Thursday, May 29, 2008

Concerns about a Charity's Investments

The New York Times reports concerns about whether one foundation, and family members connected with the foundation, controlled the investment management decisions of another foundation. Two articles, one focused on employee issues and one focused on the second foundation, the Mott Children's Health Center, appeared today.

In 1969, after the excess business holdings rules were passed, the Charles Stewart Mott Foundation had to divest some of its stock in U.S. Sugar.  The Mott Foundation did so by contributing the stock to the Mott Children's Health Center, a separate foundation established in 1939.  After the contribution the Children's Health Center held a 22% share in U.S. Sugar.

In 2005, when a share of U.S. Sugar stock was valued at $153 on the books of the Children's Health Center, the company recieved an offer to buy the company at a price of $293 a share.  A second offer, for the same amount, was made in 2007.  The company rejected both offers.

Complicating an understanding of what happened and why is the impact the rejection of the offers had on employee shareholders.  In 1983 U.S. Sugar created an employee stock ownership plan (ESOP) and the employees received stock in exchange for their interests in the company's pension plan.  Then in recent years, the company began laying off senior workers in order to compete with global sugar prices.  The senior workers received their retirement funds for as little as $194 a share, at the time the offer of $293 a share was on the table.  Although they were shareholders, the company did not tell the workers about the offers or let them vote on a decision to sell.  The workers now suspect a secret agreement between the Mott Foundation and the Children's Health Center.

The end result of the rejection of the offers is that employees are being cashed out at a depressed price, and the employees' shares are returned to the company, increasing the control of those holding the remaining shares.  In addition, the company has stopped paying dividends which means the Children's Health Center not only lost the opportunity to increase its investment funds (valued at $293 a share, its stock was worth $125 million) but also now no longer receives the dividends it depended on to sustain its charitable work.  Because U.S. Sugar is not a public company, there is no market for the stock, so the Children's Health Center is stuck with an asset that has become a poor investment.

Some former employees of U.S. Sugar have filed a lawsuit against the company.  Records of the Children's Health Center have been requested in the suit, so more information about what the charity knew and whether it acted in concert with the Mott Foundation will be coming.


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