HSY Hershey Company

By Annie Gasparro 

Hershey Co.'s largest shareholder -- a trust that oversees billions of dollars for a local, nonprofit school -- has agreed to make significant governance changes that could affect the future of the chocolate company, according to people familiar with the matter.

Hershey Trust Co. has agreed on terms of a settlement with Pennsylvania's top law-enforcement officer, which has been investigating the trust board over allegations of excessive compensation and conflicts of interest.

The parties are in the process of drafting a legal document outlining the terms, which would lead to resignations of some trust board members, these people said. The settlement would include enforcing a cap on compensation and term limits of board members, according to these people.

With its roughly 30% stake in Hershey and 81% of its voting power, the Hershey Trust plays a key role in the future of the chocolate company.

A few weeks ago, Mondelez International Inc., maker of Oreo cookies and Ritz crackers, made a $23 billion bid for Hershey. The offer was rejected unanimously by Hershey's corporate board, which includes three members of the trust's board.

"We have reached an agreement in principle and are working on the final details in productive discussions with the Office of the Attorney General," a spokesman for the trust said Friday.

First Deputy Attorney General Bruce Castor said in an email Friday that he met with board members and a lawyer for the trust on Thursday and agreed "in principal to a series of changes." He declined to give further details on the proposed deal.

Industry experts say the upheaval, and a nearly entirely new 10-person board, could give Mondelez or other potential bidders an opening to try to buy the company.

Any future offers for Hershey that are accepted by the corporate board would require the approval of the trust as well as the Pennsylvania Attorney General's Office, which has oversight powers over the trust and can take it to court to stop a sale if it thinks it will hurt the local economy.

The Hershey Trust has opposed efforts to sell the company in the past, as it has been under pressure by the local community to keep Hershey independent. In 2002, the trust ultimately rejected an offer by Wm. Wrigley Jr. Co.

The trust's board has a legal obligation to act in the best interest of the Milton Hershey School for underprivileged children. Proceeds from the trust's investments provide the revenue to run the school, which has about 2,000 students, many of whom get jobs and internships within the Hershey empire, including the chocolate factory in town, the Hershey resort and the local theme park.

But the trust's roughly $12 billion endowment is largely tied up in Hershey stock, making its portfolio heavily concentrated. Some say selling the company would benefit the school by diversifying the trust's assets and generating higher returns.

At issue in the current investigation by the attorney general's office were concerns about alleged overpayments for board members, reimbursements for exorbitant travel expenses and term limits that exceed 10 years, according to internal memos from the attorney general's office reviewed by The Wall Street Journal.

Under the settlement, several board members would resign at the end of the year, according to people familiar with the matter. This would be in addition to the four who have resigned in the past several months.

Write to Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

July 23, 2016 02:48 ET (06:48 GMT)

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