The goings on at Hershey Company are always of great local interest here in Central Pennsylvania. But of more than local interest is the litigation surrounding the management of the Milton Hershey School Trust and the attempt to sell the company.
Jonathan Klick of Florida State University College of Law and Robert H. Sitkoff of Harvard Law School have published Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off in 108 Colum. L. Rev. 749 (2008). Here is the abstract:
"In July 2002 the trustees of the Milton Hershey School Trust announced a plan to diversify the Trust’s investment portfolio by selling the Trust’s controlling interest in the Hershey Company. The Company’s stock jumped from $62.50 to $78.30 on news of the proposed sale. But the Pennsylvania Attorney General, who was then running for governor, opposed the sale on the ground that it would harm the local community. Shortly after the Attorney General obtained a preliminary injunction, the trustees abandoned the sale and the Company’s stock dropped to $65.00. Using standard event study methodology, we find that the sale announcement was associated with a positive abnormal return of over 25% and that canceling the sale was followed by a negative abnormal return of nearly 12%. Our findings imply that instead of improving the welfare of the needy children who are the Trust’s main beneficiaries, the Attorney General’s intervention preserved charitable trust agency costs of roughly $850 million and foreclosed salutary portfolio diversification. Furthermore, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Company. Our analysis contributes to the literature of trust law by supplying the first empirical analysis of agency costs in the charitable trust form and by highlighting shortcomings in supervision of charities by the state attorneys general. We also contribute to the literature of corporate governance by measuring the change in the Company’s market value when the Trust exposed the Company to the market for corporate control. "
The authors are critical of the PA Attorney General’s role:
"Regarding trust law, our findings imply agency costs arising from the Trust’s charitable trust form on the order of $850 million, about 15% of the 2002 value of the Trust. Although the trustees controlled more than three-quarters of the shareholder votes in the Company, they failed
to impose a value-maximizing strategy on the Company’s managers. As we have seen, the market judged the Company as being $2.7 billion (or 25.5%) more valuable when the Company’s managers were expected to be subject to the market for corporate control instead of supervision by the trustees.
Moreover, instead of reducing the agency costs associated with the Trust’s charitable trust form, the Attorney General’s intervention made those agency costs permanent. Without any offsetting financial benefit to the Trust, the Attorney General forced the Trust to retain an asset that was worth $850 million more on the open market than in the hands of the trustees. While the sale’s detractors argued that the sale would hurt other stakeholders, such as the residents of Hershey and the Company’s employees, one wonders whether their gain offsets the preservation of such enormous agency costs. The $850 million in Trust assets destroyed translates roughly into $67,000 per resident of Hershey, or $62,000 per employee of the Company—plus the Trust’s exposure to uncompensated risk was continued." (108 Colum. L. Rev. 749 (2008) pp. 815-816)
Juan Antunez gives these cites for more background information:
"[t]he Hershey Power Play in Trusts & Estates Magazine by Pennsylvania attorney Christopher H. Gadsden, and Daniel Gross’s piece in Slate entitled Hershey Barred, whose subtitle says it all: How Pennsylvania officials screwed poor kids out of $1 billion by stopping the sale of the candy-maker. "
Blogging credit goes to Juan Antunez who writes the Florida Probate & Trust Litigation Blog as well as to Professor Gerry W. Beyer’s Wills, Trusts & Estates Prof Blog.