Under Penalty of Catapult

I just spoke with Robert Levy, chairman of the Cato Institute’s board of directors. He responded to a number of claims in Charles G. Koch’s statement issued yesterday.

First let’s review what Koch said:

We did not want to address this shareholder issue at this time. Although our legal filing has accelerated media coverage of this issue, this was not our desire. For months we made every effort to resolve, avoid, or delay this issue. We proposed a standstill agreement to delay for one year or longer any discussion on the shareholders agreement. We asked to delay any shareholders meeting, which would have left the pre-March 1 board of directors in place during this period. We proposed third-party mediation. We proposed alternative corporate structures. We made every effort to avoid this dispute –finally requesting just an additional four days to negotiate a potential resolution – but all of our proposals were rejected. Every counterproposal we received required we forfeit our shareholder rights and act contrary to the corporate governance documents.

Levy confirmed the Kochs offered a “standstill agreement” for “one year.” Levy believed this was a “tactical” move designed to get the Kochs “past the elections.” Levy said the standstill agreement was “impractical” for Cato because “our largest donor and other large donors announced they would not contribute to Cato as long as there was the possibility of a Koch takeover.” (Levy, of course, would not identify any of these donors.) A one-year standstill would therefore cripple Cato’s ability to raise operating funds.

Regarding a delay in the shareholders meeting—and the Kochs charged that Ed Crane forced such a meeting on March 1—Levy correctly noted that Cato’s bylaws require such a meeting every year on the first business day in December. Levy said all of the shareholders agreed to several delays while the Kochs considered a proposal from Crane and Levy—which we’ll get to in a minute—but that after three deadlines passed with no response from the Kochs, Crane felt he had delayed the shareholders meeting long enough.

As for third-party mediation, Levy said this was no different than the standstill agreement. It would simply prolong the dispute, which would still cripple Cato’s fundraising, and in any case, mediation is non-binding on the parties.

Finally, Levy said that the Kochs proposed only one “alternative corporate structure”—permanent control of half the Cato board seats. Levy noted this is the same outcome they’re seeking through the lawsuit. “We are trying to sustain a think tank whose board is independent,” Levy said, “not half of which is appointed by Charles and David Koch. We can’t sustain a think tank with that kind of structure.”

Levy said Cato made a counter-proposal to the Kochs, under which the corporation would abandon its shareholder structure in favor of a traditional self-perpetuating board, and in exchange the Kochs would acquire “approval rights”—essentially, veto power—over certain “key issues,” including any material change in Cato’s mission, any material sale of assets (such as the building), any proposal to merge with another nonprofit, and, perhaps most importantly, who would eventually succeed Crane as Cato’s president and CEO.

The succession issue is perhaps the biggest point of contention between the parties. Levy said the Kochs demanded Crane, who is 68, depart as president within “six to eight weeks,” and that they would not give Cato another dollar until he did. Levy said that time frame was unacceptable, but he did say that “we would begin a choice of successor” shortly. “We agree with David and Charles that we would begin a fairly intense process to identify Ed’s successor,” Levy said, however, the process would “take a year or two years” and not just a few weeks.

Levy said “all of this bullshit about donor intent,” an issue the Kochs refer to repeatedly as justification for their lawsuit, “was taken care of by our proposal.” Levy said three separate deadlines passed without a response. After the third deadline, Levy said he spoke to Koch associate Richard Fink, who told him there would be no response. Levy said that’s when they went ahead and scheduled the shareholder meeting that had already been delayed for 90 days.