Buying a Food Company? An Ounce of Prevention is Worth a Pound of Cure

Published in Food Manufacturing.

Authors: Ronald J. Levine, Herrick counsel, and Richard Torrenzano of The Torrenzano Group

A recent New York Times article on ‘misleading’ lawsuits about package labels underscores the flurry of litigation by advocacy groups and consumer plaintiffs’ lawyers attacking companies for what they describe as a surge in deceptive marketing.

Labeling lawsuits are not the only legal challenges facing food and beverage companies. They are challenged by mandatory recalls, criminal charges for selling contaminated products, multiple crises arising from health concerns, and supply shortfalls arising from the pandemic.

Notwithstanding these brewing storms, food industry investors are still in acquisition mode, exploring expanding their footprint in the industry or entering it for the first time. Manufacturers of traditional canned and packaged goods are looking to expand offerings and markets with innovative products which appeal to the growing consumer demand for fresh, healthy and organic foods.

While the desire to protect and build the bottom line is understandable, some of these ‘hot’ new companies and products can be lurking landmines. For any investor group thinking of acquiring a food company, it is essential to probe well beyond the target company's balance sheet to avoid stepping into a potential legal sinkhole and public scorn that devastate sales.

Companies must consider the 3 P’s: Processes, Philosophy and Policies.

Processes

It is critical to ask probing questions and conduct investigations, as well as research concerning issues about the target's processing practices, bases for labeling, risk management policies, media coverage, social media commentary and postings by customers, competitors, adversary groups, unions, disgruntled current or former employees hiding in the shadows, as well as those seeking exposure for their special issue.

Moreover, potential buyers should conduct a thorough investigation into the source of ingredients and quality controls which guard against dangerous contaminants. A company can be exposed to serious liability claims if ingredients have an elevated level of toxicity.

Key questions a potential investor should explore when evaluating a food company’s processes:

First, is management current on the ever-changing landscape of food regulations?

Any food manufacturer must be on top of the constantly evolving labeling regulations promulgated by the Food and Drug Administration, Department of Agriculture, as well as state and local authorities, and other regulatory bodies.

Second, is the company carefully vetting claims on advertising and labels?

Words such as "natural" and "healthy" should not be used unless the company has studied regulations and knows how courts are interpreting those words. Product labels with those words attract plaintiffs’ lawyers as they survey the grocery shelves for litigation targets.

Mere technical compliance with government regulations may not be the end of the story. Since government regulations can sometimes be ambiguous and do not cover the entire terrain of labeling, courts have upheld claims against food companies where the product complied with regulations.

Third, does the company “push the envelope” when promoting products?

If the company engages in overselling products with "puffery," it may well encourage trouble. The company may be driving sales with elaborate claims, but profits could be eaten up defending claims by private plaintiffs or the Federal Trade Commission.

Additional key questions: Does current advertising and messaging resonate with customers? Is all company commentary consistent, written in simple English – as if you were explaining information to high school seniors – not in corporate speak or legalese?

Philosophy

In addition to investigating the target’s quality control, labels and advertisements, buyers should size-up management.

Some food companies are only one step from a founder’s kitchen stove. Sometimes, these creators believe that the brew they dreamed up is the perfect cure for the common cold or obesity. The rise in social media has created a fertile soil for selling dreams of quick health fixes.

The litigation battlefields are littered with bodies of enthusiastic founders of products who convinced themselves, and others, that they had discovered the next best thing.

Hundreds of thousands of potential consumers can be lured into buying useless, relatively inexpensive, products which they are led to believe will replace pricey drugs.

It is time-consuming, expensive and necessary to develop scientific support for health and medical claims. Investors should check for extravagant claims unless they can back them up with independent facts and data.

Policies

It is critical to assess past, present or potential future claims against the company. These risks include personal injury claims, consumer fraud class actions, recalls or regulatory investigations.

Social media is also a good place to look for plaintiffs’ lawyers who may be trolling for claims against the company. These sites are used to find and sign-up new clients for their firms. Even if there are no current claims against the company, are claims anticipated?

Finally, carefully evaluate company insurance for commercial and product liability, cyber, false advertising, as well as depth of suppliers’ policies and whether they have added the company as an additional insured.

Peace of Mind

With a significant opportunity to profit in the food industry, any buyer must take time and care to know the intended target’s processes, philosophy and policies.

When an investor embarks on due diligence the team must be prepared to do more than taking a deep dive into the profits and losses, and the growth history of the potential investment. The investor’s team must include experts who know where to look for potential claims, whether in court dockets or online.

And they must be ready to ask the current owners the right questions to determine whether the product is snake oil... or the real thing.

This due diligence of the 3P’s will hopefully lead investors to a fourth “P”: Peace of mind.

About the authors:

Ronald J. Levine is a litigation counsel to the Herrick, Feinstein LLP law firm in New York, where he specializes in class actions. He is also an adjunct professor at Rutgers University where he teaches food regulations and is a consultant to the food industry on crisis management strategies. 

Richard Torrenzano is chief executive of The Torrenzano Group, a reputation and high stakes issue management firm that helps organizations take control of how they are perceived, www.torrenzano.com. For almost a decade, he was a member of New York Stock Exchange Management (policy) and Executive (operations) Committees. He co-authored the bestselling, award-winning book, Digital Assassination: Protecting Your Reputation, Brand, or Business Against Online Attacks, St. Martin’s Press.

This article originally appeared in Food Manufacturing.