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Excerpts from the University's motions seeking summary judgment

Sole Beneficiary

In 1961, Marie Robertson donated $35 million in A&P stock “to and for the use of” Princeton University. The assets were placed in a foundation and, at Mrs. Robertson’s request, dedicated to the development and expansion of the graduate program of Princeton University’s Woodrow Wilson School of Public and International Affairs. For nearly 45 years, the Robertson Foundation assets have been used to recruit and retain a distinguished faculty to teach graduate students and conduct policy-related research, to develop curricula for the School’s graduate programs, to attract graduate students committed to pursuing careers in public service, and to build structures that would house these programs and activities.

Plaintiff William S. Robertson, a son of Mrs. Robertson, has served on the Robertson Foundation Board of Trustees since 1978. Plaintiff Robert Halligan has served on the Board as a Robertson Family-designated Trustee since 1982. In June 2002, plaintiff Katherine Ernst (Mr. Robertson’s sister) replaced General Andrew J. Goodpaster as a Family-designated Trustee of the Robertson Foundation. In July 2002, these plaintiffs, joined by two other Robertson siblings, Anne Meier and John Robertson, filed this lawsuit, seeking to sever the relationship between the Foundation and its sole beneficiary, Princeton University. In addition, plaintiffs claim (among other things) that the University-designated Trustees have breached their fiduciary duties by causing the Foundation to spend realized capital gains, in violation of its Certificate of Incorporation, which (according to plaintiffs) limits spending to dividends and interest.

In order to narrow the issues in this litigation, appropriately plan for future spending and administration, and ensure that Princeton University can rely on the continued support of the Robertson Foundation, the Princeton defendants seek summary judgment on two issues: (1) whether the unprecedented and extreme remedy sought by plaintiffs of removing Princeton as the sole beneficiary of the Robertson Foundation could ever be reconciled with the governing documents of the Foundation; and (2) which of the Robertson Foundation’s growing assets are expendable in furtherance of the Foundation’s mission.

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The Robertson Foundation was organized as a non-profit, tax-exempt corporation under the requirements of section 501(c)(3) of the Internal Revenue Code (the “Code”). In order to obtain the significant tax advantages that would flow from her proposed donation (i.e., income and gift tax deductibility), Mrs. Robertson sought a ruling from the Internal Revenue Service (“IRS”) confirming the Foundation’s section 501(c)(3) status and the income tax and gift tax deductibility of her proposed gift. In seeking that ruling, Mrs. Robertson’s attorney, Jack Myers, emphasized to the Tax Rulings Division of the IRS that the gift to the Foundation should qualify for both income and gift tax deductions because the gift was, importantly, ultimately “to or for the use of Princeton University;” furthermore, the Foundation would be under Princeton’s control. Mr. Myers advised the IRS that Mrs. Robertson would retain no control over the Foundation and, as required, had relinquished every right to the assets except the right to appoint a minority of the Foundation’s Trustees.

Princeton’s control over the Foundation was a key condition both to the IRS’s issuance of favorable exemption, income tax and gift tax rulings and to Princeton’s acceptance of Mrs. Robertson’s donation. In May 1961, Princeton University President Robert Goheen submitted a letter to the IRS in support of Mrs. Robertson’s ruling request that expressly noted the importance of Princeton control over the Foundation. Dr. Goheen wrote:

From the very inception of [Mrs. Robertson’s proposal], the prospective donor has fully understood and agreed that the University must have the responsibility for the direction, maintenance and operation of the School in all its aspects . . . [N]o university could plan so many permanent appointments to its faculty and develop an expanded program of this magnitude unless both policy control and continuous financial support for the program were assured to it.

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Thus, there is no question but that the donor intends this gift to be for the sole use of Princeton University. Indeed, the Trustees of Princeton University would not have agreed to accept this gift, and authorized this most important and greatly expanded program of post-graduate instruction for the public service, if they had not been advised and believed that the University controlled the Foundation through its majority representation.

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After the addition of new Code section 509, the Robertson Foundation, pursuant to section 609, was required to notify the IRS as to which classification it had elected under the new provisions. In 1970, Foundation President Charles Robertson represented to the IRS that the Foundation should be classified as a “supporting organization” of Princeton University because:

(i) the Foundation is “operated exclusively for the benefit of Princeton,”

(ii) the Foundation is “controlled by Princeton,”

(iii) the University’s requirement of “effective control of the Foundation” in order to “undertake the long term commitment involved in the project” was “agreed to by the donors,” and

(iv) the Foundation is a public charity within the subcategory of “supporting organizations, and not a private foundation.”

In response, on November 9, 1970, the IRS confirmed its acceptance of Mr. Robertson’s representation and classified the Foundation as “an organization that is not a private foundation as defined in section 509(a) of the Internal Revenue Code.”

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Plaintiffs urge this Court to rewrite and fundamentally change the express terms of the Foundation’s governing documents. But plaintiffs cite to no ambiguity in the Certificate of Incorporation or Bylaws. Nor can they. Indeed, it is evident from the plain language of the documents that Princeton University is the sole beneficiary of the Foundation’s charitable endeavors and that the University-designated Trustees must comprise a majority of the Foundation’s Board. In the absence of any ambiguity, this Court cannot recast the Foundation’s Certificate of Incorporation and Bylaws….

[N]either the Certificate nor the Bylaws contains any ambiguity with respect to Princeton’s status as the sole beneficiary of the Foundation or Princeton’s right to appoint four members of the Foundation’s Board. Any change in that status or right can only be accomplished by the unanimous vote of the Foundation’s Trustees.


Capital Gains

Article 11(c) restricts expenditure of funds “which do not constitute income or accumulated income as defined in Treasury Department Regulation 1.504-1(c).” In 1961, Treasury Regulation 1.504-1(c) defined “income” as “gains, profits, and income determined under the principles applicable in determining the earnings and profits of a corporation.” In 1961 (and today), “earnings and profits” included gains realized upon the sale of an asset. For purposes of Article 11(c), therefore, income -- “as defined in” Treasury Regulation 1.504-1(c) -- included realized gains, and Article 11(c) does not restrict their expenditure in any respect.

These facts are not in dispute. Plaintiffs point to nothing in the four corners of the Certificate of Incorporation to prove that the definition of income in Article 11(c) excludes realized gains…. [N]either Mr. Robertson or Mr. Halligan, prior to April 2002, ever objected to or challenged the Foundation’s spending of realized capital gains over the preceding decade. Not only did the Robertson Family-designated Trustees fail to object to the increased spending, but at the April 1992 Board meeting, they approved an increase in the spending rate that would require the expenditure of capital gains.

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Delaware has adopted the Uniform Management of Institutional Funds Act. Two of UMIFA’s goals were to provide clarity to the law of endowment funds and to free trustees of such funds from alleged limitations on their own spending authority. The statute accomplished these goals by adopting the “total return” concept of investing and by establishing a standard of “ordinary business care and prudence” to govern trustees’ investment decisions.

UMIFA expressly provides the trustees of an endowment fund with authority to spend the realized and unrealized capital appreciation of the fund:

The governing board may appropriate for expenditure for the uses and purposes for which an endowment is established so much of the net appreciation, realized and unrealized , in the fair value of the assets of an endowment fund over the historic dollar value of the fund as is prudent under the standard established by 4706….

The Delaware legislature gave UMIFA retroactive application to govern “gift instruments executed or in effect before or after [its] effective date.” Thus, even though UMIFA was enacted in 1975, long after Mrs. Robertson’s gift in 1961, it governs the Robertson Foundation’s spending authority.

Princo

Plaintiffs claim that the Foundation’s decision to retain Princo violated the Robertson Foundation’s Certificate of Incorporation and the University-designated Trustees’ fiduciary duties to the Foundation; they ask the Court to reverse the transaction. But, as this Court has previously held, the Certificate of Incorporation clearly and unambiguously authorized the Foundation to retain Princo . Furthermore, as demonstrated below, the undisputed facts show that the University-designated Trustees’ decision was a valid exercise of their independent business judgment and plaintiffs cannot rebut the presumption that the Trustees acted in accordance with their duties of care, loyalty, and good faith. Thus, as a matter of law, the decision to retain Princo was appropriate and is entitled to the protection of Delaware’s business judgment rule; summary judgment should accordingly be entered in favor of the Princeton defendants…

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The record facts unequivocally demonstrate that, after serving unstintingly and successfully for more than 20 years, the two professional investment management members of the Robertson Foundation Investment Committee, John Sherrerd and John Beck, came to believe that a new investment management structure was necessary for the investment of the Foundation’s assets. Given their intimate knowledge of the industry and of Princo , they considered Princo to offer the best opportunity for the Foundation, and tried to persuade Mr. Robertson that this was an appropriate course. Mr. Robertson resisted, apparently because he believed his father did not want Princeton University to manage the Foundation’s assets (despite a prior history of doing so), and because he liked things the way they were with the three-member Investment Committee retaining a handful of money managers, mostly invested in the traditional asset categories of stocks and bonds.

After Shirley Tilghman became President of Princeton and Mr. Sherrerd had advised her of his recommendation (and of Mr. Beck’s desire to retire), she asked Mr. Wendell (who was the incoming chairman of Princo but was not yet a member of the Robertson Foundation Board) to investigate the feasibility and advisability of retaining Princo . Mr. Wendell — a venture capitalist with a strong background in finance and service on boards of directors — ultimately reached the conclusion that Princo represented an excellent opportunity for the Foundation, and so counseled President Tilghman. President Tilghman met on several occasions with Mr. Robertson, in an effort to persuade him to support the recommendation, and Mr. Wendell arranged for a private briefing by Princo representatives for Mr. Robertson and his financial advisor.

Although a consensus seemed to have emerged at the April 2002 Foundation Board meeting that the Investment Committee recommendation to retain Princo was in the best interests of the Foundation, President Tilghman met yet again with Mr. Robertson after he had a change of heart, ultimately agreeing with Mr. Robertson to ask the Investment Committee to identify and consider other portfolio managers as alternatives to Princo .

Led by Mr. Sherrerd, the Investment Committee considered nine candidates, and (based on interviews and written proposals) concluded that Princo represented “the best management possible” for the Robertson Foundation. Majority and minority reports were submitted to the Board and discussed at the April 24, 2003 annual meeting. Prior to submitting the matter to a vote, however, President Tilghman sought still more information from University Treasurer McCrudden and Princo President Golden. The Board voted in November 2003 to retain Princo , and new Trustee Stephen Oxman was tasked with the responsibility of retaining separate counsel to represent the Foundation in the negotiation of an Investment Management Agreement between the University and the Foundation. The Board reviewed and approved the Agreement in December 2003 and, finally, Princo became the Foundation’s investment manager as of January 1, 2004 – some twenty months after the Board’s initial consideration of the “ Princo proposal” at its April 2002 annual meeting.

This record … demonstrates … the extraordinary efforts of the individual defendants to understand and accommodate Mr. Robertson’s concerns while discharging their own fiduciary duties to advance the best interests of the Foundation.

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The facts of record demonstrate that President Tilghman and Messrs. Oxman, Sherrerd and Wendell derived no personal financial benefit either from the decision to retain Princo or its implementation. Nor can it be said that they lacked the independence to consider objectively whether the transaction was in the best interest of the Foundation.... They have testified unequivocally that they supported the retention of Princo by the Robertson Foundation because they considered it to be in the best interests of the Foundation. That testimony stands unrebutted. Plaintiffs have not adduced any evidence that would even suggest that the individual defendants have breached their duty of loyalty to the Foundation. To the contrary, the undisputed facts demonstrate that their votes to retain Princo were the product of disinterested and independent judgment.

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