A Delaware court has dismissed an investor group's legal claim that the Hershey Co. had engaged in "wrongdoing" by relying on West African farms that use illegal child labor to harvest cocoa beans.
Illegal conduct in one industry sector does not provide a credible basis for a plaintiff to allege wrongdoing or mismanagement against a specific company, the Delaware Court of Chancery ruled.
In Louisiana Municipal Police Employees' Retirement System v. Hershey, the court conceded that child labor in the chocolate industry is a serious problem, but it ultimately concluded that the retirement system presented no evidence that Hershey had itself violated the law or relied upon child labor for its cocoa.
"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," said Master in Chancery Abigail M. LeGrow.
The Louisiana Municipal Police Employees' Retirement System, a Hershey shareholder, sent an October 2012 letter demanding inspection of Hershey's books and records, requesting information on possible breaches of fiduciary duty by Hershey's board by contracting with West African cocoa farms that may utilize child labor.
Hershey, based in Hershey, Pa., refused to permit inspection and LAMPERS responded by filing a lawsuit in the Chancery Court alleging that Hershey's board breached its fiduciary duty by refusing to end its reliance on child labor farms.
The plaintiff's lawsuit alleged that Hershey purchased cocoa originating in both Ghana and the Ivory Coast. Although both nations have laws banning human trafficking and child labor, LAMPERS contended that child labor on cocoa farms is still a major issue. In addition, LAMPERS claimed that Hershey violated the Trafficking Victims Protection Reauthorization Act of 2008, a U.S. law permitting criminal charges against companies that obtain labor through illegal means.
Hershey countered that LAMPERS failed to allege a credible basis for the court to infer any wrongdoing.
Ms. LeGrow found that the plaintiff did not present enough evidence that Hershey was specifically using child labor to obtain cocoa from West Africa.
"Notably none of those sources -- or any other source identified in the complaint -- states that Hershey has violated the law or is under investigation for possible legal violations, nor do they identify any illegal conduct within the company," Ms. LeGrow said.
The plaintiffs had argued that since child labor is a pervasive problem in the countries where Hershey sources cocoa, and because the defendant has a 42 percent share of the U.S. chocolate market, statistically, it is likely that Hershey is dependent on child labor and, therefore, has violated both national and international laws.
In the original complaint, filed in 2012, the retirement fund claimed that Hershey's board knew that its ingredients came from West African suppliers, and knew that those suppliers relied on illegal child forced labor.
Hershey's tacit support of the farms "is beginning to harm its business relationships, which could ultimately cost the company millions in profits," the pension fund said in the suit.
But Ms. LeGrow said that under the Chancery Court's decision in Louisiana Municipal Police Employees' Retirement System v. Countrywide Financial, a 2007 decision, the court can only consider a statistical correlation if it was "adequately supported by a sound logical methodology and competent expert testimony."
"Even when a statistical correlation meets that standard, however, it forms the 'outer limits' of the 'minimal quantum of evidence' a shareholder must provide to satisfy the credible basis standard," she said.
Last year, Hershey pledged that by 2020, it would use cocoa suppliers with sanctioned labor practices.
Jeff Mordock.: firstname.lastname@example.org or 215-557-2485.