Monday, December 6, 2010
I continue thinking about Chancellor Chandler's opinion in eBay v. Newmark, and I still find myself troubled by the determination that, by embracing it's "community service mission," craigslist was being run improperly as corporate entity (see my prior post here). To recap, Chancellor Chandler explained that by choosing "a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders."
As I mentioned before, in apparent contrast to Chancellor Chandler, I don't think it necessarily follows that embracing a "community service mission" is inconsistent with "promot[ing] the value of a corporation for the benefit of its stockholders." In fact, it may be that the community service mission is the precise reason that stockholders are gaining the benefit. Take, for example, Ben and Jerry's Ice Cream. Ben and Jerry's began as a small start-up looking to expand its business. Over time, the company began to grow, and along with this growth, embraced environmental causes and created a foundation giving 7.5% of pretax profits for distribution to worthy causes. (See Ben & Jerry's History here.) Of course, the company would not likely have any value if the ice cream were bad (just as craigslist would have no value if it did not work to sell things), but the company philosophy helped build the brand.
Ben & Jerry's grew to the point that it is now a wholly owned subsidiary of Unilever. The company has three-tiered mission statement, with a social mission, a product mission, and an economic mission. The economic mission is of Ben & Jerry's is:
To operate the Company on a sustainable financial basis of profitable growth, increasing value for our stakeholders and expanding opportunities for development and career growth for our employees.
Furthermore, the company explains:
Capitalism and the wealth it produces do not create opportunity for everyone equally. We recognize that the gap between the rich and the poor is wider than at any time since the 1920’s. We strive to create economic opportunities for those who have been denied them and to advance new models of economic justice that are sustainable and replicable.
Is Ben & Jerry's just as vulnerable as craigslist to a shareholder complaint? Obviously not directly, because Unilever owns all the shares. But should Unilever be permitted to allow Ben & Jerry's to operate in this manner? It seems to me that Unilever shareholders would have a legitimate complaint. After all, if the use of the corporate form for such goals is improper, it should be an improper use of Unilever's assets, too. Unilever could seek to accomplish Ben & Jerry's goals through a variety of other mechanisms, such as the use of gifts to a nonprofit entity See, e.g., A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581 (N.J. 1953). But if the use of the corporate form to pursue Ben & Jerry's goals without the primary goal of profiting for the shareholders is improper, this is a place that form should triumph over substance.
Perhaps the answer instead lies in the size of the investment or the amount of money available to be made. That is, Ben & Jerry's is a small portion of Unilever, so Unilever shareholders should not have much to complain about. Regardless of the decision, it's small potatoes. Chancellor Chandler noted that "[i]f Jim and Craig were the only stockholders affected by their decisions, then there would be no one to object. eBay, however, holds a significant stake in craigslist, and Jim and Craig’s actions affect others besides themselves." Perhaps it is this "significant stake" that is the problem. That is, if the decision pursued seems significant enough (or the potential loss of not pursuing the apparently more profitable end is great enough), then the Delaware court will step in and provide its own judgment.
If so, it seems to mean that the business judgment rule can be rebutted in another way, in addition to showing fraud, self-dealing, and illegality: by showing the likely profitability of choosing another course.