Fiduciary Duties Motion

What was the Robertsons’ “fiduciary duties” motion? How did the court rule?


What was the Robertsons’ “fiduciary duties” motion? How did the court rule?

In their “fiduciary duties” motion, plaintiffs asked the court to find that, under Delaware law governing the fiduciary duties of board members, the University-designated trustees of the Robertson Foundation have an inherent and disabling conflict of interest solely because they are trustees and officers of the University. In essence, Mrs. Robertson’s children asked the court to overturn the governance structure of the Foundation (and, by extension, the governance structures of other supporting organizations around the country), which was put in place by their parents and which explicitly requires that some of the University-designated trustees of the Foundation be officers and trustees of the University. In addition, the motion sought a declaration that because of this so-called disabling conflict of interest, the “entire fairness” standard should be applied by the court in its review of their historical (and, potentially, prospective) conduct instead of the “business judgment rule.” [See: Do the University-designated trustees have an inherent conflict of interest because of their status as fiduciaries of Princeton and of the Robertson Foundation?]

Courts traditionally defer to the business judgments made by trustees and corporate directors, and make exceptions only when they might have been motivated by considerations other than the best interests of the corporation. In opposing plaintiffs’ motion, the Princeton defendants pointed to the absence of such conflicts in this case. In addition, Princeton demonstrated that the governance structure had been agreed to by Charles and Marie Robertson and later confirmed by Charles Robertson in correspondence with the Internal Revenue Service. [See: Did the donor intend to give Princeton control over the Robertson Foundation?; Did the donor retain any control over the Robertson Foundation?; How did the Robertson Foundation become a supporting organization?] Moreover, these arrangements had been critical both to preserve the charitable nature of the Robertson gift and to ensure that decisions about the academic program of the Woodrow Wilson School would remain under the control of the University. [See: Did the donor intend to give Princeton control over the Robertson Foundation?; How did the Robertson Foundation become a supporting organization?; In its discussions with Mr. and Mrs. Robertson, did Princeton discuss the fundamental importance of preserving University control over academic judgments?]

The court agreed with Princeton that decisions made by the trustees of the Robertson Foundation will be reviewed under this deferential business judgment standard unless plaintiffs can show that a particular transaction was tainted by conflict of interest. Absent such a conflict of interest, Judge Shuster ruled, plaintiffs will have to prove that the expenditures they challenge are completely beyond the scope of activities authorized by the Foundation’s Certificate of Incorporation. As he put it: “If Plaintiffs’ true motive in the present matter is to have the burden shifted to Defendants…it would seem that such an attempt is misplaced.”

In rejecting plaintiffs’ claims, the court placed great significance on the fact that the Foundation is not a private, family-controlled foundation but instead is what federal tax law calls a Type 1 “supporting organization” of Princeton. “Plaintiffs attempt to discount the significance of the [supporting organization] model, but any such attempt ignores the main purpose of supporting organizations—to be responsible to the public charities they support.” The court further emphasized the critical fact that the governance structure was adopted at the inception of the Foundation, finding that “it was decided at the creation of the Foundation that the University would control the Foundation Board.” Under these circumstances, the court concluded, the delegation of functions like bookkeeping and calculation of the Foundation’s annual expenditures was not negligent but “consistent with expectations and requirements of the Type 1 supporting organization model.”

The court found the spending decisions plaintiffs challenged “fundamentally distinguishable from the line of cases” they asked the court to follow. “[S]o long as the course of action taken by the fiduciaries is consistent with the Foundation’s mission, the Foundation benefits to an equal degree. In such instances, it can hardly be said that the University receives a benefit to the exclusion and detriment of the Foundation.”