On March 1 Charles G. Koch and David H. Koch filed suit against the Cato Institute in a Kansas court, with the goal of taking control of the Cato Institute board of directors under Cato's long-dormant shareholder agreement. A subsequent lawsuit was filed April 9, related to the structure and membership of Cato's Board of Directors.On June 25, the Cato Institute and its shareholders announced an agreement in principle that would resolve pending lawsuits filed by Charles Koch and David Koch against Cato, its CEO, and several of its directors.
- Read the Press Release on the Agreement
- Video Podcast with Cato Chairman Robert A. Levy on the Agreement
Additional resources and background information on the lawsuits below.
Cato Vice President Gene Healy responded recently to the issue of board independence, which figured heavily in a David Koch Statement:
Mr. Koch argues that leaving Cato’s current board in place and converting the Institute to a normal nonprofit structure with a self-perpetuating board of directors would result in a board “largely subservient to Ed [Crane].” Instead, David and Charles want what they believe Cato does not currently have: “a board independent of management.”
As of March 1, the non-Koch-affiliated members were:
- K. Tucker Andersen, Director, Above All Advisors
- Edward H. Crane, President, Cato Institute
- Richard J. Dennis, President, Dennis Trading Group
- Ethelmae C. Humphreys, Chairman, Tamko Roofing Products, Inc.
- Robert A. Levy, Chairman, Cato Institute
- Howard S. Rich, Chairman, Americans for Limited Government
- Kathryn Washburn, Nonprofit Advisor
- Jeffrey S. Yass, Managing Director, Susquehanna International Group, LLP
- Fred Young, Former Owner, Young Radiator Company
- Frank Bond, Director Emeritus, Chairman, The Foundation Group LLC
The four members bumped by the Kochs on March 1 and restored March 22 are:
- William A. Dunn, President, Dunn Capital Management
- John C. Malone, Chairman, Liberty Media Corporation
- Lewis E. Randall, Board Member, E*Trade Financial
- Donald G. Smith, President, Donald Smith & Co., Inc.
To take just two examples from the roster above, Ethelmae Humphreys has always struck me as a pretty independent spirit (there weren’t a whole lot of women running companies and fighting unions in the 1950s, when she ran operations at TAMKO Roofing Products). And Liberty Media Corp.’s John Malone—once depicted as “Mad Max” on a Wired magazine cover—is no shrinking violet himself.
But, for the sake of argument, let’s assume all of these highly successful entrepreneurs and investors are “subservient to Ed,” given to wilting before the sheer force of his personality. They are still independent in one sense at least: they don’t depend on Ed Crane for their livelihoods.
The Cato Institute is organized as a nonprofit stock corporation under Kansas law. On March 1, 2012, Charles and David Koch, two of the Institute's four stockholders, filed a lawsuit against the Institute and its other two stockholders, Edward Crane and the Estate of Bill Niskanen. Kathryn Washburn, Niskanen's widow, was also named as a defendant, both individually and in her capacity as personal representative of the Estate.
The Petition includes a number of allegations related to an Agreement purportedly binding all Cato stockholders. Essentially, the Petition alleges that under the Agreement, the Estate is obligated to offer its Cato stock for purchase by the Institute. The Petition further alleges that, in the event the Institute elects not to purchase the stock, the right to purchase shall be deemed granted pro rata to the remaining stockholders. In either event, the result would be the reduction of the number of stockholders from four to three, with David Koch and Charles Koch owning two-thirds of the outstanding stock.
The Kochs portray this dispute as a breach of contract that denies them their property rights. They ask, how could libertarians not honor contractual commitments and property rights? That would be a compelling argument if the underlying premise—breach of contract—were correct. It is not.
First, the Agreement does not anywhere state that the death of a stockholder is a transfer of stock subject to the Agreement. Instead, the Estate takes the place of a deceased stockholder at death as a matter of law, without transfer. When the Estate is closed, if the Estate or the designated beneficiary attempts to dispose of the stock, a disposition might trigger the right of the Institute to receive an offer to purchase the stock. Meanwhile, the law of Kansas, where the lawsuit was filed, provides that "persons holding stock in a fiduciary capacity are entitled to vote the shares so held." Kansas courts have held that a personal representative of an estate acts in a fiduciary capacity.
Even if the Agreement is construed to require that the Estate's stock must be tendered at some point to the Institute the Agreement does not require that Cato purchase the offered stock. Further the Agreement does not provide that the stock must be offered to the other stockholders unless Cato deems that a purchase by Cato would be "inconsistent with its corporate purposes."
Finally, with respect to the Institute's governance structure: A stockholder arrangement for a nonprofit corporation is unusual, but not impermissible. That type of structure is clearly allowed under Kansas and federal law. Moreover, the Institute has disclosed its structure on its Form 990, filed annually with the Internal Revenue Service. Stockholders of a nonprofit can elect the board of directors, but stockholders do not have a property right in corporate assets or a financial interest in donations. An alternate and more typical nonprofit structure—control by "members"—involves designating individuals as members whose function is to elect the board. In many nonprofits, the members are the directors themselves. Thus the board, in effect, is self-perpetuating. But nothing would preclude the members from being other persons, including the same persons who are currently the Institute's stockholders. In other words, the designation as a "member" or "stockholder" of a nonprofit is not material. There are no "owners"—just persons who elect the board.
The key question for Cato is whether its board will consist of the type of individuals who for 35 years operated the Institute as a non-partisan, non-aligned, independent source of libertarian views on key policy questions, or individuals who might be perceived as controlled by, affiliated with, or responsive to, Charles and David Koch as they pursue their many political and corporate interests.
March 1 Lawsuit
April 9 Lawsuit
- Petition
- Petition to File Portions Under Seal
- Motion for Order Maintaining Status Quo or Temporary Injuction
- Memo In Support of Motion for Order Maintaining Status Quo or Temporary Injuction
- Affidavit of Charles G. Koch
- Affidavit of Andrew P. Napolitano
- Affidavit of Theodore B. Olson
- In addition to filing suit, Charles and David Koch have used their existing power under Cato's long-dormant shareholder agreement to place several major shareholders, employees, and consultants of Koch Industries and the Koch Foundation on Cato's Board of Directors, removing several directors who have been among the organization's largest and most steadfast financial contributors. Some of the new directors are Republican operatives and social conservatives, a poor fit for the board of an independent libertarian think tank.
- The officers and all the non-Koch directors of the Cato Institute are determined to resist this takeover attempt and preserve the independence of the Institute.
- The Kochs have not been open and transparent about their intentions. They cite no criticism of the Cato Institute or its management, and yet they have told Cato chairman Robert A. Levy that they insist on removing Cato's co-founder and president, Edward H. Crane.
- The Kochs' goal is not to improve the stature nor effectiveness of the organization, but rather, to turn a venerable, independent and effective nonpartisan institution into yet another political arm of their vast empire. They told Levy that they wanted Cato to work more closely with their organization Americans for Prosperity. As the New York Times reported on October 30, 2011, AFP works closely with Karl Rove's American Crossroads and American Action Network and with official Republican organizations "to make further gains in the Congressional elections next year and defeat President Obama ...they collaborate and divide up duties where possible."
- The non-Koch-related directors of the Cato Institute feel strongly that an independent, nonpartisan think tank should steer clear of such associations and activities.
- The takeover attempt also comes just as Cato concludes a $50 million capital campaign and the doubling of its headquarters building, making Cato a more valuable asset than at any point in history.
- The Kochs want to acquire Cato's reputation for independence and thoughtful policy analysis. But they cannot acquire this. A personal, partisan, corporate takeover of Cato will destroy the reputation the Institute has built up over 35 years.
- "Cato has managed the difficult feat of becoming both a fount of true-blue libertarian ideas and a reputable source of information even for those who don't share its views. It may be the most successful think tank in Washington."
- Steve Chapman, Chicago Tribune
- "Over the years, Cato has successfully injected libertarian views into Washington policy and political debates, and given them mainstream respectability."
- New York Times
- "When I read Cato's take on a policy question, I can trust that it is informed by more than partisan convenience. The same can't be said for other think tanks in town."
- Ezra Klein, Washington Post
- "[Y]ou should wish for an independent Cato Institute even if—maybe especially if—you're a socialist statist tool (like me). Cato is mostly antiwar, decidedly anti-drug war, and sponsors a lot of good work on civil liberties. That ... is basically what the Kochs don't like about them, because white papers on decriminalization don't help Republicans get elected."
- Alex Pareene, Salon
- "Cato and its brethren may have ideological agendas, but don't routinely twist the facts to suit their funders. Whatever the legal merits of Charles Koch's suit, Cato is better off under Crane, simply because he doesn't have a $98-billion-per-year industrial empire to oversee. Washington think tanks fall short of universities in assuring the independence of their research, but they aren't corporate shills, either. That fragile membrane of public protection must be preserved."
- Boston Globe editorial
- "Cato's strict libertarian line has been one of its advantages over the years. It has been willing to criticize—or praise—either major party based on deviations from or adherence to libertarian, and not partisan, thinking."
- Tevi Troy, Washington Post
Luke Mullins, The Washingtonian
Ryan Cooper, Washington Monthly
May 9, 2012
An Open Letter From Latin American Think Tanks in Support of Cato
April 20, 2012
Jim Harper, Tech Liberation Front
April 16, 2012
Michael Cannon, NPR
Justin Logan, Foreign Policy
April 11, 2012
Dick Armey, C. Boyden Gray, Matt Kibbe, FreedomWorks
April 10, 2012
Michael F. Cannon, Politico
April 9, 2012
Christopher A. Preble, Koch v. Cato
James A. Dorn, Forbes
Gene Healy & Jerry Taylor, National Review Online
April 5, 2012
Walter Olson, Secular Right
April 3, 2012
Congressman Jared Polis, Republic Report
April 2, 2012
Robert A. Levy, CNN
April 1, 2012
John Tamny, Forbes
March 27, 2012
Gene Healy
March 25, 2012
Michael Tanner, Forbes
March 23, 2012
Gene Healy
March 19, 2012
John Samples
Patrick Maines, Media and Communications Policy
March 18, 2012
Rupert Cornwell, The Independent (UK)
March 17, 2012
Ian Vásquez
P.J. O'Rourke, Weekly Standard
March 15, 2012
Tevi Troy, Washington Post
Michael F. Cannon, Forbes
March 14, 2012
Charles Murray, National Review (Online)
Marie Gryphon, Extra Ordinary Ideas
Gene Healy
March 12, 2012
A Response to Charles Koch from Robert A. Levy, Chairman, Cato Institute
March 11, 2012
Jim Powell, Forbes
March 9, 2012
David Boaz, Politico
Bradley A. Smith, Politico
Kevin Dowd, Huffington Post
March 8, 2012
Andrew Sullivan, The Daily Beast
Jerry O'Driscoll
David Isenberg, Huffington Post
Brink Lindsey, Bleeding Heart Libertarians
March 7, 2012
Robert A. Levy, The Bob Harden Show
Ezra Klein, Washington Post
March 6, 2012
Daniel Klein, An Open Letter to Charles and David Koch
Ilya Somin, The Volokh Conspiracy
New York Times
March 5, 2012
Alex Pareene, Salon
Julian Sanchez
Boston Globe Editorial
David Weigel, Slate
Gene Healy
Jane Mayer, New Yorker
March 4, 2012
Donald Boudreaux, Cafe Hayek
March 3, 2012
Jerry Taylor, The Volokh Conspiracy
March 2, 2012
Jonathan H. Adler, The Volokh Conspiracy
Alison Frankel, Thomson Reuters News & Insight
Steve Chapman, Chicago Tribune
© 2012 The Cato Institute
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