Hershey’s Controlling Trust Is Besieged at a Pivotal Juncture
With new bid from Mondelez possible, trustees face threat of court action by Pennsylvania attorney general
HERSHEY, Pa.—The charitable trust that controls Hershey Co. could be asked to consider the sale of one of America’s most famous brands to snack giant Mondelez International Inc. at the same time the trustees are under scrutiny by Pennsylvania’s attorney general.
The attorney general’s office is threatening to take the trustees to court if they don’t make governance reforms at the trust by the end of the month, according to people familiar with the matter.
Such legal action might not directly affect the chocolate maker, which recently spurned a $23 billion takeover offer from Mondelez. But it would be a potential distraction for the trust at a critical time.
Mondelez, whose brands include Oreo cookies, hasn’t dropped its pursuit of Hershey, and could raise the offer if it sees an opening, said two of the people familiar with the matter.
Meanwhile, because of pressure from state regulators, the trust could lose three longstanding board members, after losing four members since December, including one last weekend.
A spokesman for the trust, one the nation’s richest charities, said the board is in talks with the attorney general’s office and hopes to reach a resolution.
The trust, which has a roughly 30% stake in the company and 81% of its voting power, was thrust into the spotlight by the Mondelez bid. Hershey’s corporate board, which includes three representatives of the trust, unanimously rejected the offer.
The trustees are under pressure to keep Hershey independent. The 122-year-old company provides 5,000 jobs and is a major source of pride in its hometown, where street lights along Chocolate Avenue are shaped like Hershey’s Kisses. But the trustees also have a legal obligation to maximize revenue for the trust’s beneficiary, a local school for underprivileged children.
In 2002, a previous state attorney general pushed the trust to sell the company to diversify its assets. Amid the resulting political backlash, the attorney general did an about-face and won an injunction in state court that effectively prevented the trust from selling Hershey to suitor Wm. Wrigley Jr. Co.
“We think the outcome will be the same: no sale of Hershey,” said Pablo Zuanic, a food analyst at Susquehanna Financial Group. “True, the Mondelez approach is well-timed, given the slew of challenges faced by the Hershey Trust…but there are too many, mostly political, variables that would need to come together.”
The trust was established in 1909 by company founder Milton Hershey, who used his fortune to benefit an orphanage for boys. It later became the Milton Hershey School. Proceeds from the trust’s investments provide the revenue to run the school, which is now co-ed and has about 2,000 students.
But infighting and scandals have plagued the trust’s board for years.
In 2010, regulators announced an investigation into the trust’s 2006 acquisition of a golf course adjacent to school property for $12 million—more than twice the appraised value. The school built a $5 million clubhouse, only to close the course a few years later to build student housing.
Dozens of local businessmen and doctors, including Hershey’s chief executive at the time, benefited from the deal because they owned shares in the golf course, according to an investigation by the Philadelphia Inquirer.
The attorney general’s office struck a deal with the board in 2013, which required trustees to adhere to stricter conflict-of-interest standards and limited base pay for board members to a $30,000 retainer each.
Few other large charities pay their board members, including Ivy League schools that manage multibillion-dollar endowments.
In the year prior to the agreement, four board members earned more than $250,000 from various Hershey boards, including one who received more than $1 million in compensation, according to the charity’s tax returns.
Earlier this year, the attorney general’s office sent the charity a letter accusing it of failing to adequately reduce compensation, among other concerns.
In addition, it called for the resignation of three board members because they have served for more than 10 years, including former chairman Robert Cavanaugh, who also sits on Hershey’s corporate board, and the trust’s current chairman. None of those three board members have resigned.
Around the same time, regulators began digging into an internship then-chairman Mr. Cavanaugh helped acquire for his son with a company client after other disgruntled board members raised the matter, according to documents reviewed by The Wall Street Journal.
Mr. Cavanaugh didn’t respond to a request for comment.
Last year, four trustees, two of whom have since resigned, wrote a letter to the board’s head of governance, saying the board had “been required to devote substantial time, effort and trust resources on internal investigations, intrusion on management and infighting.” The divisiveness has “paralyzed us as a board,” they said.
In a more recent development, the state attorney general’s office has warned it will pursue court action if it can’t reach a settlement with the trust to remove the board members who have served longer than a decade, and comply with the other governance reforms, people familiar with the matter said.
Even if the trustees should be persuaded to approve a sale of the company, the attorney general could challenge the sale, thanks to a quirk of Pennsylvania law. Trustees would have to prove in the local Orphan’s Court that the sale was in the best interest of the charity.