promoters organize corporate formation
◼ Subscribers offer to purchase stock in corporation in
formation process
◼ State selected for incorporation
38-12
Questions to Consider in Selecting a State For
Incorporation
◼
How much flexibility does the state grant to corporate
management?
◼
What rights do state statutes give to shareholders?
◼
What restrictions does the state place on the distribution of
dividends?
◼
Does the state offer any kind of protection against takeovers?
38-13
Legal Process of Incorporation
◼ Selection of corporate name
◼ Drafting and filing articles of incorporation
◼ First organizational meeting held
38-14
Remedies For Defective Incorporation:
◼
“De jure” corporation: Lawful corporation that has met the substantial
elements of incorporation process
◼
“De facto” corporation: Corporation that has not met the requirements of
state incorporation statute, but courts recognize it as a corporation for most
purposes to avoid unfairness to third parties who reasonably believed it was
properly incorporated
◼
Corporation by estoppel: Corporation prevented by court from denying its
corporate status
◼
Piercing corporate veil: Shareholders personally liable when they have used
corporation to engage in illegal/wrongful acts
38-15
Situations When Courts Likely To Pierce Corporate
Veil
◼
Corporation lacked adequate capital when initially formed
◼
Corporation did not follow statutory mandates regarding
corporate business
◼
Shareholders’ personal interests and corporate interests are
commingled (corporation has no separate identity)
◼
Shareholders attempt to commit fraud through corporation
38-16
Debt Securities Versus Equity Securities
◼ Debt Securities:
Bonds (representing loans to
corporation from another party)
◼ Equity Securities:
Stock
38-17
Types of Debt Securities (Bonds):
◼
Unsecured Bond: No assets support corporation’s obligation to repay face
value of bond
◼
Secured Bond: Specific property supports corporation’s obligation to repay;
creditor can seize secured interest if bond not repaid
◼
Income Bond: Corporation pays interest on bond in proportion to earnings
◼
Convertible Bond: Allows shareholders to exchange bond for shares of
company stock
◼
“Callable” Bond: Allows corporation to call in and repay bond at specific
times
38-18
Equity Securities: Preferred Stock
Versus Common Stock
◼ Preferred Stock:
Stockholder enjoys preferences
regarding assets and dividends
◼ Common Stock:
Stockholder owns portion of
corporation, but no preferences regarding assets and
dividends
38-19
Chapter 39
Corporations, Directors,
Officers, and
Shareholders
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 39 Case Hypothetical and Ethical Dilemma
Zaxxon-Mobile Oil Company, Inc., headquartered in Mobile, Alabama, is a multinational
corporation with 2009 annual profits of $45 billion. Zaxxon-Mobile has twelve (12) board
members who serve the company on a part-time basis, with each board member receiving an
average of $300,000 per year in compensation.
Emily D. Chanel, a pre-law student at The University of Alabama at Mobile, is very familiar
with Zaxxon-Mobile Oil Company, Inc., and she has studied her business law textbook
material on corporations and their directors, officers and shareholders very carefully. She
recalls that the board of directors and its members owe a strict fiduciary duty to the
corporation; as part of this fiduciary duty, the board must exercise oversight in monitoring
the actions of corporate employees, including the executives and officers of the corporation.
Emily ponders, “How can board members of a major corporation be truly objective when
they are being paid such lavish sums of money? Would not board members have a “Don’t
rock the boat” mentality in terms of exercising their oversight function? Why, for example,
would a Zaxxon-Mobile board member question the practices of the company’s high-ranking
executives and officers, when such an inquiry might jeopardize his or her $300,000 per year
annual compensation? ‘Make no bones about it,’ if I were a board member at Zaxxon-Mobile,
I would probably be a ‘yes-woman” and approve of everything the chief executive officer, the
chief financial officer and the chief operating officer wanted to do!”
How do you respond to Emily D. Chanel’s questions and overall concerns about board
member compensation and objectivity?
39-2
Chapter 39 Case Hypothetical and Ethical Dilemma
Dr. Charles Finnegan is a newly-appointed member of the Board of Directors of Walnut
Grove Community College (W.G.C.C.) in Walnut Grove, California. The position is unpaid,
but does come with the “perks” of positive exposure and prestige in the local community.
At his first board meeting, the directors are discussing and considering for approval service
contracts between W.G.C.C. and the local business community. The third contract for
consideration is a janitorial service contract, valued at $150,000, between W.G.C.C. and
Antiseptic Andy Cleaning Service, Inc. Finnegan is quite surprised; after all, “Antiseptic
Andy” is owned and operated by his first cousin, Andrew Deere. Cousins Finnegan and
Deere have not seen each other in three years, nor have they otherwise communicated during
that period of time.
The chairperson of the Board of Directors calls for a vote on the janitorial service contract.
According to W.G.C.C. regulations, the board must unanimously approve contracts with the
business community.
Finnegan is perplexed. If he votes and says nothing about his kinship to Deere, he still feels
he can “sleep at night,” since he will not receive any financial gain from the contract. If he
discloses his kinship to Deere, he fears that Deere’s business opportunity will be jeopardized.
Does Finnegan have a legal obligation to disclose his relationship to Deere? Would it be a
“conflict of interest” for Finnegan to vote in favor of the contract? Does he have an ethical
obligation to disclose the relationship?
39-3
Summary of Roles of Directors, Officers, and
Shareholders
◼
Directors–
◼
◼
◼
◼
◼
Officers–
◼
◼
◼
Shareholders–
◼
◼
Vote on important corporate
decisions
Appoint and supervise officers
Declare and pay corporate
dividends
Manage corporation
Run “day-to-day” business of firm
Agents of corporation
Elect board of directors
Approve major board decisions
39-4
Summary of Rights of Directors, Officers, and Shareholders
◼
Directors–
◼
◼
◼
◼
◼
Officers–
◼
Shareholders–
Right to Compensation
Right to Participation
Right to Inspection
Right to Indemnification
◼
Rights determined in employment
contract
◼
Stock certificates
Preemptive rights
Right to Dividends
Right to Transfer Shares
Inspection Rights
Right to Corporate Dissolution
Right to File Derivative Suit
Right to File Direct Suit
◼
◼
◼
◼
◼
◼
◼
39-5
Fiduciary Duties
Definition: Duties to corporation that individuals
within corporation have
Primary fiduciary duties include:
◼
Duty of Care
◼
Duty of Loyalty
◼
Duty to Disclose Conflict of Interest
39-6
Exhibit 39-2: Liability of Directors and
Officers
◼
Can be held personally liability for their own torts and crimes
◼
Can be held personally liable for torts and crimes of other
employees they supervise
◼
Can be held liable for wrongful transactions involving company
stock
◼
Cannot be held liable for decisions that harm company if they
were acting in good faith at time of decision
39-7
Exhibit 39-3: Liability of Shareholders
◼
Shareholders liable (to extent of their investment) for debts of
corporation
◼
Shareholders liable for breach of contract if stock subscription
agreement signed and no stock purchased
◼
Shareholders liable for watered stock
◼
Shareholders personally liable for receiving illegal dividends
39-8
Quorum (Definition):
Minimum number of directors necessary to
validate corporate directors meeting
39-9
Proxy (Definition):
Provides authorization for third party to
vote in place of shareholder at shareholder’s
meeting
39-10
Voting Trust (Definition):
Agreement between stockholder and trustee in
which stockholder transfers his/her legal share titles
to trustee; trustee is then responsible for voting for
those shares
39-11
Business Judgment Rule
(Definition):
Provides that directors and officers are not
liable for decisions that harmed corporation
if they were acting in good faith at time of
decision
39-12
“Watered” Stock
(Definition):
Stock issued to individuals at value
below fair market value
39-13
Corporations: Directors, Officers, and Shareholders-Other Relevant Terminology
◼
Par-Value Shares: Fixed face value noted on stock certificate
◼
No-Par Shares: Stock shares without a par value
◼
Stock Subscription Agreement: Contractually obliges individual to buy shares
in corporation
◼
Pre-emptive Rights: Preferential rights given to existing shareholders to
purchase shares of new stock issue; preference given in proportion to
percentage of stock shareholder already owns
◼
Dividend: Distribution of corporate profits/income ordered by directors and
paid to shareholders in proportion to their respective shares in corporation
39-14
Corporations: Directors, Officers, and Shareholders–Other
Relevant Terminology (Continued):
◼
Right of First Refusal: Given to existing shareholders to purchase any shares
of stock offered for resale by shareholder within specified period of time
◼
Inspection Rights: Protect shareholder interest by giving them right to
inspect corporation’s books and records after asking in advance to inspect
and having proper purpose
◼
Stock Warrants: Vouchers issued to shareholders, entitling them to given
number of shares at specified price
◼
Shareholder’s Derivative Suit: Filed by corporate shareholder when corporate
directors fail to sue in situation where corporation has been harmed by
individual/another corporation
39-15
Chapter 40
Corporations: Mergers,
Consolidations,
Terminations
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 40 Case Hypothetical
Minisoft Corporation and Pear, Inc. are the two largest computer companies in the
United States. Pending Department of Justice antitrust review, the two
corporations plan to merge, renaming their company “Mini-Pear, Inc.” As an
integral part of the merger, existing shareholders of Minisoft Corporation and
Pear, Inc. will be offered an even “stock swap.” Per the terms of the proposed
trade, current shareholders of Minisoft Corporation and Pear, Inc. will exchange
each share of their company’s stock for one (1) share of Mini-Pear, Inc. stock.
A few shareholders of both Minisoft Corporation and Pear, Inc. do not approve of
the terms of the proposed merger, nor do they approve of the merger itself. The
vast majority of shareholders of companies approve of the merger. What rights do
these shareholders have, either in terms of blocking the merger, or in terms of
estimating the fair value of their existing shares?
40-2
Chapter 40 Ethical Dilemma
As you will learn in reading the chapter material, there are several circumstances
that can “trigger” a state government’s right to involuntarily dissolve a corporation
headquartered in its state, including: 1) the corporation fails to pay taxes within 60
days of the government-imposed deadline; 2) the corporation fails to submit its
annual report to the secretary of state within 60 days of the report’s due date; 3) the
corporation does not have a registered agent or office in the state for 60 days or
more; 4) the corporation fails to notify the secretary of state within 60 days that its
registered agent and/or registered office has changed; or 5) the corporation’s
duration, as specified in its articles of incorporation, has expired. Arguably, many
of the described “triggering events” are technicalities, and “inquiring minds”
might wonder why a state government would make such a drastic decision to
revoke a corporate charter, especially when it would jeopardize the livelihood of
corporate employees, as well as future corporate tax payments to the state. The
absence of those corporate tax dollars could jeopardize government social
programs, which could negatively affect scores of citizens who need access to
those programs.
In light of the potential negative impact on the community, how readily should a
state government use its involuntary corporate dissolution right?
40-3
Merger (Definition):
A legal contract combining two or more
corporations such that only one of the corporations
continues to exist; in essence, one corporation
“absorbs” another corporation
40-4
Consolidation (Definition):
A legal contract combining two or more
corporations, resulting in an entirely new
corporation; in consolidation, neither of the original
corporations continues to exist
40-5
Procedures for Mergers and Consolidations
◼
Boards of directors of all involved corporations must approve
the plan
◼
Shareholders must approve the plan through a vote at a
shareholder meeting
◼
The corporations must submit their plan to the secretary of state
◼
The state must review the plan, and if it satisfies legal
requirements, grant an approval certificate
40-6
Other Terminology/Rights Regarding Mergers and
Consolidations
◼
Short-form merger (Parent-subsidiary merger): Parent
corporation merges with a subsidiary corporation; does not
require shareholder approval
◼
Rights of shareholders: Shareholders vote only on exceptional
matters regarding the corporation
◼
Appraisal right: Shareholder’s right to have his/her shares
appraised, and to receive monetary compensation for their value
40-7
Purchase of Assets/Purchase of Stock
◼
◼
Purchase of Assets: One corporation can extend its business operations by
purchasing the assets of another company
◼
Corporate Assets (Definition): All intangible items (corporate goodwill, company
name, company logo, etc.) and tangible items (buildings, property, etc.) owned by
the corporation
◼
Note: Generally, corporation that purchases assets of another corporation does
not acquire its liabilities
Purchase of Stock: An acquiring corporation can take control of another
corporation by purchasing a substantial amount of its voting stock
40-8
“Hostile” Takeover
(Definition):
A takeover to which management of the
target corporation objects
40-9
Types of Takeovers
◼
Tender Offer: Aggressor (acquiring corporation) offers target
shareholders a price above current market value of their stock
◼
Exchange Offer: Aggressor offers to exchange target
shareholders’ current stock for stock in aggressor’s corporation
◼
Cash Tender Offer: Aggressor offers target shareholders cash
for their stock
◼
“Beachhead” Acquisition: Aggressor gradually accumulates
target company’s shares
40-10
Self-Tender Offer (Definition):
Response to corporate takeover attempt in which target
corporation offers to buy its shareholders’ stock; if
shareholders accept offer, target corporation maintains
control of business
40-11
Leveraged Buyout (Definition):
Occurs when group within a corporation (usually
management) buys all outstanding corporate stock
held by the public; group gains control over
corporate operations by “going private” (i.e.,
becoming a privately-held corporation)
40-12
“Legal Death” of Corporation
Occurs in two phases:
◼
Dissolution: Legal termination of corporation
◼
Liquidation: Process by which trustee converts corporation’s
assets into cash, and distributes them among corporation’s
creditors and shareholders
40-13
Voluntary Versus Involuntary Dissolution
◼ Voluntary Dissolution:
Occurs when directors or
shareholders initiate the dissolution process
◼ Involuntary Dissolution:
State government forces the
corporation to close
40-14
Reasons For Involuntary (State GovernmentInitiated) Dissolution of Corporation
◼
Corporation failed to pay taxes within 60 days of due date
◼
Corporation failed to submit its annual report to secretary of state with 60
days of due date
◼
Corporation did not have a registered agent or office in the state for 60 days
or more
◼
Corporation failed to notify secretary of state within 60 days that its registered
agent/registered office had changed
◼
Corporation’s duration (as specified in its articles of incorporation) has
expired
40-15
Reasons for Court-Ordered Involuntary
Dissolution of Corporation
◼
Corporation obtained its articles of incorporation fraudulently
◼
Corporate directors have abused their power (“ultra vires” acts)
◼
Corporation is insolvent
40-16
Exhibit 40-3: Life of a Corporation
◼
Incorporation—Company becomes incorporated when articles
of incorporation signed
◼
Corporation Conducts Business—Directors and officers oversee
business, as shareholders insure company’s stock has value
◼
Dissolution—Corporation legally terminated, either voluntarily
or involuntarily
◼
Liquidation—Directors convert corporate assets into cash and
distribute them among corporation’s creditors and shareholders
40-17