Caveat Emptor Chapters Revision 7-22

Running head: CAVEAT EMPTOR 1

Caveat Emptor vs. Primum Non Nocere

Bruce D. Parker

Hodges University

MAN 6400 Independent Study

Dr. Nancey Wyant

Due: Aug. 8, 2014

Submitted: Aug. 8, 2014

CAVEAT EMPTOR 2

Buyer beware vs. not knowingly to do harm

The primary purpose of this study is to define and determine whether if cultural, ethical

or moral values are underminedabate when small business acquisitions fail to meet the buyer’s

expectations. The secondary purposes of this study it to gain a greater understanding of ethics

and morals in western business and culture today. This paper is an attempt to understand the

ethics that managers need and the ethics of responsibility in the small business acquisition.

In small business acquisitions, a case study will be used regarding the author’s own

personal experience. It is one of many similar cases where buyer’s expectations may be misled,

regarding the condition of the acquisition, which then causes the buyer to receive unanticipated

financial and organizational distress.

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Caveat Emptor vs. Primum Non Nocere: Buyer Beware vs. Not Knowingly To Do Harm

The ethics that managers need and “ethics of responsibility” in small business acquisition

Introduction

Moving further into the 21st Century the need for ethical and moral responsibility is ever-

increasing. How individuals developfoster personal morals, and ethics hass been a topic of

much debate for philosophers, educators, and scholars alike. The focus ofin this chapter is to

define ethics and morals in a personal view., and tTo illustrate this author’s belief that there

should be no difference between business ethics and business morals, as defined by scholars

in the business field? .

In his book “The Essential Drucker”, Peter Drucker examined the “ethics of

responsibility” as inpertaining to the world of business (Drucker, 2001, p. 63). In brief,

businesses people should not lie, cheat, steal, or do any unethical or immoral act that would

cause harm to any stakeholder. This premise of what actions a business should not do should

beginbe pre-empted with a statement of what businesses should do. Developing standards in

business is a direct reflection on a corporate CEO’s or Ppresident’s personal beliefs and conduct.

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Chapter One

Ethics in infancy

Marcus Tullius Cicero stated that it was Socrates who “summoned philosophy down from

the heavens...to make inquiree into life and morals and things evil and good” (Rosen, 2009, p.

5). Socrates was a master of rhetoric and used his skills adroitly as he ably defended his

positions on good and evil, right and wrong, morality and immorality, and the very nature of life

itself. Socrates’ positions and abilities led David Knox to title Socrates: “The First Professor”

(Knox, 1998, p. 115). As Knox points out, he was the founder of the Socratic Method, a method

of intellectual and moral discovery through the depth of dialogue between teacher and student.

Socrates was more than just a teacher, as Xenoephon points out,: “Socrates was interested in

forming the entire person” (p. 118). Socrates’ mission was “to form a virtuous whole thatwhich

would be a benefit and ornament to society” (p. 118). His successors like Aristotle used similar

methods to draw the student of humanity into the world around them.

In one of Aristotle’s first works titled “The Nicomachean Ethics,” Aristotle states that:

“every art and every investigation, and similarly every action and pursuit is considered to

aim at some good” (Thomson, 2004, p. 1). He further states that “knowledge of the good is of

great importance to us for the conduct of our lives” (p. 2). He then suppositions that the “highest

of all practical goods ds….is happiness” according to Aristotle (p. 7). He defined happiness as

“something perfect and self-sufficient being the end to which our actions are directed,” a

practical good (p. 15). If one is to believe this philosophy, the subsequent actions then according

to Aristotle, should be based on the pursuit of happiness, the practical good.

As a side note, in developing business ethics, Brague takes the position that “Aristotle

offers a business ethic intent on advancing the attainment of personal happiness…Defining

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happiness in universalistic terms, Aristotle insists upon the priority of exercising the virtues, of

habitually acting in ways that fulfill the highest human potentialities” (Brague, 2006, p. 342).

Aristotle also states: that “moral goodness, on the other hand, is the result of habit, from

which it has actually got its name, being a light modification of the work ethos” (Thomson,

2004, p. 31). Ethics and morality are are intertwined by Aristotle. Stanley Rosen in “The

Philosopher’s Handbook” had his introduction written by Paul Rahe. Rahe states that “Aristotle

contends that there is also such a thing as moral virtue” (Rosen, 2009, p. 13).

Are morality and ethics are the same?

So far as this author can discern, there are numerous differences between the two as

promulgated by various authors. For instance, psychologists have been studying morality for

centuries. In one a recent study, several published psychologists determined thatstate:.

“mMorals can be defined as concepts, reasoning, and actions related to well-being, rights,

and the fair treatment of other people” (Vélez García & Ostrosky‐Solís, 2006, p. 349). This

definition seems to be a reasonable statement and is in line with the authors aboveforementioned

authors regarding goodness, human potential, and the conduct of individual lives.

Immanuel Kant, ann 18th- century German philosopher, takes a very strong stand on

morals with his statement that:

Morality demands that we act on the sort of policies which, if adopted by

everyone, would generate a community of free and equal members, each of whom

would, in the process of realizing his own purposes, also further the aims of his

fellows. (L'Etang, 1992, p. 742)

This statement by Kant becomes part of the entwining in the moral and ethical dilemma.

Are morals and ethics the same? Morals do become the basis for ethics, and ethical conduct and

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ethics are a standard duty or a code of action to the community as implied by almost all the

philosophers. Accordingly, . L’Etang takes the position from Kant’s multiple statements that:

“the moral significance of codes of ethics is contained in their existence, and they have the

potential to yield the process of ethical decision-taking” (p. 743).

Due to the abundance of definitions of morals and ethics by numerous authors, countless

references have been melded together to try and perfect an acceptable definition offor ethics and

morals. Individual and group conduct have has been analyzed and dissected to the point where

many authors agree, with a certainty of reasonable expectation of general acceptance by

philosophers, educators, and psychologists, on a relative test statement. Hosmer wrote that:

Ethically justifiable behavior, to repeat the argument for emphasis, consists of

morally correct decisions and actions in which the interests of the society take the

degree of precedence that is "right," that is "just," and that is "fair" over the

interests of the individual. (Hosmer, 1995, p. 399)

Codes of ethics from society to business

SocietThis is an area that seems to bepresent an easy transition, and over the last half

century more and more social ideas have become business practices. “The Department of Labor

(DOL) administers and enforces more than 180 federal laws” (United States Department of

Labor, 2014, para. 1). Some of the laws enacted with social ideas as a base train of thought,

include:

tThe eEqual pPay (not equated to color, sex, or nationality) aAct.

V . and V various societal employment acts such as:

o C child labor laws,

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o E equal opportunity laws and acts, where employment is exhibits no

regard tonot based on race, age, religion or national origin.

The list has become quite large since the mid- 1960’s, including the Taft-Hartley Aact thatwhich

handlesis responsible for regulating employee- employment employer relations. The Taft-Hartley

Aact may be the most extensive and important act regarding business to employee relations!

(United States Department of Labor, 2014, para. 3)

Not only has the business community been forced to accept social ideas;, they businesses

bearare scrutinyized by the community or governmental bodies in which they operate in the

western world. Ethical codes of conduct had to be implemented by a majority of companies to

withstand the outside pressure of governmental and societal standards and laws. Unfortunately,

not all ethical codes of conduct are the same, but many of them have a criteria based on societal

needs. Phillip V. Lewis states there are two points that are known for certain about the content of

any code of ethics:

[(1)] oOne's business ethics cannot be separated from his or her personal ethics (or all other

ethics);

[(2)] The bBusiness will never be any more ethical than the people who are in business.

(Lewis, P., 1995, p. 377)

These are two remarkably candid points, and they are the crux of success or failure in

any ethical business situation. They form a formidable barrier thatabout how thewhich ensures

that the connection between business and personal ethics cannot have separation be separated

without serious consequences.

In a similar, but different light, the comparison between personal and business ethics was

put forth by Stanwick and Stanwick in their textbook “Understanding Business Ethics.” The

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authors defined ethics “as the value an individual uses to interpret whether any particular action

is considered acceptable and appropriate” (Stanwick & Stanwick, 2009, p. 2). The authors also

use a similar variant of the same statement when they defined business ethics. Business

ethics consists of “as “the collective values of a business organization that can be used to

evaluate whether the behavior of the collective members of the organization isare

considered acceptable and appropriate” (p. 3). It is apparent that business ethics needs an

avenue of connection to personal ethics.

Ethics of Responsibility

Mr. Drucker is very succinct when he states that “one main topic is plain, everyday

honesty” (Drucker, 2001, p. 63). There have been liars, cheaters, and thieves throughout all

periods of time;: thoese human beingsmiscreants exists in are not just relegated to the business

industry, butand resonate withinin all every aspects of any society.

Drucker believes that “the problem is one of moral values and moral education, of the

individual, of the family, and of the school” (p.64). Drucker also believes that the way to fix the

problem is with a penalty, commiserate commensurate with to the broken moral or ethical act,

that would cause serious reflection upon any individual of moral fortitude. The removal of

inducement to commit an immoral or unethical act by a suitable known and stout punishment,

Drucker believes, is substantial enough to slow the onslaught of unethical business activity

(p.64).

Management is at the forefront when it comes to responsibility for immoral and unethical

acts committed by employees, management, or business owners. Being at the forefront is often

construed aswith being the leader or part of the leadership team. However, it is only natural that

many managers are not natural born leaders, according to Drucker. In many cases, being a

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manager is simply a position of responsibility and puts a manager in the “membership of the

leadership group” (p.65). Therefore, being a “member of the leadership group, a manager stands

under the demands of professional ethics-the demands of an ethic of responsibility” (p. 65).

The reason Drucker has emergedbeen chosen as the median standard offor business

ethics is brought forth by the authoraddressed by Klein when he states that. Klein states: “after

all, an argument can be made for the opinion that Drucker not only invented modern

business management, but that he embodies, more than any other business management

theorist, Aristotelian practical wisdom” (Klein, 2000, p. 121).

Primum Non Nocere

According to Drucker, Primum NonNocere non nocere is the first part of the

Hippocratic Oath. and tThe translation that most non-physicians are familiar with is

“above all, not knowingly to do harm” (Drucker, 2001, p. 65). Drucker further explains that

Primum NonNocerenon nocere should be the “basic rule of professional ethics, the basic rule of

an ethics of public responsibility” (p.66). However, this is not the course of business today,;

golden parachutes, excess compensation in all forms, and the need for profit, all have have all

disillusioned the general public away from trusting almost any business. Whether any business is

doing what is best for the public is now at questionquestioned. All of these items have stunted

the trust that the wwestern world has in the way businesses are operated.

The public requires a greater education as to why certain business methods are needed

prior to the nefarious deed (see examples given) going public for the first time and causing

tremendous business trust repercussions. Does the public really understand why it is so

important for a company to make a sizeable profit? In that fact, why should Wal-Mart, Apple,

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Wells Fargo, Warren Buffet, or any businessman or enterprise make more than anyone in the

world? “How much money is too much?” is a question this author’s father often posed when he

played his lottery tickets.tickets? The dream of being so rich he could not spend all of his money

in a lifetime was more than he wanted.

Why businesses wanted to make so much money was something he did not quite

understand. What he did understand was greed, and that human beings run the businesses

of this world,;. iIt wasis not the fault of the businesses for making more than they needed;,

it was is the people who ran them who that had taken greed to a new level.

A recent perspective was published in an epilogue in a not well -known magazine,

European Eating Disorders Review. This statement is critical for the next few chapters. It is as

follows:

Of course, old Hippocrates had a point. Not doing harm is important. It was in his time

when most treatments were ineffective. It still is now that powerfully effective treatments

often are available. But perhaps the ‘priimum’ bit needs to be thought about. Now the

balance between risk of harm and chance of benefit is where it is at. (Palmer, 2002, p.

230)

Summary

What constitutes ethics,? aAre they principles of application or simplistic statements of

being? Do morality and ethics mean the same in western society? What was the basis for morals

and ethics to begin withwhen these concepts upon introduction?; hHow are they adapted bydo

most human beings perceive morals and ethics?. These were tthe original questions that this

author had in his mind before venturing into the case study that is to follow.

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‘Do no harm’ in business, for this author has been the mainstream of his life. Being

raised on a small farm with small farm morals and ethics, and then moving into the business

world was an eye-opening experience. A fundamental shift, due to several severe lifetime

experiences, caused serious doubts and uncertainty about how the author had led his life. This

was the author’s focus for this chapter’s seminal review about ethics, morals, business, and

practices of today and years gone by. In the author’s mind no case study could move forward

without a more complete understanding of why human beings do the deeds the do. Primal

questions must be answered.

Chapter Two

Business ethics a short history

The point can be made that the history of business ethics is a combination of everyday

ethics and moral convictions applied to business. Although the term business ethics was

virtually unheard of in the post-modern world it was being taught in every book, bible study,

classroom, TV show and religious belief system. The substance for all the ethical and moral

business discussions was justice, honesty, truthfulness, and their counterparts, lying, cheating

and stealing, at home, and in an individual’s personal and business life (De George, 2005, p. 47).

This education played an instrumental role in the development of Judaea-Christian ethics in

western society. This author vividly remembers being taught in grammar school, that George

Washington chopped down the cherry tree, but he did not lie about the deed. This was one of the

many teachings regarding personal ethics that taught the values of western society. Standing in

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the corner at school, in the first grade, because this author’s dog ate the homework from the night

before, was a reinforcement of one of those principles called honesty. The counterpart, the

villains, liars and cheats for example in many of the old western movies, were always bad

bankers, cheaters at cards, cattle-rustlers, etc., all associated with bad business and personal

ethics and morals.

The Ox-bow Incident is indicative of novels of western lore that were steeped in moral,

ethical and immoral and unethical behaviors. Clark submitted that:

True law, the code of justice, the essence of our sensations of right and wrong, is the

conscience of society. It has taken thousands of years to develop, and it is the greatest,

the most distinguishing quality which has developed with mankind. (Clark, 2014)

The code of justice, the code of the west, the knight’s oath, a code of ethics, the

Hippocratic Oath, is indicative of reinforced social behavior.

‘“Do no harm,”’ in business for this author has been the mainstream of his life. Being

raised on a small farm with small farm morals and ethics, and then moving into the business

world was an eye-opening experience. A fundamental shift, due to several severe lifetime

experiences, caused serious doubts and uncertainty about how the author had led his life. This

was the author’s focus for this chapter’s seminal review about ethics, morals, business, and

practices of today and years gone by. In the author’s mind no case study could move forward

without a more complete understanding of why human beings do the deeds they do. Primal

questions have to be answered.

Chapter Two

Business ethics and corporate codes

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Introduction

This chapter contains a brief history of business ethics in the 20th century. The history is

based on western societal norms, ethics and values. Individuals/mManagers are the major

movers in leading their businesses toward acceptable social behavior. Standards of behavior are

reviewed and applied in the search for a universal code of ethics. A code of ethics is just one

small piece in the larger picture puzzle of corporate governance. Corporate governance is the

foundation for all businesses regardless of size. Finally, a moral corporation will be discussed as

explained by Peter Drucker in corporate good, founded on moral principles.

Business ethics: a short history

The history of business ethics encompasses a combination of everyday ethics and moral

convictions. Although the term “business ethics” was virtually unheard of in the post-modern

world, today it is being taught in every book, bible study, classroom, TV show and religious

belief system. The substance for all the ethical and moral business discussions was justice,

honesty, truthfulness, and their counterparts, lying, cheating and stealing, at home, and in an

individual’s personal and business life (De George, 2005, p. 47). Education played an

instrumental role in the development of Judaeao-ChristianJudeo-Christian ethics in western

society. This author vividly remembers being taught in grammar school that George Washington

chopped down the cherry tree, but did not lie about the deed. This was one of the many teachings

regarding personal ethics that taught the values of western society. Standing in the corner at

school in the first grade because this author’s dog ate the homework from the night before, was a

reinforcement of one of those principles called honesty. The counterpart, the villains, liars and

cheats, for example, in many of the old western movies, were always bad bankers, cheaters at

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cards, cattle-rustlers, etc., and all were associated with bad business and personal ethics and

morals.

The Ox-bow Incident is a novel indicative of 19th century western lore that was steeped in moral,

ethical and immoral and unethical behaviors. Clark submitted that:

True law, the code of justice, the essence of our sensations of right and wrong, is the conscience

of society. It has taken thousands of years to develop, and it is the greatest, the most

distinguishing quality which has developed with mankind. (Clark, 2014)

The codes of justice, the code of the west, the knight’s oath, a code of ethics, and the Hippocratic

Oath, are all indicative of reinforced social behavior.

AlmostI every immoralmmoral or unethical act in are business is characterized is

postulated by the individuals behind the act. Business is included andbecomes made part of the

act by the individuals, not the other way around. Peter Drucker talking about all institutions

used this an analogy “when this government agency makes this ruling or this decision, we

know perfectly well that it is some people within the agency making the ruling or the

decision” (Drucker, 1985, p. 5). It is the role of management within an organization to make

responsible decisions, according to Drucker. “It is also business management, to which our

society increasingly looks for leadership in respect to the quality of life” (p.10). If managers

are there to lead then “Managing ethical behavior is thus no doubt a critical social problem for

business organizations” (Stead, Worrell & Stead, 1990, p. 233).

Business ethics had to emerge from the social classrooms and into business classes, and

De George believed that “the new ingredient and the catalyst that led to the field of business

ethics…was the entry of a significant number of philosophers, who brought ethical theory and

philosophical analysis to bear on a variety of issues in business” (De George, 2006, p.52).

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Business ethics received little to no recognition until the 1970’s when, according to De George,

business ethicsit gained its roots in the world of academia. The change was a result of business

schools and businesses being pressed by social constraints to improve the relationship between

business and society. The first conference of business ethics was in 1974 at the University of

Kansas. At this conferenceFrom this conference an anthology of subject matter was used to

develop some of the new courses in business ethics (De George, 2006, p. 52). Today there are

at least 42 different business journals including the popular beginning with journals like,such

as African Journal of Business, Business Ethic: A European Review, and this author’s favorite,

Journal of Business Ethics and , contained in the Hodges University on-line resource library

listed under Journal Title: Business Ethics. There is even athe Journal of Business Ethics

Education listed in the library resources for journals. It appears that the need for bBusiness ethics

in the classroom, in the boardroom, and in all institutions of ethical responsibility has never been

greater.

A business code of ethics

How can you have a business code of ethics unless you have something to base it ona

base standard? Is the code based on the type of business that is being operated? Is the code

based on where you live? Is the code based on societal values or normative values?

Businesses are not the same;. eEveryone does not live in the same place., Location

and situation determine what standards of business are used. Indeed, and ssocietal values or

normative values are as interchangeable as the authors. In todays business world, ,

aacademia, philosophers, business management, and stakeholders that assist in writing a

business code of ethics. Varying codes of ethics definitions imply similar ideas;. for

instance, Stanwick and Stanwick proposed in 2009, that a code of ethics must represent “the

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collective values of a business organization that can be used to evaluate whether the

behavior of the collective members of the organization are considered acceptable and

appropriate” (p. 2). Schwartz proposed that “a code of ethics by most definitions is a

written, distinct, formal document which that consists of moral standards which that help

guide employee or corporate behavior” (Schwartz, 2002, p. 27). ). Looking at both

statements the value most needed in these two instances seems to be behavior. Schwartz (2002)

states thatcontinues that “codes of ethics by their very definition, imply that they contain

normative guides for behavior” (p. 27).

What types of behavior or standards can be appliedneed to be included in all “codes of

ethics”? Raiborn and Payne (1990) suggest that corporate “codes of ethics should be based at

the highest moral levels” (p. 880). In the same regard, standards of behavior need compliance

with societal laws and business laws. “A corporation, in developing a code of business ethics,

should take its proper place as a member of society through its status of a legal “person” (p. 880).

(Drucker addressed this same issue of the corporation as a ‘legal person’ in 1954, when he stated

that “society has been forced to grant to the enterprise…first a charter of perpetuity, if not of

theoretical immortality to the ‘legal person” (p. 382). Raiborn and Payne (1990) further suggest

that there are four fundamental principles that would build a good foundation for standards of

behavior that would be applicable to any viable ethical question or dilemma. These principles

are:

1. Integrity-of sound moral principle, with characteristics of honesty, sincerity, and

candor.

2. Justice-having impartiality, sound reason, correctness, conscientiousness, and good

faith.

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3. Competence-being capable, reliable, and duly qualified.

4. Utility-the quality of being useful and, philosophically, providing the greatest good for

the greatest number (or the least harm to the greatest number) (p. 885).

The principles are suggestions as stated, but can be exemplified with simplistic across -the -

board clarity; in a single statement the McDonnell Douglas Corp. policy “states that employees

should be honest and trustworthy in all relationships” (p. 883). However clear, and simplistic,

this statement of policy, it did not prevent McDonnell Douglas Corp. owners and managers from

becoming embroiled in major defense scandals:.

In 1979, James McDonnell III and three other company officials were indicted on charges

of bribing foreign officials…Clark Clifford, a former secretary of defense, defended the

company in court by arguing that these payments were made with the full knowledge of

the U.S. government in "difficult sales environments” (Funding Universe, 2014, para.

20).

Raiborn and Payne (1990) encapsulated this behavior when they stated “that it is important to

note…an ethics code will fail…in a company whose management does not adhere, in good faith,

to the ideals espoused by the code” (p. 884).

Patrick Murphy in Business Ethics Quarterly (2010) states that:

1. Corporate codes should be specific” and that employee’s need guidance in interpreting

their actions.

2. Codes should be public documents as well as blunt and realistic about violations., i.e.

violators will be terminated.

3. Codes should be revised periodically and become living documents to reflect current

ethical problems (p. 909).

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It is apparent that Murphy’s statement shows a one -sided view of corporate codes.,

lLeadership or management is not mentioned; yet, they are often the cause of corporate ethical

failure. Drucker believes that employees need leadership, not guidance. He states that

leadership’s job is to lift man up, set the proper example, and to give the employee vision in his

performance abilities and assist him to be a better person. “Nothing better prepares the ground

for such leadership than a spirit of management that confirms in the day-to-day practices of the

organizations strict principles of conduct and responsibility, high standards of performance, and

respect for the individual and his work” (Drucker, 1954, p. 159).

Corporate Governance

To ensure that corporations are directing and managing their business affairs, a new

term was formed in the 1990’s called “corporate governance”. .” One definition by Mayer states

that “corporate governance is concerned with ways of bringing the investors and managers in

line and ensuring that firms are run for the benefit of the investors” (Abor & Adjasi, 2007, p.

113). This definition is suitable for larger enterprises, but what about the small and medium

enterprises (SMEs)? What qualifies as an SME?

Van der Wijst considers small and medium-sized business as privately held firms with 1-

9 and 10-99 people employed, respectively; Jordan et al. define SME’s as firms with less

than 100 employees and less than [euro] 15 million turnover; Michaelas et al. consider

small independent private limited companies with less than 200 employees and López

and Aybar analyze companies with sales below [euro] 15 million (Abor & Adjasi, 2007,

p. 112).

There is no easy way to simplify the three definitions of SME’s given by the different

authors. In the United States many small corporations exist as a singular owner -run operations

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with corporate officers often being husband and wife. Small corporations vary:, by employee

size and business efficiency, the industry in which the corporation is involved, and the value of

the assets. In medium run enterprises, the number of employee’s increases to often over 50

people, and the corporation may have a diversified officer core. The ownership is more

diversified with investors as owners. Drucker clarifies his opinion on what he believes is one

fairly reliable criteria. “In a small business the man at the top knows who the few people are in

the organization,” the man at the top knows almost everything about his employees and

“regardless of title and position, it can hardly exceed twelve to fifteen” employees. In the

medium sized business the man at the top is normally three or four top notched co-owners or

managers, who when asked collectively, can tell you about the 40-50 employees they have under

their supervision. Drucker also states that “this test is neither infallible nor precise” (Drucker,

1985, p. 647-648).

In the SME’s, corporate governance is critical for short and long term financial growth,

employee supervision, financial accountability, social accountability, and organizational control.

Abor and Adasji (2007) state:

Corporate governance is “about putting checks and balances in place to prevent abuses of

authority and ensure the integrity of financial results…setting rules and procedures as to

how the company is run…that good governance does not guarantee business success.

However, poor governance could be symptomatic of a business failure. More

importantly, lifting the confidence of existing owners and potential new owners is a

valuable goal. (p. 119)

In effect, corporate governance is the truthful corporate diligence due to the stakeholders, who

are involved in a firm’s realm of activity.

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A moral corporation

Society needs moral corporations on every level,; “no pluralistic society such as ours…

has ever worked unless its key institutions take responsibility for the common good” (Drucker,

1974, p. 379). Klein states that “the manager must assume the responsibility for the public good

and equate what is genuinely in the public interest with the firm’s self-interest” (Klein, 2000, p.

123). (Note: “Manager” could easily be transposed with “owner” in any of the previous or

following statements.) Managers need abide by an ethical code of conduct; self-interest must

share equally in all occasions with what is best for society and stakeholders alike. Klein states

that “Drucker believed that a moral principle grounded in the nature and purposes of an

organization is necessary to give business management legitimate authority” (Klein, 2000, p.

124). Ownership then of any organization does not give an individual legitimate authority; it is

moral principle that is the foundation of respect and the recognition of legitimacy by all

stakeholders.

Ownership should then in “any institution exists for the sake of society and within a

community” (Drucker, 1974, p. 18). Managers should consider the responsibility they have to

societal moral values and need to look beyond the relative scope of their immediate impact

within the confines of their own business establishment. Immoral and unethical managers’ and

owners’ actions, words, and impact, “tend to cause social disruption. They tend to conceal

unhealthy reality and create disease, or at least social hypochondria. They tend to misdirect and

to prevent understanding, and this is grievous social harm” (Drucker, 1974, p. 369).

Corporations rely on professional managers and owners alike to carry the moral torches that

provide a path for others to follow, stakeholders all.

Summary

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The term business ethics did not magically appear on the scene of in the business world;

it was a culmination of years of methodical business research and educational rhetoric. Ethics

and morals are terms that had to find a place within the andragogy of business students. The

need for business ethics and a unified code of ethics has never been greater than it is today.

Business and business managers should stand on high moral ground. Ethical principles of

conduct need to be in harmony with societal beliefs and norms. In order for this to happen,

corporate governance has to be enforced from SME’s to large corporations. Without the proper

checks and balances provided with ethical and moral corporate governance, dangerous predators

in the business world could cause and have caused tremendous societal harm. Drucker has valid

points about the need for societal responsibilities outweighing the needs of the individual’s self-

interest.

Chapter Three

Introduction

This chapter defines mergers and acquisitions (M&A) and the difference between how

the two different types of business may increase their consolidated value. and How how

businesses realize their potential in M&A’s and generates revenues needed for expansion. It

takes Aa brief look at which type of business transaction may be more beneficial and when are

the best times to do a merger or acquisition. Caveat Emptor (buyers beware) is a serious threat

in any acquisition or merger. The terms origins and usage are discovered andas well as how

caveat emptor is universally adopted as one of the laws of the land in regards to business

transaction are applied. The case study is presented with the original complaints filed by the

plaintiff. The case study is reviewed between plaintiffs and defendants with corresponding

CAVEAT EMPTOR 22

history, actions and results of the U.S. District Court’s decisions on declaratory judgments that

solidified the original complaints in the eyes of justice.

About Mergers and Acquisitions

Although the terms mergers and acquisitions (M&A) are often used together in layman’s

terms they are similar but not the same. There are different ways in which a two or more

companies or businesses may become more valuable together than apart. M&A have a similar

valued key principle and “the key principle behind buying a company is to create shareholder

value over and above that of the sum of the two companies” (Investopedia, 2014, para.1). An

acquisition defined is when one company purchases or acquires another company and the

purchased company ceases to exist. Legally, the target company acquired is enveloped by the

buyer and the assets, stocks, and shares are all legally owned in the name of the purchasing

company. In a merger,;

Two firms, often of about the same size, agree to go forward as a single new company

rather than remain separately owned and operated. This kind of action is more precisely

referred to as a "merger of equals." Both companies' stocks are surrendered and new

company stock is issued in its place. (Investopedia, 2014, para. 5)

An example of a merged stock would be ExxonMobil, two former oil giants merged into one.

An example of an acquisition would be Google and YouTube. Both still function as independent

names but Google is the parent company.

Acquisitions

“Prosperity and growth come only to the business that systematically finds and exploits

its potential” (Drucker, 1996, p. 163). How do businesses realize their potential? Peter Drucker

said that “gradual growth from within is not possible, as a rule. Only sale of the company,

CAVEAT EMPTOR 23

acquisition of another company in the same industry, or merger will produce a business of the

size needed” (Drucker, 1986, p. 180). In layman’s terms, other than using finance or excess

profit as a means of financial growth, a business cannot grow to the size it needs to generate

more money.

Acquisition of a business is when one business buys another. Business acquisitions can

be related (when the business being purchased is similar to the acquiring business) or unrelated

(when the business being purchased is not similar to the acquiring business). Drucker called the

related business acquisition a “common core of unity” (Paine & Power, 1984) and used the

“common core of unity” as one of the five rules for managers to be successful in acquiring

another business. The five rules are:

1. Common core of unity--both businesses need a common market, common technology

or a similar production process.

2. Contribution--the acquired firm cannot be just a money contribution by the acquiring

business. The business making the acquisition must provide substantial contributions

in other areas such as potential skills, management techniques, or other significant

contributions.

3. Temperamental fit--the acquired business products, customers, and materials have to

be recognized as a significant part of the investment. The acquired company has to

maintain its perceived value for the buy-in to be successful.

4. Top management--new top management must be provided within one year by the

acquiring business. (Drucker (1986) stated that the “managers of the acquired

company rarely stay around for long”.) (p. 425) Drucker believed that the acquiring

business had to have people that they could trust in upper management positions,

CAVEAT EMPTOR 24

mangers who knew company procedures, guidelines and who understood the motives

of the parent company.

5. Promotions--in the first year the companies should promote managers from each

company to work within the other company’s infrastructure. (Paine & Power, 1984, p.

99-100)

Paine and Power (1984) did not readily agree with the rules as laid out by Drucker for

acquisitions. They pointed out that few authors believed that acquisitions could ever be as

financially successful as the parent company. The authors state that there are some factors that

make acquisitions more inclined to fail such as a falling economy, financial health of the

acquired company, and disconcerting industry factors for—for example,; a seasonal business.

Their final conclusion is that there are no concrete rules that will make an acquisition successful.

(p. 99-108) On the other hand, Vermeulen and Barkema ( 2001) state that “acquisitions allow

firms to achieve greater market power, to overcome barriers to entry, to enter new markets

quickly, and to acquire new knowledge and resources” (p.457). The same authors also indicate

that “acquisitions are often associated with implementation problems and unsatisfactory post-

acquisition performance” (p. 458). The authors support their statement with various studies

including Porter, Ravenscraft and Scherer, and Roll.

Ravenscraft and Scherer found that, on the average, the profitability of target firm’s

declines after their acquisition. In fact, a large proportion of acquired companies are

again divested or sold off (Porter, 1987; Ravenscraft & Scherer, 1987), with the prime

reason being their unsatisfactory performance (Ravenscraft& Scherer, 1991; Roll, 1986).

An important reason for the disappointing performance is the problems that are

associated with the integration of acquisitions (Haspeslagh & Jemison, 1991).

CAVEAT EMPTOR 25

Acquisitions can be profitable if they are made under the right conditions. “Salter and Weinhold,

and Allen, Oliver and Schwallie advocate locating and purchasing undervalued assets that can be

revitalized with minimum investment: and Salter and Weinhold stress the need to have excess

cash or access to financing on favorable terms” (Paine, & Power, 1984, p. 109). Acquisitions

when firms are at the weakest condition may not be the only caveat for a business purchase.

Michael Porter “suggests that managers should make acquisitions when the economy is bad,:

have superior information,; and have a unique ability to improve operations” (p. 110). It is

apparent that acquisitions are a risky business, and there is no guarantee of success or rules of

acquisition finite enough,sufficient to alleviate the risk and burden of an acquisition’s failure. It

is also apparent that there are sufficient guidelines laid out by prominent business analysts, who

advocate business acquisitions as a method of increasing a business’s capacity to excel or

improve financially.

Mergers

As the two terms, M&A, do mean slightly different things, there is a synergy that occurs

during a merger. aAccording to McClure, (2014) he states that a “synergy is a magic force that

allows for enhanced cost efficiencies for the new business.” Synergy does take the form of

revenue enhancement and cost savings. By merging the companies hope to benefit from the

following:

1. Staff reductions--normally, the first person to lose their job is the CEO (with a nice

severance package) and then the redundant accounting, marketing, operations and

department personnel become additional business casualties.

2. Economies of scale--optimistically, merged business savings occur from purchasing

office supplies to buying equipment in a larger abundance. Purchasing power from a

CAVEAT EMPTOR 26

larger organization does provide a tremendous amount of leverage in negotiating

lower prices.

3. Acquiring new technology--theoretically, merging a smaller company with a greater

technological edge may be all the larger company needs to remain competitive or

gain a competitive edge.

4. Improved market reach and industry visibility--visibly, an increased sales and

revenue opportunity occurs with an increased market size. The perceived business

growth from the investment community and the banks may also lead to an abundantly

ready cash flow. (para. 9)

Even with all the benefits that may occur there are is no guarantee for success and no the

magic force. McClure says that “synergy opportunities may exist only in the minds of the

corporate leaders and the deal makers” (para. 11). Sean Becketti, (1986) former visiting scholar

at the Federal Reserve Bank of Kansas City states that one of the other important reasons for a

merger and a ‘significant difference’ is that a firm’s output expands more rapidly during a

merger. In an acquisition business investments traditionally would carry investitures with a

larger cash output before the business could expand. (p. 19) “Many analysts believe that

mergers allow assets of acquired firms to be directed toward more profitable activities” (p. 20).

There are numerous types of mergers as stated by Becketti:

1. Consolidation--the combination of many firms into a single new firm. An example of

this type of merger would be U.S. Steel which in 1901, was formed from 785

different firms.

CAVEAT EMPTOR 27

2. Horizontal--where a union is formed of former competing companies. An example of

this type of merger would be Daimler-Benz and Chrysler who merged and formed

DaimlerChrysler.

[3.] Vertical--is a merger of a supplier to its customers. An example of this type of

merger would be Time Warner and the Turner Corporation. Time Warner is a major

cable operator and they merged to use the services of the Turner Corp. which

produced CNN, TBS and other programming.

[4.] Conglomerate--is a merger that would combine businesses that have no relationship

or unrelated common core. An example of this type of merger would be Walt Disney

and ABC. (Becketti, 1986, p. 14)

Beckett also states that the simplest form of a leveraged buyout is with a cash purchase for shares

program. (p. 15) aA majority of mergers are financed with debt and are dependent on cash

availability as well as the cost of funds (prevailing interest rates). (p. 18) Changes in interest

bank interest rates have a direct correlation to the cost of any merger;, borrowed funds costs may

increase or decrease the cost of the funds needed for the merger. (p. 23) Mergers also appear to

be cyclical and occur during the expansion period of a business cycle and definitely occur prior

to when the GNP reaches its peak for that particular expansion period. (p.17) Vis-à-vis, during a

downswing in the business cycle or during a recession there are fewer numbers of mergers.

Like a poker hand, a business merger is sometimes a bad deal. As most poker player’s

will tell you, a bad deal is just that, a bad deal, and corporate managers, investors, and

stakeholders involved in a bad deal will be penalized in numerous ways. These ways may

include loss of stock value, termination, bankruptcy, and dissolution of the merged venture

altogether. Business, like playing poker professionally, is a speculative game and a speculative

CAVEAT EMPTOR 28

industry is always at the mercy of circumstance:, the economy, the consumer and investors, and

the dealer. Any failure in any of these areas and the merger may be a bust.

Caveat Emptor

The dealer, the one holding all the cards initially, is in control of the game. Through

sleight of hand, hiding cards, dealing from the bottom of the deck, and counting cards, the dealer

has numerous ways to persuade the player into thinking he has something of value in his hand.

The principle is simple:, card player beware, you are at the mercy of a professional. The

principle in business is the same;, like card player beware, the term buyer beware or Caveat

Emptor is well established in the business world. The professional business thief knows that one

fact is certain: once the money is gone it is almost impossible to retrieve.

Caveat Emptor is not a new term. In a lawsuit levied in 1930 by the state of Connecticut

against sellers of useful oils who may have been selling oils (motor oil), that did not meet state

standards, Caveat Emptor was employed by the judiciary, and the Connecticut law was

overturned.

The court seemed concerned lest opportunity for sale be denied to "useful oils which

have a wide market and satisfy the public," and seemed disposed to frown upon attempts

to prevent "buyers and sellers from dealing" when "the buyer gets exactly what he

wants." The appearance of such reasons, held in ready reserve, is significant; it indicates

that even in high judicial places the notion survives that the buyer had best be allowed to

take his own chances” (Hamilton, 1931, p. 1134)

A note about Mr. Hamilton:, he was the Southmayd Professor of Law at Yale from 1928-

48.Walton Hale Hamilton (1881-1958) was one of the intellectual leaders of the Legal Realist

movement at Yale. An economist but not a lawyer, Hamilton applied the insights of institutional

CAVEAT EMPTOR 29

economics to legal contexts, producing many classic critiques of legal formalism. In works such

as “The Ancient Maxim Caveat Emptor,” 40 Yale L. J. 1133 (1931), “Affectation with a Public

Interest,” 39 Yale L. J.  1089 (1930), and “The Path of Due Process of Law,” 48 Ethics 269

(1938), he showed how legal concepts that had evolved in specific historical and social contexts

could lead to surprising and undesirable outcomes when removed from context and generalized

into universal legal principles.

Mr. Hamilton was brilliant in his research and this author has chosen Mr. Hamiltonhim to be the

key point of reference in seminal thought on the term ‘“Caveat Emptor”’.

In the use of legal authority by the public judiciary and through legislative acts the

prevailing authorities do not, in many cases, protect the purchaser of product or enterprise. He

refers to caveat emptor as the “good old doctrine” as it applies to the “rules of law it has come to

comprehend, and of the public policy it has been made to serve” (p. 1136). The term “caveat

emptor” appears for the first time in print in the 16th century over a horse trade, of all things;,

although Latin in origin at no time in history prior had the term been written but had been an

understood maxim. (p. 1164) The first true legal standing for the common law of caveat emptor

in the late 18th century states that “for the common law, that the general rule is caveat emptor and

that the buyer has a legal remedy only because of “express warrant,” deceit “to disguise

defects,” and “provisions unwholesome at the time of delivery”. (p. 1174)

In a case where the purchaser of hops from a seller suffered the loss of all the hops due to

overwatering by the grower, not affiliated with the seller of said hops the following occurred:.

The barristers who represented the defense plead a lack of express warranty and an

absence of deceit, and claimed the rule of caveat emptor. The bench insisted that the

CAVEAT EMPTOR 30

buyer had had his opportunity to inspect; and that if he had doubted, he might have

insisted upon a formal warranty or have refused to purchase. (p. 1176)

These two cases served as the benchmark for judicial caveat emptor. According to Mr. Hamilton

“the buyer who at the time of sale has failed to exact positive assurances against future

contingencies deserves to take the consequences of his slothfulness”. (p. 1178) Hamilton states

that Kent in his Commentaries on American Law (1840) is correct when he backs away from the

laws of higher ethics when he stated:

human laws "are not so perfect as the dictates of conscience" and that "the sphere of

morality is more enlarged than the limits of civil jurisdiction," and defends the caveat

emptor which "very reasonably requires the purchaser to attend, when he

makes his contract, to the quality of the article he buys. (p. 1180)

Caveat emptor seemed to so firmly established that Justice Davis, “speaking for the U.S.

Supreme Court declares “caveat emptor· to be of such universal acceptance that, with a single

exception, the courts of all the States in the union, where the common law prevails, sanction it”

(p. 1181). Regardless of the countless laws that have been put in place since this was written in

1931, with the attempt to protect the product, the purchaser, and the seller one truth remains. Mr.

Hamilton expressed this fact succinctly in his closing line when he said “in plain speech and law,

a refined caveat emptor still means that purchase is a game of chance” (p. 1187)

Case Study-Rolsafe International, LLC. V Rolsafe Internationals, Corp. /Joe Kafka

This case is a modern day study in morals, ethics, business ethics, acquisition processes,

caveat emptor and the judicial system.

Rolsafe-History of

CAVEAT EMPTOR 31

Rolsafe hurricane shutters were the brainchild of Bruce Hoovis, who filed and was

granted a license to do business in the state of Florida with the Florida Department of Business

and Professional Regulation in 1989. (FDBPR, 2014, p. 1) Mr. Hoovis changed the name to

Rolsafe International Corp in 1996. (FDBPR, 2014, p. 1) and continued ownership in the

company until 1999 when it was sold to Mr. Joe Kafka. According to the records for DBPR Mr.

Kafka applied for a dba in 2002 as Rolsafe International Corp. and never finalized it. Rolsafe

International LLC purchased Rolsafe International Corp. on 11 Jan. 2005. On July 27, 2005

Rolsafe International LLC was licensed to do business in the State of Florida. (FDBPR, 2014, p.

1)

The primary business of Rolsafe Corp was the “selling, manufacturing and installing” of

hurricane home and business outdoor protective devices, in the advance and onset of a hurricane

of sufficient strength to damage said homes and businesses. (Arnold, 2005, p.2)

Migg Capital and the acquisition

“Mr. Pete A. Klisares has been a Principal Owner and Manager of MIGG Capital

(MIGG), an Ohio-based capital investment company, since October 1999 and also serves as a

Business Consultant” (Bloomberg: Business Week, 2014, para. 2). Mr. Brett Klisares, “is

currently employed at MIGG Capital” located in Columbus, Ohio. (Bloomberg: Business Week,

2014, para. 2)

In the closing months of 2003 Migg found that Rolsafe International Corp. (Rolsafe

Corp.) was for sale. MIGG as a venture capitalist company specialized in purchasing

underachieving companies, managing them for a period of time, and then turning the companies

out for sale. “Beginning in 2004, plaintiff (Rolsafe International LLC-formed by MIGG capital

in 2004) indicated an interest in acquiring Rolsafe Corp.’s assets from Kafka, its sole

CAVEAT EMPTOR 32

shareholder…Kafka agreed to sell the assets of Rolsafe Corp. to plaintiff in exchange for, among

other things, $3,000,000 and a 19.5% membership interest in plaintiff. (Arnold, 2005, p. 2)

In addition to assets of Rolsafe Corp., several other contractual documents were signed as

part of the purchase agreement. Tthey included a consulting agreement, non-compete and non-

solicitation agreement, promissory note, and an operating agreement of Rolsafe International

LLC. (U.S. District Court, (2005). docs. 1-11).

The complaint against defendants

Rolsafe International LLC, (plaintiff) v. Joseph Kafka and Rolsafe International

Corporation (defendant) were sued forincluded the following claims:

First Claim--breach of contract where 13 parts of the asset agreement were cited and

identified as being breached, with an estimated damage which exceeded $8,000,000.

Second Claim--indemnification where the plaintiff exerts that they are entitled to all loses

incurred due to defendant’s actions.

Third Claim--fraud and intentional misrepresentation where the plaintiff exerts that they

were intentionally misled as to the current financial, operating, and liability conditions of Rolsafe

Corp., and asked for an additional $25,000 in attorney’s fees.

Fourth Claim--negligent misrepresentation where the plaintiff exerts that they had a right

to accurate information prior to the purchase of Rolsafe Corp. and restates the claim for

$8,000,000 in damages suffered.

Fifth Claim--declaratory judgment, consulting agreement where the plaintiff exerts that

they had a right to submit that the declared consulting agreement be null and void. Defendant

exerts that this is unenforceable and plaintiff is required to meet their obligations under the

CAVEAT EMPTOR 33

consulting agreement and defendant did not have to fulfill the agreement when payment was

stopped.

Sixth Claim--declaratory judgment and promissory note where plaintiff exerts that the

promissory note should be declared null and void and prior payments made be reimbursed to

plaintiff and further payments are relieved from payment to defendant.

Seventh Claim--declaratory judgment and capital contribution where plaintiff exerts that

the terms of the operating agreement be declared null and void as the defendant never paid the

19.5% of membership interest. Plaintiff submits it has paid all the cash equivalents and assets

that were purchased and that purchased assets did not meet the 19.5% obligation under the terms

of the agreement. (Arnold, 2005, pp. 1-18)

There were 134 separate case documents that included motions, appeals, notices, pretrial

orders, depositions, counterclaim, third party suits, amended counterclaims, opinion and order,

trial brief and finally stipulation of dismissal. This complaint case was settled out of court and

finalized on Aug. 6, 2007 by Judge Michael H. Watson. (U.S. District Court, (2007). docs. 1-

134)

Although each claim has its own merits they combine to form a picture that is the basis

for caveat emptor v. primum non nocere. The plaintiffs’ claims show serious breaches in ethical,

moral and business behaviors that are in opposition to societal standards and behaviors on the

part of the defendant. The defendant implores caveat emptor as his defense and the decision on

the complaint lies in the hands of the court system, and the ways the laws have been interpreted

in the past.

Primum non nocere discoveries

CAVEAT EMPTOR 34

The first claim and maybe the most egregious, called the breach of contract, refers to the

lack of a disclosure statement by the defendant that should have included:

1. Overstated accounts receivable by $800,000.

2. Overstating inventory by at least $190,000.

3. Making agreements with employees and interfering in the due diligence process

by instructing employees not to divulge information to the plaintiff.

4. Making agreements with certain employees to pay them after the sale of the

company in order to hide the condition of Rolsafe Corp.

[5.] Failing to meet the requirements of the various municipalities, in regards to not

pulling permits or applying for them prior, during, or in many instances. after the

installations were completed as required by state and local statutes.

5.[6.] Abandonment of contracts for storm panels and not informing the clients or

reimbursing the deposits.

6.[7.] Delayed the hiring of key personnel with an abundance of contracts to be

fulfilled, until after the sale of Rolsafe corp.

7.[8.] Not disclosing the numerous lawsuits and other matters pertaining to the legal

position of Rolsafe Corp.

8.[9.] Not disclosing the Better Business Complaints that Rolsafe Corp. had left

unresolved prior to the close of sale.

9.[10.] Not mentioning the patent dispute that was in contention with the former VP

of engineering on one of Rolsafe’s key products.

10.[11.] Adding the inventory of another company owned by the defendant in the

asset agreement for sale.

CAVEAT EMPTOR 35

11.[12.] Not disclosing the loans outstanding made by the defendant to keep the

company afloat and not representing the true financial condition of Rolsafe Corp.

12.[13.] Not paying the installers on all closed hurricane protective device

installations prior to the close on 11 Jan, 2005 and informing them the new

company would pay them in March of 2005. (Arnold, 2005, pp. 7-9)

Key moral and ethical decisions on the first claim

1&2. Moral reasoning as defined by Kohlberg involves morality judgments on right and

wrong. Kohlberg also states that individuals who have the highest “level of moral

reasoning have differentiated themselves from the rules and expectations of others and

define values based on internalized principles” (Uddin, & Gillett, 2002, pp. 19-20). A

corporate officer must be aware of the impact that certain immoral decisions will have on

current and future stakeholders. Inescapable wrong moral decisions, like deliberate

misrepresentation of accounts receivable and current inventory, have a negative effect on

the plaintiff’s ability to ascertain Generally Accepted Accounting Principles (GAAP) on

future revenue.

3&4. Bribing upper management for silence-Ramdani and Witteloostuijn (2012) state that”

applying the logic of agency theory, we argue that corporations without separation of

ownership and control are more likely to be involved in bribery than their counterparts

with separation of ownership and control” (p.497). In this claim the plaintiff proved

through deposition that the gift of two and half percent of corporate stocks in 2003 to the

VP, the executive secretary, and the onsite controller was enough for the defendant to

control the outflow of information to the plaintiff during due-diligence. (U.S. District

CAVEAT EMPTOR 36

Court, (2007). docs. 43 & 86). These documents were added corroborating testimony to

this author by two of the three corporate officers.

5. Federal, state and local statutory and regulatory compliance is a hallmark of good

governance within any construction industry business. Failure to maintain minimal

standards of responsible construction led to legal actions by the municipalities against the

defendant in over six hundred installations. Non-compliance with local building codes

and permit requirements led to the suspension on obtaining future permits until the

existing jobs were permitted, inspected, and finalized with certified building code

approval. (Arnold, 2007, p. 7) The defendant failed as a good corporate citizen. A good

corporate citizen is often understood as an organization with the following

characteristics:

- Does "the right thing" from the point of view of company's moral obligation and

ethical performance.

- Contributes to sustainability.

- Comprises good relationships with suppliers and commitment to local

community protection and engagement.

- Includes good relationship with employees and unions. (Petrovic-Lazarevic,

2010, p. 116)

Sonja Petrovic-Lazarevic sets the correct standards for a good corporate citizen

and the defendant did not meet the company’s moral obligation and ethical performance.

The defendant was also remiss in not maintaining good relationships with the local

communities.

CAVEAT EMPTOR 37

[6.] The defendant’s abandonment of contracts for storm panels and not informing the

clients or reimbursing the deposits shows a lack of a business and personal code of ethics

as well as corporate governance. “The stakeholder’s theory states that an organization

may adopt an ethical code of conduct to satisfy its stakeholders. This theory suggests that

corporations are not only responsible to shareholders, but also to all individuals, groups,

etc. that have a particular interest in a specific company” (Rodriguez-Dominguez, et. al.,

2009, p. 191). These contracts were counted as part of the accounts receivable sold by

the defendant to the plaintiff. These contracts were also part of the common good. The

stakeholder theory is based on “Argandonda’s concept of the common good, which

suggests that corporations must contribute to the common good, which ranges from the

common good of the company itself to that of the local community, the country and all of

mankind, including future generations’’ (Rodriguez-Dominguez, et. al., 2009, p. 191).

These contracts were purchased by the public with the hopes that in the future the

hurricane protection provided by the storm panels would save their homes and businesses

from catastrophic structural failure. The unreliability on the defendant to contribute to the

common good of the community was superseded by the value of the contracts. The panel

contracts were in the $3,000-$5,000 range, and according to the defendant, was not in the

best interest of short term profitability for Rolsafe Corp., as relayed to the author by the

General Sales Manager in December of 2004.

6.[7.] Delaying the hiring of key personnel until after the sale. What truism is known about

individual corp. owners is “owners put their money in the firm expecting rewards. They

do not do so out of selflessness, love of neighbor or some other lofty ideal” (Sison,

(2007), p. 471) The Agency Theory presupposes that individuals are opportunistic, that

CAVEAT EMPTOR 38

is, they constantly aim to maximize their own interests. (Fontrodona, & Sison, (2006), p.

34) The authors also state that “agency theory subscribes to individualism: its basic unit

of analysis is the human being fully constituted as an individual and bereft of any social

dimension…seek above all their own utility or pleasure, the satisfaction of their own

desires” (Fontrodona, & Sison, (2006), p. 35). This portion of the claim seems to be an

opportunistic call by the defendant in what he sees as his best interest, and is part of

agency theory.

7.[8.] The non-disclosure of current legal problems by the defendant was addressed by

Ostapski and Isaacs (2002) when they stated that:

The intentional non-disclosure of important information on lawsuits and fines by

corporate financial officers deprives…managers and shareholders of the

opportunity to fairly assess the harm which the company has caused during the

course of its operation. The non-disclosure of morally material information

consists of a breach of the corporation’s obligation to society. (p. 237)

There were three minor shareholders and one major shareholder (the defendant) and their

actions of non-disclosure of the numerous lawsuits and building code violations

constituted a moral breach to the plaintiff, according to the authors quoted.

8.[9.] Better Business Bureau (BBB) complaints were non-disclosed as well to the plaintiff.

Several of these sub-claims under claim one fall under the line items of page 12 of the

Asset Purchase Agreement, article i: Legal Compliance which states:

The Seller has complied in all material respects with all applicable laws

(including rules, regulations, codes, plans, injunctions, judgments, orders, decrees,

ruling, and charges thereunder), and no action, suit, proceeding, hearing,

CAVEAT EMPTOR 39

investigation, charge, complaint, claim, demand, or notice has been filed or

commenced against the Seller alleging any failure so to comply. (U.S. District

Court, (2005). Doc. 5)

A BBB complaint is not a legal remedy for a customer-business dispute. Many

businesses choose to belong to the BBB to enhance their standing in the community of

customers who may or might have purchased a product from their company. If you do

not respond to the complaint filed by the consumer with the BBB the company will lose

their accreditation. (Gott, (2013), paras 1-14) This makes future customers reticent if

they check out a company with the BBB to purchase products from the company. This

act of non-resolution by the defendant caused considerable time and harm to the plaintiff

in resolving the numerous BBB complaints. The author was a participant in resolving

several issues with the BBB against Rolsafe Corp. Although not Rolsafe Corp but

Rolsafe International LLC the company officers of LLC decided it was in the best

interest of the company to resolve these issues.

9.[10.] Patent disputes fall under the asset purchase agreement breaching sections 3(f, g, h, l

(ii), l (iii), s and dd. These are part of the Intellectual Property section where the seller

(defendant) agrees that he has rights and possessions to all material intellectual property.

This also includes and intellectual rights of third parties. The issue here is of personal

knowledge to the author, the VP of engineering, who was part of the 2 ½ % of the

company stock release by the defendant, had developed a new type of rollshutter. This

development revolutionized the industry and lead to Rolsafe leading the hurricane

industry, by having the strongest product on the market. This led to a short term

advantage for Rolsafe until the competition was able to produce similar products. This

CAVEAT EMPTOR 40

author is not privy to any resolution of the said patent dispute and cannot ascertain the

validity of this dispute. The fact that the plaintiff filed this sub-claim perhaps validates

that there was a question of intellectual property rights which the defendant did not

disclose. The VP of engineering was never required to appear before the court or to

provide deposition.

10.[11.] Adding inventory owned by the defendant to the inventory owned by Rolsafe Corp

to inflate the assets sold to the plaintiff. Fraud as it is simply known has many faces.

The more common types of fraud include embezzlement and theft, asset transfers and

fraudulent financial reporting. Embezzlement, theft and asset transfers are perpetrated

for the rather obvious purpose of diverting assets. The purpose of fraudulent financial

reporting is generally to mislead such users of the financial statements as

investors/shareholders, creditors or a parent company to conceal theft, artificially

improve the company's financial condition or both. (Rock, & Severson, (1996), p. 26)

In defendant’s counter claim, the defendant claimed that he had no knowledge of

inventory of Tomar Investments Company being co-mingled with Rolsafe Corp

inventory. Defendants simply “deny the allegation in paragraph 11 of the Complaint”

(U.S. District Court, (2005), doc. 4). In virtually all of the plaintiff’s claims this is the

response given by the defendant.

11.[12.] Hidden loans and fraudulent financial misrepresentation by Rolsafe Corp.

“Accounting failures are failures of individuals to fulfill their responsibility, to behave

ethically” (Staubus, (2005), p. 6). Under the duress of an overzealous CEO or a few

corporate managers in recent years a number of highly publicized scandals of corporate

fraud have been widely spread in the publicized world. Staubus (2005) states that

CAVEAT EMPTOR 41

“corporate personnel have primary responsibility for financial reporting-more direct that

auditors…they are the main perpetrators” (p. 7) of ethical failures. “At the end of the

day, the CEO is the captain of the ship with the authority to determine financial reporting

and with responsibility for it” (Staubus, (2005), p. 7). When there is no one to be

accountable to and no independent control mechanisms, the cost of getting caught in

financial fraud is minimal. Therefore it seems that a risk analysis was performed by the

CEO and the financial reporting was made to appear as it needed to meet the

circumstance (cooking the books).

12.[13.] Delaying incentive and final payment to sales and installers until the new company

takes control of the organization, without the knowledge of the plaintiff, caused an

unforeseen burden on the plaintiff. This is the result of an “asymmetric information

problem…when the selling firm’s information is superior to the information of the

buying firm” (Datar, Frankel, & Wolfson, (2001), p. 201). According to the authors this

is also an agency cost, as the acquired company has to bear the burden of previous

ownership thus reducing the perceived value of the acquisition. The financial burden to

be paid was also not allocated in the financial statements provided to the plaintiff. (U.S.

District Court, (2005), doc. 11)

The second claim-indemnification

Included in the second claim was the premise of the first claim, that all the sub-claims in

the first claim are incorporated into the second claim. In Sec. 8 of the Asset Purchase Agreement

the defendants are required to hold the “plaintiff harmless” against any and all claims, liabilities,

obligations, etc. (Arnold, 2005, p. 9) The purpose of indemnification is to protect the plaintiff

against any actions that were performed under the previous owner, in this case the defendants.

CAVEAT EMPTOR 42

Due to the many warranties and representations agreed to by the defendant the plaintiff is

entitled to indemnification. The amount requested under the indemnification claim exceeds

$8,000,000. (Arnold, (2005), p. 10) The reason for the request was that Rolsafe International

LLC covered all the costs associated with the damages in order to maintain the common good of

the corporate name.

It is interesting to note that previous laws or statutes have set the precedent for what the

laws are now. In an article in the Harvard Law Review from 1928 Arthur Corbin declares that

the statute of frauds has been in existence for over 250 years. Indemnify is part of the statute of

frauds as Dr. Corbin declares the “the word indemnify is…used in exactly the sense of

“guarantee” or “be surety for”. (p.694) The “Statute of Frauds was drawn for the protection of

persons in the position of the plaintiff, rather than those in the position of the defendant. (p. 701)

In this instance the seller under the Statute of Frauds, has indemnified Rolsafe Corp as the

guarantor for all losses due to the defendants’ misconduct, including all attorneys’ fees and

expenses.

The third and fourth claim-fraud/intentional and negligent misrepresentation

Fraudulent and intentional, negligent warranties and misrepresentations, material

misrepresentations, negligent misrepresentation, all made knowingly by the defendant were

easily proved by the preponderance of evidence. In order to prove or to succeed on a claim of

fraud, plaintiff must prove the following:

1. A misrepresentation of material fact;

2. Made with knowledge of its falsity;

3. For the purpose of inducing another person to rely on it;

4. That the person relied on the misrepresentation to his detriment; and

CAVEAT EMPTOR 43

5. That this reliance caused damages. (U.S. District Court, doc. 133, (2007). p. 10).

This proof was backed up with a statement by the plaintiff’s lawyer:

The evidence will show that Rolsafe Corp. was failing financially and operationally, and

had already been rejected by another prospective purchaser. Corp. had defaulted on loan

obligations in the past, the company had declining sales for years, and Kafka had to pay

personally to keep the Company afloat. He did not want to go through another

unprofitable year. (U.S. District Court, doc. 133, (2007). p. 10)

(This statement will prove useful later in the chapter)

Finally — and perhaps most importantly — the defendants’ anticipated defense that LLC

should have performed more due diligence to learn the truth is simply irrelevant to

breach of representation and warranty claims. As stated in Spherion, infra, one cannot

escape responsibility for breaching representations and warranties by claiming that the

non-breaching party could have, or should have, discovered the truth. To do so would

render representations and warranties meaningless. (U.S. District Court, doc. 133,

(2007). ps. 15-16)

Claims five, six and seven

These claims are for;

#5 A declaratory judgment for negligent misrepresentation,

#6 A declaratory judgment for the promissory note of $500,000 (which was to be

paid out in 60 installments over a five year period) for the defendant as agreed in the

Asset Purchase Agreement,

CAVEAT EMPTOR 44

#7 A declaratory judgment based on the operating agreement where a 19.5% interest

in Rolsafe International LLC was to be assigned the defendant when all capital and assets

were assured and paid by the defendant. (Arnold, (2005), ps. 15-17)

A declaratory judgment

What is a declaratory judgment? In order for the case study to have merit it was

determined by the author that the case documents must have legal standing and the reader

must have an awareness of part of the Judicial Code that applies to business lawsuits.

The President of the United States, Franklin D. Roosevelt, signed the Federal Declaratory

Judgment act in 1934, amendment #274D to the Judicial Code for the Federal Courts. It

reads as follows:

In case of actual controversy the courts of the United States shall have power

upon petition, declaration, complaint, or other appropriate pleadings to declare

rights and other legal relations of any interested party petitioning for such

declaration, whether or not further relief is or could be prayed, and such

declaration shall have the force and effect of a final judgment or decree and be

reviewable as such. (Borchard, (1934). p. 35)

Complaint is underlined above because these documents that have been identified in the

case study are in accordance and harmony with the Federal Judicial Code. The initial

complaint was filed in Franklin County Common Pleas Court Ohio and was then

transferred to the U.S. District Court Southern District of Ohio (Columbus) on Aug. 30,

2005. When asking for relief by declaratory judgment on these three claims, the plaintiff

was asking to bypass in trial by jury, and receive an opinion and order by the presiding

judge. This action did occur and will be discussed later in the chapter

CAVEAT EMPTOR 45

The Counterclaim

As expected the defendants filed a counterclaim by attorney on August 26, 2005. With

69 different answers to claim one, 19 defense statements, and 15 counts against the seven claims

by the plaintiff. Defendant claims that full performance incurred under the Asset Purchasing

Agreement. Defendant claims that the plaintiff defaulted on the promissory note. Defendant

applied for declaratory relief for breach of contract, indemnification, fraud, negligent

misrepresentation and declaratory judgment. Defendant also applied for indemnification, breach

of fiduciary duty, and tortious interference of contract. (Wiles, 2005, ps. 1-23)

As the plaintiff’s claims have been stated, a restatement of the claims in contrary is redundant.

Defendants did argue that MIGG under the auspices of Rolsafe International Acquisition

did, despite serious concerns, proceed with the purchase of Rolsafe Corp, because of $9,000,000

in contracts on the table, $900,000 cash, and the marketplace demand for hurricane shutters after

Hurricane Charley. Defendants argued that MIGG felt it could turn the company around.

(Watson, (2007), p. 25)

The opinion and order by the presiding judge

The judge in his opening remarks restates the plaintiffs and the defendants in the case and

immediately granted two partial summary judgments for the plaintiff (Doc. 55), MIGG capital,

and Bret Klisares (Doc. 56). One partial judgment both granted and denied in part for the

defendants (Doc. 87). One partial judgment denied for the plaintiff (Doc. 88).

Doc. 55. Deals with the counterclaim counts three and nine where the defendants claim

MIGG capital and Bret Klisares are an equal part plaintiff in the original complaint. The judge

also confirms that the defendants cannot circumvent the plaintiff’s right to a jury trial.

CAVEAT EMPTOR 46

Doc. 56. The defendant was unable to establish a financial or obligational relationship

between Rolsafe International LLC, MIGG Capital and Bret Klisares.

Doc. 87. Sealed by the court

Doc. 88. Sealed by the court

The 6th Circuit court held that they could not exercise a declaratory summary judgment on any of

the other claims and counterclaims because they could not pass the court’s five-factor litmus test.

1. Whether the judgment would settle the controversy.

2. Whether the declaratory judgment would serve a useful purpose in clarifying the

legal relations at issue.

3. Whether the declaratory remedy is being used merely for the purpose of

“procedural fencing: or “to provide an arena for a race for res judicata (a thing

decided)”.

4. Whether the use of a declaratory action would increase the friction between our

federal and state courts and improperly encroach on state jurisdiction.

5. Whether there is an alternative remedy that is better and more effective. (U.S.

District Court, doc. 55, (2007). p. 6)

There exists no unsealed substantiating documents; the court left the decision to the plaintiff for

a jury trial or an alternative remedy.

The court’s decision that rocked the Rolsafe International LLC cradle happened when the

judge reviews the laws for breach of contract, fraudulent inducement, and negligent

misrepresentation with his opinion and order. Judge Watson states that: “when a party seeks

damages for a fraudulent inducement claim, they affirm the contract and thus ratify its

CAVEAT EMPTOR 47

provisions, and are bound by its terms” (Watson, (2007), p. 30). The gavel drop could be heard

all the way to Southwest Florida for every current Rolsafe employee.

The Civil Docket

There were numerous counter motions, counter claims, two contra motions, motions to

amend, motions for time extensions, sealed docs, sealed depositions, and a stipulation of Joint

Waiver of Jury Demand prior to the Opinion and Order by the presiding judge on the 12th of July,

2007. The Stipulation of Dismissal (case closed) was the last document filed by Rolsafe

International LLC. After the opinion and order the case was settled out of court and the results

of the case were never publicized.

Summary

The chapter began with the differences between mergers and acquisitions in corporate

business transactions. Acquisitions are when one business buys another. Mergers are when two

businesses are formed and the example given was ExxonMobil two of the largest businesses ever

to merge into one company. Both types of transactions are speculative and are at the mercy of

the economy, circumstance, the consumer and the investors. Caveat Emptor’s history and usage

as law is not a new term. Caveat Emptor has been around since the 1600’s and the purpose of

the law is to ensure that the purchaser attend to his purchase with contract and ascertains the

quality of goods bought prior to purchase. This is commonly known today ias doing your due

diligence and can mean the success or failure in mergers and acquisitions. The case study

between plaintiffs and defendants, the history behind the original complaints and the results

which ended in favor of the defendants bring an end to the chapter.

Conclusion

CAVEAT EMPTOR 48

The primary purpose of this study was to define and determine whether cultural, ethical

or moral values are undermined when small business acquisitions fail to meet the buyer’s

expectations. Caveat Emptor: when unethical behavior, lack of moral goodness and

unprofessional business actions lead to the harm of others, then the answer is unequivocally yes,

business endeavors have been undermined. When this occurs all the stated values of society

become violated and society suffers, as it does not benefit from what philosophers have called,

the highest quality conduct of our lives. “Buyer beware” is a mask for the immoral to hide

behind as the laws are not stringent enough to curtailn the acts of the unethical. Countless are

the deeds of the unprincipled in just this singular case study. The nefarious conduct of the

defendant has caused irreparable harm to more than just the defendant. The woman who ran the

lathe, the man who drilled the holes, the assembly people who put the products together, the

salesman, the secretaries;, more than 130 people lost their jobs, their retirement, their security

and their peace of mind. The damages are beyond this seemingly small scale of affected

individuals, they rebound in the community over and over again as lives, homes and businesses

have been permanently changed.

This paper is also an attempt to understand the ethics that managers need and the ethics of

responsibility in small business acquisition. When morals and ethics are readily defined and

understood by society then managers need to act in accordance with those standards. By their

actions managers set the tone for benefiting themselves and their fellow men. The development

of a business code of ethics becomes imperative in the day to day operations of all business.

This provides a constant guidance for managers which appear lacking in today’s business place.

Truly, like Drucker supposed, the business actions of managers should be a reflection of their

own ethics and morals. In a society high on the pursuit of personal wealth and opulence, is this

CAVEAT EMPTOR 49

possible? Sadly the constraints of self-preservation often outweigh the necessity of “do no harm

to others.” Ethics and morals are pushed off the high road for personal and societal attainment.

Doing the best you can for yourself, often overcomes the overwhelming societal requirement of

doing what is best for others.

Socrates stated that he wanted to “inquire into life and morals and things evil and good”

(Rosen, 2009, p. 5). 2400 years later Drucker believed that humanity should continue in this

path of inquiry and educate the populace in moral values, for the betterment of every individual

and every family. (Drucker, 2001, p. 63) The educated pursuit of ethically justifiable behavior

according to Hosmer (1995) “consists of morally correct decisions”. (p.399) If, as a society we

are not teaching ethics and morals in our educational systems, who then will? My inquiry into

ethics, morals, and behavior that is commensurate with what is best for society is self-driven.

My education at Hodges has increased my desire to teach others how to be a professional

business people and more importantly how to be better human beings. It is only at this endeavor

that I can see self-fulfillment for myself and assist others to reach for higher plateaus as well.

Acceptable actions and behaviors, that may not serve the best interest of all involved, have been

allowed to burrow deep into the foundations of society. It is my conclusion that the only way to

elevate ethical behavior is through education.

In writing this paper my views of ethics and morals in our culture today have been

enhanced and enlightened. There has been a significant change in my life that has occurred due

to my personal attempt to educate myself at the request of my teachers. I have a better

understanding of why we are encouraged to write and rewrite about personal and business topics

and the experience that we have gained from them.

CAVEAT EMPTOR 50

Finally, the reality of responsible business seems to be eschewing business for profit.

There is absolutely nothing wrong with being in business for profit. Defining the reasoning for

choosing profit for profit’s sake is a prevalent topic of discussion over the centuries amongst

experts. Egregiously earned profit is a violation of professional ethics when one deliberately, and

knowingly, does harm in any business endeavor.

CAVEAT EMPTOR 51

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