Wall Street analysts and bankers generally dismiss the idea that a multibillion-dollar sale of Hershey Foods could be killed by local opposition in Pennsylvania. But legal experts are not so sure.
Pennsylvania is one of several states with a reputation for gumming up proposed corporate mergers and acquisitions, unlike more business-friendly states like Delaware or New York. The controversial proposed sale, announced in July by Hershey's controlling shareholder, the Hershey Trust, raises a host of issues unique to the situation that could fester in courts for years, experts say.
Those delays alone could complicate any proposed purchase that has attracted the attention of global giants such as Kraft Foods, Nestle and Cadbury Schweppes, some experts suggest. Allied Signal's takeover of Pennsylvania-based AMP, for instance, was thwarted by community action in 1998.
"The law in Pennsylvania does not require maximisation of shareholder value to the exclusion of other interests," said Toby Myerson, a mergers and acquisitions attorney with New York-based Paul, Weiss, Rifkind, Wharton and Garrison. Other factors, such as "the interests of employees and communities" must be considered in takeovers, he said.
Such stipulations put Pennsylvania in conflict with other states - such as Delaware, where Hershey Foods is incorporated - in which a corporation's prime duty is to act in the best interests of shareholders. And the rules could force Hershey bidders to make expensive concessions that could put a dampner on any deal.
"This case has aspects I don't think any other court has seen in Pennsylvania," Judge Warren Morgan of the Dauphin County Orphans Court said at a hearing Friday. "They may have to be addressed in a different way."
The judge last week delivered the first setback to the sale last week when he issued a temporary injunction to any corporate agreement to sell Hershey. Arguing that the court has no jurisdiction, the trust promptly appealed the case to the Commonwealth Court in Harrisburg, where a hearing was set for 11 September.
The $5.4 billion (€5.6bn) Hershey Trust announced on 25 July that it was considering selling its 77 per cent controlling stake in the nation's largest chocolate maker in a deal that analysts say could be worth $12 billion or more.
The proposal generated a storm of protest from Hershey town residents worried about job losses and economic disruption. Pennsylvania's politically ambitious attorney general, Mike Fisher, whose office has sole jurisdiction over trusts, is taking a lead role in challenging the sale.
One overriding legal question, say experts, is whether the Hershey Trust has the unfettered right to sell assets as it pleases to protect its main beneficiary, the 1,200-student Milton Hershey School, as it asserts.While proponents say the trust has no fiduciary duty to anyone but the students at the school, critics say the welfare of the town - where half the population works for Hershey and related businesses - must be considered in any corporate action.
Pennsylvania has a history of putting proposed corporate mergers to the test when faced with local opposition.
For instance, the UK's Beazer Homes in 1988 ran into a storm of community protest in buying Pittsburg building products company Koppers. While Beazer ultimately prevailed in its $1.7 billion takeover, state lawmakers later imposed new rules forcing corporations to consider the impact of corporate actions on the local community.
Those rules later thwarted Allied Signal efforts to buy Pennsylvania electronics company AMP in 1998 by tying it up in court until Tyco International came in with a "white knight" offer that won the company, legal experts said.
The Hershey sale has other aspects that may hinder it, experts say. First, it involves a charitable trust, which unlike other states is subject to regulation by the state attorney general. And second, the trust as structured by philanthropist Milton Hershey a century ago has no clear stipulations barring the disposal of Hershey stock.
"Purely and simply, this is going to depend on Pennsylvania law and will set a precedent for stockholders in that state," said a New York mergers and acquisitions lawyer who requested anonymity because his firm represents a potential Hershey bidder.
The legal uncertainties have opened the door for challenges by community groups like the National Hershey Association, composed of Hershey family members and others, and the Milton Hershey School Alumni Association, who have rallied community opposition to any deal.
Central to the debate is the late Milton Hershey himself, who founded the chocolate maker and built the Pennsylvania town. Sale opponent John Schmehl, an attorney with Pennsylvania law firm Dilworth Paxson, argues that the philanthropist's vision was to create something of a Utopia, where a prosperous company would finance the school for disadvantaged children. Any sale to an outside buyer would disrupt that plan, said Schmehl.
"If you study his life, I don't know how you could come to any other conclusion," said Schmehl.
The trust equally vehemently argues that the collapses of WorldCom, Enron and nearby Adelphia are poster children for the need to diversify stock holdings.
Because the trust has 58 per cent of its assets in Hershey stock, "their portfolio is twice as risky as the typical college, university or independent schools," argued James Bailey, senior managing director of fund advisory group Cambridge Associates, at a court hearing.
Opponents are unswayed by such arguments and have raised questions about the competence of the 17-member Hershey Trust board for even considering the sale. "Why would anyone in their right mind want to trade a significant share of Hershey's with its excellent characteristics for an insignificant share in a hodgepodge of American businesses?" asked Guy Spier of the New York-based Aquamarine Fund in a letter to the Financial Times.
"Do the Hershey trust directors really think they can do better for their beneficiaries? I urge them to think again, and to consider their motives," Spier wrote.
Additional reporting by David Morgan and Arindam Nag