Jonathan Klick and Robert H. Sitkoff's engaging, enlightening and thorough article examines the controversy over the attempt by the trustees of the Milton Hershey School Trust to divest a controlling interest in the Hershey Company in 2002. At that time, the trust's $4.7 billion of Hershey stock constituted 53 percent of the trust's $8.8 billion of assets. The trustees announced their intention to sell in order to diversify the trust's investments.
Although the trust held only 30 percent of the company's stock, that stock possessed 75 percent of the voting power because the company operated with a dual stock arrangement that granted the trust's stock with greater voting power. After the announcement, the price of publicly traded Hershey stock shot up from $63 per share to $78 per share. The proposed sale generated political resistance from Hershey employees, the residents of Hershey, Pa., and eventually the Pennsylvania Attorney General, who filed suit to prevent the sale. After a trial judge enjoined the sale, the price of the stock fell to $65 per share.
The authors use the scenario as a case study to test the theories: (1) that agency costs are inherent with ownership by charitable trusts; and (2) that management performance can be improved when there is a risk of a takeover. The agency costs that the authors identify include, among other things, the increased likelihood of management complacency and an aversion to taking potentially lucrative business risks to pay steady dividends from stable and conservative business operations to the charitable endowment.
The authors conclude that the Hershey case study verified the existence of such agency costs. Their conclusion is that shareholder stock values often can reach their greatest potential when corporate management is subject to market forces and when politicians stay out of the way. The authors present extensive financial information relating to the Hershey transaction.
A reader might wonder how much of the dramatic stock price fluctuation might occur anytime Wall Street learns that a controlling block of the voting stock of a corporation with a dual class stock structure is up for sale (for example, Google or Dow Jones). The authors observe that dual class ownership of publicly traded companies is relatively uncommon in the United States (mainly because the New York Stock Exchange has a general prohibition on trading non-voting stock of such companies), but it is much more common in European stock markets.
Overall, the article is a great piece of scholarship that addresses the powerful economic, social and political forces that can converge when a charitable organization contemplates the potential sale of control of a major corporation that is a prominent corporate citizen.
Reviewer: CHRISTOPHER R. HOYT is a professor of law at the University of Missouri-Kansas City and a member of Trusts & Estates' advisory committee on retirement benefits