1. Stanford University medical researchers conducted a study on the correlation
ID: 433931 • Letter: 1
Question
1. Stanford University medical researchers conducted a study on the correlation between the use of fertility drugs and ovarian cancer. Their study, published in the American Journal of Epidemiology, concludes that the use of the fertility drugs, Pergonal and Serophene, may increase the risk of ovarian cancer by three times. The lead author of the studies, Professor Alice Whittemore, stated, "Our finding in regard to fertility drugs is by no means certain. It is based on very small numbers and is really very tenuous."
FDA Commissioner David Kessler would like the infertility drug manufacturers to disclose the study findings and offer a warning on the drug packages. He notes, "Even though the epidemiology study is still preliminary, women have a right to know what is known. We're not looking to make more of this than there is."
If you were a manufacturer of one of the drugs, would you voluntarily disclose the study information?
2. Joseph Horne Company, a Pittsburgh department store chain, was the target of a management leveraged buyout in 1986 and was suffering with the resultant $160 million in debt.
Horne executives were relieved when, in 1988, Dillard Department Stores, Inc., and mall developer Edward J. DeBartolo agreed to buy Horne’s stock for $74 million and to assume the 1986 buyout debt.
As part of the deal, Dillard’s installed data lines and computers in Horne’s fourteen stores to prepare for the consolidation. With the stores hooked into its Little Rock, Arkansas, headquarters, Dillard’s assumed control of Horne’s merchandise purchasing.
Dillard’s executives wanted financial and purchasing control because the contract price was contingent upon a finding that Horne’s financial statements were accurate. Horne’s CEO, Robert A. O’Connell, voiced his concerns to E. Ray Kemp, Dillard’s vice chairman, about the extent and speed of Dillard’s assumption of control. Kemp told O’Connell, “Trust me, it would take an act of God for this deal not to go through.”
Dillard’s had been acquiring department stores like Horne’s all over the country, adding 196 stores in five years. From 1987-1991 Dillard’s earnings had gained 20 percent through its strategy of taking over financially troubled firms.
In 1990, however, Dillard’s deal with Horne’s fell through, and Horne sued Dillard’s and DeBartolo for breach of contract and fraud. Horne’s suit alleged that Dillard’s plan in taking over the buying and data was to decrease the value of Horne’s to get a bargain price.
Experts in the industry indicate that Horne demonstrated inexperience by allowing Dillard’s rapid infiltration. The contract provided that Horne could veto any proposal for Dillard activity in Horne’s business.
Between the time the contract was negotiated and Dillard’s cancellation of the agreement, Dillard’s executives found that some Horne accounting practices were questionable. But some industry experts and Horne executives said Dillard’s often “nickels and dimes” sellers to bring down the price.
Horne’s suit also alleged that Dillard’s told 500 employees that their jobs would be gone after the takeover. Thirty percent of those employees quit before Dillard’s and DeBartolo withdrew. Because Dillard’s took over merchandise buying, Horne maintained, merchandise deliveries were late and the wrong merchandise was ordered for critical periods, such as the holiday season.
A Pittsburgh National Bank officer testified in his deposition in the suit that a Dillard’s executive told him in 1988 that Dillard’s might wait until Horne’s bankruptcy to buy the company. Dillard’s denies the statement and the plan. Dillard’s and Horne’s settled the suit in 1992.
a. Were the damages Horne’s experienced just a consequence of a failed business deal?
b. Did Dillard’s take advantage of a debt-ridden company?
c. What financial-disclosure obligations do takeover targets have?
d. Did Dillard’s have any special obligations because of its access to Horne’s data and buying power?
e. Is it unethical to take advantage of a naive party in a commercial transaction?
Explanation / Answer
1
If I was the manufacturer of one of the drugs I would not voluntarily disclose the study information. The reason behind this is that the study is nowhere near conclusive even as per the author of the research. Creating fear and panic among users and at the same time incurring loss in the business does not make sense when it is not even confirmed if the drug use will cause ovarian cancer.
2
a) The deposition of the Pittsburg National Bank officer clearly indicates that Dillard was attempting to create a desperate situation for Horne’s and then purchase the store at a cheaper price. Thus we cannot count the damages as a consequence of a failed business deal.
b) Yes. Dillard took advantage of a debt-ridden company.
c) The company that is taking over obviously needs to be aware of the liabilities that of the acquired company. However, there is always the risk of unethical business practice such as mentioned in this case. When it comes to obligations the companies need to maintain a high level of transparency in terms of liabilities and assets. The acquiring company too has the obligation of letting their interest known immediately (prior to influencing operations).
d) No. Dillard did not have any special obligation by default.
e) Yes. It is unethical to take advantage of a naïve party in commercial transaction. However, it is also the duty of the naïve party to take every possible precaution against fraud.
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