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Ben & Jerry’s Israel Fight Carries ESG Lesson for Deal Makers

Aug. 10, 2022, 2:37 PM

Ben & Jerry’s unprecedented lawsuit against its Unilever plc parent over sales in the Israeli-occupied West Bank demonstrates the importance of carefully carving out the level of autonomy for a targeted company in acquisitions.

The fight over the direction of Ben & Jerry’s social mission—as Unilever tries to bulldoze its way into selling ice cream in the West Bank over its subsidiary’s objections on human rights grounds—demonstrates how laying out the extent of a parent’s control is more significant amid amplified environmental, social and governance concerns, lawyers say.

Companies have always mulled various considerations during an acquisition, such as how a targeted business is run, but ESG priorities are getting more attention than ever. The Vermont ice cream brand’s lawsuit shows how a lack of harmony on ESG can galvanize disputes within companies—serving as a warning to both acquiring and target companies to hammer out just how much independence a subsidiary can expect if a deal goes through.

Levels of control will vary. Some parents want to keep their subsidiaries very centralized, while others are adamant that their subsidiaries “are responsible for their own actions—for better or for worse,” said Douglas Chia, president of Soundboard Governance LLC, an independent corporate governance consulting firm.

Either way, companies should specify the extent of autonomy verbally, during negotiations, and on paper. ESG disputes aren’t going anywhere, lawyers said, considering how sensitive and emotionally charged the topics can be.

“They’re very personal,” said Helene Banks, a partner at Cahill Gordon & Reindel. Ultimately, “it may be that you just find yourself a parent company that’s already sympatico with your ESG perspective.”

Ice Cream Conflict

In the case of Ben and Jerry’s, its board was set up to have a unique level of autonomy over its business, an arrangement that seemed to work for the more than two decades since Unilever bought the brand for in 2000 for $326 million.

Ben Cohen, the company’s co-founder, said in court filings that the autonomous structure was “the most critical provision” in its contract with Unilever, and that the sale would not have gone through without it.

Things changed when the board of Ben & Jerry’s said it would stop selling its products in the West Bank in 2020 over human rights concerns.

After Unilever moved to sell the ice cream brand’s Israel business to a local licensee, essentially circumventing the boycott, Ben and Jerry’s sued the British multinational in Manhattan for an injunction to block the Israel sale.

Unilever’s actions “will undermine our social mission and the essential integrity of the brand, which threatens our reputation, and ultimately, our business as a whole,” Ben & Jerry’s said in its statement.

Ben & Jerry’s said in an August statement that Unilever’s move is a blatant violation of the 22-year-old merger agreement that gave the ice cream company’s board primary responsibility over its social and political priorities. After the lawsuit was filed, Unilever countered by freezing compensation for Ben & Jerry’s independent board.

At a federal court hearing on Monday, Ben & Jerry’s lawyers argued that, without an injunction, the company’s credibility will take a hit because customers will be confused about who leads its social mission. A lawyer for Unilever said Ben & Jerry’s has no power to sue its parent.

The Manhattan judge has not yet ruled on the injunction, but said he wasn’t sure why the potential harm was imminent.

Investors, too, have taken their gripes with Unilever to the courts, suing the company in June over allegations that it improperly handled Ben & Jerry’s plans to boycott the Israeli-occupied West Bank. Shareholders argued that the company misled investors by hiding the boycott decision and mischaracterizing the news when it was announced.

It’s not the first time Unilever has been up against ESG issues. Two bidders for the company’s tea division that includes Lipton backed out in November over human rights concerns at the multinational’s Kenya plantations.

‘Selling Out’

A company’s social stance could be a deal breaker in a sale, lawyers say, but giving ESG priorities greater weight at the due diligence stage can help businesses gauge if they’re going to mesh with a new parent or subsidiary.

“You don’t want to end up finding yourself acquired or acquiring some company where you are politically or socially on different ends of the spectrum” on certain issues, said Josh Margolin, a partner at Selendy Gay Elsberg. “If you have different views or constituencies you’re seeking to serve it can become very complex.”

Parent companies often want a subsidiary to assimilate to their culture, said Chia. Target companies should evaluate how a parent might try and shake up their social values, he said, as acquired companies may have to give up what they stand for as part of a sale.

“This is what people talk about when they say ‘selling out,’ that you took the money and with that you’re going to lose something,” he said.

But businesses also need to wrestle with the specter of ESG problems that could arise after a sale—for example, if a parent acquires a company that is later penalized for greenwashing.

Every ESG conflict can’t be predicted. But parent companies should at least consider their potential liability for a subsidiary’s wrongdoing and how a penalty could impact the rest of their business, lawyers say.

“Buyers are spending a lot more time thinking about culture issues now,” as well as human rights and potential violations of environmental laws, said Michael Littenberg, a partner at Ropes & Gray.

To contact the reporter on this story: Clara Hudson at chudson@bloombergindustry.com

To contact the editor responsible for this story: Melissa B. Robinson at mrobinson@bloombergindustry.com, Maria Chutchian at mchutchian@bloombergindustry.com