Cato chronicles: recent "hostile takeover" attempt may not be so hostile.
Maybe it is not so obvious, as recent news stories suggest about an alleged "hostile takeover" (a Wall Street term if ever there was one) of the Cato Institute, a well-known, libertarian think tank. The story is playing out in a Kansas county court where the famous and oil-rich Koch brothers, Charles and David, founders of and shareholders in the non-profit charity, seek a ruling that the terms of a 1977 shareholder agreement be honored. The effect would be to give the brothers effective control of the Institute. Some of the heated online commentary on this closely watched case calls this "ownership" of a charity, and says that is a no-no.
Not in Kansas. It turns out that Kansas is one of a handful of states (Pennsylvania, Michigan and Wisconsin are others) that allows a non-profit corporation to issue stock. Probably the best known stock-issuing charity is the National Football League's Green Bay Packers, which currently has 100,000 shareholders and recently offered another 250,000 shares to raise funds to renovate Lambeau Field. But, as the Packers tell potential stock purchasers, they shouldn't expect "to make a profit or to receive a dividend or tax deduction or any other economic benefits" from the stock. Indeed, this is the fundamental difference between non-profit shares and for-profit shares. You can make (or lose) money with for-profit stocks; you can't do much with a non-profit stock except buy it. In other words, even if a state allows a charity to issue stock, it maintains the rules against private inurement and private benefit.
So why bother? It turns out that even in the states where non-profits can be organized on a "stock share basis" (as Pennsylvania calls it), very few bother. Those that do issue stock tend to do so as an efficient means of allocating control over the organization, particularly among a group of founders. In the absence of a membership that elects leaders, stock ownership and its transfer within the organization allows clarity of who is in charge. But it does not confer ownership of the charity in the conventional sense of the term. You can't sell the stock, except back to the charity. It does, however, confer control of the charity, and that is not a bad thing. What is a board of directors, if not a means of exercising control over a charity? Is one method of managing a non-profit to be preferred over another? The law of Kansas makes no preference.
That is why the Kansas county court will not inquire into the motives of the Koch brothers, or consider the mission of the Cato Institute or its potential role in the 2012 presidential and congressional races. The entire focus will be on the meaning of the shareholders agreement under the Kansas General Corporation Code. The institute's tax exemption is not at issue. The Internal Revenue Service is not involved, nor should it be. People--relax, and let the court do its job.
Bruce D. Collins is corporate vice president and general counsel of C-SPAN, based in Washington, D.C. Email him at firstname.lastname@example.org.
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|Title Annotation:||INSIDE NON-PROFITS|
|Author:||Collins, Bruce D.|
|Date:||Apr 1, 2012|
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