MDLZ Mondelez International Inc

For Mondelez to succeed in its bid, it must persuade secretive shareholder

By Annie Gasparro and Julie Jargon 

Snack maker Mondelez International Inc. or any other potential bidder for Hershey Co. is up against not only a board that indicated it doesn't want to sell, but a secretive, controlling shareholder -- and the state's top law officer.

Mondelez, whose roughly $23 billion bid was quickly rebuffed this week, is expected to continue fighting for a union. The company said Friday it handles situations such as this "through private communications between companies."

But, if the company continues its pursuit, it will have to contend with an unusual number of additional legal and political hurdles unique to deal making with the famous chocolate maker.

No deal would happen without the blessing of Hershey Trust Co., which controls 81% of the company's voting power and 8.4% of its common stock.

Set up in 1905 by chocolate icon Milton Hershey, the trust's mission is to make decisions based on the potential impact to the Milton Hershey School for underprivileged children, and the community of Hershey, Pa. -- which had protested selling the company in the past.

Any sale would also need final approval of Pennsylvania's attorney general, who -- under an unusual 2002 state law -- has the power to countermand the trust, and has done so in the past.

Yet another challenge is the current political turmoil in the state, where Attorney General Kathleen Kane is riding out the last few months of her first term, having been stripped of her law license after being accused of leaking confidential information and lying about it. Ms. Kane has said the charges against her are part of a conspiracy involving former state prosecutors she was investigating.

Other food makers, including Kellogg Co. and Campbell Soup Co., have significant ownership by family and trusts, but Hershey is further subject to a state law that requires the top law-enforcement official to green light the sale of any company controlled by a charitable trust.

The law is a "public policy tragedy," according to Robert Sitkoff, a Harvard Law School professor who has studied the trust. He said that diversifying the trust's portfolio would benefit the school and community but said he thinks any deal would face difficulties.

Others, including a former Pennsylvania attorney general, said a sale would hurt the community by resulting in job losses and other adverse economic and social impacts.

"Predicting and trying to rationalize the Trust's behavior has always been a tricky exercise," said Susquehanna analyst Pablo Zuanic.

A spokesman for the Hershey Trust board said it wouldn't comment on whether it supports selling the company, but three trust board members have seats on Hershey's board, which unanimously voted against the Mondelez offer of $107 a share on Thursday.

The trust itself is juggling other problems. A continuing investigation by the attorney general's office into alleged overpayment of directors and conflicts of interest has led to several directors resigning. The trust has said it is cooperating with the probe.

The fate of the 2002 deal talks is instructive. Hershey called off a sale to chewing-gum maker Wm. Wrigley Jr. Co., now a unit of the privately held Mars Inc., at the final hour, after facing resistance from the attorney general's office, which obtained an injunction granted by Pennsylvania Orphans' Court, saying a sale would hurt the community.

Less than two months after the scuttled deal, the Pennsylvania governor signed an amendment to a statute requiring the attorney general to approve the sale of any company controlled by a charitable trust.

A spokesperson for the attorney general's office said this week that it would need to review the details of any offers to buy Hershey before determining if it would be in the best interest of the school.

Write to Annie Gasparro at annie.gasparro@wsj.com and Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

July 02, 2016 02:47 ET (06:47 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.