Yet another helping of Ben & Jerry's
This time, in a Manhattan court. Ben & Jerry’s Homemade, Inc (BJH) versus its immediate parent, Conopco, Inc, is not a good look: il faut laver son linge sale en famille, as Napoleon once quipped.
The dispute arises out of the announcement by Unilever that it had sold its Ben & Jerry’s business interests in Israel to the current local licensee. The effect will be to enable the ice cream to be sold in what BJH refers to as the “occupied Palestinian territory”. This responds to a previous decision taken by the board of BJH to cease such sales in the pursuit of its “historical social mission”. That was, and continues to be, reputationally damaging to Unilever plc.
Who gets to eat the ice-cream is one question and the underlying politics is another, but the real issue for the markets involves the law of corporate governance in England. In the context of a multinational corporate group, where sound group governance practices ordinarily cascade downstream, can a subsidiary operate outside of that framework?
Where the subsidiary is an operating vehicle, it is difficult to conceive of such an arrangement. Investors do not bargain for risk and reward in equal measure. They rely on the board of the parent to limit the former and maximise the latter - across the entire group.
The importance of effective corporate governance is well understood. Amongst investors, it forms part of the holy trinity of E, S and G. In fact, it is the most established of that triumvirate, tracing its place at the top table to the UK’s seminal Cadbury Report on corporate governance published in 1992.
For parent companies, which are also investors, their focus on corporate governance is driven by commercial and legal factors. The subsidiary has the potential to impact the parent’s finances, share price, risk and reputation. In English company law (and it is that which is indirectly relevant to a dispute between two U.S. companies lower down the group corporate structure), it is not sufficient for directors of a parent company to turn a blind eye to the operations of a subsidiary. Where the subsidiary has an independent board the directors, this is a fortiori. Nor can directors avoid their responsibilities by placing intermediate holding companies between themselves and the operational companies in a group.
This all points to a position where there must be serious doubts as to the possibility of contracting-out from group governance, at least where the subsidiary is an operating (a.k.a. risk-generating) company. Where a subsidiary seeks to flex its muscles by arguing that such arrangements can and do exist, this incontrovertible factual and legal matrix is likely to form part of any court’s thinking.
The default position for any parent company, as direct or indirect owner of the shares of an operating subsidiary company, is to take the opportunity to supervise the management of the subsidiary. An interpretation that favours BJH would require a conclusion that the parties intended to go against that grain. Where the parties to such agreement were the subsidiary and its immediate holding company, but not Unilever plc, which would ultimately be affected by such an agreement, the BJH interpretation is even more doubtful.
Mapping the timeline of the development of the law and practice of group corporate governance allows us to gauge Unilever’s approach at that time. At the time of the acquisition agreement, Unilever plc had itself been a contributor to the Cadbury Report on corporate governance. It appears that at that time Unilever was for, and not against, effective group governance.
Any arrangement between intermediate parent and subsidiary that preserves a degree of autonomy for the subsidiary owes its existence to the law of obligations. It does not impact on the parent company’s property rights as (indirect) owner. It would otherwise be illogical if, as part of the acquisition of a subsidiary, the arrangements alienated the very asset it had acquired. BJH itself did not intend to be an island. It intended to become a Unilever product (the Unilever logo is displayed on tubs of BJH ice cream).
BJH’s activism in the “occupied Palestinian territories” did not appear to exist at the time of its acquisition in 2000. This “mission” only began to be formulated in 2019 and is therefore arguably outside the scope of the acquisition terms, which relate to BJH’s “historical social mission”. That is surely right: no parent company would or could commit to a future unknown “mission”.
The outcome of the case is awaited with keen interest on both sides of the Atlantic.