In the past century, trust funds involving large blocks of Coca-Cola stock in Georgia trust funds has been litigated at least 167 times. Take a look at cases like: Savannah Bank & Trust Co. v. Groover, Pedraza v. Coca-Cola Company, Askew v. Central Trust Co., Rose v. Trust Co. of Georgia, Fulton Nat. Bank of Atlanta v. Moody, In Re: Estate of Howard, In Re: Estate of Frizzell, Head v. Rich, In Re: Estate of Munroe, In Re: Estate of Budd, King v. Lafayette Trust Co., Riley v. New York Trust Co., Bennett v. C.I.R.
These suits cover a variety of contested issues: selling concentrated blocks of Coca-Cola stock in a trust in order to diversify, incurring large capital gains taxes without the consent of affected parties, and even morally irresponsible claims like a trust fund heir demanding diversification and then suing when the alternative investments did not perform as well. There is even suit blaming the Central Trust Co. for not selling Coca-Cola, because the beneficiary started receiving benefits in 1998 when Coca-Cola was at 50x earnings and the lawsuit took place in 2005 when P/E compression turned $1,000,000 in 1998 KO stock into $622,000 in 2005 KO stock.
The problem with the latter is the comparison: From 1995 through 2005, Coca-Cola compounded at 5.5% because the 1995 P/E ratio of 27 was high but not wretched enough to destroy the medium-term compounding like you saw from the 1998. The poor performance of Coca-Cola from 1998 onward was a reflection of illusory gains. Imagine running a pizza den that makes $100,000 in profits with absentee ownership and grows those profits at 10% per year. The value of the pizza den is constantly increasing, but there was a three-year period when people were willing to pay $1,600,000 instead of the expected $800,000 or so to buy the business. Blips of irrationality in pricing shouldn’t sour you on what is otherwise a world-class assets, chugging along to higher profits every year.
What makes Coca-Cola such a unique case study is that it is one of three or four dozen firms in the United States history where the ordinary wisdom of diversification has not been the path to the greatest riches because Coca-Cola truly is one of the best companies at growing profits during all economic environments and has raised its dividend 383,000% since 1922.
Diversifying from Coca-Cola has led to some rough outcomes; Asa Candler’s great-great granddaughter Elizabeth Candler Graham had this to say about the fellow heirs of Coca-Cola that diversified their inheritance away from the stock: “Some of the Candler scions would long regret the decision to sell the company as it became a global behometh…Like many clans catapulted into economic heights by new-found wealth, some limbs on the Candler family tree floundered even as others thrived. Some struggled with legal troubles, depression and business failures, their woes magnified by Atlanta’s press. Ten of Candler’s 22 grandchildren became alcoholics, and six died of their addiction.”
I think what happened is that many of Candler’s grandchildren suffered from the Dunning-Kruger Effect, seeing the ease with which their family history mastered entrepreneurship and made the best investment in the State of Georgia’s history, and similarly assumed that they, too, would be able to develop their economic skills. If you are sitting on 100,000 shares of Coca-Cola, I think it is going to be very difficult to sell the $4,000,000 in stock, take the $3,000,000 remaining, and then do something that will result in more wealth over the next 25+ years than letting the status quo be.
If you are in Georgia and have a significant trust fund, or looking at how to structure your assets, it is likely that Coca-Cola has been an important part of the story. Since 1981, Coca-Cola has been compounding at 15%, taking Coca-Cola trusts from “rich” to “dynastic” over the time frame (a trust with $1,000,000 in Coca-Cola in 1981 would have $118,000,000 today. You’d be collecting $11,000 in dividends per day. You could go out to dinner, spend $150, and end up $300 richer at the end of the hour because the compounding force unleashed by that kind of wealth creation would be so strong.
The raises the question: What exactly are the rules for trust administration involving concentrated blocks of stock? The most comprehensive survey on the topic was written by Eric A. Manterfield in an article titled “Shelter From the Gathering Storm: Protection for Trustees Facing Fiduciary Challenges” that was published through the American Bar Association.
If you are a beneficiary a trust, you must sign a consent form to permit concentrated ownership positions in a particular stock. The caveat is that it is only binding on the one that signs it. For instance, if a son and daughter own a trust that consists of nothing but Enron stock, and the son signs a consent form authorizing the concentrated position, he will not be able to successfully sue the trust administrator but the daughter will have that right. She will then have to convince the judiciary that the trust violated the “prudent man” rule that was codifed under the (you guessed it) Prudent Investor Act. If the trust had something like 80% of the assets in Enron without her consent, there is a high probability that her claim would be successful.
The trust administrator isn’t necessarily in the clear after getting the son’s consent form. There is also the matter of whether the state permits “virtual representation”, and this varies state by state. Virtual representation answers the question of whether consents are binding on the successors, such as the son of the son inheriting the trust. If it is a virtual representation state, then the original son’s consent is binding on the people who inherit the trust after he dies. If it is not a virtual representation state, then the son of the son would have just as much right as the daughter to sue in the event of a concentrated ownership position going bankrupt in the trust.
If a man is trying to create a trust that consists of 20% U.S. Treasury Bonds and the rest in 10,000 shares of Coca-Cola stock, he must do two things in the authorizing document: (1) He must mandate the retention by name (e.g. specifically stating “Thou shalt not sell the Coca-Cola stock”), and (2) he must relieve the trustee of liability for its retention (e.g. “If Coca-Cola goes bankrupt, the trust company shall not be liable.”) The gray area that keeps lawyers employed is when a trust only states one of these two things, and/or uses ambiguous language to do so.
None of this is a recommendation to fill a trust with nothing but Coca-Cola. If I were setting up a million-dollar trust, I’d divide things among thirty or so firms: Not just Coca-Cola, but also Hershey, Nestle, Pepsi, Berkshire Hathaway, Exxon, Chevron, Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, Heinz-Kraft, and you know the drill. Instead of abandoning the one firm with the truly superior business characteristics, I’d find the two or three dozen that share those characteristics and act accordingly.
But it is also important to understand that it is your money, and you get to direct it as you see fit. There is a strong presumption in the trust world against concentrated ownership positions, and I think this is overall good public policy. But there are exceptions to every general good idea, and people with concentrated ownership positions in Coca-Cola stock have been able to create superior outcomes based on the decision. If that is something you are interested in doing, then you need to be aware of the specific actions you must engage in to overcome the strong diversification presumption that exists in the trust industry.
Originally posted 2015-08-22 22:20:05.