Question

AVX Electronics is very close to bringing a revolutionary new computer chip to the market. The company fears that it could soon be the target of a takeover by a giant telecommunications company if this news were to leak leak before the product is introduced. The current AVX management intends to redistribute the company’s stock holdings so its managers will have a larger share of ownership. So, management has decided to buy back 20% of the company’s common stock while the price is still quite low and distribute it to the managers – including themselves – as part of the company’s bonus plan. Are the actions of AVX management ethical? Explain why this strategy would reduce the risk of a hostile takeover. Was any group hurt by this strategy?

Answer 1

The actions of AVX management is not ethical as it is an insider information. The strategy though can reduce the risk of takeover but still it may happen that some outside shareholders may purchase the shares of the management including the managers stock by using the insider information and by offering a high value price to the management and its managers. The stakeholders might be hurted by this type of strategy as the company management should not use the insider information for their own benefits.