Legal eye

This post originally appeared on CSRwire.

In the jurisdiction of Oz, where Messrs. Page and Katz apparently believe most corporations are domiciled, all Ben Cohen and Jerry Greenfield would have needed to do to resist unwanted suitors was to have clicked their heels three times and incanted “there’s no place like home..

For better or worse, Ben & Jerry’s Homemade was a Vermont corporation subject to Vermont corporate law and, as a public company, regulation by the United States Securities Exchange Commission. Messrs. Page and Katz hypothesize in their article, The Truth about Ben and Jerry’s, what the company and Ben Cohen might have reasoned and done.

Unfortunately, they are misguided. I know as I was there and represented first a group of independent “socially responsible” investors that would take Ben & Jerry’s private and then Ben Cohen individually as the company was sold to Unilever.

Ben & Jerry's: The Story

Let’s stipulate some of the facts.

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

Maintaining the Company's Social Mission

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

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

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

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

Legalities

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.