The Kochs and Cato
Would Koch control doom the Cato Institute?


No one knows quite how the Koch brothers’ recent lawsuit to take shareholder control of the Cato Institute will end, but it seems fair to say that it will seriously wound both parties, and thus, the libertarian cause.

Charles Koch founded Cato in 1977, in conjunction with the institute’s current president, Ed Crane, and supplied the seed money (since then, the Kochs have provided approximately 8 percent of Cato’s donations). A shareholder’s agreement was drawn up, allocating shares equally to four men: Charles Koch (who later left the institute); Ed Crane; economist William Niskanen; and George Pearson, a Koch ally who later transferred his shares to the Kochs. Thus, the Kochs currently control half of Cato’s shares. But Niskanen passed away in October, and his wife essentially now controls his shares. The Kochs have filed a suit in Kansas to the effect that these shares should have reverted to Cato or been offered to the shareholders — giving the Kochs majority control of the institute.

Koch supporters seem far more confident in the legal standing of their argument than Crane’s and Cato’s do. As unusual as Cato’s legal structure is, Niskanen made no mention in his will of what should be done with his shares, and it seems that therefore they must revert to Cato or be offered to the other shareholders.

In fact, the chairman of Cato’s board, Bob Levy, and others seem to admit implicitly that their legal case is shaky, or, at least, not really based on the existing shareholders’ agreement, by admitting that they would like to change the nature of the agreement, or scrap it entirely. Levy explains to National Review Online that “the way forward is to abandon this shareholder structure, substitute a structure where the institute is controlled by members, the way just about every non-profit in the world is, and those members would be the board of directors themselves, so that we have a self-perpetuating board.”

Levy concedes that “if the Kochs feel the need for their original, back in 1977, donor intent to be preserved, we have made proposals toward that end, such that they would have veto power over things like a material change in the institute’s mission.” Levy accepts that Charles Koch’s foundational support and original donor intentions do matter, but suggests that the existing agreement doesn’t reflect the important views of today’s donors (the Kochs have not donated to Cato since 2010). Wes Edwards, deputy general counsel of Koch Companies Public Sector LLC, explains that “the founders of the Cato Institute reached an agreement and agreed to be bound by it. That is all we are seeking here — that the parties stand by what they agreed to when they founded Cato.” The Kochs argue that their negotiations, which they conducted on the basis of the shareholder agreement, were continually rebuffed; indeed, Cato does not seem interested in resolving the issue within the context of the shareholder agreement.

Thus, Koch supporters suggest that Crane and Cato’s efforts will require waging a personalized war, relying as much on the court of public opinion as possible. They cite the rejection of their suggested standstill order, which would have postponed the issue until 2013, as evidence that Cato and Crane would like to fight the battle during the 2012 election season, when liberal demonization of the Kochs is most intense.

While that contention may be a stretch, Levy seems to admit the personal nature of the battle; he suggested to me that the fundamental issue was not the existing legal agreement, but the fact that the current shareholders, rather than Cato’s directors, hold the reins: “It’s strictly a matter of control. It wouldn’t matter whether we called these folks shareholders, or whether we called them members. What matters is who they are. If this was a membership organization, but the members were the same people who are now our shareholders, there would still be this concern about control over our activities.”