The Cato-Koch Suit: Analyzing The Kochs’ PR Statements

Since suing the Cato Institute in a dispute over the Institute’s shareholders’ agreement, the Koch Institute has issued a PR statement and Charles G. Koch has issued a personal statement.  (See Cato Chairman Robert A. Levy’s excellent response to the latter here). Both statements are upsetting for what they say and what they do not say. Below, I offer some thoughts on both the substance of the statements and the legal issue.

First, I want to make something very clear: I do not and will not besmirch the Kochs in the fashion that is now a major participant sport for those on the left and is threatening to become one for libertarians (of course, the Mises Institute has always attacked the “Kochtopus”). Both sides of the political aisle spend too much time trying to explain away their failures in the political arena by pointing out the “unfair” tactics of the other side. For the right the bogeymen are the media, left-wing teachers, Hollywood, and liberal universities. For the left it has become corporate interests, personified by the Koch brothers.

I immensely respect the Kochs and what they have done for liberty. I have defended their political activity many times, and I will continue to do so in the future. They are true libertarians who have devoted incredible resources to the ideas they believe in. And those resources have made a difference, especially for me. Like my colleague Gene Healy, I am also a product of the Koch Summer Fellowship Program, a program that completely changed my life. I recently had an opportunity to briefly meet Charles Koch and thank him for what he has done for liberty and for helping me go from being a libertarian who rants about freedom in bars, to being a libertarian who rants about freedom professionally. I thank him again here.

Because of this respect for the Kochs, what most upsets me about their PR strategy is the failure to articulate a position on where Cato has gone wrong and what they hope to change about the Institute. I understand why they haven’t made such overtures. Doing so would play right into the “hostile takeover” narrative that has emerged in the discussion. But, as it stands, we can only infer their intentions from their heavy-handed actions. Hiding behind smokescreen PR statements that are mostly full of detached legal analysis and trivial observations only makes their goals seem more suspect.

To elaborate: The first part of their initial PR statement merely reiterates the purpose of closely held shareholders’ agreements: “[The shareholder agreement] was done because Charles, as principal donor and founder of the Charles Koch Foundation and Cato, wanted to keep oversight of Cato in the hands of a few shareholders who could be relied on to maintain the original intent and vision for the organization, even if the composition of the board changed over time.  That was and is the reason for the restrictions on the shareholders’ ability to transfer Cato stock to other people; and each shareholder agreed to be bound by the terms of the shareholders’ agreement.”

This is both true and banal. Closely held shareholder structures exist because it matters to the individual shareholders who will be holding the shares. Unlike publicly traded companies, where it is mostly irrelevant who is holding the shares, closely held agreements include heavy restrictions on how shares can be transferred. That’s the point. The only remaining question is what these restrictions are and how they will be interpreted, or, what did “each shareholder [agree] to be bound by in terms of the shareholders’ agreement?”

But the law does not like restraints on alienability, that is, restrictions on the ability for individuals to transfer, sell, give, or generally divest themselves of assets. In many ways, the law promotes free markets by promoting the movement of resources to their highest and best uses. Historically, people have tried to restrict transfers in many ways, particularly through wills (“my son can have my record collection provided he never sells it and only wills it to a true Van Halen fan”), and these restrictions will often be struck down as against “public policy” (or a violation of the Rule Against Perpetuities).  Because the law prefers transferable assets, the closely held shareholder agreement can be thought of as an aberration to the general rule. Thus, it makes sense to keep the aberration limited to the terms. In other words, if it doesn’t say “no transfers by will,” then it will not be assumed that “no transfers by will” is in the contract.

This is why I think the Kochs have the short-end of the legal argument. But don’t take my word for it, take the word of a respected legal treatise: “Courts generally will not apply restrictions on the transfer of shares to testamentary dispositions [transfers through a will] in the absence of express terms that refer to such transfers.” Fletcher Cyclopedia on the Law of Corporations, Chapter 58, Section XX.  Or, take the word of the North Carolina Court of Appeals in Avrett & Ledbetter Roofing & Heating Company v. Philips, 85 N.C. App 248, 251 (1987), a case that is almost completely on-point:

The pivotal question is whether the first refusal option is triggered by the death of a stockholder. Our research discloses no North Carolina decision squarely on point but the majority rule is that general restrictions on the sale or transfer of stock do not include testamentary dispositions. See Application of Blakeman, 518 F.Supp. 1095 (E.D.N.Y.1981) and cases cited therein. Restrictions on alienation or transfer of stock are not favored and consequently are strictly construed. In re Estate of Martin, 15 Ariz.App. 569, 490 P.2d 14 (1971); Matter of Estate of Riggs, 36 Colo.App. 302, 540 P.2d 361 (1975). Under this rule of strict construction, courts have required express restrictions on intestate or testamentary dispositions. Vogel v. Melish, 31 Ill.2d 620, 203 N.E.2d 411 (1964). Words like “sell,” “transfer,” “assign,” “convey” or “otherwise dispose of” describe voluntary inter vivos [gifts during life] transfers and generally have not been held to restrict testamentary dispositions. Id. Storer v. Ripley, 12 Misc.2d 662, 178 N.Y.S.2d 7 (1958); Taylor’s Administrator v. Taylor, 301 S.W.2d 579 (Ky.1957). 

Now, I’m not a Kansas lawyer and I don’t know how the law in Kansas differs (although it seems that it favors Cato’s side and the “majority rule” discussed by the court above). I raise these issues to lead into my second point: that the Kochs’ discussion of the “rule of law” is equally disappointing. The Kochs’ have stressed their appreciation for “recognizing and respecting the rule of law[,]” and their simple, detached desire that the “parties stand by what they voluntarily agreed to when they founded Cato.”

Of course, that is precisely what is at issue in this case: what the parties agreed to and how to fill in the gap in the agreement in the absence of an express term. In fact, I would argue that because the law disfavors restrictions on alienability—something that libertarians do and should support—it is more libertarian to strictly confine the restrictions in shareholders’ agreements to the terms. Doing so will ensure that future lawyers drafting closely held shareholders’ agreements will know that restrictions that are not expressly spelled out will not be inferred. Moreover, this will encourage more predictable judging that better vindicates the “rule of law.” And, as a final bonus, a strict reading of shareholders’ agreements will likely encourage more such agreements in the future, something that the Kochs should appreciate since they seem to be big fans.

Perhaps now you can better see my disappointment with the Kochs’ PR: they’ve restated the purpose of closely held shareholders’ agreements, they’ve championed basic principles of law and contract interpretation, and they’ve expressed a desire that Cato continues as the preeminent libertarian think tank in the world. In short, they’ve only expressed positions that are fungible–that is, positions that everyone can endorse. Using fungible arguments is usually a tell-tale sign that the real disagreement is being hidden. Nowhere have they explained why they chose to pursue this course of action now or what their issues are with Cato’s current policies/mission/structure/organization/etc.

Yet we all know that the Kochs have deep disagreements with how Cato currently operates. In addition to all the other evidence, their smokescreen PR makes their motives evident. Therefore, my advice to the Kochs is to man-up and tell the public, the media, and, crucially, the employees of Cato, their disagreements with Cato’s management philosophy/organizational structure/strategies/etc, and their proposed solutions. As I wrote on Libertarianism.org, there are many ways to pursue liberty, and political involvement is one viable, if second-best, path. If they firmly believe this, then they should be willing to defend it publicly.

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FOUNDSOUND: Lambchop “Give It”

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Listen to Captain Kirk: Don’t Worship the Constitution, Read it

The Economist is warning us of the “Perils of Constitution-Worship.” The piece attacks the tea partiers for holding the Constitution in too high of regard. Apparently “the constitution provides few answers to the hard questions thrown up by modern politics.”

Our constitutional principles, not the words, deserve reverence and understanding. It is ironic that The Economist, a British publication existing under an unwritten constitution that is essentially a collection of principles, seems to forget that constitutions are about more than the text. As Captain Kirk overacts so clearly, if you don’t understand the principles at the heart of the Constitution then revering the words becomes nothing more than idolatry.

But the piece does offer an interesting point of view that should be addressed seriously by advocates of originalism and constitutional fidelity. Originalism is always stylized as in pitched battle with the “living Constitution” and vice versa. Few people, however, are 100% originalist or 100% living constitutionalist. To be the former, for example, would be to believe that the First Amendment only prohibits prior restraint (as many now think was the original interpretation), and that the Establishment Clause does not apply to the states. A 100% living constitutionalist, on the other hand, would ignore the text completely and view the Constitution as irrelevant.

No serious scholar holds either of these views. At best, “originalist” or “living Constitutionalist” describes a disposition, not a rigorous set of viewpoints. At worst, the phrases are merely epithets.

This is, ultimately, the problem with The Economist piece: it ignores the disposition behind constitutional veneration, which is an appreciation of the principles upon which it was constructed. It treats tea partiers’ appreciation of the Constitution as totemic rather than rational. While I’m sure that there are those who simply revere the Constitution as a pseudo-religious object, those of us who venerate the Constitution intellectually do so because it offers a set of principles that offer the most reliable check on arbitrary rules that violate our rights.

It is absolutely true that the Constitution cannot offer an answer to every question that arises in  the modern world. It was not designed to. Modern constitutions, be they the European Union’s not-yet approved one or most constitutions of American states, try to do too much. They become snowballs of amendments and provisions that should mostly be statutory. An overview of modern constitutions shows that most countries and states have forgotten what constitutions are: a statement of principles and a framework under which those principles can be enacted.

Unfortunately, many American politicians have also forgotten what constitutions are. I don’t mean that they’ve forgotten the nuances of the Dormant Commerce Clause, I mean that they seem to have forgotten that the Constitution exists. As I blogged before, during the health care debates many representatives displayed an unabashed disdain for the Constitution and any constraints that it may place upon their ability to make the world awesome (my friend Aaron Powell’s memorable phrase). For many, bringing up the Constitution is now either reactionary or jingoistic.

This is precisely the type of attitude from elected representatives that the Constitution was designed to cabin: that they are constrained only by the limits of their visions, the strength of their rhetoric, and the shouts from the crowd. Originalism is a call for humility. To be an originalist is to champion the virtues of constraint–constraint by checks and balances and rights–against the allure of power and the self-satisfaction that comes from distributing largess and picking favorites. These are the principles that undergird the Constitution and they are the philosophical, rather than the idolatrous, reasons that we “worship” that wizened old document that has seen better days.

So, heed the words of Captain Kirk: don’t worship the Constitution, read it, study it. And even if you do not “fully understand” the words–like the slack-jawed alien in the clip–at least learn the principles. Learn that it does not create a system in which all governmental powers that are not prohibited are permitted. It creates a system in which all that is not permitted is prohibited. And, if you don’t like this, try to change it through the proper channels. It is entirely possible, if not probable, that some desired policies are not constitutional. After all, it’s not a document designed to enthrone our desires; it was designed to constrain our avarice.

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FOUNDSOUND: The Notwist “Gloomy Planets” w/ Andromeda Mega Express Orchestra

One of the best musical performances on YouTube from a criminally underappreciated band.

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Keeping LA County Safe From the Menace of Bacon-Wrapped Hot Dogs

A bacon-wrapped hot dog seems a nearly intolerably delectable treat. One of those gustatory delights that makes you feel slightly tawdry, if not unclean. Something that violates that many provisions of Leviticus is certain to raise eyebrows of the puritanical and chaste.

It also, apparently, raises the eyebrows of the LA County health inspectors. And they are willing to jail those who sell this (I’m sure) delicious treat. Elizabeth Palacios is become another classic example of a person of lower means who has been tormented by draconian government regulations that, by and large, are supposedly designed to help people like her out.

Read more about it here.

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Praising Fast Food

At Utne Reader, Rachel Laudan has written a magnificent essay on food and the realities of “all natural” and “organic” offerings. In Praise of Fast Food is well worth a read. An excerpt:

Historical myths, though, can mislead as much by what they don’t say as by what they do say—and nostalgia for the past typically glosses over the moral problems intrinsic to the labor of producing food. Most men were born to a life of labor in the fields, most women to a life of grinding, chopping, and cooking.

“Servitude,” said my mother as she prepared home-cooked breakfast, dinner, and tea for 8 to 10 people 365 days a year. She was right. Churning butter and skinning and cleaning hares, without the option of picking up the phone for a pizza if something goes wrong, is unremitting, unforgiving toil. Perhaps, though, my mother did not realize how much worse her lot might have been. She could at least buy our bread. In Mexico, at the same time, women without servants could expect to spend five hours a day kneeling at the grindstone preparing the dough for the family’s tortillas.

In the first half of the 20th century, Italians embraced factory-made pasta and canned tomatoes. In the second half, Japanese women welcomed factory-made bread because they could sleep a little longer instead of getting up to make rice. As supermarkets appeared in Eastern Europe, people rejoiced at the convenience of ready-made goods. For all, culinary modernism had proved what was wanted: food that was processed, preservable, industrial, novel, and fast, the food of the elite at a price everyone could afford. Where modern food became available, people grew taller and stronger and lived longer. Men had choices other than hard agricultural labor; women had choices other than kneeling at the metate five hours a day.

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Cato’s Video on Filming Cops

Edited by my friend, roommate, and colleague Evan Banks. Good stuff:

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