There are some real and less appreciated lessons from the Ben & Jerry’s situation.
By James G. Steiker
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, what the company and Ben Cohen might have reasoned and done.
Unfortunately, they are misguided. I know as I was there and 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.
Ben & Jerry's: The Story
Let’s stipulate some of the facts.
Ben & 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 Dreyer's and Unilever, would pay a significant premium to the then-current stock price to acquire all of the outstanding Ben & Jerry’s stock.
Maintaining the Company's Social Mission
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.
Blocking the Sale
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.
The Benefit Corporation: Unnecessary?
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.
Lessons from the Ben & Jerry Sale
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 & 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.
About the Author
James G. 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. He can be reached at email@example.com and 215-508-5643.
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