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Louisiana Municipal Police Employees Retirement System v. The Hershey Co.

Court of Chancery of Delaware

November 8, 2013

LOUISIANA MUNICIPAL POLICE EMPLOYEES RETIREMENT SYSTEM, Plaintiff,
v.
THE HERSHEY COMPANY, Defendant.

Submitted: May 21, 2013.

Draft Report: August 16, 2013.

Exceptions Submitted: October 25, 2013.

Michael J. Barry, Esquire and Justin K. Victor, Esquire of Grant & Eisenhofer, P.A., Wilmington, Delaware; Attorneys for Plaintiff.

Srinivas M. Raju, Esquire and Robert L. Burns, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware; Attorneys for Defendant.

Scott M. Tucker, Esquire of Chimicles & Tikellis LLP, Wilmington, Delaware; Attorneys for Nancy Gertner and Kent Greenfield.

MASTER'S REPORT

LEGROW, Master.

A large portion of the world's cocoa originates in two countries in which illegal child labor often is used on farms, including cocoa farms. The plaintiff, a stockholder of the Hershey Company ("Hershey"), is aware that much of Hershey's cocoa is sourced in these two countries, and the stockholder believes that Hershey may purchase some of that raw material directly from growers, and therefore may be complicit in the illegal activity or have knowledge that the company's products are tainted by the illegal conduct of the grower. The stockholder, armed with little more than the undisputed facts that (i) Hershey is a major player in the chocolate industry that uses cocoa beans and products derived from 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 and cocoa-derived products originate in those countries, demanded to inspect an expansive list of books and records. The company refused to allow the inspection, and moved to dismiss the Section 220 complaint filed by the stockholder.

The question this case presents is whether illegal conduct within one sector of an industry provides a credible basis from which this Court may infer that wrongdoing or mismanagement may have occurred at a company in that industry. This is not a novel question, having been addressed, for example, in two other cases involving the stockholder who filed this action. In this case, because the stockholder failed to sustain its minimal burden of providing credible evidence from which the Court may infer mismanagement or wrongdoing at Hershey, rather than within the cocoa supply chain, I recommend that the Court dismiss the complaint.

BACKGROUND[1]

The plaintiff, Louisiana Municipal Police Employees' Retirement System ("LAMPERS" or the "Plaintiff"), is a nonprofit organization that provides pension benefits for employees of municipal police departments in Louisiana.[2] The defendant, Hershey, is a Delaware corporation with its principal place of business in Hershey, PA. The Hershey brand is well-known to anyone who experiences even an occasional craving for chocolate, having developed several distinctive consumer products, and having forever cemented the storied connection between chocolate and love with its iconic "Kiss." Shares of Hershey are traded on the New York Stock Exchange, its products are sold in more than 70 countries, and it occupies approximately 42% of the market share for chocolate sold in the United States, making it the largest producer of chocolate in North America. [3] According to the complaint, LAMPERS has continuously owned Hersey stock "at all relevant times."[4]

On October 4, 2012, LAMPERS sent Hershey a letter demanding inspection of Hershey's books and records under 8 Del. C. § 220 (the "Demand Letter").[5] The Demand Letter identified six categories of documents that LAMPERS sought to inspect. Some of the categories included several subparts. According to the Demand Letter, the purpose of the demand was to investigate:

(a) mismanagement by the directors and/or officers of Hershey in connection with the matters discussed in the grounds [identified in the Demand Letter];
(b) the possibility of breaches of fiduciary duty by directors and/or officers of Hershey in connection with the matters discussed in the grounds [identified in the Demand Letter]; and
(c) the independence and disinterestedness of the Board, and to determine whether a pre-suit demand is necessary or would be excused prior to commencing any derivative action on behalf of the Company.[6]

The Demand Letter offers a relatively detailed description of the grounds LAMPERS believes support its stated purposes for inspection. All of the stated grounds relate to the undisputed and unfortunate endemic use of child labor on cocoa farms in West Africa. The complaint that LAMPERS filed after Hershey refused to permit inspection (the "Complaint") provides additional background and allegations that LAMPERS argues undergird the validity of the books and records demand.

The facts that LAMPERS contends form a credible basis from which this Court can infer possible mismanagement largely are not disputed. It is a sad and unavoidable fact that, although most Americans likely can catalogue happy childhood memories – whether those of campfires or holidays – that involve chocolate in some form or another, much of the world's cocoa is grown using illegal child labor. This "dark" side of chocolate – and not the semi-sweet variety – became the focus of public attention in 2001.[7] In the wake of press reports on the prevalence of child labor, forced labor, and human trafficking on cocoa farms in West Africa, Congress began considering proposed legislation that would have required "slave-free" labeling on cocoa products.[8] Concerned about the implications of that labeling, chocolate manufacturers lobbied against the legislation.[9] A compromise ultimately was reached when the Chocolate Manufacturers Association signed the Harkin-Engel Protocol (the "Protocol") on September 19, 2001.[10]The Protocol stated that it was the goal of the chocolate industry, in partnership with other major stakeholders, to "develop and implement [by July 1, 2005] … industry-wide standards of public certification … that cocoa beans and their derivative products have been grown and/or processed without any of the worst forms of child labor."[11] Hershey signed the Protocol to indicate its support for the measure.[12]

The signatories to the Protocol were not successful in achieving their stated goals by 2005. In 2005 and 2008, Senator Harkin and Representative Engel issued joint statements regarding the progress that had been achieved toward completing the goals identified in the Protocol. In 2010, representatives of the United States Department of Labor, the Government of the Republic of Côte d'Ivoire (the "Ivory Coast"), the Government of the Republic of Ghana, and the International Chocolate and Cocoa Industry signed a "Declaration of Joint Action to Support Implementation of the Harkin-Engel Protocol" (the "2010 Declaration").[13] The 2010 Declaration and the accompanying Framework of Action to support implementation of the Protocol (the "Framework")[14]provided that the participants' goal was that "[b]y 2020, the worst forms of child labor as defined in ILO Convention 182 in the cocoa sectors of Côte d'Ivoire and Ghana will be reduced by 70 percent in aggregate through joint efforts by key stakeholders…."[15]

Despite these commitments from industry members and governments, child labor and human trafficking continue to be a pervasive problem in cocoa farming. Approximately 70 percent of the world's supply of cocoa beans, and the largest percentage of Hershey's supply, comes from West African nations, including Ghana and the Ivory Coast.[16] LAMPERS's Complaint relies on a number of recent news reports to make the undeniable point that child labor continues to be common on cocoa farms in West Africa, with children forced to leave their families and forego schooling to work in horrific conditions.[17]

The documents incorporated by reference in the Complaint, including Hershey's 2011 Corporate Social Responsibility Progress Report (the "CSR Report"), [18] confirm that Hershey cannot certify that all of the 10, 000 suppliers from which it sources raw materials produce cocoa without relying on the "worst forms of child labor." Hershey acknowledges that "West Africa is a region of continuing focus for [the] company …[because] it is where [Hershey] source[s] the majority of Hershey cocoa …."[19] The CSR Report identifies Ghana and the Ivory Coast as among Hershey's "major sourcing countries, " and acknowledges that ethical sourcing and child labor are among the priorities identified by Hershey's stakeholders.[20] The CSR Report also confirms that Hershey has taken steps to attempt to address those priorities. Those steps include developing and later revising a supplier code of conduct, by which Hershey requires its suppliers to abide.[21] Hershey also undertook an internal risk assessment and supplier audit, in an effort to give preference to suppliers who adequately address human rights concerns and to identify and develop remediation plans for high risk suppliers. To that end, Hershey engages "qualified third part[y]" organizations that assist companies in addressing supply chain performance.[22]

Hershey has acknowledged that child labor is a deep-seated problem in the cocoa industry, and that eliminating the worst forms of child labor is a complex task that involves cultural and economic issues and requires the involvement of both governments and industry leaders.[23] Hershey recently has pledged $10 million over 5 years toward programs that are designed to, among other things, promote ethical labor practices.[24] On October 3, 2012, Hershey announced that by 2020 it will source 100 percent certified cocoa for its global chocolate product lines. [25] LAMPERS points to this recent announcement as evidence that Hershey is aware of child labor within its supply chain, but will not take action to end its reliance on ill-gotten cocoa until 2020.[26]

In the Complaint, LAMPERS takes Hershey to task for failing to limit its supply chain to those suppliers Hershey can verify are not relying on child labor. LAMPERS points out that other chocolate manufacturers have adopted such certification requirements, [27] and that Hershey's failure to do so according to the timeline established in the Protocol is subjecting the company to negative publicity and causing retailers to raise concerns. Among other things, LAMPERS points out that one national retailer, Whole Foods, announced it would no longer carry one of Hershey's brands, Scharffen Berger, in its stores due to "Hershey's failure to assure that cocoa is sourced without the use of forced child labor."[28] LAMPERS further alleges that a consortium of retailers sent Hershey's board of directors (the "Hershey Board" or the "Board") a letter voicing concerns over Hershey's failure to remedy child labor problems in the supply chain.[29]

LAMPERS argues that its allegations provide a credible basis from which this Court can infer that the Hershey Board breached its fiduciary duties by actively participating or being complicit in violations of the laws of Ghana, the Ivory Coast, the United States, and California.[30] What LAMPERS's Complaint succeeds in establishing is that (1) Hershey is a major chocolate manufacturer, and (2) the chocolate industry faces the problem of obtaining raw materials for its products while being aware that certain countries that are major sources of cocoa beans have wide-spread incidence ...


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