Mondelez's bid may find gaps in Hershey's armour

An elaborate structure put in place to preserve Hershey's ties to its local community has been roiled by scandal, creating an opening that Mondelez International seized on to launch a $23 billion bid for the chocolate giant.

While Hershey's board of directors unanimously rejected Mondelez's offer on Thursday, its once impenetrable defences are now looking weaker due to an investigation into the charitable trust that controls it.

A controversy facing the Pennsylvania Attorney General (AG), who also has a say in any change in Hershey's ownership could also favour Mondelez.

If the deal goes through, the two companies will combine to become the world's largest choloclate company, surpassing Mars.

The Hershey Trust, set up by the company's founder a century ago, holds 81 percent of the company's voting stock and without its approval, a sale is impossible.

The Trust has blocked Hershey deals in the past, including a 2002 takeover bid for the company, which makes Hershey's Kisses and Reese's Peanut Butter Cups.

But the Trust set up over 100 years ago to help underprivileged children is now being investigated by the Pennsylvania AG's office for how much it spends and how long its directors have served for.

The AG's office has called for the resignation of three of its longest tenured employees. Separately, this year, the Trust fired its executive vice president, after he pled guilty to wire fraud associated with campaign contributions.

The Trust is one of Pennsylvania's wealthiest charities. Its shares in the chocolate giant have created a $12 billion endowment that helps to fund a school as well as an amusement park and resort in Hershey, a small town about 100 miles (160 km) west of Philadelphia.

Another hurdle to the Mondelez bid is the Pennsylvania AG's office, which has the right to intervene in a Hershey deal if it deems it "unnecessary for the future economic viability of the company."

But the current AG in Pennsylvania, Kathleen Kane, is set to go on trial next month for allegedly leaking lewd and bigoted emails between prosecutors and judges to a reporter.

Joel Glenn Brenner, author of the 2000 book "The Emperors of Chocolate: Inside the Secret World of Hershey and Mars", said that the troubles facing the Trust and Kane could make them less resolute in opposing a deal.

"This time, what makes it different is these investigations, the chaos at the attorney general's office, and the fact that there has been a turnover at the trust," she said.

The fiduciary duty of the Trust, laid out in a 1909 deed, is to support the Milton Hershey School, an establishment created for children from low-income families, not Hershey's shareholders.

In 2002, when Wm. Wrigley Jr. wanted to buy Hershey for $12.5 billion, the Trust called off the sale at the last minute. It also thwarted a deal in 2007, when confectionary company Cadbury entered into conversations about a tie-up and, in 2010, the Trust prevented Hershey from bidding for Cadbury.

The Pennsylvania AG's office also helped pull the plug on the Wrigley deal in 2002.

Hershey's founder Milton Snavely Hershey created his chocolate empire from selling candy on a horse-drawn wagon, according to the New York Times. He established a model community town in Pennsylvania where the chocolate factory was located and employed most of the workforce from nearby areas.

Over the years, as its chocolate became famous, the company's properties became sort of a landmark and the town itself came to be called Hershey.

Milton S. Hershey was also generous. His company distributed quarter of its profit among workers every three months.

Before he died in October 1945, he entrusted his share in the company to the Trust. He and his wife, Catherine Sweeney, had no children.

In 2015, Mondelez drew 27.2 percent of its revenue from chocolate business segment. That comes to around $8 billion.

Hershey's net sales were $7.4 billion.