By: Brandon Kinnard
On Friday, November 8, the Delaware Court of Chancery dismissed a complaint filed by the Louisiana Municipal Police Employee’s Retirement Systems (LAMPERS) against the well-known chocolate producer Hershey Co. The Complaint accused the board of breaching its fiduciary duties by relying on West African child labor in sourcing the majority of the company’s cocoa.[1] LAMPERS filed the Complaint after Hershey denied the pension group access to the company’s books and records.
LAMPERS, a stockholder of Hershey Co., demanded access to the company’s records in order to determine whether the chocolate producer uses cocoa sourced from farms in Ghana and the Ivory Coast where child labor is a pervasive problem. The Complaint was filed in the Delaware Court of Chancery to compel Hershey to allow inspection of the books and records. LAMPERS based their complaint on a number of undisputed facts, such as, “(i) Hershey is a major player in the chocolate industry that uses . . . cocoa beans, (ii) child labor is endemic in two countries that produce a large portion of the cocoa beans, and (iii) some of Hershey’s cocoa beans . . . originate in those countries.”[2] In addition to these general claims, LAMPERS accused Hershey of violating not only the domestic laws of Ghana and the Ivory Coast, but the Trafficking Victims Protection Reauthorization Act of 2008 which permits criminal charges against companies that benefit from illegal labor practices.[3]
In the state of Delaware, a plaintiff stockholder must show that it has a “credible basis” to believe that corporate mismanagement or wrongdoing has occurred in order to make the court compel access to the company’s records.[4] This “credible basis” standard is quite low. To prevail under this standard, the stockholder must produce “some evidence” to support its claim, and will not be carried by a mere suspicion of wrongdoing.
Unfortunately for LAMPERS, they failed to meet this burden in the eyes of the Court of Chancery. The LAMPERS argued that the undisputed facts listed above, paired with statistical analysis suggesting that Hershey relies on child labor, and the fact that Hershey has pledged to use only suppliers with sanctioned labor practices by 2020[5], met the quantum of evidence. However, the court used the commanding precedent of Louisiana Municipal Police Employee’s Retirement System v. Countrywide Financial Corp. to flesh out the strength of statistical inference: “statistical correlation, if adequately supported by a sound, logical methodology and competent expert testimony” may constitute evidence of wrongdoing.[6] As applied by the court, LAMPERS complaint could not satisfy this standard, and thus failed to produce “some evidence” to provide a “credible basis” to decide that Hershey, Co. may be engaged in wrongdoing.
The issue at the heart of this case is whether facts that suggest illegal conduct in one sector of a given industry provide a credible basis from which a court may infer that wrongdoing may have occurred within a company in the given industry.[7] The shorthand answer to that question is no, if the complaint is based on undisputed facts that require large logical or inferential leaps to arrive at the charges of wrongdoing. The mere fact that Hershey procures much of its cocoa from the Ivory Coast and Ghana, countries in which child labor is rampant, was not enough to support a claim that Hershey uses goods derived from child labor.
This case stands to illustrate exactly what a shareholder must prove in order for the Delaware Court of Chancery to compel a company to grant access to its records. Mere facts that suggest, but do not directly connect, companies to illegal means of production are not enough to carry the burden mandated by the court. This ruling is decidedly pro-business – it insulates companies and their directors from curious shareholders that wish to inspect the books. Corporate transparency seems to be the loser here; facts which disclose that eighty-nine percent of children from the Ivory Coast are involved in the cocoa industry[8] and Hershey imports the majority of its cocoa from these countries[9] were not enough to grant shareholders access to corporate records – which would have likely confirmed or dispelled any suspicions.[10] Practitioners and activist shareholders should take note of this case; it is a helpful guide to determine whether a plaintiff has any chance at gaining access to a corporate defendant’s books through Court of Chancery litigation.
[1] Louisiana Municipal Police Employee’s Retirement Sys. v. Hershey, CO., C.A. No. 7996, at 1 (Del. Ch. 2013).
[2] Id.
[3] Id. at 9.
[4] Id. at 14.
[5] Jeff Mordock, Court Dismisses Child Labor Claims Against Hershey, Traffic Alerts (September 2, 2013), https://traffickalerts.wordpress.com/tag/municipal-police-employees-retirement-system-v-hershey/.
[6] Louisiana Mun. Police Employees’ Ret. Sys. v. Countrywide Fin. Corp., CIV.A. 2608-VCN, 2007 WL 2896540 (Del. Ch. Oct. 2, 2007) order clarified, CIV.A. 2608-VCN, 2007 WL 4373116 (Del. Ch. Dec. 6, 2007)
[7] Louisiana Municipal Police Employee’s Retirement Sys.. at 1.
[8] Phil Milford and Dawn McCarty, Hershey Should Supply Child Labor Records, Academics Say, Bloomberg Business Week (April 12, 2013), https://www.bloomberg.com/news/articles/2013-04-12/hershey-should-supply-child-labor-records-academics-say.
[9] Louisiana Municipal Police Employee’s Retirement Sys., at 5.
