Question

Express Chemical Company is a publicly traded company that has been operating at a profit for years.

Its officers (all of whom are stockholders) are concerned about the prospects of the company. Customers and employees claiming that toxic chemicals produced by the company caused their health problems have sued many similar firms. Lawsuits have yet been filed against Express, but the officers fully expect them to be filed within the next two years.

The officers hold 70% of the stock and estimate that their total stockholdings have a current market value of about $8 million (although its value would be much lower if all the facts were known). They are worried that if suits are filed and the company loses, there will not even be enough remaining assets to satisfy creditors' claims, and the officers' stock would be worthless. Private legal counsel informed the officers that the company is likely to lose any suits that are filed.

One of the officers suggested that they could at least receive something for their stock by having the company buy half of the shares held by the officers at a total price of $4 million. Another officer asked if such a treasury stock transaction would be legal. The response was that the transaction would be legal and retained earnings would be reduced to a zero balance. However, there would not be a debit balance because of the transaction.

If you were one of the officers, would you feel comfortable engaging in this proposed treasury stock transaction? Briefly explain.

What are your ethical responsibilities, if any, as they relate to the proposed treasury stock transaction?

Answer 1

treasury stock transactions are transactions that occur when a company decides to repurchase its own stocks for various reasons out of its retained earnings.the buy back of shares is done from the open market ,it is a contra entry .

as per the case above,if the officers or the customers will file a suit against the company on the grounds of illegal action,then the comapnay will on the verdict of the court start its winding process and during this time it needs to sell off its assets and reserves to pay the secured creditors and employees , but the company is not capable to do due to lack of funds and after the proportional payment to the creaditors would become insolvent and wont be able to pay the stockholders,which would lead to gret loss to the stockholders.

so ,As an officer,it is right decision to sell back the company its 50% of shares at a price of $4million in order to safe itself from a loss of 4 million,if it doesnt do this ,the company ll be bankrupt and the stockholders will be in huge loss.

the ethical responsibilities will be that the treasury stock transaction shall be as per the prescribed guidelines as per USGAAP and IFRS and after the bord resolution and sanction by all the shareholders agreeing for this repurchase.