About a hundred years ago, when Milton Hershey founded the Hershey Company—now the largest confectionery company in North America—he also established a school for needy children, and a charitable trust for the benefit of the school. Today, the trust—worth over $8 billion—holds a controlling interest in the publicly traded Hershey Company.

In 2002 the trustees of the Milton Hershey School Trust announced their intention to diversify the Trust’s investment portfolio by selling its 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, opposed the sale on the ground that it would harm the local community. Shortly after the Attorney General obtained a preliminary injunction, the trustees abandoned the sale and the Company’s stock dropped to $65.00.

In an important study recently published in the Columbia Law Review, Harvard Law School Professor Robert Sitkoff and co-author Jonathan Klick, a professor of law at the University of Pennsylvania, examine the fallout from the tumult of 2002. They identify some troubling problems not only in the stewardship of charitable trusts by their trustees, but also in the oversight of charitable trusts by state attorneys general and in the governance of corporations whose fortunes are intertwined with those trusts.

Examining the Hershey Company’s stock price movements before, during, and after the sale window, Sitkoff and Klick found that the sale announcement was associated with a positive abnormal return of over 25% and that canceling the sale was followed by a negative abnormal return of nearly 12%. Their 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 of roughly $850 million and foreclosed salutary portfolio diversification.” Sitkoff and Klick also concluded that “blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Company.”

The study by Sitkoff and Klick contributes 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 charities by the state attorneys general. It also contributes to the literature of corporate governance by measuring the change in the Company’s market value when the Trust exposed the Company to the market for corporate control.

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