Saturday, July 9, 2022

For Whom Are Ben & Jerry's Corporate Managers Trustees?

Y’all could have guessed I’d be blogging about this, because it’s like someone created a corporate law honey pot just for me personally.

I’m a bit late to the party on the Ben & Jerry’s structure – I know social enterprise scholars have studied the Unilever/Ben & Jerry’s arrangement for years – but now that there’s a dispute, I am fascinated.

As I understand it, Ben & Jerry’s was a publicly traded company, with a multi-class stock structure that handed control to founders Ben Cohen and Jerry Greenfield.  Cohen and Greenfield were famously committed to the company’s social mission as well as its economic one, but the stock traded at an unimpressive dollar figure, making the company a tempting takeover target.  Eventually, Cohen and Greenfield agreed to sell to Unilever in an all-cash, two-step merger consisting of a tender offer on the front end and a voted merger on the back end.  (On the back end, Unilever had more than 90% of the company’s votes, so I gather the necessity of a voted merger was because Vermont – where the company was (and is) incorporated – either didn’t have a short form process or set the threshold higher than 90%). 

In any event, as set forth in the merger agreement between Ben & Jerry’s Homemade and Unilever (Unilever acting through its acquisition vehicle Vermont All Natural Expansion Company, and its US subsidiary, Conopco), it was agreed that after the merger, the company would survive as a wholly-owned Unilever subsidiary, organized as a Vermont close corporation.  Unilever would only have the right to appoint a minority of the board, however; most of the board would be continuing directors from the former company, and they would get to choose their own successors.  Unilever, as the sole shareholder, was then contractually obligated to vote for those successors to cause them to be seated as new board members.  The board would be in charge of overseeing the social mission of the company, but operational/financial control would be in the hands of a CEO, which Unilever would be permitted to select.  The merger agreement devoted a significant amount of space to the social mission priorities of the surviving company, and to the board’s responsibility for them.

Separately, Unilever signed a “shareholders agreement” that laid out the same idea.  The shareholders agreement – which I gather was signed after the merger, because the agreement identifies Ben & Jerry’s as a Vermont close corporation – was between Conopco, as Ben & Jerry’s sole shareholder, and Ben & Jerry’s itself, and allocated responsibility for pursuing social responsibility priorities to the independent board, while the CEO would retain managerial authority over other areas.

Both the merger agreement, and the shareholders agreement, explicitly stated that there were no third party beneficiaries.  Instead, the enforcement mechanisms set forth in both agreements were that Ben & Jerry’s could sue for specific performance, and that, if Unilever failed to vote for a selected director candidate, then current board members and the spurned director could sue. 

Anyway, Ben & Jerry’s continued over the years with its social mission and its open political stances, but matters came to a head when the board decided to halt all sales in the Israeli-occupied territories

That, apparently, was a bridge too far for Unilever, and it decided to simply sell the brand to a third party distributor who would market Ben & Jerry’s products in the West Bank.  Which prompted Ben & Jerry’s – via its independent board – to sue Unilever in SDNY for breach of the merger agreement and the shareholders agreement, seeking an order that would prevent Unilever from transferring Ben & Jerry’s trademarks for use in the West Bank. 

Well.

The most boring aspect of this dispute is the plain old contractual one.  Did Unilever violate the agreement?  Jesse Fried and David Webber think not.  They point out that the merger agreement also included a license agreement, which was attached to the proxy statement.  That license agreement obligated Ben & Jerry’s to “use commercially reasonable efforts to obtain…for [Unilever] the right to conduct all facets of the Business in Israel,” and they argue the specific obligation trumps Unilever’s general obligations.

I’m not sure it’s that simple, though; the license agreement also is qualified by the social responsibility promises.  For example, the license agreement states:

[Unilever] agrees that the following will apply to its conduct of the Business in the Territory. Products bearing the Licensed Mark shall be developed, introduced, promoted and marketed by [Unilever] in a manner so as to further the Essential Integrity of the Principal Licensed Mark, as such Essential Integrity of the Principal Licensed Mark is now embodied in the business conducted by [Ben & Jerry’s] in the United States (and certain countries outside the United States), and as it may evolve hereafter in a manner consistent with its current embodiment.

And it goes on from there, for several paragraphs, including, “The parties agree that the performance by [Unilever] of its obligations in this Section 7 is a material and fundamental element of this Agreement and is essential to preserve the Essential Integrity of the Principal Licensed Mark.”

And because the license agreement makes clear that the social responsibility obligations will evolve over time, theoretically something that was not required at one point would become required at another.

Fried and Webber also argue, though – and this is something Fried lays out more here – that the social responsibility obligations only attach if they are commercially reasonable, and withdrawing from an entire market (while leaving Unilever vulnerable to anti-BDS sanctions from states) is unreasonable, threatening to cut into the financial and operational authority reserved to Unilever via the CEO.  That’s the kind of messy interpretive issue that I would not necessarily expect to see quickly resolved; it could drag out into discovery.

But far more interesting to me is the conceptual idea that Unilever, as now the sole shareholder of Ben & Jerry’s, formed a binding contract with its own wholly owned subsidiary regarding entity governance.  I mean, this is Vermont law, not Delaware, and I don’t claim to be familiar with Vermont corporate law, but I would think there’s a very good argument that the contract is simply the legal equivalent of a New Year’s resolution: a promise I made to myself, with about as much binding effect.

(Yes, we can argue about whether it’s even legal for a business corporation to adopt a social responsibility mission on par with the financial one; Vermont has a vague constituency statute and this is a close corporation, but leaving that aside, even in Delaware, I’m assuming shareholders can voluntarily agree to that kind of thing.  The question here is, did they?)

I mean, it’s one thing to treat the corporation as its own entity with its own interests, separate from the interests of a particular set of shareholders, and it’s another thing to leave those interests entirely unspecified, with no actual person/entity standing them behind them, not even particular stakeholders.  It’s not as though the board is representing, say, some group of creditors who want to preserve Ben & Jerry’s assets against parent expropriation; this is not even like a nonprofit, which exists to advance the interests of the beneficiaries and the donors who contribute with the expectation their dollars will be used for particular ends, and where the system is ultimately enforced via the parens patriae power of the state.  Under the Ben & Jerry’s structure, the board has fiduciary duties to the corporation, but it’s unclear who are the actual human people standing behind the legal entity whose interests they represent, and certainly no stakeholder has control over the board.   The business has a social responsibility mission, as defined by a self-perpetuating board with literally no accountability to any constituency, that has no stake, and whose personal interests have been defined out of the contract.  The board represents someone, surely, but who?  Doesn’t all this take the “real entity” theory of the corporation too far?

It would be different, of course, if the documents allowed for a third party beneficiary.  Because obviously there are some: Ben Cohen and Jerry Greenfield.  They wanted this promise, it was an important part of their decision to sell their controlling stake in the first place.  Likely, they would not have sold without this promise, and certainly it would be reasonable for them to have enforcement rights.  They could have sold their shares but retained for themselves a kind of social responsibility easement that gives them, and their heirs and assigns, continuing rights in certain areas.

But that’s not how they structured the deal.  The contracts explicitly deny the possibility of third party beneficiaries.  So the interesting question is, why?

One possibility, I suppose, is that Unilever didn’t want so effective an enforcement mechanism; they’d have balked at the prospect of accountability directly to identified persons.  If that’s the reason, then Cohen and Greenfield deliberately agreed to a legally uncertain structure and presumably were paid more for their shares as a result.

But what I actually think is more likely, though, has to do with the fact that Cohen and Greenfield were, in fact, controlling shareholders, who sold their high-vote shares on the same terms and for the same price – $43.60 – as everyone else.  This was Vermont, of course, and I am not an expert in Vermont law, but in Delaware, there’s a huge difference between a controller selling to a third party for the same consideration as the minority shareholders, and selling with a side-deal – even a social responsibility side-deal.  If the merger agreement explicitly contracted that the social responsibility promises were made to Ben Cohen and Jerry Greenfield, that could have immediately subjected the deal to entire fairness scrutiny in a subsequent shareholder challenge.

Plus, the company charter apparently had an unusual provision that allowed the board to convert the high vote stock into ordinary stock if it chose – though the reason for that is unclear.  If Cohen and Greenfield insisted on side consideration in a merger, there might have been questions about whether the board had a responsibility to remove their control rights.

And that assumes Ben Cohen and Jerry Greenfield were even legally able to get additional consideration in the event of a merger; some controllers give up that right in the charter, and I don’t know if Cohen and Greenfield did.

So it’s possible that Cohen and Greenfield wanted a personal promise but structured the deal to avoid the appearance of that, which is what – in my view – makes the entire agreement legally suspect.

That said, we can imagine alternatives where the public shareholders themselves valued the social responsibility promises – that’s kind of the point of a lot of CSR theorizing, i.e., that public shareholders would vote for value-reducing social promises if they didn’t suffer from a collective action problem.  What if they wanted this built into the merger?

Well, then I suppose the agreement could have created some kind of trustee, representing the interests of the selling public shareholders, with enforcement power as a third-party beneficiary.  But Ben & Jerry’s didn’t do that, either.

So while I certainly don’t think shareholders should be legally barred from creating enforceable social responsibility promises, I am very, very uncomfortable with the kind of … well, subterfuge … it took for Cohen and Greenfield to get theirs, and I’m sympathetic to possibility that this particular promise is unenforceable due to a lack of, well, distinct parties to the contract.

That said, while that argument might be available to Unilever, I’m not sure Unilever has much of an interest in making it.  Though this article suggests that Ben & Jerry’s social activism has become a headache for Unilever in recent years, social responsibility is very much part of the Ben & Jerry’s brand.  I assume there’s a contingent of consumers who have warm fuzzies about the company because of it, and even those opposed to the company’s stances on particular issues probably dismiss them as the views of quirky Vermont hippies without much real world effect.  In other words, I suspect most of the time, the social conscience of Ben & Jerry’s is net profitable, and nuking the entire arrangement over this one issue would fire off a cannon to kill a bug.  So, Unilever may prefer to litigate this as a matter of interpretation over what the contract requires – knowing that a win will allow Unilever more control over the social stances that the company takes in the future.

Unilever’s papers are due Monday, so we’ll see.

https://lawprofessors.typepad.com/business_law/2022/07/for-whom-are-ben-jerrys-corporate-managers-trustees.html

Ann Lipton | Permalink

Comments

Maker's Mark, which I understand is a wholly-owned subsidiary of Beam Suntory, Inc. (itself a subsidiary of the Japanese Suntory parent company), recently converted to a Kentucky public benefit corporation*. One difference from the Unilever/Ben & Jerry's situation is that Maker's Mark was a subsidiary long before it converted. As benefit corporations increase in number and the normal M&A activity marches on, these conflicts will become more common.

*The Kentucky benefit corporation statute, annoyingly, uses the term "public" for privately-held and publicly-traded benefit corporations alike.

Posted by: H. Justin Pace | Jul 9, 2022 6:00:19 AM

Hi Justin. That's fascinating but I don't think the label will have much legal significance. I mean, benefit corps don't function well as commitment devices in general, and with a single shareholder, who's to challenge the company if it doesn't live up to its commitments? Most benefit statutes I know only give litigation rights - such as they are - to the shareholders.

Posted by: Ann Lipton | Jul 9, 2022 6:05:39 AM

Ann: Both the Model Legislation and Vermont's act also give directors standing to sue. Given the odd arrangement of the directors at Ben and Jerry's, that seems relevant

Posted by: Brett McDonnell | Jul 11, 2022 10:10:00 AM

Hi Brett. How is that relevant though? I mean there is still a question of whose rights they're enforcing and if it's the company's I have the same question - who is the company representing? And the contract disclaims any personal rights for anyone else.

Posted by: Ann Lipton | Jul 11, 2022 10:14:54 AM

I am finding this fascinating, too, Ann. And I have not looked at the governing law or the agreements or court filings, which could affect my ultimate views. My reason for writing here stems from your comment: “Doesn’t all this take the ‘real entity’ theory of the corporation too far?”

My answer to your question: I think not. I will lay out an analysis here that responds to aspects of your post and to some of the commentary. It’s somewhat difficult to describe, but I will give it a go.

As you may know from some of my prior work, I have been critical of the benefit corporation form for a number of reasons, one of which is that benefit corporation statutes, read together with the corporate charters opting into that corporate form, typically direct the board as to the interests that must be considered or balanced in decision making, constraining the way in which the board exercises its authority to manage the corporation in accordance with its corporate purpose (as articulated in its governing documents and as permitted under the applicable state law). Iow, I am concerned that the benefit corporation form unnecessarily restricts and oversimplifies the otherwise complex, multifaceted decision making in which a for-profit corporate board of directors could and should engage based on a corporation’s purpose and the state law or its organization.

In advising and reviewing the actions of for-profit corporate directors, in the ordinary context (in which the corporate purpose is broad or ill-defined), we presume that the constituency primarily (but not solely—except perhaps in Delaware in certain circumstances) benefitted by the board’s decision making and fiduciary duties to the corporation is the shareholders. (That may or may not be the law in Vermont, of course.) However, the Ben & Jerry’s situation does not appear to conform, as we all have come to understand it, with that archetypal corporation. Its governing documents articulate an evolving social mission for the firm. This means that the board is free to consider all interests of corporate constituencies important to that articulated social mission. The board is in charge of protecting that corporate mission, which undoubtedly matters to a number of corporate constituencies. Those constituencies do not have to have independent enforcement rights to matter. And they need not be third party beneficiaries in a contractual sense. So, conceptually, I do not have the difficulty you describe in your post.

I am interested in what you think of this analysis. I am traveling and not on the Internet often for the next ten days. But I will try to check back in to see whether you think when I am able to jump online.

Posted by: joanheminway | Jul 11, 2022 3:47:22 PM

Hi, Joan - I guess it just comes down to fundamentally differing conceptions about the corporation! And maybe the nature of a contract, because this requires not only that the board be essentially unaccountable, but you also have to believe the sole shareholder made a binding promise to the corporation that it owns and the unaccountable board that it ... elects? It's the combination of these features that kind of breaks my brain, that the corporate parent set up a subsidiary and made a binding promise to the subsidiary as to how the subsidiary would be run, that the subsidiary independent of the parent can enforce, but that still does not invoke the rights of any other party. I wish I had a more thoughtful answer, but that's where the circularity goes too far for me.

Posted by: Ann Lipton | Jul 11, 2022 4:19:05 PM

Hi back, Ann! Your response is helpful. You may be right about fundamentally different conceptions of the corporation.

The board, in my conception, is accountable to the firm itself, the entity to which the directors owe their fiduciary duties. The sole shareholder elects the board to serve out the corporation's purpose, which is constructed by state corporate law, the corporation's charter, bylaws, and any shareholder agreements (meaning those sanctioned under the law of the state of organization as governance altering arrangements), together with any other statutorily or judicially recognized governance agreements or instruments (e.g., proxies, voting agreements, and voting trusts). And in my conception of the board, the rights and responsibilities and circumstances of multiple parties may be impacted by the effect of the corporations' governance structure on the board’s decision making. The board has to identify and take account of those stakeholders’ interests and them all out in taking action.

But ai am not sure that anything that I write here gets you any further down the road in your thinking on this, although I thought I would at least try. In writing this I feel a bit like I am explaining a blockchain or cryptocurrency, both of which also seem to challenge folks’ pre-existing knowledge and conceptions.

Posted by: joanheminway | Jul 12, 2022 5:40:39 PM

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