The Hershey Trust's quest to diversify: redefining the state Attorney General's role when charitable trusts wish to diversify.

• Author: Komoroski, Jennifer L.
• Position: Pennsylvania

INTRODUCTION

In 2002, the trustees of the Hershey Trust, in an effort to diversify the trust's holdings, started down the path to sell the trust's controlling interest in Hershey Foods Corporation. As offers to buy the controlling interest emerged and the sale came close to being consummated, the Pennsylvania Attorney General, in his parens patriae role, sought to block the sale by petitioning a court to order the trustees of the Hershey Trust to show cause as to why the sale of the trust's controlling interest in Hershey Foods should not require court approval. (1) The Pennsylvania Orphans' Court granted an injunction halting the sale and the Commonwealth Court of Pennsylvania later affirmed this injunction. Subsequently, the trustees agreed to an out-of-court settlement and voted against selling the Hershey Trust's controlling interest in Hershey Foods.

This Note examines the state attorney general's role in the supervision of a charitable trust. Specifically, in light of the Hershey Trust's settlement with the Pennsylvania Attorney General agreeing not to sell its controlling share in Hershey Foods Corporation, this Note argues that the power of the attorney general should be limited when (1) a trustee has discretionary power to make investments as expressed in the trust document, and (2) a trustee, in good faith and without breaching any fiduciary duties, uses this discretionary power to diversify the charitable trust's investments.

Part I of this Note examines the legal doctrine of charitable trusts, how they are formed, what their purposes may be, and what fiduciary duties apply to their trustees. Part I also sets forth the framework of a trustee's duty to diversify the charitable trust assets under the Prudent Investor Rule and Pennsylvania's adoption of that rule. (2) Part II discusses the historical underpinnings of the attorney general's patens patriae role in supervising charities as well as the attorney general's current function. Part III of this Note analyzes the actual language of the original trust document to discuss the formation of the Hershey Trust and the powers granted to its trustees. Part III also describes the circumstances surrounding the recent settlement of the Hershey Trust with the Attorney General, and includes a description of Pennsylvania's rather stringent legislative response to the Hershey Trust's actions. Part IV offers recommendations for placing limits on an attorney general's action by outlining the procedure that an attorney general should follow when faced with situations similar to the Hershey Trust's quest to diversify.

1. CHARITABLE TRUSTS

   1. Background

      Charities, particularly in the form of charitable trusts and charitable foundations, play a significant role in meeting the needs of many Americans. Due to this significance, it is helpful for purposes of this Note to explain how charitable trusts came to be recognized legally in this country.

      Charitable trusts formed in the United States today trace their legality back to early English common law. Historically, the laws pertaining to charities, and more specifically, charitable trusts, were embodied in the law of trusts that the English Courts of Chancery developed. (3) A significant law that the English enacted was the Statute of Charitable Uses of 1601, which sought to establish an efficient enforcement scheme to protect against the mismanagement of charities and their funds and "guid[ed] for centuries the development of the charitable trust." (4) As people left England for the New World, early colonial settlers continued the English tradition of private charity in the American colonies. (5)

      After the Revolutionary War, the framers of the U.S. Constitution did not specifically enumerate charitable institutions as one of the powers of the federal government. (6) As such, most charities "are chartered under the auspices of a state." (7) Many states passed laws that supported charities. (8) For example, a 1776 draft of Pennsylvania's Constitution stated that "all religious societies or bodies of men heretofore united or incorporated for the advancement of ... other pious and charitable purposes, shall be encouraged and protected in the enjoyment of the privileges, immunities and estates which they were accustomed to enjoy ... under the laws and former constitution of this state." (9) Although many states after the Revolutionary War supported charities through legislation, some states, which specifically repealed all English statutes, no longer supported charities because they wished to rid themselves of any vestiges of English sovereignty. (10)

      In 1819, the U.S. Supreme Court addressed the legality of charitable trusts in Trustees of the Philadelphia Baptist Ass'n v. Hart's Executors. (11) In Hart's Executors, a case involving a charitable trust in Virginia, the Court ruled that the legality of charitable trusts originated from the Statute of Charitable Uses of 1601 and, because Virginia repealed all English statutes, the particular charitable trust at issue failed legally. (12)

      In Vidal v. Girard's Executors, decided in 1844, the Supreme Court reversed itself and held that courts should recognize charitable trusts in America despite state statutes that abolished English law. (13) In deciding Vidal, the Court recognized that it erroneously had concluded in Hart's Executors that trusts without specific beneficiaries did not exist under English common law before the time of the Statute of Charitable Uses of 1601. (14)

      Charitable trusts and charitable foundations became an important part of American history and the American social landscape. (15) Throughout the history of the United States, many noteworthy industrialists and business leaders who Amassed enormous fortunes established charitable trusts and foundations to bestow some of their wealth on those less fortunate. In the first half of the twentieth century, several notable charitable trusts and foundations originated, carrying the names with the likes of "Russell Sage, Phelps-Stokes, Rosenwald, Duke, Guggenheim, Kellogg, Mellon," Ford, (16) and Hershey. In recent times, Bill Gates, founder of Microsoft Corporation, has taken up the torch of his predecessors by using his vast wealth for charitable purposes with the formation of the Bill and Melinda Gates Foundation. (17)

      One of the most influential persons in the history of American charities was Andrew Carnegie, who, in 1889, set forth his "gospel of wealth." (18) Carnegie defined a millionaire as a "trustee for the poor, [entrusted] for a season with a great part of the increased wealth of the community, but administering it for the community far better than it could or would have done for itself." (19) The driving idea behind Carnegie's vision was giving people the means to "realize their potential." (20)

      Charities play a meaningful part in American society, notably in the form of "orchestras, professional associations, civic groups, social-service organizations, and religious groups ... [as well as] ... museums, colleges and universities, hospitals, and libraries." (21)

   2. Legal Doctrine

      Although now vested with an understanding of the legal roots of charitable trusts in the United States as well as the vision behind their establishment, it is also important for purposes of this Note's analysis to present a brief discussion of the legal doctrine behind charitable trusts. This section discusses how and for what purposes one forms a charitable trust.

      The Second Restatement of Trusts defines a charitable trust as "a fiduciary relationship with respect to property arising as a result of a manifestation of an intention to create it, and subjecting the person by whom the property is held to equitable duties to deal with the property for a charitable purpose." (22) Usually, a charitable trust arises by an inter vivos or testamentary transfer of property. (23) Necessarily, a charitable trust must have a settlor who intended to create such a trust, delivery of property that will be the trust's subject matter, a charitable purpose, and indefinite beneficiaries. (24) A charitable trust is not valid until the settlor surrenders legal title to the property creating the trust. (25) Unless otherwise provided in the document creating the trust, a charitable trust may continue indefinitely. (26)

      According to the Second Restatement's definition, a charitable trust must be formed for a charitable purpose. (27) Such permissible purposes include: relieving poverty, advancing education, advancing religion, promoting health, advancing a government or municipal aim, and any other purposes that benefit a community. (28) A purpose of a charitable trust, however, cannot contravene public policy or effectuate committing a crime or tort. (29)

   3. Charitable Trusts Under Pennsylvania Law

      Pennsylvania has enacted laws defining charitable trusts that are similar to those embodied in the Restatements. Like other jurisdictions, Pennsylvania requires that the beneficiaries of a charitable trust be indefinite in nature; that is, "[t]he beneficiary of charitable trusts is the general public to whom the social and economic advantages of the trusts accrue." (30)

      Pennsylvania courts have the authority to provide relief if a trustee or representative acts beyond the scope of the trust. In Pennsylvania, a "court ... may restrain a personal representative from making any sale under an authority not given by the governing instrument or from carrying out any contract of sale made by him under an authority not so given." (31) To summarize, "[e]xcept as otherwise provided by the trust instrument, the trustee, for any purpose of administration or distribution, may sell, at public or private sale, any real or personal property of the trust." (32) A trustee, however, may not be held liable for a breach of his duty unless that breach caused a loss. (33)

   4. The Trustee's Fiduciary Duties

      A trustee's duties arise from two different origins: the terms...