HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE
Born into a poor, lower-class family, Milton S. Hershey dropped out of school before reaching the fourth grade. He developed an interest in becoming a confectioner. He believed there would be great demand for affordable, mass-produced chocolate, and thus he built the Hershey Chocolate Company. Hershey’s is now the largest producer of quality chocolates in North America and a global leader in chocolate and sugar confectionery. Although he enjoyed making money, Milton S. Hershey was intent on using his vast fortune for philanthropic purposes. He decided to surround his enterprise with a model town and personally financed the building of roads, utilities, houses, and public buildings. In addition, he and his wife donated their whole fortune to create the Milton Hershey School. The Hershey Trust Company was created to manage the founder’s large endowment. Additionally, the Hershey Trust Company’s board of trustees was given the principal objective to financially support the mission of the Milton Hershey School. By 2002, the Hershey Trust Company became Hershey Foods Corporation’s largest shareholder, owning 77% of the stockholders’ votes. In March of 2002, the Hershey Trust Company’s board of trustees decided to sell the shares it held in the Hershey Foods Corporation with the belief that it would be better to diversify its holdings and not concentrate the bulk of its investments in Hershey stock. The Hershey Trust Company board of trustees considered two offers: a $12.5 billion dollar bid from the Wm. Wrigley Jr. Company; and a $10.5 billion dollar joint bid from Nestlé S.A. and Cadbury Schweppes PLC. Hershey Foods Corporation, its employees, the community of Hershey, Pennsylvania, and the Attorney General of the state of Pennsylvania were adamantly opposed to this sale.
We favor the rejection of Wrigley's offer as well as that of Nestlé S.A./Cadbury Schweppes PLC because we do not believe that the board of trustees of the Hershey Trust Company made a convincing argument in favor of financial diversification. First, we do not believe the Hershey Trust Company was in serious financial jeopardy even with their largest investment in the Hershey Foods Company. Secondly, diversifying their investment portfolio may make the Hershey Trust Company subject to greater economic risk. In addition, we believe that neither bidding party (Wm. Wrigley's or Nestlé S.A./Cadbury Schweppes PLC) have a vested interest in protecting the philanthropic, charitable, and socially responsible legacy of the founder, Milton S. Hershey. The new owner may agree in principle to uphold the founder's legacy, but what if either of these parties was purchased by a larger multinational company? Or, what if either of these parties eventually became bankrupt? In our analysis, there is no contractual obligation that will prevent either of these two parties from selling Hershey Food Corporation’s assets and ignoring the philanthropic legacy of its founder should any of these adverse economic situations occur. Moreover, after analyzing the financial statements of the Hershey Foods Corporation, we found that they are financially sound and will remain so into the foreseeable future. Therefore, a sale of the Hershey Trust Company’s shares of Hershey Foods Corporation stock is not a financially advisable decision that our group can support at this time.
Assume that you are a member of the Hershey Trust board. To whom (or what) do you owe your fiduciary responsibility? How does the legacy of Milton S. Hershey affect your thinking as a member of the board?
If we were members on the Hershey Trust Company board, we would owe our fiduciary responsibility primarily to the Milton Hershey School and to financially support the mission of the institution. The legacy of Milton S. Hershey would affect our thinking as members of the board in...
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