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Socially Responsible Business

The Truth About Ben and Jerry’s

Contrary to myth, the sale of Ben & Jerry’s to corporate giant Unilever wasn’t legally required.

 
ben_and_jerrys_ice_cream_cup

(Photo by Holly Lindem)

Though it occurred a dozen years ago, the sale of Ben & Jerry’s continues to haunt social entrepreneurs. The sale’s notoriety keeps growing, moreover, because of the central role it plays in current debates over the development and enactment of new US corporate forms—such as low-profit limited liability corporations (L3Cs), benefit corporations, and flexible purpose corporations—that attempt to embed a company's social mission into its legal structure.

The story of Ben & Jerry’s is a legend in two acts. In Act One, Ben Cohen and Jerry Greenfield, two underachievers with counterculture values, open an ice cream store in a renovated gas station in South Burlington, Vt. The company, founded in 1978, becomes a social enterprise icon. It is fair to its employees, easy on the environment, and kind to its cows. The company pioneers the pursuit of business with a double bottom line—profits and people—that Cohen and Greenfield called the “double dip.” In its heyday (circa 1990), the company was a kind of corporate hippie, wearing its convictions on its labels with funky-named flavors like Cherry Garcia, Whirled Peace, and Wavy Gravy. Peace, love, and ice cream!

In Act Two, set in 2000, the mood sours. Ben & Jerry’s is sold (out) to Unilever, the world’s third-largest consumer goods company, described by one commentator as “a giant multinational clearly focused on the financial bottom line.”1 News of the sale sends “shudders and shivers through the socially responsible business community.”2 An all-too-brief and unexpectedly wonderful trip becomes a bummer. If Ben & Jerry’s was a kind of corporate Woodstock, this sale was its Altamont. (As a fitting coda, Unilever discontinued Wavy Gravy in 2003 because it wasn’t profitable enough.)

This article aims to dispel the idée fixe that corporate law compelled Ben & Jerry’s directors to accept Unilever’s rich offer, overwhelming Cohen and Greenfield’s dogged efforts to maintain the company’s social mission and independence. Contemporaneous observers concluded thus, such as the stock analyst who claimed in 2000 that “Ben & Jerry’s had a legal responsibility to consider the takeover bids. … That responsibility is what forced a sale.”3 Cohen says the same thing—on a 2010 NPR radio segment on social enterprise, he said that “the laws required the board of directors of Ben & Jerry’s to take an offer, to sell the company despite the fact that they did not want to sell the company.”4 Greenfield agrees: “We were a public company, and the board of directors’ primary responsibility is the interest of the shareholders. … It was nothing about Unilever; we didn’t want to get bought by anybody.”5

Corporate law has been fingered as the culprit in Ben & Jerry’s sale, which has become the poster child, proof text, and Exhibit A for the proposition that the traditional business corporation is fundamentally inhospitable, if not outright hostile, to social enterprise. Consider this passage from the summer 2009 issue of the Stanford Social Innovation Review: “[A]mong social entrepreneurs, Unilever’s purchase of Ben & Jerry’s serves as a cautionary tale of how easily corporate fiat can undermine social responsibility. ‘The board was legally required to sell to the highest bidder,’ says [an attorney with expertise in social enterprise]. Neither Ben Cohen nor Jerry Greenfield wanted to sell the company, but because it was public they had no choice.”6

If the corporate form is bad for social enterprise, social entrepreneurs should use more suitable alternatives. Proponents of new legal forms—such as L3Cs, benefit corporations, and flexible purpose corporations—invariably cite the sale of Ben & Jerry’s to show why such forms are necessary or attractive. (See “New Organizational Forms for Hybrids,” below.) For example, a legislative report on SB 201, California’s Flexible Purpose Corporation act, states that “The story of Ben and Jerry’s Ice Cream is an example of why a new entity form is sought.” It then repeats the now familiar story: “Even though Ben and Jerry did not want to sell out, they had little choice.”7

new_organizational_forms_of_hybrids

Proponents of these forms claim they could have prevented the sale of Ben & Jerry’s, and prevent future such scenarios. After Vermont enacted its Benefit Corporation Act in 2011, one commentator asserted that “If Vermont’s law had been around 11 years ago, Ben Cohen and Jerry Greenfield might not have had to sell their ice cream company. … [T]he laws of shareholder responsibility forced the hippie founders to sell, even though they wanted to keep control. Now, with today’s law, a new kind of corporation is created that prevents exactly that.”8

Because the sale of Ben & Jerry’s is a critical fixture in debates over new legal forms, it’s essential to get it right. This article challenges the canonical account of that sale. It exposes the underlying assumptions about corporate law as erroneous: Corporate law does not require publicly traded corporations to maximize shareholder wealth. We describe the elaborate machinery that Ben & Jerry’s built to resist hostile takeovers and explain why these defenses, had they been invoked, would almost certainly have worked.

The Ben & Jerry’s sale does not make the legal argument for new forms. Rather, it is a lesson in how social entrepreneurs can use existing forms in creative ways to protect an enterprise’s social mission—even if they decide to forgo such protection in the end. (Of course, if the social entrepreneur remains the sole owner of the business, such protections aren’t even necessary.) The Ben & Jerry’s story contains other lessons for social entrepreneurs, including the impact of financial performance on mission and the idea that committed decision makers are the best security for mission sustainability.

From Humble Beginnings

When Cohen and Greenfield first started out, they were simply trying to earn a living. It was only when the business began to take off that they began the transition toward a progressive enterprise. Cohen was disappointed that Ben & Jerry’s was “just a business, like all others, [that] exploits its workers and the community.”9 A friend, however, challenged him, pointing out that he could change whatever he didn’t like about the business. Over time, Cohen and Greenfield came to view their business as, in Cohen’s words, “an experiment to see if it was possible to use the tools of business to repair society.” At the end of each month, said Cohen, he and Greenfield would ask of themselves and the company: “How much have we improved the quality of life in the community? And how much profit is left over at the end of each month? If we haven’t contributed to both those objectives, we have failed.”10 By their own expectations, and many others’, they were extraordinarily successful.

From the outset, Cohen and Greenfield were deeply committed to Vermont’s economy and environment. They relied heavily on local suppliers of milk to make their products. They hired a local artist to design their cartons and graphics. As the company’s need for capital increased, they resisted venture capitalist financing, which typically requires relinquishing significant control over the company. Instead, it sold stock to Vermont residents, thereby reinforcing the company’s local roots. In 1985 the company formalized its philanthropy by creating the Ben & Jerry’s Foundation. Cohen endowed it with $850,000 worth of his shares, and the company agreed to contribute 7.5 percent of its pretax profits.

For a while the company thrived, but in the early to mid-1990s, Ben & Jerry’s once-stellar financial performance began to lag, even as its other bottom line—social contributions—went from strength to strength. In 1994, the company’s annual report disclosed that sales growth slowed and it had suffered its first financial loss. By 1999 the stock had dropped nearly 50 percent from its peak, because of the company’s weaker financial performance. Some investors argued that the company’s social mission was a luxury it could no longer afford.

Ben & Jerry’s anemic stock performance attracted interest from prospective buyers who thought they could manage the company more profitably. Dreyer’s Grand Ice Cream tried to buy the company in 1998, but Ben & Jerry’s board refused. Other buyers were rumored to be interested when in early 2000, Cohen and a group of investors (including Body Shop founder Anita Roddick) offered to take the company private at $38 a share—about double the stock price of a few months earlier.11 Dreyer’s made another bid, which in turn prompted Unilever to offer $43.60 a share. Although Unilever spoke about nurturing the social mission, many observers were skeptical.

Despite reported reluctance, Ben & Jerry’s board announced on April 11, 2000, that it had approved Unilever’s offer. (Melodramatically, some refer to this day as “4/11.”) The transaction, valued at $326 million, was finalized with overwhelming shareholder support. Cohen’s and Greenfield’s shares were worth close to $40 million and $10 million respectively. After more than 20 years as an independent enterprise, Ben & Jerry’s became a wholly owned subsidiary of Unilever.

The deal, according to Ben & Jerry’s securities filings, contained some provisions intended to maintain the corporation’s social mission. Although Unilever controlled the financial and most operational aspects of Ben & Jerry’s, the subsidiary had its own independent board of directors to help provide leadership for the social mission and the brand’s integrity. The new board included Cohen and Greenfield, and its members, not Unilever, would appoint their successors. Moreover, this subsidiary board had the right to sue Unilever, at Unilever’s expense, for breaches of the merger agreement.

Unilever also promised to continue contributing pretax profits to charity, maintain corporate presence in Vermont for at least five years, and refrain from material layoffs for at least two years. Finally, Unilever agreed to contribute $5 million to the Ben & Jerry’s Foundation, award employee bonuses worth a total of $5 million, and dedicate $5 million to assist minority-owned and undercapitalized businesses.

Ben & Jerry’s today is described on Unilever’s website as a “wholly owned autonomous subsidiary of Unilever.” Although Ben & Jerry’s has clearly preserved some of its unique values, most observers are disappointed. Cohen and Greenfield too have reportedly “expressed concerns that the company has shifted away from its original mission of social responsibility.”12 As was stated in a post on the Stanford Social Innovation Review’s blog, “[n]obody wants to end up like Ben & Jerry’s.”13

The Legal Landscape

It is widely believed that corporate law forced Ben & Jerry’s directors to accept Unilever’s rich offer and sell the company. This perception reflects the erroneous view that corporate directors must always act to maximize shareholder value. The best and arguably only support for this view is from Dodge v. Ford, a 1919 decision from the Michigan Supreme Court. That court opined that a “business corporation is organized and carried on primarily for the profit of the stockholders.”

Dodge v. Ford is an anomaly, as other courts have not followed its view of shareholder primacy. In the blunt words of respected Cornell Law School corporate law professor Lynn Stout, “shareholder wealth maximization is not a modern legal principle.”14 Other state courts have recognized this, including New Jersey’s Supreme Court, which stated that “modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the community within which they operate.”15

Most state legislatures have resisted the tenets of Dodge v. Ford by enacting statutes that expressly authorize corporate directors to look beyond shareholder wealth maximization. Vermont enacted one, nicknamed “the Ben & Jerry’s law,” after the company had successfully lobbied Vermont’s legislature. Vermont’s “other constituency” statute, as these laws are called, is illustrative: It provides that when directors make decisions they may consider such matters as “the interests of the corporation’s employees, suppliers, creditors, and customers; the economy of the state, region, and nation; [and] community and societal considerations, including those of any community in which any offices or facilities of the corporation are located.” State statutes also give corporations wide latitude to donate profits to charities.

In practice, courts are deferential to board decision making. Under a doctrine called the business judgment rule, unless the directors have a conflict of interest, nearly all board business decisions are beyond judicial review. If there is a potential benefit to shareholders, the courts will not interfere. In this way board decisions advancing a social mission are effectively immune from challenge; there’s no limit to the human mind’s ability to conceive of some benefit accruing to shareholders at some point, even if in the far-distant future. Absent special circumstances, a board’s decision to reject a proposed merger would easily survive a court challenge.

Was Corporate Law the Villain?

By the time Unilever approached Ben & Jerry’s in early 2000, the company was well defended. Its founders, lawyers, and lobbyists had taken many steps to prevent a hostile takeover. In addition to promoting Vermont’s enactment of an “other constituency” statute, the company had adopted a “poison pill.” A poison pill thwarts hostile acquisitions by making them prohibitively expensive. To cancel a poison pill, an acquirer must either find a friendly board or get one elected. Because elections for Ben & Jerry’s board were staggered, an acquirer would need at least two elections scheduled a year apart to elect the board of its choice.

In the case of Ben & Jerry’s, Unilever could not have elected a friendly board, as the two founders and another early employee, director Jeff Furman, effectively controlled enough votes to direct the election of board members. The company had two classes of common stock, one with 10 votes per share and the other with one vote, and between them they held three-quarters of the super-voting stock. (This capital structure was not unique to Ben & Jerry’s. The New York Times Co. and Google, for example, have issued super-voting stock to enable their heirs or founders to maintain control.)

Faced with an entrenched unfriendly board, a would-be acquirer might have gone to court claiming that corporate law required the board to redeem a poison pill. If the court chose to scrutinize the situation carefully, it would have examined whether the board’s failure to redeem a pill was reasonable in relation to the threat that Unilever posed to Ben & Jerry’s. The legal standard is murky, but there have not been many cases where courts have ordered a pill’s redemption.

Finally, Unilever might have asserted that Ben & Jerry’s was for sale and so the board was obliged to sell the company to the highest bidder. This was unlikely for two reasons. First, although Vermont courts have not been presented with this situation, most state courts that have considered it have rejected any such obligation. Second, even if the obligation might theoretically exist, this situation was unlikely to trigger it. Although it’s true that the board was considering a sale, it had not committed itself. If the matter were litigated, most courts would hold that there was no obligation to sell on grounds that neither the breakup nor sale of Ben & Jerry’s was inevitable.

Suppose, however, that a Vermont court had required the board to act to redeem its poison pill or enter into a merger agreement. Cohen and Greenfield still had one more card to play in order to preserve Ben & Jerry’s independence. A board’s decision to redeem a pill merely allows a tender offer to be submitted to shareholders for their approval. It does not mean the offer will succeed. If a majority of shareholders do not agree to tender their shares for sale, the attempted takeover fails. If they did not tender, they retained their stock and their control of the company.

Similarly, even if the board approves a merger, although it’s a legally binding obligation, shareholders must vote in favor of the merger before it becomes effective. Because of the principal stockholders’ ownership of super-voting stock, a hostile acquirer could not have gained voting control of the company or a merger finalized without their approval.

The crucial point is that even if Ben & Jerry’s directors had a fiduciary duty in their capacity as directors to accept or facilitate a transaction, they had no such duty in their capacity as shareholders, and as such were empowered to support or oppose the transaction as they saw fit. As shareholders, they were entitled to enjoy the benefits of selfish ownership, which ironically in this context could have been exercised altruistically to maintain the company’s social mission.

If the super-voting stock were somehow insufficient, Ben & Jerry’s had yet one more defense: an unusual class of preferred stock that held veto rights over mergers and tender offers. The Ben & Jerry’s Foundation owned all of this preferred stock. A takeover of Ben & Jerry’s thus required the foundation’s agreement, and two of the three directors of the foundation were the same principal stockholders. The foundation itself could not be taken over because its board members selected their own successors. In any event, the foundation’s directors were unlikely to be sued because the only party who could sue them was Vermont’s attorney general.

There is one complication in the analysis above. For reasons that are unclear, Ben & Jerry’s organizational documents granted the board the right to redeem the preferred and super-voting stock. It is an interesting question whether a court would ever find that a board’s fiduciary duties required the redemption of these securities in order to eliminate their voting rights. The board would, after all, owe fiduciary duties to the holders of super-voting stock, and a duty of good faith and fair dealing to holders of the preferred stock. Ben & Jerry’s own public statements support this analysis. The company’s securities filings disclosed that its capital structure would make it difficult for a third party to acquire control if the transaction were not supported by the principal stockholders or the foundation.

Nonetheless, this possible loophole shows only that Ben & Jerry’s didn’t get its defenses quite right, not that some flaw in corporate law required the sale. Shrewder lawyering would have made Ben & Jerry’s corporate independence even more unassailable. Corporate law permitted super-voting stock and the granting of a veto to a charitable foundation. Moreover, corporate law allows directors to reject an offer, at least where the directors have not irrevocably committed themselves to a sale.

Although Ben & Jerry’s legal defenses to a forced sale appeared impregnable, the board unanimously agreed to sell the company. Why? Some cynically claim that the founders were ready to cash out. After all, Cohen and Greenfield grossed nearly $50 million from the sale. Moreover, Ben & Jerry’s faced some operational issues that a takeover could solve, such as product distribution. People close to the decision say they were motivated by fear of litigation, followed by a judgment that they would have to satisfy personally. If the directors were held personally liable—a remote possibility—Ben & Jerry’s charter included a provision that would have indemnified them.

Lessons for Social Entrepreneurs

This revised and richer account of Ben & Jerry’s sale offers valuable lessons for aspiring social entrepreneurs. The legal consequences of an entrepreneur’s choice of for-profit organizational form are likely to be smaller than often portrayed. Financial success is also essential to staying is control. Most important, the chief safeguard for maintaining the social mission is the people in control.

A hybrid legal form is neither necessary nor sufficient to maintain a social enterprise | Although the publicly traded corporate form can be challenging, many businesses employing it have pursued social missions with vigor and endurance. The list includes prominent firms such as The New York Times Company, Whole Foods, Starbucks, and the Body Shop (before it encountered operational problems unrelated to its form), and less well-known companies like EV Rentals and Interface Carpets. These firms use several strategies, legal and nonlegal, to ward off hostile takeovers. Foundations and super-voting stock are not uncommon. In some cases, new forms include provisions that could make an enterprise’s social mission harder to dislodge, yet such provisions are used by conventional for-profit corporations as well.

Financial success is critical to maintaining control | Ben & Jerry’s early financial successes enabled its founders to negotiate powerful control mechanisms from a position of strength. Ultimately the most important change at Ben & Jerry’s was not its directors’ legal ability to resist takeovers, which indeed increased over time. Rather, it was the declining health of the business itself. In its final years as an independent company, Ben & Jerry’s sales, financial performance, and stock price had stagnated, and the company faced various operational challenges.

Successful and promising companies are better positioned to take on new investors while retaining controlling positions for the founders. When Google went public in 2004, for example, with super-voting stock for the insiders, the company candidly admitted that public shareholders’ voting rights would have little impact on the company’s direction. Facebook’s 2012 initial public offering of stock allowed its founder, Mark Zuckerberg, to retain control through a combination of super-voting stock and contractual arrangements with other shareholders. (Interestingly, both companies also asserted that providing services, rather than making a profit, was their top priority.)

Although it is true that even successful companies are bought, it is also true that shareholders tend to back successful management. Put differently, takeovers often result from poor stock performance, which usually results from weak financial performance. Investment bankers commonly observe that the best defense is a high stock price. Had Ben & Jerry’s remained successful, its directors would have felt more comfortable rebuffing offers, as they had done several times before.

It’s the people! | Ben & Jerry’s defenses made the company virtually impregnable to hostile takeover. Yet in the end, Ben & Jerry’s directors chose to accept a generous offer, even at a cost to the social mission, rather than allow the company’s defenses to be tested. Anti-takeover protections are only as effective as the people positioned to use them.

Regardless of the for-profit organizational form in which a business is housed, people who exercise control over the company will usually be able to thwart its social mission. One oft-repeated objection to new forms is that they aren’t much more effective at screening out conventional for-profit people and businesses with conventional for-profit souls. So long as the organizational structure is adequate, it will be the decision makers who make the difference. The surest way to maintain a business’ social mission is to put committed people in charge. (Cohen and Greenfield attempted to achieve this by negotiating the creation of an independent and robust board for the post-acquisition subsidiary.)

When critics claim corporations are inherently pathological, they mean that they encourage antisocial decision making by their employees. Executives at hybrid forms likely feel less pressure to maximize profits at society’s expense. Yet the causation is uncertain: Does a virtuous form make directors more virtuous, or do the virtuous seek out businesses so formed?

Conclusions

Because new forms are being represented as correctives to the cause of Ben & Jerry’s sale, it’s critical to identify the true causes and manner of what happened. Hence the irony. The full account of that sale does not make the case for new forms; rather, it illustrates how social entrepreneurs can use existing forms to protect an enterprise’s social mission—even if they choose not to assert such protections. Proponents of benefit corporations and the like should be pressed to identify real and unavoidable instances of the Ben & Jerry’s scenario, or stop using it to demonstrate the dire need for such forms.

Of course, even if new forms for social enterprises are not legally necessary, some structural innovations might prove useful nonetheless. A standard form, “off-the-rack” legal entity designed expressly for social enterprise would presumably save rising social entrepreneurs the trouble of (re)discovering tested solutions to its perennial challenges. A distinct legal form might also convey information and influence perception, for example, by assuring investors and potential investors that the company’s managers will not pursue profits über alles, and perhaps cultivating consumer loyalty to a social enterprise brand.

To date, a significant amount of resources has been devoted to developing social enterprise forms and lobbying states to enact them. As an exercise in political entrepreneurship, this strategy has produced results: Eight states have L3Cs, seven states have benefit corporations, and one has a flexible purpose corporation. It is an open question, however, whether this approach fosters more social innovation than would otherwise occur, or promotes it more effectively.

Social entrepreneurship might benefit from states competing to become the Delaware of an emerging “social enterprise law.” At the same time, fueling this competition yields diminishing returns. When a form has been enacted in one state, it is available to residents of every state. You don’t have to live or operate in Vermont to set up a Vermont L3C. What then is the point of pressing more states to enact the L3C, which is primarily intended to attract capital from relatively sophisticated investors—namely, grantmaking foundations?

We should remember that what really matters is not the organizational form but rather the formation and flourishing of social enterprises. It remains to be seen whether new forms will nurture new social enterprise icons or be an unhelpful (but tasty!) distraction. By moving beyond the received wisdom on the Ben & Jerry’s sale, we can better focus our energy on where it will do the most good.

Notes

1 Jill Bamburg, Getting to Scale: Growing Your Business Without Selling Out (San Francisco:
Berrett-Koehler, 2006): 57.
2 Jeffrey Hollender and Stephen Fenichell, What Matters Most: How a Small Group of
Pioneers Is Teaching Social Responsibility to Big Business, and Why Big Business Is Listening

(New York: Basic Books, 2005): 211.
3 “Buyout Sweet Enough for Ben & Jerry’s Founders; Ability to Pursue Social Causes
Key Factor in Deal,” The Pantagraph, May 12, 2000.
4 April Dembosky, “Protecting Companies That Mix Profitability Values,” NPR Morning
Edition
, March 9, 2010.
5 Hannah Pool, “Question Time with Hannah Pool,” The Guardian, July 31, 2008.
6 Jenna Lawrence, “Making the B List,” Stanford Social Innovation Review, Summer 2009.
7 SB 201, Analysis of Original Bill, https://www.ftb.ca.gov/law/legis/11_12bills/sb201_
020811.pdf
. The full passage cited reads: “In 2000, Unilever made a buyout offer to the
company’s shareholders. Even though Ben and Jerry did not want to sell out, they had
little choice. The board could not risk accepting a lower competing offer without exposing
itself to litigation from shareholders asserting their right to the highest possible
return at the expense of all other considerations—a right upheld by many courts.”
8 Alex Goldmark, “The Benefit Corporation: Can Business Be About More Than
Profit?” Good Business, July 1, 2011. http://www.good.is/post/the-national-march-ofthe-
benefit-corporation-continues-now-protecting-ben-and-jerry-s-backyard-fromfuture-
sellouts

9 Fred Lager, Ben & Jerry’s: The Inside Scoop: How Two Real Guys Built a Business with a
Social Conscience and a Sense of Humor
(New York: Three Rivers Press, 1994): 57.
10 Ben Cohen, “On Becoming an Ecopreneur,” The Green Festival Reader: Fresh Ideas
from Agents of Change
(Boulder, CO: Paradigm Publishers, 2008): 51.
11 Jim Steiker and Michael Golden, “Hot Fudge Partners: Insiders Tell How Social Investors
Tried to (but Couldn’t) Buy Ben & Jerry’s
,” Business Ethics, May/June 2000.
12 Jenna Lawrence, “Making the B List.”
13 Kevin Jones, “Selling vs. Selling Out,” Stanford Social Innovation Review blog, Feb. 27,
2009. http://www.ssireview.org/opinion/entry/selling_vs_selling_out
14 Lynn Stout, “Why We Should Stop Teaching Dodge v. Ford,” Virginia Law & Business
Review
3, 2008: 163.
15 A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581 (N.J. 1953).

 
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COMMENTS

  • CouillardF's avatar

    BY CouillardF

    ON August 16, 2012 10:58 AM

    Thank you for this most useful analysis. In many countries where hybrid forms of organizations are nonexistent, the for-profit structure is often adopted. This is the case, for example of the many Social Businesses started by Nobel Laureate Prof. Yunus. Perhaps all the efforts to create these hybrid forms should, as you are suggesting, be re-focused in educating social entrepreneurs on how to protect their social missions within the for-profit model?
    Francois Couillard
    Ottawa, Canada
    http://www.strategies-direction.com

  • Sandra Pickering's avatar

    BY Sandra Pickering

    ON August 30, 2012 03:23 PM

    Thank you.
    A valuable and thought-provoking article for social entrepreneurs and customers of socially-responsible businesses.
    I had the pleasure of working at The Body Shop long before it was sold to L’Oreal and I can strongly recommend that anyone involved in socially-responsible businesses should read and re-read this.

  • Yunseok Chang's avatar

    BY Yunseok Chang

    ON September 1, 2012 06:05 AM

    Very interesting point!!!
    I’ve never heard and thought the case of Ben & Jerry’s from this viewpoint.
    Thank you.

  • Tony Wang's avatar

    BY Tony Wang

    ON September 3, 2012 05:07 AM

    I found the legal analysis wanting. First, the article doesn’t consider Delaware corporate law explicitly, which governs most corporate decision making in the United States. If the authors want to argue convincingly that shareholder wealth maximization is not required, and that a company doesn’t have to sell to the highest bidder when the company is for sale, the authors should have explicitly considered key Delaware cases like Revlon and others.

    Second, although the authors assert that “the breakup nor the sale of Ben & Jerry’s was inevitable,” the fact that Cohen and a group of investors offered to take the company private at $38 a share a few months earlier would make litigation matters more complicated than the authors seem to suggest. In fact, the Steiker and Golden article that the authors cite mentions how three shareholder lawsuits were filed because their deal did not maximize price.

    I probably agree with the authors’ conclusions that alternative and hybrid legal forms are largely unnecessary, but I would have liked a more thorough treatment of the legal issues in question.

  • BY Neetal Parekh

    ON September 4, 2012 01:46 PM

    This is an interesting article, and well-written. I recall studying Dodge v. Ford and being fascinated by the ramifications of a corporate fiduciary duty to maximize shareholder wealth.

    In a post written for Innov8Social, I posed this thought…

    “The BJR is a step. So are constituency statutes, but we may find that these tools may be forcing a system designed to make profit above other concerns fit the shifting paradigms of social business and informed consumerism.

    At the end of the day, we may be ready for a new corporate structure that can expand our conception of stakeholders and that can create quantifiable ways to measure progress of the bottom line (profits), double bottom line (community, profits), and triple bottom line (environment, community, profits).” http://www.innov8social.com/2011/08/what-is-business-judgement-rule-how.html

    In my research, I came across an interesting 2009 Loyola Law Review article by Anthony Bisconti titled, “The Double Bottom Line: Can Constituency Statutes Protect Socially Responsible Corporations Stuck in Revlon Land?”  that you may find enjoy.

  • BY Peter Smith

    ON September 13, 2012 10:16 PM

    Thank you for further explaining the Ben and Jerry’s sale to Unilever. I, for one, am guilty of using this canonical story to support so-called “hybrid” legal entities without fully understanding the facts.  While I agree that the proponents of Benefit Corporation need to better understand the story, or else remove it from their justification for the benefit corporation, I wonder whether the “expanded” story still has merit in the case for the hybrid organization.  I think an expansion of the corporate law doctrines discussed above and the human elements of the story might make a stronger case for hybrid corporate structures from the Ben and Jerry’s story. 

    Before getting into any expansion, please note that Washington State has recently enacted the “Social Purpose Corporation” (think flexible purpose corporation, with modifications).  I’ve helped several social entrepreneurs organize under this new structure, and so the SPC must now be included in the patch-work fabric of social entrepreneurship.

    Tony Wang’s comment is on target, a little expansion on the corporate law is warranted.  Patel’s comment also makes sense and I suggest reading up on the eBay v. Craigslist et al case for the outer limits of the business judgment rule to protect social entrepreneurs.  While I appreciate the discussion of Dodge v. Ford and the clarification of the business judgment rule, the fiduciary duties in the Ben and Jerry’s story are better governed by the “Revlon” or “Unocal” standard which essentially states that a board of directors acts as an auctioneer in the case of a sale or merger—the board is required to maximize profits at the point of sale.  Admittedly, that is an oversimplification of Unocal and that doctrine is from Delaware, not Vermont, but arguably most states would follow the persuasive authority from DE.  And now that I know a little more about the facts of the case, it seems like a change in control was imminent, at least to Cohen and Greenfield. You mentioned that there was a plan to take the company private, offers from Dryers as well as Unilever, and financial instability. The directors were going to make a move—Cohen and Greenfield clearly wanted out—the only question was which move would they make?

    So the article assumes these results and continues on to discuss the poison pill and other mechanics established in the corporate governance.  Yes, these mechanics provided several defenses against selling out to Unilever, but “testing them” doesn’t happen in an academic vacuum.  Cohen and Greenfield have employees, suppliers, customers (brand image and loyalty), and personal liabilities on the line.  A drawn-out shareholder lawsuit (note the overwhelming support for the Unilever deal, making a derivative suit in the case that they rejected the deal a likely possibility), even if the defenses ultimately prevail or the company indemnified Cohen and Greenfield from ultimate liability, such a suit would have had devastating consequences.  Yes, we can question their courage or lack of faith in their corporate attorneys to test these strategies, but it seems that the “culprit” here was testing the unknown, not necessarily corporate law. 

    But now I’m curious to know, what if Ben and Jerry’s was a benefit corporation when they made the decision to sell to Unilever?  Would they still have sold to the highest bidder or would they have followed the option to take the company private with hand-picked successors who would follow the corporate mission?  Either way, the Ben and Jerry’s story still—under the expanded facts you provide—demonstrate the need for a hybrid structure in an interesting way: if Ben and Jerry’s was a benefit corporation, they wouldn’t have the option of hiding behind the specter of corporate law in a sellout. 

  • Jenifer Morgan (SSIR)'s avatar

    BY Jenifer Morgan (SSIR)

    ON September 17, 2012 09:21 AM

    POSTED ON BEHALF OF ANTONY PAGE:

    Thanks to all for your comments.  If we may just clarify the legal analysis, we intended to address Delaware’s Revlon standard in the text when we wrote, “Unilever might have asserted that Ben & Jerry’s was for sale and so the board was obliged to sell the company to the highest bidder.”  This is Revlon.  We then explain why the Revlon standard was unlikely to apply—both because Revlon likely wasn’t triggered and because most state courts that have considered it have rejected it.  Moreover, even if Revlon did apply, it wouldn’t matter because Revlon is about board action and not shareholder action.  For a much more detailed legal analysis of this case, anyone interested can download our paper from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1724940

    Granted, if the board hadn’t agreed to the sale they might well have been sued.  (In America, anybody can sue anyone else for anything - they may just not get very far.)  This would have been unpleasant, and distracting, but devastating?  For a company like Ben & Jerry’s such a lawsuit might have had an upside. They would get publicity for defending their quirky company against Unilever, just as they had in the 1980s with their lawsuit against Pillsbury.  If our legal analysis is correct, they would prevail.

    eBay v. Newmark, the Delaware craigslist case, is fascinating, but probably doesn’t change the analysis.  Note that eBay doesn’t challenge any of craigslist’s operating decisions, only defensive measures that are irrelevant as long as the two controlling shareholders choose not to sell.  Moreover, Chancellor Chandler states that “[]the corporate form … is not an appropriate vehicle for purely philanthropic ends.”  (Our emphasis.)  This would appear to leave plenty of room dual-mission corporations, like Ben & Jerry’s.

    Peter Smith:  your last paragraph is spot on.  What happens if Ben & Jerry’s were a benefit corporation?  Cohen & Greenfield could have sold, or not.  Either way they could get sued, even though the cases would ultimately get nowhere.  The one thing they could not do is sell to the highest bidder and blame the law.

  • The Real Truth About Ben & Jerry’s and the Benefit Corporation: Part 1

    “The Truth About Ben & Jerry’s” presents a dangerously inaccurate legal analysis of current corporate law and completely misses the point about the need for new corporate form legislation.

    The sale of Ben & Jerry’s is a distraction. 

    Authors Anthony Page and Robert A. Katz, by generalizing their analysis of the unique situation of the sale of Ben & Jerry’s to conclude that there is no need for new corporate forms designed to serve the needs of social entrepreneurs, impact investors, and the public interest, have failed completely to account for: 1) the facts of Delaware corporate law, arguably the only corporate law that matters when it comes to scaling high impact businesses; 2) the practical reality of how corporate law is applied in the boardroom given the lack of clarity in existing corporate statutes across the country; 3) the needs of the growing marketplace of impact investors who are demanding greater accountability and transparency; 4) the needs of social entrepreneurs as shareholders to have additional legal rights to ensure, not simply hope, that directors consider social mission not just profit margin when making decisions; and, 5) the needs of some social entrepreneurs and impact investors to have the freedom and legal protection to build businesses that seek to optimize impact rather than profit. 

    The primary objective of the benefit corporation is to enable mission-driven businesses to be built to last and scale with their missions intact, not to entrench individual charismatic leaders.  Once elected by the shareholders of the corporation, benefit corporation status, ensures, as existing corporate forms to do not, that a company and its directors and officers are clearly empowered to pursue the creation of value for the public even if doing so fails to maximize value for shareholders, and that impact investors are clearly empowered to hold a company accountable for maintaining the mission in which they invested. 

    On both accounts, existing corporate law – both the letter of the law and the practical reality of how it is interpreted, in operating and in liquidity scenarios – fails the test.  Benefit corporations meet the test.  Becoming a benefit corporation gives a company more choice and, as we’ll point out, it also gives social entrepreneurs and impact investors more power and consumers more protection from greenwashing.

    *  *  *

    It is true there are dissenting voices in the academy on whether or not current corporate law actually requires corporations to maximize shareholder value, but that misses the point for two reasons: 

    First, it misses the point because the legal establishment believes otherwise.  The authors fail to acknowledge this by failing to reference any Delaware case law since Dodge v Ford in 1919 (most famously, Unocal v Mesa, 1985 and Revlon v MacAndrews, 1986).  Specifically, the most recent past and current Chancellors of the Delaware Court of Chancery think otherwise.  Think of the Chancellors as something like the Chief Justices of the Supreme Court for business in the United States because the majority of public traded corporations, 63% of the Fortune 500, and most corporations that seek venture capital, are incorporated in Delaware.  In EBay v Craigslist, 2010, then Chancellor William B. Chandler III said, “Directors of a for-profit Delaware corporation cannot deploy a [policy] to defend a business strategy that openly eschews stockholder wealth maximization - at least not consistent with the directors’ fiduciary duties under Delaware law.”  And in Wake Forest Law Review, 2012, current Chancellor Leo E. Strine, Jr. says, “These commentators seem dismayed when anyone starkly recognizes that as a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation.”

    Second, it misses the point because, not surprisingly given the above, practicing corporate attorneys think and act otherwise, and therefore corporate culture operates otherwise.  If electing benefit corporation status does nothing other than create clarity between entrepreneur, directors, and investors, that the directors of a benefit corporation are required, not just permitted, to consider the impact of their decisions on stakeholders, then, as the authors themselves state in their conclusion, it is a useful innovation. 

    Even in a state with a permissive constituency statute like Vermont that allows directors to consider non-shareholder interests when making decisions, as the Vermont Assistant Attorney General wrote in an informal opinion sent to the Vermont Secretary of Commerce and Community Development in March 2000 in reference to a hypothetical scenario involving the sale of a Vermont corporation (remember, Ben & Jerry’s coincidentally announced their sale in April 2000), there is a hard to quantify limit to the latitude directors are given to turn down a purchase offer. 

    That latitude would be greater for a benefit corporation.  Benefit corporations would not only enjoy greater legal protection to choose to remain independent, or to choose to sell to a non-high bidder that would better meet the needs of workers, communities, and the environment, but also to choose to make decisions that create incremental value for society even if at the expense of maximizing value for shareholders. 

    But benefit corporation status does more than that. 

    Benefit corporation status also requires that the corporation seek to create a material positive impact on society and the environment as assessed and publicly reported against a credible and comprehensive third party standard.  Current corporate law does not address these issues of corporate purpose or transparency, but increasingly, entrepreneurs and investors care about these issues, as does, and perhaps because so does, a skeptical public that wants to support a better way to do business.

    In their conclusion, the authors state that ‘proponents of benefit corporations . . . should be pressed to identify real and unavoidable instances of the Ben & Jerry’s scenario.’  Based on our analysis above, here are two:  1) if Ben & Jerry’s were incorporated in any of the roughly 20 states in which no constituency statute exists, including Delaware; and 2) if Ben & Jerry’s justified any corporate decision on the benefits that might accrue to society and not to shareholders. The latter would seem particularly relevant for social entrepreneurs or impact investors, if not also for consumers, policy makers, and those of us that make up society.

    Additionally, as about 20 practicing corporate attorneys, including a former President of the American Bar Association, stated in a White Paper entitled “The Need and Rationale for the Benefit Corporation” (Clark et al, 2011), and as the Vermont Assistant Attorney General seems to concur in her informal opinion, ‘Based on the limited case law available, courts [even in states with constituency statutes] seem reluctant to wade into these issues and often fall back on shareholder primacy [i.e. maximizing shareholder value as the de facto sole legitimate corporate purpose].’  Here is the relevant section from the White Paper.

    While it is clear that directors of mission-driven companies incorporated in constituency statute jurisdictions may take into consideration the interests of various constituencies when exercising their business judgment, the lack of case law interpreting constituency statutes, coupled with the context in which many of these statutes were enacted, makes it difficult for directors to know exactly how, when and to what extent they can consider those interests.  . . . Based on the limited case law available, courts seem reluctant to wade into these issues and often fall back on shareholder primacy.

    Without clear authority explicitly permitting directors to pursue both profit and a company’s mission, even directors of mission-driven companies in constituency statute jurisdictions may be hesitant to “consider” their social missions for fear of breaching their fiduciary duty. . . .

    Further, permissive constituency statutes only create the option (and not the requirement) for directors to consider interests of constituencies other than shareholders. Thus, directors have the permission not to consider interests other than shareholder maximization of value. Mission-driven executives and investors are often in minority shareholder positions and would prefer that directors and officers be required to consider these expanded interests when making decisions, with a shareholder right of action providing the “teeth” to enforce such consideration. This is particularly true in situations where a company is considering strategic alternatives and directors’ discretion in making business decisions is more limited by traditional principles requiring shareholder value maximization.

    *  *  *

    The authors draw three lessons for social entrepreneurs which we address in order. 

    Lesson #1: ‘A hybrid legal form is neither necessary nor sufficient to maintain a social enterprise.’ 

    Whether or not a benefit corporation is necessary (it is in the circumstances discussed above) or sufficient (it is not), as the authors themselves state in their conclusion, electing benefit corporation status might prove useful, not to mention easier and less expensive than hiring ‘shrewder’ lawyers to ‘(re)discover tested solutions to perennial challenges’, particularly in aligning expectations between executives, directors, and investors, and ‘cultivating consumer loyalty.’

    Lesson #2: ‘Financial success is critical to maintaining control.’ 

    We agree: no margin, no mission.  The authors are correct in stating that the biggest threat to an entrepreneur losing control of her or his mission-driven business is running the business poorly.  This is too often overlooked or underestimated and can’t be said loudly enough.  But it is equally critical to remember that benefit corporation legislation seeks to enhance mission control, not entrepreneur control.  The objective of a mission-driven business ought to be to create value for society, not to create long term control for the entrepreneur.  That’s why benefit corporation legislation creates accountability to shareholders (to create value for shareholders and to create value for society) that simply doesn’t exist in the constituency statute states that the authors laud.  In this important respect, benefit corporation legislation recognizes that it’s not about the people, it’s about the system.  Which brings us to the authors’ lesson learned #3.

    Lesson #3: ‘It’s the people!’ 

    While this is true enough, it is also true that people are enabled or constrained by the system in which they operate.  As a point of law, no matter how thoughtful or noble or harebrained the people, depending upon your point of view, there is zero flexibility for the people (in this instance a company’s directors and officers) to decide to pursue a corporate purpose other than maximizing value to shareholders. 

    As the authors themselves state, ‘executives at [benefit corporations] likely feel less pressure to maximize profits at society’s expense.’  Their ensuing question regarding causation (i.e. whether [benefit corporations] make directors ‘more virtuous’ or vice versa) is like asking which came first the chicken or the egg.  The practical thing to know is that chickens lay eggs.  And, to this point, that benefit corporations, assuming they ultimately behave like Certified B Corporations, will create higher quality jobs and improve the quality of life in their communities more so than ordinary businesses.  Whether causal or correlated, let’s have more of them, please.

    What about the authors’ remaining point that, in the end, directors don’t make the final decision, shareholders do?  True, but shareholders don’t get to vote until a sale offer is presented to them.  The negotiations over the terms of the sale have already taken place, so shareholders only choice is to say no.  Ignoring how infrequently less-informed shareholders vote against the recommendations of a board, simply exercising the right to say no is not a very compelling method for scaling high impact social enterprises that are built to last. 

    Moreover, the authors miss several important elements of benefit corporation legislation that give ‘the people’ more power.  Shareholders of benefit corporations have additional rights of action (i.e. the legal standing to bring a lawsuit) –- rights that do not exist under existing corporate law, even in states with permissive constituency statutes like Vermont—to hold directors accountable to consider the impact of their decisions on all stakeholders and to pursue the creation of a material positive impact on society and the environment as assessed against a credible and comprehensive third party standard. 

    That positive impact can now be judged more easily not only by shareholders, directors, or if need be a judge, but also by the general public (aka ‘the people’) for whom the benefit corporation is required to publish publically their annual benefit report which includes that assessment of their overall social and environmental performance against a third party standard.  It is largely this transparency provision in benefit corporation legislation that would give ‘the people’ (whether they be investors, consumers, policy makers, or employees) useful information to form an educated opinion about, for example, whether or not they feel Chevron’s ad in this same Fall issue of SSIR about their support for education in America tells a complete story about their overall corporate social and environmental impact.

    Because benefit corporations meet clear and higher standards of corporate purpose, accountability and transparency, it offers entrepreneurs clear differentiation and it offers investors and consumers additional protection.  Rather than a potential ‘unhelpful distraction’, benefit corporations are making it easier for social entrepreneurs, impact investors, and we the people to create the change we wish to see in the world. 
    * * *

    Perhaps most importantly, the authors’ exclusive focus on a legal analysis of the Ben & Jerry’s sale misses something crucial – that ultimately performance matters more than policy.  Lost in the inordinate focus on whether Ben & Jerry’s could’ve or should’ve resisted the sale to Unilever is an examination of what matters most to many observers – namely, what has happened to Ben & Jerry’s post sale? 

    The best way to judge the sale of a mission-driven business is to assess to what extent that mission has been maintained post sale as evidenced by its ongoing performance.  And in a world in which the public (perhaps appropriately) doesn’t trust what a company says about itself, maybe especially so for a business that claims to be one of the good guys, verified performance matters even more.
    We’ll examine this lingering question soon in Part 2 of this story.  Stay tuned.


    Jay Coen Gilbert, Bart Houlahan, Andrew Kassoy
    B Lab, co-founders

    B Lab is a nonprofit organization whose mission is to harness the power of business to solve social and environmental problems, and whose activities include working with businesses and investors to advance benefit corporation legislation and certifying businesses that have met rigorous and independent standards of performance as Certified B Corporations.

    For inquiries: Jay Coen Gilbert .(JavaScript must be enabled to view this email address) 610-296-8283

  • BY Antony Page & Robert Katz

    ON October 4, 2012 03:29 PM

    Thanks to the B-Lab co-founders for their detailed critique. We wanted our article to encourage discussions about new corporate forms that do not hinge on an inaccurate but deeply entrenched account of the sale of Ben & Jerry’s.  Their response gives us hope that our efforts will bear fruit.  Despite its length, their response does not dispute our central claim that the sale of Ben & Jerry’s to corporate giant Unilever was not legally required. We’re delighted.

    There is much common ground here.  We agree that off-the-rack structures like the benefit corporation may have some value.  For example, they may be able to save rising social entrepreneurs the trouble of reinventing some wheels and give a glimpse of what a double or triple-bottom-line business might look like. A distinct legal form may be able to convey information and influence perception, for example, by reassuring investors and potential investors that the company’s managers will not pursue profits above all else, or by cultivating consumer loyalty to a social enterprise brand.  Moreover, we note that “social entrepreneurship might benefit from states competing to become the Delaware of an emerging “social enterprise law.”  Like the responders, we say “let’s have more” businesses “that improve the quality of life in their communities more so than ordinary businesses.”  Responders claim that the benefit corporation structure will make that happen; we say it remains to be seen.

    For the sake of brevity, we’ll respond to just some highlights.  We have some substantive disagreements.  B Lab’s co-founders claim that our article’s legal analysis is faulty. (Their language is more ominous: the article “presents a dangerously inaccurate legal analysis of current corporate law.”)  We display such fault by “failing to reference any Delaware case law since Dodge v Ford in 1919 (most famously, Unocal v Mesa, 1985 and Revlon v MacAndrews, 1986).” (emphasis ours). Yet this is not true for two reasons.  First, Dodge v. Ford is not a Delaware case, it was decided by a Michigan court.  170 N.W. 668. (Mich. 1919).  Second, our article does indeed reference modern Delaware law, as corporate law experts know, when it asks “whether the board’s [action is] reasonable in relation to the threat”—that’s Unocal—and states that if a company is for sale, “the board [is] obliged to sell the company to the highest bidder” – that’s Revlon.  For readers desiring more extensive legal analysis—citations and all—we direct them to our article in the Vermont Law Review, where their appetites will be more than sated.  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1724940.

    In any case, for Ben & Jerry’s Unocal & Revlon are sideshows.  Neither standard required shareholders Cohen, Greenfield, and their friend Fuhrman to sell.  If shareholders don’t sell, there is no sale.  No sensible court would ever require directors to approve a sale that shareholders are going to reject – especially where directors are also controlling shareholders, and so can predict the outcome in advance. 

    Does corporate law requires directors to run their businesses so as to maximize shareholder value?  Arguably in support of that proposition stands Dodge v. Ford, the nearly century-old Michigan case. We can find no case where a court overrules a corporate board’s operational decisions on the grounds that they failed to maximize profit.  You can find more details in this article, including plenty of citations.  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1392628  Note that eBay v. Newmark was not about operational decisions. (Gilbert et al erroneously refer to this case as “EBay v Craigslist.”) Does anybody believe that craigslist today is run to maximize profit?  (Where are the ads?)  eBay didn’t even bother challenging the board’s management of the company’s affairs.

    Or consider The New York Times, a publicly traded corporation with a dual class stock structure.  Joe Nocera, a former business columnist and now op-ed columnist, wrote just this week, “If you buy New York Times stock, you are buying into the notion that you’ll let the family run the show, as it has done for more than a century. And the Sulzbergers will put The Times’s journalism ahead of all else, because that is what is in the family’s DNA.” Theirs is a dual-mission business, not run to maximize profit, and every reader of the paper should be either pleased or on notice, or both.  (We are!) How is the claim that “there is zero flexibility for … a company’s directors and officers to decide to pursue a corporate purpose other than maximizing value to shareholders” consistent with the real world?  Or consider Facebook: it went public stating “[s]imply put: we don’t build services to make money; we make money to build better services.” 

    Now let’s turn to the responders’ claims about the benefit corporation.  They write “[t]he primary objective of the benefit corporation is to enable mission-driven businesses to be built to last and scale with their missions intact, not to entrench individual charismatic leaders.”  Yet benefit corporations can readily switch to conventional corporations, with the approval of the board and (typically) a two-thirds supermajority of shares.  (A corporation can always include a supermajority change-of-control requirement in its governing documents.)  Is there any doubt that had Ben & Jerry’s been a benefit corporation, and Cohen and Greenfield wanted to sell to Unilever, that they would have been able to do this?  The point is that the benefit corporation offers slight legal protection against controllers that no longer wish to pursue a social mission.  This “legacy problem” is well known in social enterprise circles. 

    Likewise the form offers limited legal protection against the directors of a benefit corporation intent on subordinating the social mission.  They write that “investors are clearly empowered to hold a company accountable for maintaining the mission in which they invested.”  In the real world, however, such provisions offer preciously little legal accountability. The business judgment rule prevails in every U.S. jurisdiction, and it is enormously deferential to a board’s decision.  Just as in the real world there are almost no cases that bar a corporation from making decisions that advance a social mission, there will likely be no cases preventing a benefit corporation from making whatever decisions it wants.  (Cases involving conflicts of interest and self-dealing, will presumably remain the same for both kinds of corporations.) 

    So where are we?  Benefit corporations may facilitate the creation of some social benefit. If they do, however, it won’t primarily be because of law; it will be because of the people running them. At some point, the energy being spent persuading more states to pass new corporations forms will be better spent getting more businesses to adopt the forms already enacted.  If we’re not there now, we will be soon.  If you’re interested in still more, here is an article that helps place hybrid businesses in historical context, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1851782  Last.ly, for the truly insatiable, here are some thoughts on what social enterprise like the benefit corporation may be able to achieve. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1724942 

  • James Steiker's avatar

    BY James Steiker

    ON October 11, 2012 08:53 AM

    In the jurisdiction of Oz, where Messrs. Page and Katz apparently believe most corporations are domiciled, all Ben Cohen and Jerry Greenfield would have needed to do to resist unwanted suitors was to have clicked their heels three times and incanted “there’s no place like home”.  For better or worse, Ben & Jerry’s Homemade was a Vermont corporation subject to Vermont corporate law and, as a public company, regulation by the United States Securities Exchange Commission. Messrs. Page and Katz hypothesize in their article, “The Truth about Ben and Jerry’s” (sic.) what the company and Ben Cohen might have reasoned and done. Unfortunately, they are misguided. I know as I was there and I represented first a group of independent “socially responsible” investors that would take Ben & Jerry’s private and then Ben Cohen individually as the company was sold to Unilever.

    Let’s stipulate some of the facts. Ben and Jerry’s stock, after initially providing large gains for investors, languished a bit in the late ‘90s. Prior to the board’s announcement that it would need to consider outside offers, it was trading in the low $20s.  It became clear to the Company and its board that several outside suitors, notably Dreyers and Unilever, would pay a significant premium to the then-current stock price to acquire all of the outstanding Ben & Jerry’s stock.

    Messrs. Page and Katz state that the purpose of their article is “to dispel the idée fixe that corporate law compelled Ben & Jerry’s directors to accept Unilever’s rich offer, overwhelming Cohen and Greenfield’s dogged efforts to maintain the company’s social mission and independence.” They make light of “the stock analyst who claimed in 2000 that “Ben & Jerry’s had a legal responsibility to consider the takeover bids. … That responsibility is what forced a sale””, ignoring that that stock market evidently believed this to be the case as the Ben & Jerry’s stock price rose significantly after the initial offers, despite clear signals from Ben Cohen that he personally preferred not to sell the Company.

    The authors go on to argue first that the Ben and Jerry’s board did not have a legal obligation to consider third-party offers to purchase the company and second that it had no obligation to accept even a high-premium offer. They claim, without any support, that

    “In practice, courts are deferential to board decision making. Under a doctrine called the business judgment rule, unless the directors have a conflict of interest, nearly all board business decisions are beyond judicial review. If there is a potential benefit to shareholders, the courts will not interfere. In this way board decisions advancing a social mission are effectively immune from challenge; there’s no limit to the human mind’s ability to conceive of some benefit accruing to shareholders at some point, even if in the far-distant future. Absent special circumstances, a board’s decision to reject a proposed merger would easily survive a court challenge.”

    One would hope that such statements, presenting as conclusions without evidence, and ignoring a long line of Delaware corporate takeover cases, such as Revlon v MacAndrews (1986), if presented by a second-year law student in one of their classes, would receive the “C” it so richly deserves.

    No practicing attorney would, in my view, advise their corporate client that a clear conscience and an empty head would be good enough to prevail against a high-premium takeover bid in all circumstances. Indeed, as Ben & Jerry’s shares were acquired by Wall Street arbitragers betting on the likelihood of the sale of the company, there can be little doubt that the board refusing an offer of nearly double the pre-sale discussion share price, would provoke significant legal action. One only needs to consider the current plethora of “stock-drop” cases brought against public companies and their directors to understand that litigation in this situation would be a near certainty.

    The authors go on to conclude that even if there was litigation, the Company would have been required to indemnify the directors, implying that any fear of personal risk or loss was ill-founded. Again one might suspect the authors have never been sued as directors of a company. The time, personal cost and difficulty of defending a well-funded and reasonably founded lawsuit, even if indemnification applies, would and should be enough to scare even the most hardy director.

    Finally, the authors argue that Ben Cohen and Jerry Greenfield could have blocked the sale simply by using their super-majority voting power and blocking any merger or tender as shareholders. They further assert that it would be unlikely that the super-majority voting stock could be forcibly redeemed. Again, this assumes a high appetite for litigation risk on behalf of both the directors and shareholders.

    The authors’ arguments that Ben & Jerry’s founders had the ability to preserve the social mission goals of the Company by blocking a sale either via a friendly board or through well-designed poison pill supermajority stock have some theoretical merit but absolutely fail in the real world. In theory, theory and practice are the same. In practice, they are different. The board, the Company and the shareholders would likely have found themselves in protracted and expensive litigation with an uncertain outcome.

    Messrs. Page and Katz then assert that the new Benefit Corporation legislation and related special forms of limited liability corporations (LLCs) with social mission provisions are unnecessary. In their view, the Vermont “constituency” statutes are enough and add sufficient additional heft to takeover defenses so as to make these new forms unnecessary or irrelevant.

    Moreover, the authors believe that clever lawyers can achieve the same results as the new benefit corporation statutes through smart design and use of traditional takeover protections.

    The authors miss the point mightily. There is a large distance from statutes that merely allow directors to consider formally other stakeholders and tricked-up governance structures to the Benefit Corporation statutes that actively identify a public benefit of the corporation, state a duty and accountability to this public benefit, and provide formal exculpation for directors from the Revlon standard and its progeny in other states.

    There are some real and less appreciated lessons from the Ben & Jerry’s situation. There was no mechanism in the 1980s to access the public markets, accept capital from anonymous investors, and make clear that the corporate directors could pay unfettered loyalty to social mission and other corporate goals without exclusive focus on shareholder value. He who took the king’s shilling would ultimately need to play the king’s tune. In short, there could be no “social contract” among the shareholders of Ben & Jerry’s as a public corporation with numerous shareholders that would enable the corporation’s directors to set a balance among the corporation’s various bottom lines.

    Corporate governance matters a lot when there are several or many shareholders. The rules about the conduct of directors and shareholders define the things the corporation must focus on and the things that directors and shareholders may consider and do in conducting the business of the corporation. Ben & Jerry’s had anti-takeover poison pills and long-standing corporate practices around multiple bottom lines but there was no fundamental agreement among the shareholders to ensure that these “social mission” practices would be perpetuated. The Ben & Jerry’s directors and shareholders, without a “benefit corporation” or similar hook to hang their hats on, rightly feared for both themselves and the company in considering Unilever’s takeover offer.

    One can argue whether the Unilever acquisition was ultimately better or worse for Ben and Jerry’s as a company or for its constituents or for it “social mission” It does seem clear though, that corporate shareholders ought to be permitted to agree among themselves about a corporation’s mission, constituents and practices. Ben & Jerry’s shareholders did not have this opportunity. The outcome, had Ben & Jerry’s shareholders been permitted to elect to be a “Benefit Corporation” under the emerging statutes, would likely have been different.

    Jim Steiker is the founder of Steiker, Fischer, Edwards & Greenapple, P.C., a Philadelphia-based law firm that focuses on employee-owned companies and socially responsible businesses. He represented a group of independent investors and then Ben Cohen during the sale process of Ben & Jerry’s. He is a trustee of the Employee Ownership Foundation, Chair of the ESOP Association Finance Committee, and a member of the board of directors of the National Center for Employee Ownership. He also serves as a board member of eight privately-held employee-owned companies. His email is .(JavaScript must be enabled to view this email address) and his direct phone is 215-508-5643.

  • How much of Ben & Jerry’s $50 million was donated to charitable causes?

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