Sweet Company, Bitter Fight
After buyout talks failed, one side of the Blommer Chocolate family sold 50 percent of the voting stock to Cargill Inc.
Last April The Chicago Tribune reported on a family feud at the Blommer Chocolate Co., a $150 million confection maker in Chicago. The battle between the heirs of two of the three brothers who founded the firm, Henry Blommer Sr. and A.J. Blommer, led to lengthy buyout negotiations, which failed. The dissident cousins then turned around and sold their half of the business to Cargill Inc. When the remaining founder, Henry Blommer Sr., died, his heirs suddenly found themselves running a company that had a multibillion dollar conglomerate as their new partner. A judge in Delaware refused to undo the Cargill deal.To illuminate the lessons of the Blommer Chocolate imbroglio, Family Business here reprints the Tribune article as a case study. Afterwards, four experts comment on the issues, particularly on what the controlling faction might have done to prevent the sale to an outsider, and what, if anything, the cousins in control of management can do now. –The Editors.
In downtown Chicago, Blommer Chocolate Co. is widely known—by smell. Even an ill wind blows some good when it catches the cocoa aroma from the company's Near West Side plant and carries the scent over the Chicago River.
But most Chicagoans know little about what goes on inside the company, or within the family that has run it for 54 years. Few were aware of a long-simmering dispute between two branches of the Blommer family until it boiled over into court last year.
Aside from reports by Tribune marketing columnist George Lazarus, there was little coverage in newspapers or the trade press of how one side of the family exacted sweet revenge on the other by selling its 50 percent of voting stock and 42 percent of nonvoting stock in Blommer Chocolate to food industry behemoth Cargill Inc. for $18.4 million.
The side that retained its shares went to court last year in Delaware, where Blommer Chocolate is incorporated, to challenge the sale. Briefs filed in court show how nasty and bitter the fight was.
The papers tell of a Blommer cousin who nearly wore out a copying machine duplicating confidential documents for Cargill and who helped Cargill executives conceal their identities so that they could inconspicuously tour Blommer Chocolate plants.
Blommer Chocolate's elderly chairman, Henry Blommer Sr., died as maneuvering for control of his company reached its head. Before his sons could bury him, they received another jolt: Cargill told them it was going to become their business partner by purchasing their cousins' stock.
Most of the court papers are sealed. Those made public are heavily edited, long sections whited out in deference to requests for secrecy by the very private Blommers and the even more tight-lipped families who control Cargill.
Based in Minnetonka, Minnesota, Cargill is the nation's largest privately held firm, with annual revenue of about $50 billion.
Blommer Chocolate, with sales, according to a Dun & Bradstreet credit report, of around $150 million a year, is a leading domestic maker of bulk chocolate, a fraternity that includes about a dozen closely held firms or divisions of large conglomerates.
The company processes cocoa beans and makes chocolate that is supplied to such confectionary firms as Mars Candy Co., Nestle Foods Corp., and Hershey Candy Co. Its Boldemann subsidiary in California sells chocolate and chocolate bars. Through another firm, Blommer Machinery Co., the Blommers sell chocolate-processing equipment.
Although the Blommers established and have been running Blommer Chocolate in Chicago since 1939, the family is really a Milwaukee clan. Blommers have long been active in that city's civic affairs, and many family members still live there.
Henry Blommer Sr., who founded the firm with his two brothers, commuted daily between Chicago and Milwaukee by small plane for nearly 30 years. He was a highly respected figure in the chocolate industry and was still active in the firm as its chairman when he died at 88 a year ago.
It has been about a year since Cargill acquired its stake and since Delaware courts rejected efforts by Henry Sr.'s heirs to enjoin or rescind the transaction. In the court papers those heirs claimed that Cargill had a plan to pressure them into selling the company's remaining shares, including making them “squirm” while an “army of bookkeepers” tied the company in knots.
Despite those claims, it appears Cargill is content to co-exist with Henry Sr.'s heirs until they are ready to sell. It is believed that those heirs retain their management positions. Henry Sr.'s three sons hold half of the six seats on the company board, but Cargill people are said to occupy the other three.
In a brief telephone interview in late February, Joseph Blommer, Henry Sr.'s youngest son and the company's longtime treasurer, said: “We're beginning to get to know the Cargill people.” He declined to comment further and, speaking for his two brothers, said his side of the family didn't want to be interviewed. Reached again in the spring, he again declined a request for an interview, saying: “We're a private company. I don't see how anything is served by rehashing this.” Cargill also declined to comment.
Besides being treasurer, Joe Blommer is manager of the Chicago plant and another in East Greenville, Pennsylvania. His oldest brother, Henry Jr., better known as Hank, has been the company's president for more than a decade and manages the remaining plant at Union City, California. The middle brother, Peter, operates his own business, the Chocolate Factory restaurant chain in Milwaukee; Peter joined the Blommer board last year, replacing his late father.
Chocolate and sweets have long been the lifeblood of the Blommers. Conrad Blommer founded Blommer Ice Cream Co. in turn-of-the-century Milwaukee, selling the concern before he died in 1932. One of his children, William C., was a partner in Ambrosia Chocolate Co., another Milwaukee firm now controlled by the giant W.R. Grace & Co. of Boca Raton, Florida.
William C. had three sons who founded Blommer Chocolate: Bernard J., who died in 1965; Aloysius J., who died in 1987; and Henry J. It isn't clear what happened to Bernard's stock in the firm. Court papers show that by 1988, 50 percent of the company's Class A shares, which carry the right to vote on shareholder matters, and 58 percent of the nonvoting Class B were held by Henry Sr., while the rest of the A and B shares were controlled by A.J.'s children, Robert Blommer and Suzann Blommer.
The family divides
It was Robert Blommer and the Loves who sold their shares to Cargill and who, along with Cargill, are defendants in the suit filed by Henry Sr.'s sons. Robert Blommer, who lives in Kankakee, Illinois, declined to comment. Through their attorney, Suzann Love and her husband, John, who live in Colorado, also declined to comment.
The infighting at Blommer Chocolate is not unlike what has occurred at other family firms when power passes to the younger generations. One side of a family may predominate in management; other relatives and their spouses feel left out and complain about company policy and dividends.
After A.J.'s death, Henry Sr.'s side controlled the top positions at the firm. Of A.J.'s line, only Robert held a prominent position; he was corporate secretary and a sales manager for the Chicago and Union City, California, plants, until his cousins suspended him from those posts last summer.
According to briefs filed by A.J.'s heirs, the company turned a deaf ear to requests for employment by Suzann and John, who is believed to be in the banking business. Robert, Suzann, and John did hold three seats on the board, with Henry Sr., Hank, and Joe occupying the other three. But the board met so rarely that it was a “meaningless appendage to management,” according to A.J.'s heirs.
By 1988, the animosity between Henry Sr. and the A.J. heirs had deepened, and it was clear that one side would have to buy out the other. But it wasn't until May 1990 that the company had its value appraised ($43 million) so that Robert and Suzann might determine the worth of their holdings.
The bidding begins
In October 1990, the company offered Suzann and Robert $18.5 million. A month later, Henry Sr. withdrew the bid, citing the downturn in the economy.
Over the next 18 months, the company offered Robert and Suzann $14.5 million and then $16 million. But the A.J. heirs were looking for more from outsiders.
In 1991, Grain Processing Corp., an Iowa-based firm that is controlled by two families, made separate overtures to the A.J. and Henry Sr. sides, even offering to buy the whole company for $39.1 million. It gave up after Henry Sr. rejected its bid in November 1991.
Cargill, which already was in the cocoa processing industry through its Gerkens division in the Netherlands, got the same response when it approached Henry Sr. sometime in 1991. In December of that year, the A.J. heirs contacted Cargill about their stock and soon agreed to share confidential company information with the Minnesota firm.
By June 1992, Robert apparently had so warmed to the task that he was sending documents Cargill hadn't requested, according to a brief filed by Henry Sr.'s sons. In depositions, two Blommer Chocolate employees recalled seeing Robert standing over an office copy machine for almost two hours duplicating documents. One noted that the machine broke down from the extended use.
The employee said he also heard Robert gloat about fooling people at the Pennsylvania plant so three representatives of Cargill's Dutch operation could tour the facility without arousing suspicion. They managed to pass themselves off as members of a Georgia peanut firm, even though one had a British accent and the other two barely spoke English.
A deal is made
On July 2, 1992, the A.J. heirs formally agreed to sell their holdings to Cargill for $18.4 million. The sale wouldn't close until September, but the A.J. heirs and Cargill wanted to tell Henry Sr.'s side before the Blommer Chocolate annual shareholders meeting slated for July 17 (but subsequently postponed). Nevertheless, they waited awhile because Henry Sr. was ill and his chances of recovery uncertain.
On July 15, a Cargill executive phoned Hank to request an appointment. Henry Sr. got on the line, said he didn't want to meet, and repeated that the firm wasn't for sale, according to a Cargill brief.
On July 16, Henry Sr. died of heart failure. Apparently unaware of his death, the Cargill executive called the firm on July 17 and again pressed for a meeting. Hank and Joe met the next day with Cargill representatives at the Milwaukee airport and learned that Cargill had bought their cousins' stock.
According to court papers, Hank and Joe reacted angrily to this revelation, with Joe accusing Cargill of acting like “a thief who had come in the night.” The brothers refused Cargill's offer to buy their shares. In September, they filed a complaint in Delaware Chancery Court in the name of the company against A.J.'s heirs and Cargill.
The sale goes forward
In the complaint, Henry Sr.'s heirs asked the court to enjoin the stock sale. They argued that A.J.'s heirs had violated their duty as directors and injured the company by disclosing confidential information to a competitor, Cargill. Despite having spurned previous offers to sell the firm, Henry Sr.'s heirs claimed that they now couldn't auction the company to the highest bidder because Cargill would deter any offers.
On Sept. 28, William Allen, head of the Chancery Court, rejected Blommer Chocolate's request for a preliminary injunction. He noted that the company's bylaws didn't restrict the sale or transfer of the A.J. heirs' stock, and he was skeptical that Cargill would seek to hurt the company. As for Robert Blommer's alleged disclosure of confidential information, Allen said: “I believe the terms ‘ill-advised' and ‘inappropriate' are probably fitting.”
On Oct. 9, the Delaware Supreme Court upheld Allen's ruling. Their court fight over, Henry Sr.'s heirs and Cargill now work at their relationship behind closed doors. The fate of Blommer Chocolate may be up in the air, but it's only the air of chocolate coming from the company that is discernible to outsiders.
Charles Storch is a Chicago Tribune reporter. Copyright �(c) April 7, 1993, The Chicago Tribune Company. All rights reserved, used with permission.
How the Experts See It
President of YHB Consulting in Farmington, CT.
“You don't really know someone until you share an inheritance with them.” The Blommers will certainly testify to the truth of Mark Twain's words.
It is obvious why Cargill would go ahead and buy a portion of a competing company. Cargill can pick up the pieces after the family falls apart. Sooner or later, the remaining Blommers will sell, and the longer Cargill waits, the lower the price will probably be.
This case represents an excellent example of what happens when the owners of a closely held business fail to control the ownership of the business stock. Even the owners of less than 50 percent of a private company have extensive legal rights, and the courts are providing more and more protection for them. Somehow, owners need to get it through their heads that the business is not like a typical asset that can flow through the estate plan, in which everyone can share and share alike. The business will be destroyed if control goes beyond a small, discrete group that can manage it profitably.
Before giving or bequesting stock to their children, A.J. and Henry Sr. should have required the next generation (and their spouses) to sign a valid stock control agreement. This should have been done before any stock was transferred. The agreement should have specified that, in order to sell shares to a third party, the selling shareholders had to first offer their stock to the remaining shareholders at a specified price.
What should Henry Sr.'s heirs do now? I suppose they can try to work with the Cargill people, try to “ownership-manage” as a team—that is, forge a consensus on the company's values and strategy for the future. But living with that challenge every day will get old, and stressful. For that reason, they should sell out now.
Take the sizable sale proceeds and invest them wisely. Start another chocolate company if they want. Life is too sweet to spend in a stressful work situation, especially if you don't need to.
Family business advisor
Stephen B. Swartz
Consulting principal, the Family Business Group of McGladrey & Pullen, Minneapolis, MN.
The case of Blommer Chocolate is a painful example of both the ignorance and the arrogance which often plague and threaten successful family businesses that continue beyond the founder and sibling generations, to the point where cousins share control of the enterprise.
Ignorance. Most family businesses focus their succession planning on the challenge of management transition and do not recognize that the parallel goal of creating a sound plan for ownership transition can be the more difficult challenge. The Blommers might have avoided the current situation by:
• Recognizing the need to “prune” the ownership tree rather than allowing it to spread uncontrollably (the fatal error made by a number of very successful family businesses). Even from a strictly financial point of view, persuading family members to accept a buyout is often difficult, because a family business is usually viewed as a superior investment, especially in difficult economic times.
• Creating a set of ground rules—before it was clear which branch of the family would be in control—governing whether and under what circumstances family members who were not working in the business could maintain an ownership interest. If nonworking owners are to be allowed, the ground rules must include provisions for communication by management with outside owners; the voice those owners will have in the governance of the corporation; and the return that outside owners will receive on their equity.
• Acknowledging to one another that, despite all the legal and financial intricacies, ownership issues are exceedingly emotional. Because the business in many families is considered almost “a member of the family,” it is extremely difficult for the members to let go of stock. Inactive cousins often feel jealous when they see their cousins in control of “the baby.” To address these issues successfully requires sensitivity, along with a recognition of the strong emotional attachment that all family members have to the business.
Arrogance. Although the family's secrecy makes it difficult to know for sure, it appears that Henry Jr. and his siblings made the naive assumption that A.J.'s heirs were powerless to do anything to rectify their unhappiness but sell their stock to their cousins. Moreover, the management group apparently underestimated the emotional “slap in the face” of their father's withdrawal of the October 1990 buyout offer, and his subsequent attempts to buy for less. Experienced attorneys could have counseled them that corporate statutes in most states protect minority shareholders with far smaller holdings than A.J.'s heirs against arbitrary treatment.
At this point, the surviving Blommer family owners have no alternative but to fashion a “corporate partnership” with Cargill and to face the sad fact that, if the company remains a family business, it will probably be the Cargills and not the Blommers who will continue it.
S. Donald Gonson
Senior partner specializing in family businesses, Hale and Dorr, Boston.
It is striking that a company such as Blommer Chocolate, owned by a single family since its inception, apparently did not have restrictions on the transfer of shares. A family business should at least consider establishing, in its charter or a buy-sell agreement, the right to acquire a stockholder's shares on the same terms offered by an outsider.
Lacking such a provision, the Henry Sr. side should have asked for, as part of the negotiation with the A.J. side, a right to match any third-party offer. In exchange, the A.J. side presumably might have been given assurance that if the parties disagreed on valuation, there would be some mechanism (such as an arbitration, or puts and calls) to provide liquidity for their stock.
It would appear that communications between the two sides of the family left a great deal to be desired. There are myriad approaches to resolving issues of corporate control, but they are seldom found if the parties will not discuss them.
What now? Cargill very likely wants some say in how the company is managed and hopes that its investment will lead to synergies with its cocoa processing unit and other businesses. But the Henry Sr. side may have no obligation to contract with other Cargill businesses, to offer management positions or other benefits to the larger company.
However, under Delaware law, certain standoffs between two 50 percent voting groups allow either group to petition the court for the appointment of a custodian to take control of the business, and even to order the sale of the company. This provision is a threat to both parties. It may encourage Henry Sr.'s side to come to some agreement with its new partners on the management of the company. On the other hand, if Henry Sr.'s side decides it wants to sell its interest rather than stay in the business, the threat of invoking the Delaware statute might force a sale on terms favorable to it.
These observations bring us back to the importance of communication. The two ownership groups have a big stake in negotiating terms that will further both their long-run interests. For the Blommer group, Cargill's resources can bring greater opportunities to the jointly owned company. Cargill very likely views its position in Blommer Chocolate as a good short-term investment that in the long run can lead to acquisition of the whole company.
Perhaps those on the Henry Sr. side can learn from their experience with their cousins by setting up effective channels of communication with their new partners. Through negotiation, perhaps they can win guarantees of management control—and continued sharing in the financial benefits of the chocolate company—in return for Cargill's option or eventual obligation to acquire their stock at a fair price.
Charles W. Murdock
Professor of law, Loyola University, Chicago, and partner in the Murdock Group, consultants to family businesses.
The Blommer case reflects a fairly typical problem: management's imperiousness and indifference to the legitimate interests of shareholders. The problem is not limited to family businesses; it can be found in publicly held companies as well.
While voting control of Blommer Chocolate Co. was split 50-50 and the nonvoting stock was almost equally divided, the management side of the family treated the business as if it were their own and not something to be shared with other family stakeholders.
In a very similar situation, the Illinois Supreme Court in 1960 found such conduct at a carton manufacturing company oppressive and ordered the dissolution of the firm, thereby providing the “out” side of the family with liquidity. The case, Gidwitz v. Lanzit Corrugated Box Co., was the forerunner of judicial decisions around the country which have recognized that majority shareholders have a fiduciary duty to treat minority shareholders fairly. Along with these judicial developments, legislatures in some 20 states have enacted alternative remedies to dissolution. For example, in some states courts now have the power to order companies to declare dividends or to require the “in” side to buy the shares of the “out” side at a fair price. The A.J. heirs probably could have obtained some form of judicial relief that would have provided them with a return on their investment—either dividends or a court-ordered buyout.
The three brothers who founded Blommer Chocolate probably could have done a lot more to get their offspring to see themselves as parts of a team that was fortunate enough to own a successful business. Family members who work together need to understand and respect differences so that their efforts lead to synergies in the business instead of conflict. They can do much to avoid the Blommer result by holding regular family meetings; by encouraging family members to develop their individual talents; by educating successors in teamwork as well as technical skills; and by using facilitators to help resolve issues before they get out of control.
On the business side, a board of directors can be one of the most useful vehicles for bridging opposing points of view on the company's mission, goals, and management. Unfortunately, when conflict arises, families all too often take the Blommer tack—no more board meetings. The presence of qualified outsiders on the board helps to ensure that family members will deal with the issues rather than wish them away.
Two Sides in the DisputeThe fight within the Blommer Chocolate Co. was waged primarily by the children of two Blommer brothers, Henry Sr. and A.J.
Henry Sr.'s heirs are:
Henry Jr. (Hank), company president and a director;
Joseph, company treasurer and a director;
Peter, a company director
A.J.'s heirs are:
Robert, until 1992 company secretary and a director;
Suzann Blommer Love, a director until 1992;
John Love (Suzann’s husband), a director until 1992.