Pennsylvania is on its way to becoming perhaps the worst place in the United States to create a charitable trust, setting a precedent that would be very dangerous to philanthropic organizations and their beneficiaries if it spreads to other states.
First the Pennsylvania state courts, and now the state legislature, have just overturned the centuries-old law and policy that trustees’ highest duty is to the intentions of the donor who created the trust and to the needs of the beneficiaries selected by that donor. Trustees are now required to consider whether their decisions would cause economic harm to the city or town where the trust is located, and to notify the state’s attorney general before they act. Worse, if the attorney general objects to the trustees’ decision, the trustees are, in effect, presumed guilty until they prove themselves innocent: The law requires that the trustees prove to the court that they are entitled to carry out their stated intentions on behalf of their wards. This is a revolution, and not a good one.
The problems started when the board of the Milton Hershey School Trust, one of the wealthiest and most venerable organizations in the state, undertook to diversify its $5-billion in assets by selling its controlling interest in the Hershey Foods Corporation. That caused a great local outcry. Residents of the town of Hershey, where the company has its headquarters, feared the sale would cause job losses and other damage to the local economy.
The town’s anger found support from Pennsylvania’s attorney general, Mike Fisher, who at the time was engaged in a tight and ultimately unsuccessful race for governor. Mr. Fisher took the trust to court. Although Pennsylvania law clearly prohibited the attorney general’s actions and guaranteed the trust the right to sell its shares, the attorney general won a court order, now adopted by the legislature, flouting the law and completely affirming his position.
Hershey School Trust’s decision to sell its shares in Hershey Foods had nothing to do with “corporate greed” or trustees’ self-interested dealing, although enraged, misinformed critics claimed it did. The Hershey Trust is not Enron or WorldCom. The sole beneficiaries of the trustees’ actions would have been the orphan children in the Milton Hershey School, named by Milton Hershey as his trust’s only beneficiaries.
To obtain the best price for its assets, the trustees planned an auction to sell their holdings to the highest bidder. A premium price was expected for the shares, since whoever bought them would assume control of Hershey Foods. The premium price would be good news for the schoolchildren, but it especially worried the people of Hershey, who feared that the high price paid for the corporation would tempt the buyer to cut jobs, end redundancies, and eliminate other inefficiencies at Hershey Foods.
When the attorney general took up the fight of Hershey’s residents, he actually charged the trustees with doing what the law required them to do, as if doing so were wrong: trying to get as much money as possible for the orphan school children. He invoked his authority as the public’s watchdog over charitable trusts, told the court that because the trustees’ care for their wards could lead to a loss of jobs in Hershey, the trustees had operated a “charitable trust... to inflict injury and harm upon the public at large” with “callous indifference” to local economic interests, and asked the court to halt the sale.
Although it is commonplace for courts to say that the public is the ultimate beneficiary of all charitable trusts, and the attorney general in Pennsylvania does in fact have “watchdog” authority in matters relating to public trusts, Pennsylvania courts never, before the Hershey Trust case, declared that the authority to oversee public trusts empowered the attorney general to prevent action by a charitable trust simply because the attorney general and a state judge thought the action threatened the local economy. The courts in Hershey Trust, with no authority to do so, made new law, to everyone’s detriment.
Now the state legislature has enshrined this novel approach as the law in Pennsylvania. The law could be applied not just to Pennsylvania trusts, but to trusts in other states with Pennsylvania beneficiaries.
Especially in a time of tight state and corporate budgets, Pennsylvania’s action may prove a tempting guide to legislators in other states, redirecting private philanthropic resources from the organizations’ mission toward the state’s general fund and politicians’ favored beneficiaries.
Pennsylvania law and public policy, like those in other states, had long protected donors’ wishes against such appropriation in order to encourage charitable giving. That policy, and only that policy, made it possible for the public at large, as well as for the specific groups of beneficiaries named by philanthropic donors, to receive donors’ largess.
The new Pennsylvania law will harm the general public as well as society’s most vulnerable citizens because trustees will no longer be permitted to act in the best interest of their wards and in furtherance of the donor’s intentions if courts and politicians decide that doing so would harm the local economy or is not “necessary to maintain the economic viability” of the trust. Instead trustees are now obliged to act as bursars to distribute private assets at the behest of courts and politicians, leaving philanthropists little incentive to make gifts to charity.
The Hershey case has already demonstrated how chilling the state’s new policy can be: Even before the Hershey trustees capitulated to political pressure to end their contemplated sale, some companies interested in purchasing Hershey Foods had gotten cold feet, worried by what had been called “social constraints” affecting the transaction. When Pennsylvania law shows so little regard for a donor’s intentions, how many organizations, whether philanthropic or business corporations, will locate in Pennsylvania? No organization would willingly subject itself to courts’ and political candidates’ interference in lawful management decisions or want to be compelled to “prove by clear and convincing evidence,” as the law states, that good-faith decisions with no financial benefit to the trustees are also “necessary to maintain the economic viability” of a charitable trust.
No social good can be reasonably expected from the change in Pennsylvania’s law.
The attorney general’s words make clear that the goal of his actions is a judicially imposed system of crony capitalism: “Where a merger or acquisition process is being conducted with competition among those interested enough to make an offer, the bid price usually includes a premium,” he said in his challenge to the Hershey School Trust. “This leads the acquiring company to introduce management efficiencies in order to cut costs to achieve an acceptable return.”
This damning of “efficiency” creates the artificially propped-up web of underachieving companies that has crippled economies abroad, draining investments and human energy from potentially productive enterprises and pouring them into dead-end factories. In the short term, jobs are saved. In the long term, many more, at far higher wages, are lost. And that, in turn, is disastrous for charitable institutions, virtually all of which must rely on a flourishing economy to make possible the generosity of donors.
Pennsylvanians have been making generous contributions to philanthropic ventures since colonial times.
For the sake of charitable trusts like those left by these men and women, and the myriad beneficiaries of philanthropists throughout Pennsylvania, it is imperative that the rash actions of the attorney general and the courts now given the force of statutory law be reversed. Now that state elections are over, let’s hope that prudent consideration will be given to this important issue. The legislature should rescind the act hastily passed a few weeks ago in the midst of elections and make clear by its action that the misguided and unprecedented decisions of Pennsylvania courts in the Hershey matter are not the law in Pennsylvania.
Meanwhile, nonprofit groups across the country would be wise to make clear to their own legislators how disastrous this law would be, and why it would be completely unwise for any other state to follow Pennsylvania’s improvident lead.
Dan Larkin is a lawyer in Merion Station, Pa., who represents businesses and nonprofit organizations. He is also president of the board of trustees of a nonprofit summer music school in Vermont
. His e-mail address is edlarkin@erols.com.