Sunday, September 16, 2007
Jonathan Klick and Robert Sitkoff have recently posted an exciting paper on the cost of the 2002 injunction that prevented the Hershey Trust's sale of its controlling interest in the Hershey Chocolate Company, "Agency Costs, Charitable Trusts, and Corporate Control: Evidence From Hershey’s Kiss-Off," on Harvard's Olin Center Faculty Discussion Paper Series. It's coming soon to the Columbia Law Review, I understand.
In July of 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, brought suit to stop the sale on the grounds that it would harm the central Pennsylvania community. In September 2002, 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 econometric analysis, we find that the sale announcement was associated with a positive abnormal return of over 25 percent and that canceling the sale was followed by a negative abnormal return of nearly 12 percent. 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 on the order of roughly $850 million and prevented the Trust from achieving salutary portfolio diversification. Overall, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Hershey Company. Our findings contribute 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 charitable entities by the state attorneys general. Our findings also contribute to the literature of corporate governance by measuring the difference in firm value when the Hershey Company was subject to a takeover versus under the control of a controlling shareholder.
Among Klick's and Sitkoff's findings: the injunction cost the trust $850 million and led to $2.7 billion in lost shareholder value. (That equates to about $62,000 per Hershey employee). That leads to important questions about whether the injunction is worth the cost. I hope to talk some more about this important paper sometime soon--once I have working drafts of my papers on Thomas Dew and on Thomas Ruffin. Close followers of propertyprof will recall that I'm much interested (and intrigued by) the Hershey Trust case.
Alfred L. Brophy
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