There’s been plenty of legal talk about Ben & Jerry’s in the impact economy. Founded in 1978 by childhood friends Ben Cohen and Jerry Greenfield and driven by responsible business values, the ice cream company thrived until its performance went downhill in the 1990s along with its stock price. In 2000, Ben & Jerry’s was sold to multinational corporation Unilever. The move caused concern for long-time Ben & Jerry’s supporters, who feared that the company’s values would be wiped out under new ownership.
In the years following the sale, questions and criticism ensued. Were the founders ready to cash out? Did they think it was best for the firm? Was the sale inevitable? Both Cohen and Greenfield responded on the decision to sell the company. Cohen told the Financial Times, “It was just about the worst day of my life.”
Before the Unilever bought the company for $326 million, or $43 a share, Cohen and other socially conscious investors attempted to take the company private at $38 a share – almost doubling the stock price that hovered below $20. But according to the Financial Times, shareholders filed a lawsuit. In the end, Unilever trumped all deals, including Dreyer’s bid to buy the company, by offering a 25 percent premium on the share price.
In 2008, Greenfield told The Guardian that it was a difficult period and that they did not want to sell the business. “But we were a public company, and the board of directors’ primary responsibility is the interest of the shareholders. So that is what the decision came down to. It was extremely difficult, heart-wrenching. It was a horrible experience for me and I can probably say it was horrible for Ben too.”
Despite the pressure that shareholders were claimed to lay down in the decision, critics believe that the sale was evitable. Lynn Stout, professor at the Cornell Law School and author of The Shareholder Value Myth, writes in the European Financial Review that only when directors breach a duty of loyalty, essentially meaning they steal from the firm, would shareholders be likely to recover damages in lawsuits.
Stout adds that as long as they don’t use corporate powers to enrich themselves, a legal doctrine called the “business judgment rule” allows managers of public companies to pursue objectives as they see fit. Provided it is not unlawful, they can choose to please customers, benefit society, or take care of its suppliers as they wish. They can also choose to maximize profit, but Stout explains that they “have no enforceable legal duty to maximize shareholder value.”
Law professors Antony Page & Robert A. Katz agree with Stout by adding another reasoning. In their article on the Stanford Social Innovation Review, they write that Ben & Jerry’s had defense mechanisms to ward off acquisitions. These include super-voting stocks and a class of preferred stocks, owned by the Ben & Jerry’s Foundation, which had veto rights over mergers and tender offers.
Motivated by a desire to get the facts straight about Ben & Jerry’s in light of debates over the necessity of new legal corporate forms – such as benefit corporations, L3Cs, and flexible purpose corporations – Page and Katz dispute the claim that corporate law is erroneous. Instead, social entrepreneurs can use existing legal forms in creative ways to protect a company’s social mission.
“Ben & Jerry’s didn’t get its defenses quite right,” write the authors, “not that some flaw in corporate law required the sale. Corporate law permitted super-voting stock and the granting of a veto to a charitable foundation. Moreover, corporate law allows directors to reject an offer, at least where the directors have not irrevocably committed themselves to a sale.”
Impact economy sparks change
Ben & Jerry’s represents only the beginning of the challenges social entrepreneurs will face when it comes to navigating the law. Part of the reason is because the impact economy has evolved beyond the traditional confines of legal realms. Janelle Orsi, the executive director and co-founder of Sustainable Economies Law Center (SELC), explains using the sharing economy.
“It’s been much easier to figure out when a taxable transaction takes place when you’re exchanging with money. Money’s very easy to quantify, but in a more sharing economy and a more sustainable economy, we think that value is going to be moving around in so many different forms and forums,” said Orsi.
Whether it’s crowdfunding, swapping, bartering, collaborating, or co-owning, there are legal considerations and barriers to navigate. In the “underground food movement”, for instance, people cook for others in gatherings around their communities. Sometimes they collect a fee and others times they ask for donations. But the activity is neither a restaurant business nor a get-together with friends. So what is it? Similarly, people who have backyard gardens may find that they want to sell their surplus yield. What are the legal barriers for doing this?
Relationships are another shifting area. Current law and regulations are well-defined between employer-employee, consumer-producer, investor-business, landlord-tenant, and so on, but in the impact economy there are relationships that don’t fit into these categories.
Kriss Deiglmeier of Stanford’s Center for Social Innovation illustrates with a recent blog post. She describes one scenario – fictitious but not unrealistic – where a consulting firm enlists the help of a social entrepreneur for a “shared value” venture with a corporation. While the consulting firm is paid for its work in brokering the project, the social entrepreneur and potentially other collaborators who devote time and resources to the project are left out of the “shared value” equation. These types of relationships are not uncommon in the social entrepreneurship space, given that pressing world problems require collaborative efforts.
Growing legal force
Since Ben & Jerry’s sale more than ten years ago, a small number of traditional law firms have new practice groups that focus on social entrepreneurship and social finance to help businesses comply with the law.
Orrick, Herrington & Sutcliffe, with a history dating back to 1863, has an Impact Investing and Social Sector Finance team dedicated to the sector. Reed Smith, Hogan Lovells, and Linklaters are other global law firms with social finance and social entrepreneurship expertise, with the last having provided pro bono legal advice to over 180 social enterprises in 18 countries.
In fact, those operating on shoestring budgets could also take benefit of pro bono legal support. LawForChange is a free legal resource created by the Lex Mundi Pro Bono Foundation that pairs attorneys with social entrepreneurs seeking legal help. Ashoka, a nonprofit supporting an international network of social entrepreneurs, enlists pro bono legal assistance from law firms for their Fellows.
Amazing work is not enough
Ben & Jerry’s ultimately salvaged their values as a responsible business. Operating as a subsidiary of Unilever, the company became a B Corp last September which certifies them as a do-good business, similar to what Fair Trade does for coffee products.
Jenny Kassan, the co-founder of SELC and the CEO of Cutting Edge Capital, a business that helps social enterprises raise capital, cautions the need for more legal education and awareness among entrepreneurs.
“Unfortunately, we’ve seen so many people doing these amazing things, like having internships on their farms or raising money for a wonderful local business, and then it turns out that they’re not doing it legally, they’re not doing it correctly under the law, and they can get into lots of trouble,” she said.
“We want to educate people about what the laws are but we also are working to change the laws, and also to help people navigate the laws because it can seem intimidating.”
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