The Legal Battle at The Cato Institute

Share This:

Posted On Mon, Apr 30th 2012 Posted by : Legaladvice.com Staff

A strange mixture of corporation law, libertarian politics and two old men who refuse to compromise has yielded two unprecedented lawsuits before a state judge in Kansas, who will rule on the not-so-theoretical question of “who owns a think tank?” in this case the venerable Cato Institute.

Long a repository for libertarian public policy, Cato was founded in the late 1970s by Kansas billionaire Charles Koch and Libertarian Party activist Edward Crane. Normally, such “think tanks” are structured as non-profit, non-stock corporations where the board of directors elects its own successors. Koch wanted to maintain a greater degree of control over Cato, however, so instead he and Crane created a nonprofit stock corporation. The original five shareholders, per a 1977 agreement, were Koch, Crane, economist Murray Rothbard, former Libertarian Party presidential nominee Roger MacBride, and Koch employee George Pearson.

In 1980, Charles Koch’s brother David ran as the Libertarian Party’s vice-presidential nominee in a campaign organized by Crane. After the party failed to improve on its 1976 showing, Rothbard publicly criticized Crane and what he saw as the politicization of Cato. Crane retaliated by seizing Rothbard’s stock and expelling him from Cato—with Charles Koch’s approval.

By the early 1990s, Cato had replaced Rothbard and MacBride as shareholders with  David Koch and William Niskanen, who served as chairman with Crane as president and CEO. George Pearson returned his shares to the corporation in the late 1990s and Niskanen died in 2011, leaving the Koch brothers and Crane as the surviving shareholders.
After Niskanen’s death, his widow, Kathryn Washburn, claimed ownership of the Niskanen shares for her husband’s estate. The Koch brothers objected, claiming the present shareholders’ agreement, signed in 1985, required the shares either be returned to the corporation or sold to the surviving shareholders. Since each individual shareholder has an equal percentage, this would give the Koch brothers together a super-majority, or two-thirds, of outstanding Cato shares.

In recent years, there has been significant animosity between Ed Crane and the Koch brothers. The original source of their dispute is unclear, but suffice to say the Kochs believe Crane has done a poor job managing Cato. In the past couple years, the Kochs have used their existing shares to elect directors who are not beholden to Crane or Cato management.
Crane, in contrast, believes the Kochs are interfering with the “independence” of Cato and want to transform the nonpartisan organization into an appendage of the brothers’ efforts to elect Republican Party candidates—an odd mirror of the same charge Murray Rothbard levied against Crane thirty years earlier. Crane and Niskanen’s successor as chairman, Robert Levy, have pushed the Koch brothers to abandon the shareholders’ agreement and convert Cato into a more traditional nonprofit, non-stock corporation.

On March 1 of this year, things came to a head. The Koch brothers sued Cato, Crane and Washburn in Kansas state court. (Although long based in Washington, DC, Cato remains incorporated in Kansas.) The lawsuit specifically targets Washburn’s refusal to return her late husband’s shares back to the corporation, and Cato and Crane’s refusal to either repurchase the shares or allow the Koch brothers to purchase them, as required by the shareholders’ agreement. Crane and Washburn claim this is an incorrect reading of the agreement and Kansas law.
But thus far, Crane has relied more on the court of public opinion to press his case. For the past two months, Crane and Cato have backed an extensive Internet and media campaign to impugn the Kochs’ motives and defend what they perceive as Cato’s “independence” from the brothers’ business and political interests. A number of libertarian, liberal and conservative groups—including other organizations financed by the Kochs—have risen to Crane and Cato’s defense on this point.

Crane’s aggressive response, however, prompted a second lawsuit filed in April. In an effort to maintain control of Cato’s board, Crane and Levy convened an emergency meeting on March 22—three weeks after the Kochs filed their lawsuit—during which four new directors were added, all Crane loyalists. (Actually, they were four previous directors who were defeated for re-election by the Kochs’ votes during the regular March 1 election.) On April 9, the Koch brothers filed a second lawsuit in Kansas court, seeking an invalidation of this unusual election.

Ultimately, the litigation is a standoff between two old allies-turned-adversaries—Crane and Charles Koch—who don’t want to publicly compromise. The real issue is Crane’s future as Cato’s CEO. Chairman Robert Levy confirmed last month that the process of determining Crane’s eventual successor has begun but could take several years. The Koch brothers want Crane to leave sooner rather than later and may, in fact, have a candidate in mind to replace him. Crane, presumably, wants to depart according to his own timetable and pick his own successor. The Kansas lawsuits may ultimately resolve which side gets to dictate terms.