Sam Farr is the president, founder, and majority owner of Galena Medical Corporation, an emerging medical technology products company. Galena is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Sam, as owner of 51% of the outstanding stock, manages the company’s operations. He places heavy emphasis on research and development and on long-term growth. The other principal stockholder is Jill Hutton who, as a nonemployee investor, owns 40% of the stock. Jill 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 Galena’s stock.

All of Sam’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, Jill has money and would likely buy enough shares to gain control of Galena. She then would dictate the company’s future direction, even if it meant replacing Sam as president and CEO.

The company already has considerable debt. Raising additional debt will be costly, will adversely affect Galena’s credit rating, and will increase the company’s reported losses due to the growth in interest expense. Jill 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, Sam is doing everything to avoid a stock issuance. He is contemplating a large issuance of bonds, even if it means the bonds are issued with a 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 Sam?