Ted was a wealthy, 20% shareholder of TDS Corporation. He was looking over the financial statements of the corporation and saw that TDS Corporation was in need of a large loan. Furthermore, he knew that December sales were weaker than expected and that the yearly financial statements would show a lower net income than anticipated. He then decided to loan the company $3 million at 5% interest and also become a customer and purchase $250,000 of merchandise. By Ted becoming a customer, it would increase the business’s December sales and net income, and give the company sufficient cash to meet expenses. When approached with the ideas, the CEO objected, stating that the “loan” would have to be recorded as additional capital because a shareholder could not loan money to a company. Ted stated that as long as the money was treated as a loan with interest and the expectation of repayment, it should be allowed. The CEO then stated that it would be unethical for the company to “borrow” money from a shareholder. Also, it would be unethical for the company to “sell” merchandise to a shareholder, because it would merely be done to improve the December sales. Ted stated that the loan agreement and 5% interest would make the arrangement reasonable. He stated that if the interest rate were 25%, then the CEO might have a valid ethical concern. Ted also argued that the sale of merchandise to him was completely ethical, because he was not going to return the merchandise. He further contended that it should not matter whether he was a shareholder because in these transactions he would be a lender and a customer, which would not involve any ethical issues.
Can a shareholder ethically lend money to the corporation? What potential ethical issues would be involved? Can a shareholder ethically become a customer to make purchases just to improve the sales and net income? Does the amount of the purchase matter? Why do you think the CEO was concerned?

  • CreatedJuly 08, 2015
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