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
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.
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.
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.
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.
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
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. Lastly, 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
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.
The most important thing I come away with from this article is reinforcement that being a lawyer means living a negative, cynical, and soul-sucking existence. What a waste of a precious life.
Thank you for this most helpful analysis. In several countries wherever hybrid sorts of organizations ar nonexistent, the for-profit structure is commonly adopted this is often the case, for instance of the various Social Businesses started by Nobel Laureate faculty member. Yunus. maybe all the efforts to make these hybrid forms ought to, as you’re suggesting, be re-focused in educating social entrepreneurs on the way to shield their social missions among the for-profit model?
There are plenty of top shelf ice creams that sell their product to restaurants in giant tubs as well as gallons to supermarkets,however whatever Ben and Jerry’s might blow up you rear end,they sell their ice cream in pints for one reason….profits.Who would pay 20 dollars for a gallon of ice cream?However when they sell the pint for 5 dollars,people are more likely to spring for this.Ben and Jerrys is EXTREMELY over priced and this nonsense about their caring for the consumer is nothing short of complete and utter bullshit.They don’t make gallons bec ause the cost of packaging and distribution would make a gallon a much more reasonable price,which they simply don’t wish to provide the average consumer,albeit if your having a corporate function they provide reduced charges and sell special sizes and rates.I no longer purchase ben and Jerrys because they are money hungry tight wads that won’t provide their product for a reasonable price at larger quantities to the average consumer using completely fabricated nonsense and stories that are nothing short of lies to dujpe the idiots willing to allow these corporate pigs to make huge profit margins!!!!
Makes me wonder where true Americans has gone - this world is not the one I grew up in where Republican’s and Decorates respected each other and there was not the hate that now plagues our nation. Shame on Ben and Jerry’s negativity. You have lost the business of many true American’s
COMMENTS
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
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.
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.
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.
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.
BY B Lab
ON October 1, 2012 06:35 AM
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. Lastly, 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
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.
BY MG
ON January 14, 2014 07:03 PM
How much of Ben & Jerry’s $50 million was donated to charitable causes?
BY Dianne
ON March 2, 2016 10:50 AM
The most important thing I come away with from this article is reinforcement that being a lawyer means living a negative, cynical, and soul-sucking existence. What a waste of a precious life.
BY Miguel Correo
ON March 18, 2016 05:31 AM
Thank you for this most helpful analysis. In several countries wherever hybrid sorts of organizations ar nonexistent, the for-profit structure is commonly adopted this is often the case, for instance of the various Social Businesses started by Nobel Laureate faculty member. Yunus. maybe all the efforts to make these hybrid forms ought to, as you’re suggesting, be re-focused in educating social entrepreneurs on the way to shield their social missions among the for-profit model?
BY Chris Elser
ON October 24, 2016 07:28 PM
There are plenty of top shelf ice creams that sell their product to restaurants in giant tubs as well as gallons to supermarkets,however whatever Ben and Jerry’s might blow up you rear end,they sell their ice cream in pints for one reason….profits.Who would pay 20 dollars for a gallon of ice cream?However when they sell the pint for 5 dollars,people are more likely to spring for this.Ben and Jerrys is EXTREMELY over priced and this nonsense about their caring for the consumer is nothing short of complete and utter bullshit.They don’t make gallons bec ause the cost of packaging and distribution would make a gallon a much more reasonable price,which they simply don’t wish to provide the average consumer,albeit if your having a corporate function they provide reduced charges and sell special sizes and rates.I no longer purchase ben and Jerrys because they are money hungry tight wads that won’t provide their product for a reasonable price at larger quantities to the average consumer using completely fabricated nonsense and stories that are nothing short of lies to dujpe the idiots willing to allow these corporate pigs to make huge profit margins!!!!
BY Tatev
ON April 3, 2020 09:38 AM
Very informative analysis. I never knew Ben and Jerry’s story, and I learned a lot about the whole process. Thank you for sharing!
BY Carol Ogrady
ON April 18, 2021 05:11 PM
Makes me wonder where true Americans has gone - this world is not the one I grew up in where Republican’s and Decorates respected each other and there was not the hate that now plagues our nation. Shame on Ben and Jerry’s negativity. You have lost the business of many true American’s