(Photo past Holly Lindem)

Though it occurred a dozen years ago, the sale of Ben & Jerry'due south continues to haunt social entrepreneurs. The sale's notoriety keeps growing, moreover, because of the central role information technology plays in current debates over the development and enactment of new US corporate forms—such equally low-profit limited liability corporations (L3Cs), benefit corporations, and flexible purpose corporations—that attempt to embed a company's social mission into its legal construction.

The story of Ben & Jerry's is a legend in ii acts. In Act One, Ben Cohen and Jerry Greenfield, two underachievers with counterculture values, open an ice cream store in a renovated gas station in Southward Burlington, Vt. The company, founded in 1978, becomes a social enterprise icon. It is fair to its employees, easy on the environment, and kind to its cows. The company pioneers the pursuit of business with a double bottom line—profits and people—that Cohen and Greenfield called the "double dip." In its heyday (circa 1990), the company was a kind of corporate hippie, wearing its convictions on its labels with funky-named flavors like Cherry Garcia, Whirled Peace, and Wavy Gravy. Peace, love, and ice cream!

In Act Two, set in 2000, the mood sours. Ben & Jerry's is sold (out) to Unilever, the world's tertiary-largest consumer goods company, described by one commentator as "a giant multinational clearly focused on the financial lesser line."1 News of the sale sends "shudders and shivers through the socially responsible concern community."two An all-besides-brief and unexpectedly wonderful trip becomes a bummer. If Ben & Jerry's was a kind of corporate Woodstock, this auction was its Altamont. (As a fitting coda, Unilever discontinued Wavy Gravy in 2003 considering it wasn't profitable plenty.)

This article aims to dispel the idée fixe that corporate law compelled Ben & Jerry'due south directors to have Unilever's rich offer, overwhelming Cohen and Greenfield'south dogged efforts to maintain the company's social mission and independence. Contemporaneous observers concluded thus, such every bit the stock analyst who claimed in 2000 that "Ben & Jerry'southward had a legal responsibility to consider the takeover bids. … That responsibility is what forced a auction."three Cohen says the aforementioned thing—on a 2010 NPR radio segment on social enterprise, he said that "the laws required the board of directors of Ben & Jerry's to take an offer, to sell the company despite the fact that they did not want to sell the company."4 Greenfield agrees: "Nosotros were a public visitor, and the board of directors' primary responsibility is the involvement of the shareholders. … It was zero about Unilever; we didn't want to get bought by anybody."5

Corporate law has been fingered as the culprit in Ben & Jerry's auction, which has go the affiche child, proof text, and Exhibit A for the proposition that the traditional business corporation is fundamentally inhospitable, if not outright hostile, to social enterprise. Consider this passage from the summer 2009 issue of the Stanford Social Innovation Review: "[A]mong social entrepreneurs, Unilever's buy of Ben & Jerry'due south serves as a cautionary tale of how easily corporate fiat can undermine social responsibility. 'The lath was legally required to sell to the highest bidder,' says [an chaser with expertise in social enterprise]. Neither Ben Cohen nor Jerry Greenfield wanted to sell the company, just because it was public they had no choice."vi

If the corporate class is bad for social enterprise, social entrepreneurs should use more than suitable alternatives. Proponents of new legal forms—such as L3Cs, do good corporations, and flexible purpose corporations—invariably cite the sale of Ben & Jerry's to show why such forms are necessary or attractive. (See "New Organizational Forms for Hybrids," below.) For example, a legislative written report on SB 201, California's Flexible Purpose Corporation act, states that "The story of Ben and Jerry'south Ice Cream is an case of why a new entity course is sought." It and so repeats the now familiar story: "Even though Ben and Jerry did non want to sell out, they had little choice."seven

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Proponents of these forms claim they could have prevented the sale of Ben & Jerry's, and foreclose future such scenarios. After Vermont enacted its Benefit Corporation Human activity in 2011, one commentator asserted that "If Vermont's law had been around 11 years ago, Ben Cohen and Jerry Greenfield might not accept had to sell their ice cream company. … [T]he laws of shareholder responsibleness forced the hippie founders to sell, fifty-fifty though they wanted to keep control. Now, with today's law, a new kind of corporation is created that prevents exactly that."8

Because the sale of Ben & Jerry's is a disquisitional fixture in debates over new legal forms, it's essential to go it right. This article challenges the canonical account of that sale. It exposes the underlying assumptions virtually corporate constabulary as erroneous: Corporate constabulary does not require publicly traded corporations to maximize shareholder wealth. We describe the elaborate machinery that Ben & Jerry's built to resist hostile takeovers and explain why these defenses, had they been invoked, would almost certainly have worked.

The Ben & Jerry'southward sale does not brand the legal statement for new forms. Rather, it is a lesson in how social entrepreneurs can use existing forms in creative ways to protect an enterprise'due south social mission—even if they decide to forgo such protection in the end. (Of grade, if the social entrepreneur remains the sole possessor of the business, such protections aren't even necessary.) The Ben & Jerry'southward story contains other lessons for social entrepreneurs, including the impact of financial performance on mission and the idea that committed decision makers are the best security for mission sustainability.

From Humble Ancestry

When Cohen and Greenfield beginning started out, they were only trying to earn a living. Information technology was only when the business began to take off that they began the transition toward a progressive enterprise. Cohen was disappointed that Ben & Jerry'due south was "just a business, similar all others, [that] exploits its workers and the customs."9 A friend, all the same, challenged him, pointing out that he could change whatever he didn't like nearly the business concern. Over time, Cohen and Greenfield came to view their business as, in Cohen's words, "an experiment to see if it was possible to use the tools of business organisation to repair society." At the cease of each month, said Cohen, he and Greenfield would enquire of themselves and the company: "How much have we improved the quality of life in the community? And how much profit is left over at the cease of each month? If we oasis't contributed to both those objectives, we have failed."ten By their own expectations, and many others', they were extraordinarily successful.

From the beginning, Cohen and Greenfield were deeply committed to Vermont's economic system and environs. They relied heavily on local suppliers of milk to brand their products. They hired a local artist to design their cartons and graphics. As the company'southward need for capital increased, they resisted venture backer financing, which typically requires relinquishing pregnant control over the company. Instead, it sold stock to Vermont residents, thereby reinforcing the company'due south local roots. In 1985 the company formalized its philanthropy past creating the Ben & Jerry's Foundation. Cohen endowed information technology with $850,000 worth of his shares, and the company agreed to contribute 7.5 percent of its pretax profits.

For a while the company thrived, merely in the early to mid-1990s, Ben & Jerry's once-stellar financial performance began to lag, even every bit its other bottom line—social contributions—went from forcefulness to strength. In 1994, the company's annual report disclosed that sales growth slowed and it had suffered its offset financial loss. By 1999 the stock had dropped nearly 50 percent from its peak, considering of the company's weaker financial functioning. Some investors argued that the company's social mission was a luxury information technology could no longer afford.

Ben & Jerry's anemic stock performance attracted involvement from prospective buyers who thought they could manage the visitor more than profitably. Dreyer's Grand Ice Cream tried to buy the company in 1998, but Ben & Jerry's board refused. Other buyers were rumored to exist interested when in early 2000, Cohen and a group of investors (including Body Shop founder Anita Roddick) offered to accept the company individual at $38 a share—about double the stock price of a few months earlier.11 Dreyer's made some other bid, which in turn prompted Unilever to offering $43.sixty a share. Although Unilever spoke well-nigh nurturing the social mission, many observers were skeptical.

Despite reported reluctance, Ben & Jerry's board appear on Apr 11, 2000, that information technology had approved Unilever's offering. (Melodramatically, some refer to this mean solar day as "4/11.") The transaction, valued at $326 one thousand thousand, was finalized with overwhelming shareholder support. Cohen's and Greenfield'south shares were worth shut to $40 million and $x 1000000 respectively. After more than 20 years as an contained enterprise, Ben & Jerry's became a wholly owned subsidiary of Unilever.

The deal, according to Ben & Jerry'southward securities filings, contained some provisions intended to maintain the corporation'south social mission. Although Unilever controlled the financial and most operational aspects of Ben & Jerry'south, the subsidiary had its own independent board of directors to aid provide leadership for the social mission and the brand's integrity. The new board included Cohen and Greenfield, and its members, not Unilever, would appoint their successors. Moreover, this subsidiary board had the right to sue Unilever, at Unilever's expense, for breaches of the merger understanding.

Unilever besides promised to proceed contributing pretax profits to charity, maintain corporate presence in Vermont for at least five years, and refrain from material layoffs for at to the lowest degree 2 years. Finally, Unilever agreed to contribute $five million to the Ben & Jerry'south Foundation, award employee bonuses worth a full of $five million, and dedicate $five one thousand thousand to assist minority-owned and undercapitalized businesses.

Ben & Jerry's today is described on Unilever'southward website as a "wholly owned autonomous subsidiary of Unilever." Although Ben & Jerry'southward has clearly preserved some of its unique values, nigh observers are disappointed. Cohen and Greenfield too have reportedly "expressed concerns that the visitor has shifted abroad from its original mission of social responsibility."12 Every bit was stated in a post on the Stanford Social Innovation Review's blog, "[north]obody wants to end upwardly similar Ben & Jerry's."13

The Legal Landscape

It is widely believed that corporate constabulary forced Ben & Jerry's directors to have Unilever's rich offer and sell the visitor. This perception reflects the erroneous view that corporate directors must ever human action to maximize shareholder value. The best and arguably only back up for this view is from Dodge v. Ford, a 1919 determination from the Michigan Supreme Court. That court opined that a "concern corporation is organized and carried on primarily for the profit of the stockholders."

Dodge v. Ford is an anomaly, every bit other courts have not followed its view of shareholder primacy. In the edgeless words of respected Cornell Law School corporate law professor Lynn Stout, "shareholder wealth maximization is not a modern legal principle."xiv Other state courts accept recognized this, including New Jersey's Supreme Court, which stated that "modern atmospheric condition require that corporations acknowledge and discharge social likewise as individual responsibilities as members of the community within which they operate."15

Most state legislatures take resisted the tenets of Dodge 5. Ford by enacting statutes that expressly authorize corporate directors to look beyond shareholder wealth maximization. Vermont enacted ane, nicknamed "the Ben & Jerry's police force," after the visitor had successfully lobbied Vermont's legislature. Vermont's "other constituency" statute, as these laws are called, is illustrative: It provides that when directors brand decisions they may consider such matters every bit "the interests of the corporation'south employees, suppliers, creditors, and customers; the economy of the country, region, and nation; [and] community and societal considerations, including those of any community in which any offices or facilities of the corporation are located." State statutes likewise give corporations wide latitude to donate profits to charities.

In practice, courts are deferential to board decision making. Under a doctrine called the business organization judgment rule, unless the directors have a conflict of interest, well-nigh all board business decisions are across judicial review. If there is a potential benefit to shareholders, the courts volition not interfere. In this manner board decisions advancing a social mission are effectively immune from challenge; there'south no limit to the human mind's ability to conceive of some benefit accruing to shareholders at some bespeak, even if in the far-distant futurity. Absent special circumstances, a lath'due south decision to refuse a proposed merger would easily survive a court challenge.

Was Corporate Law the Villain?

By the time Unilever approached Ben & Jerry'due south in early 2000, the company was well defended. Its founders, lawyers, and lobbyists had taken many steps to prevent a hostile takeover. In addition to promoting Vermont's enactment of an "other constituency" statute, the company had adopted a "poison pill." A poison pill thwarts hostile acquisitions by making them prohibitively expensive. To cancel a poison pill, an acquirer must either find a friendly lath or get one elected. Because elections for Ben & Jerry's board were staggered, an acquirer would demand at least two elections scheduled a year apart to elect the board of its choice.

In the case of Ben & Jerry'due south, Unilever could not have elected a friendly board, as the two founders and another early employee, director Jeff Furman, effectively controlled enough votes to direct the ballot of board members. The company had two classes of common stock, one with 10 votes per share and the other with 1 vote, and between them they held three-quarters of the super-voting stock. (This capital structure was not unique to Ben & Jerry'due south. The New York Times Co. and Google, for example, have issued super-voting stock to enable their heirs or founders to maintain control.)

Faced with an entrenched unfriendly board, a would-exist acquirer might have gone to court challenge that corporate law required the board to redeem a poison pill. If the courtroom chose to scrutinize the situation carefully, information technology would have examined whether the lath'southward failure to redeem a pill was reasonable in relation to the threat that Unilever posed to Ben & Jerry's. The legal standard is murky, but there have not been many cases where courts have ordered a pill's redemption.

Finally, Unilever might have asserted that Ben & Jerry's was for sale and then the board was obliged to sell the visitor to the highest bidder. This was unlikely for ii reasons. Offset, although Vermont courts accept not been presented with this situation, most land courts that take considered it have rejected whatever such obligation. Second, even if the obligation might theoretically exist, this state of affairs was unlikely to trigger it. Although it's true that the board was considering a sale, it had non committed itself. If the matter were litigated, nigh courts would concur that there was no obligation to sell on grounds that neither the breakup nor sale of Ben & Jerry's was inevitable.

Suppose, however, that a Vermont court had required the board to human activity to redeem its poison pill or enter into a merger understanding. Cohen and Greenfield still had one more card to play in order to preserve Ben & Jerry'south independence. A board's decision to redeem a pill merely allows a tender offer to be submitted to shareholders for their blessing. It does not hateful the offer will succeed. If a majority of shareholders exercise not agree to tender their shares for sale, the attempted takeover fails. If they did not tender, they retained their stock and their command of the company.

Similarly, fifty-fifty if the lath approves a merger, although it's a legally binding obligation, shareholders must vote in favor of the merger before it becomes constructive. Because of the principal stockholders' ownership of super-voting stock, a hostile acquirer could non take gained voting control of the company or a merger finalized without their approval.

The crucial bespeak is that even if Ben & Jerry's directors had a fiduciary duty in their capacity as directors to accept or facilitate a transaction, they had no such duty in their chapters every bit shareholders, and as such were empowered to back up or oppose the transaction every bit they saw fit. As shareholders, they were entitled to relish the benefits of selfish ownership, which ironically in this context could have been exercised altruistically to maintain the company's social mission.

If the super-voting stock were somehow bereft, Ben & Jerry's had yet ane more than defence force: an unusual class of preferred stock that held veto rights over mergers and tender offers. The Ben & Jerry's Foundation endemic all of this preferred stock. A takeover of Ben & Jerry's thus required the foundation's agreement, and two of the three directors of the foundation were the same master stockholders. The foundation itself could not be taken over because its board members selected their own successors. In any event, the foundation's directors were unlikely to be sued because the only party who could sue them was Vermont'due south attorney general.

There is 1 complexity in the assay above. For reasons that are unclear, Ben & Jerry'southward organizational documents granted the board the correct to redeem the preferred and super-voting stock. It is an interesting question whether a court would ever observe that a board's fiduciary duties required the redemption of these securities in society to eliminate their voting rights. The board would, after all, owe fiduciary duties to the holders of super-voting stock, and a duty of good faith and fair dealing to holders of the preferred stock. Ben & Jerry's ain public statements support this assay. The company's securities filings disclosed that its capital construction would make it difficult for a 3rd party to acquire control if the transaction were not supported past the main stockholders or the foundation.

However, this possible loophole shows merely that Ben & Jerry'due south didn't go its defenses quite right, not that some flaw in corporate law required the sale. Shrewder lawyering would take made Ben & Jerry'due south corporate independence even more unassailable. Corporate law permitted super-voting stock and the granting of a veto to a charitable foundation. Moreover, corporate police allows directors to reject an offer, at least where the directors have non irrevocably committed themselves to a sale.

Although Ben & Jerry'southward legal defenses to a forced auction appeared impregnable, the board unanimously agreed to sell the visitor. Why? Some cynically claim that the founders were prepare to cash out. Afterward all, Cohen and Greenfield grossed nearly $l 1000000 from the sale. Moreover, Ben & Jerry'due south faced some operational issues that a takeover could solve, such as production distribution. People shut to the decision say they were motivated by fearfulness of litigation, followed by a judgment that they would have to satisfy personally. If the directors were held personally liable—a remote possibility—Ben & Jerry's charter included a provision that would take indemnified them.

Lessons for Social Entrepreneurs

This revised and richer business relationship of Ben & Jerry's sale offers valuable lessons for aspiring social entrepreneurs. The legal consequences of an entrepreneur's choice of for-profit organizational class are likely to be smaller than often portrayed. Financial success is also essential to staying is control. Well-nigh important, the chief safeguard for maintaining the social mission is the people in control.

A hybrid legal form is neither necessary nor sufficient to maintain a social enterprise | Although the publicly traded corporate form can exist challenging, many businesses employing it take pursued social missions with vigor and endurance. The list includes prominent firms such as The New York Times Company, Whole Foods, Starbucks, and the Trunk Shop (before information technology encountered operational bug unrelated to its form), and less well-known companies like EV Rentals and Interface Carpets. These firms use several strategies, legal and nonlegal, to ward off hostile takeovers. Foundations and super-voting stock are non uncommon. In some cases, new forms include provisions that could make an enterprise's social mission harder to dislodge, withal such provisions are used by conventional for-profit corporations as well.

Financial success is critical to maintaining control | Ben & Jerry's early financial successes enabled its founders to negotiate powerful control mechanisms from a position of strength. Ultimately the virtually important change at Ben & Jerry's was not its directors' legal ability to resist takeovers, which indeed increased over time. Rather, it was the failing health of the business itself. In its last years as an independent company, Ben & Jerry's sales, financial operation, and stock toll had stagnated, and the company faced various operational challenges.

Successful and promising companies are amend positioned to take on new investors while retaining controlling positions for the founders. When Google went public in 2004, for case, with super-voting stock for the insiders, the company candidly admitted that public shareholders' voting rights would have fiddling affect on the company's direction. Facebook'south 2012 initial public offering of stock allowed its founder, Mark Zuckerberg, to retain control through a combination of super-voting stock and contractual arrangements with other shareholders. (Interestingly, both companies as well asserted that providing services, rather than making a profit, was their acme priority.)

Although it is true that even successful companies are bought, it is too truthful that shareholders tend to dorsum successful direction. Put differently, takeovers oft upshot from poor stock performance, which usually results from weak financial performance. Investment bankers commonly discover that the best defence is a high stock price. Had Ben & Jerry's remained successful, its directors would take felt more comfortable rebuffing offers, equally they had done several times earlier.

It's the people! | Ben & Jerry's defenses fabricated the company virtually impregnable to hostile takeover. Yet in the terminate, Ben & Jerry's directors chose to accept a generous offer, fifty-fifty at a cost to the social mission, rather than allow the company's defenses to be tested. Anti-takeover protections are only as effective as the people positioned to utilise them.

Regardless of the for-profit organizational grade in which a business organisation is housed, people who practice control over the company will usually be able to thwart its social mission. One oft-repeated objection to new forms is that they aren't much more constructive at screening out conventional for-turn a profit people and businesses with conventional for-profit souls. So long as the organizational structure is adequate, it volition exist the decision makers who make the difference. The surest mode to maintain a business' social mission is to put committed people in charge. (Cohen and Greenfield attempted to achieve this by negotiating the creation of an independent and robust board for the post-conquering subsidiary.)

When critics claim corporations are inherently pathological, they hateful that they encourage antisocial decision making by their employees. Executives at hybrid forms likely feel less pressure to maximize profits at lodge's expense. Still the causation is uncertain: Does a virtuous class make directors more than virtuous, or do the virtuous seek out businesses so formed?

Conclusions

Because new forms are being represented as correctives to the cause of Ben & Jerry'south sale, information technology'southward critical to place the true causes and manner of what happened. Hence the irony. The full business relationship of that sale does not make the case for new forms; rather, it illustrates how social entrepreneurs can utilise existing forms to protect an enterprise'due south social mission—even if they choose not to assert such protections. Proponents of benefit corporations and the similar should be pressed to identify existent and unavoidable instances of the Ben & Jerry's scenario, or terminate using it to demonstrate the dire need for such forms.

Of course, even if new forms for social enterprises are non legally necessary, some structural innovations might prove useful nonetheless. A standard grade, "off-the-rack" legal entity designed expressly for social enterprise would presumably save rising social entrepreneurs the problem of (re)discovering tested solutions to its perennial challenges. A distinct legal grade might besides convey information and influence perception, for instance, by assuring investors and potential investors that the company'south managers will not pursue profits über alles, and mayhap cultivating consumer loyalty to a social enterprise brand.

To date, a pregnant amount of resources has been devoted to developing social enterprise forms and lobbying states to enact them. As an do in political entrepreneurship, this strategy has produced results: Viii states accept L3Cs, seven states have do good corporations, and one has a flexible purpose corporation. It is an open question, however, whether this approach fosters more social innovation than would otherwise occur, or promotes information technology more effectively.

Social entrepreneurship might benefit from states competing to get the Delaware of an emerging "social enterprise constabulary." At the aforementioned time, fueling this competition yields diminishing returns. When a form has been enacted in one country, it is bachelor to residents of every country. You don't have to alive or operate in Vermont to prepare a Vermont L3C. What then is the point of pressing more states to enact the L3C, which is primarily intended to attract capital from relatively sophisticated investors—namely, grantmaking foundations?

We should recollect that what really matters is non the organizational grade simply rather the formation and flourishing of social enterprises. It remains to be seen whether new forms volition nurture new social enterprise icons or be an unhelpful (but tasty!) distraction. Past moving beyond the received wisdom on the Ben & Jerry's auction, we can better focus our free energy on where it will do the most proficient.

Read more stories past Antony Folio & Robert A. Katz.