ESG is a hot topic. There is a general perception in certain circles – including the D&O insurance community — that ESG awareness and activism are essential attributes of good corporate citizenship. There is even a perception in certain parts of the D&O insurance community that strong ESG credentials makes individual companies better D&O risks. However, as the securities class action lawsuit recently filed against U.K consumer products company Unilever shows, activism on ESG issues can, in fact, lead to D&O claims. The complaint in the Unilever action, which makes for interesting reading and arguably has important implications, can be found here.
Unilever is a consumer products company with many well-known brands. Among Unilever’s brands is Ben & Jerry’s ice cream, which Unilever acquired in the year 2000. Ben & Jerry’s had been founded in 1978 by two individuals, who had operated the company according to a multipart mission plan; among the parts of the plan was a “Social Mission,” which contemplated that they would use the company in innovative ways to make the world a better place.
When Unilever acquired Ben & Jerry’s in 2000, the transaction included some unusual features. Among other things, Ben & Jerry’s would continue to operate separately from Unilever’s other businesses and would continue to maintain an independent board of directors that was given primary responsibility for preserving and enhancing the objectives of the company’s Social Mission.
In July 2020, the independent Ben & Jerry’s board passed a resolution to end Ben & Jerry’s sales of Ben & Jerry’s products in areas the B&J Board considers to be Palestinian territories illegally occupied by Israel. The subsequently filed securities complaint alleges with respect to this board resolution that it “appears to arise out of the boycott, divestment, and sanctions (BDS) movement,” whose objective is to coerce Israel into making concessions to Palestinians. Also, according to the complaint, the BDS movement is “controversial,” having been condemned in a resolution of the U.S. House of Representatives. The complaint also alleges that 35 U.S. states have adopted Anti-BDS legislation discouraging boycotts, divestment and sanctions of Israel.
After the Ben & Jerry’s board passed the resolution, Ben & Jerry’s CEO (who had been appointed to the position by Unilever) chose not “operationalize” the resolution immediately, thus, according to the complaint, “thwarting the B&J Board’s decision.” The complaint alleges Unilever executives became involved because of the resolution’s “political sensitivity,” and alleges further that Unilever delayed the announcement of the resolution because Unilever officials were “aware of the negative consequences a truthful announcement would have made.”
In July 2021 – that is, nearly a year after the Ben & Jerry’s board adopted the resolution – Ben & Jerry’s announced on social media that upon expiration of its current licensing agreement, Ben & Jerry’s would end sales of its ice cream in “Occupied Palestinian Territory,” adding however that “we will stay in Israel through a different arrangement.” Unilever followed up with its own statement, saying that “we remain fully committed to our presence in Israel,” adding that “We also welcome the fact that Ben & Jerry’s will stay in Israel.”
However, in a separate statement by the Ben & Jerry’s board commenting in the Unilever statement, the Ben & Jerry’s board said that the Unilever statement “does not reflect the position of the independent board, nor was it approved by the independent board,” adding that by commenting on an issue directly related to Ben & Jerry’s “social mission and brand integrity,” Unilever was “in violation of the spirit and letter of the acquisition agreement.” The Ben & Jerry’s board apparently had wanted to release a different statement that made no reference to continued sales in Israel. The chair of the Ben & Jerry’s board chair allegedly made a statement to NBC News with respect to the Unilever statement that “I am saddened by the deceit of it.”
The disclosure of the Ben & Jerry’s board’s resolution provoked a reaction. The Israeli Prime Minister Naftali Bennet condemned the action, which he characterized as a “blatantly anti-Israel step.” The move was condemned in public statements from public officials in several states, including a statement by Texas Governor Greg Abbott. At least seven U.S. states announced decision to divest their pension fund investments in Unilever due to violations of the states’ Anti-BDS Legislation.
According to the complaint, Unilever’s share price declined over 5 percent on the news.
On June 15, 2022, a plaintiff shareholder filed a securities class action complaint in the Southern District of New York against Unilever and certain of its executives. Among other things, the complaint alleges that Unilever’s American Depositary Receipts (ADRs) are listed on the New York Stock Exchange. The complaint purports to be filed on behalf of a class of investors who purchased Unilever ADRs between September 2, 2020 and July 21, 2021.
The complaint alleges that in various public disclosure documents during the class period and cited in the complaint, the defendants made statements that were materially false and misleading because “Unilever acknowledged the importance of maintaining successful customer relationships with existing customers but omitted discussing that the B&J Board had already decided to end sales to existing Israeli customers, which risk reduced sales and a customer backlash”; because “Unilever acknowledged that its brands a reputation are valuable assets that could be impacted by unethical conduct but omitted discussing Ben & Jerry’s boycott decision, which risked damage to Unilever’s brands, reputation, and business results; and because “Unilever “acknowledged that complying with all applicable laws and regulations was important by omitted discussing Ben & Jerry’s boycott decision, which risked adverse governmental actions for violations of Anti-BDS Legislation.”
The complaint alleges that the defendants violate Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
The complaint in the new lawsuit against Unilever is interesting in and of itself, of course. The actions of a subsidiary’s separate and independent board have resulted in the filing of a claim against the parent company’s board, as well as against certain of the parent company’s executives. The relationship between the subsidiary board’s actions and the parent company’s disclosures involves the fraught circumstances concerning Israeli-Palestinian disputes. It is pretty clear that the independent Ben & Jerry’s board has managed to draw Unilever into sensitive territory and given Unilever a major headache.
The new complaint is also interesting to me in the context of the current focus on ESG issues. The circumstances here clearly involve the “S” part of the ESG package. The resolution of the Ben & Jerry’s board that is at the center of the circumstances here was passed as part of what Ben & Jerry’s referred to as its “Social Mission.” By self-definition, the board’s resolution is an “S” issue.
However, the Ben & Jerry’s independent board resolution may not meet what many people have in mind when they are thinking about and talking about the “S” issues as part of the ESG discussion. These days, I think what most people have in mind with respect to the “S” part of ESG is the category of Diversity, Equity, and Inclusion (DEI) issues. However, as this case clearly shows, a company with a “Social Mission” could be focused on issues entirely different than merely DEI issues. Indeed, the “S” part of the ESG label could refer to a whole host of issues, including, for example, human trafficking, child labor, living wage, or conflict minerals. It could even, depending on your political outlook, include the BDS movement.
Just to cite two recent examples that many readers will recall, think of the controversy in which Disney found itself after the company took a stand on the Florida “Don’t Say Gay” legislation; or the controversy that hit the NBA after one team executive posted a Tweet critical of Chinese actions against Uighurs in Xinjiang. The “S” in ESG can encompass a lot of ground. And “S”-related activities can draw companies into complications and controversy.
I think there are two important issues here that should not be overlooked: First, there is no uniform consensus of what the “S” part of ESG means. (I will save discussion of a related point for another day, which is that there is no consensus of what the “E” and “G” parts mean, either.) The lack of consensus sets a conversational and even intellectual boobytrap for anyone trying to talk about ESG as if it is a thing that had a uniformly accepted and understood definition. One of the big problems about all ESG discussion is that what one person talking about ESG means and what the person listening thinks it means may be very different.
The other important point that should be kept in mind is that Ben & Jerry’s activism on social issues is what got them sued here. The board resolution was, in fact, enacted as part of the company’s self-conscious “Social Mission.” My point here is that, depending on which you mean when you refer to the “S” as part of ESG, a company’s “social” activities may or may not make the company a better D&O risk. By the same token, this issue highlights the problems involved when a company says “Look, we’re great on ESG issues, we should get a discount on our D&O insurance.” It all depends on what you mean by “ESG”; a company could have a “Social Mission” of which the company is very proud but that may or may not make the company a better risk.
The most important point here is that all of this led to a securities lawsuit against Unilever. Having supposedly worthy ESG credentials may not make a company a better D&O risk; depending on what you mean with respect to “S” in ESG, the ESG activism could actually make the company a worse D&O risk. D&O activism, as this case shows, could get you sued.
One final note. I can imagine an objection to my discussion in the post on the grounds that the Unilever was not sued for Ben & Jerry’s social activism as such, but rather for the disclosures that Unilever made (or failed to make) about the activism. There is a measure of truth to this, but it is also true that there would not be a lawsuit were it not for the fracas that occurred after Ben & Jerry’s board’s resolution was disclosed. The fracas arose because of opposition to the resolution, not because of Unilever’s disclosure statements about the resolution. So for me, this is a lawsuit about the social activism, and so the lawsuit does show how social activism can lead to D&O litigation.