Session 4J

Donors, Heirs, Desires and Academic Freedom: Perspective and Context Regarding Robertson v. Princeton University

Peter G. McDonough Lorraine A. Sciarra

Princeton University

Nicole Bearce Albano Lowenstein Sandler PC

June 29, 2007

Involving nearly five years of costly litigation, an intense public relations

campaign, and an increasingly heightened national profile, Robertson v. Princeton University is a derivative suit venued in state chancery court in Mercer County, New Jersey. The litigation involves three charitable organizations: Princeton University, the Robertson Foundation, and the Banbury Fund, Inc.1

In 1961, Marie Robertson, wife of Princeton alumnus Charles Robertson ‘26,

endowed the Robertson Foundation for the benefit of Princeton with a gift of $35 million to support the graduate program of the Woodrow Wilson School, one of the world’s leading schools of public and international affairs. Under Internal Revenue Code Section 509(a)(3), the Robertson Foundation, a Delaware not-for-profit corporation, is a Type I supporting organization and, as such, must be “operated, supervised, or controlled by” the supported organization, i.e., by Princeton University.

The IRC’s control requirement is satisfied by the University controlling the

Foundation’s Board of Trustees, as the Foundation’s Certificate of Incorporation requires that the University appoint four members to its seven-person Board of Trustees, and that the Robertson family appoint the remaining three trustees. The current University-appointed trustees are Shirley Tilghman (Princeton’s president), Stephen Oxman (chairman of the executive committee of Princeton’s board of trustees), Peter Wendell (University trustee) and Thomas Kean (former New Jersey governor and chairman of the National Commission on Terrorist Attacks upon the United States, also known as the “9-11 Commission”). The current family-appointed trustees are William Robertson and Katherine Ernst (children of Charles and Marie Robertson) and Robert Halligan (son-in-law of Charles Robertson’s cousin). In July 2002, more than four decades after the Foundation’s creation, Marie Robertson’s three children, together with Robert Halligan, sued Princeton University and the then University-appointed Foundation trustees. The plaintiffs are paying their 1 The Princeton defendants are represented by Roseland, N.J.’s Lowenstein Sandler PC and

New York City’s Simpson Thacher & Bartlett LLP. The Robertson plaintiffs are represented by San Francisco’s Shartsis Friese LLP and the Princeton office of Saul Ewing LLP.

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lawyers from the Banbury Fund, Inc., a private foundation controlled by the Robertson family. The plaintiffs are also using the Banbury Fund to pay their public relations firm’s bills. The Fund’s trustees/officers are plaintiffs William Robertson and Katherine Ernst, their sister Anne Meier (also a plaintiff) and the sisters’ spouses Robert Ernst and Walter Meier. (According to the Banbury Fund’s Form 990-PF submissions to the Internal Revenue Service, plaintiff William Robertson draws a salary from the Fund that exceeded $158,000 in 2005.)2 During the first two years after this suit was filed, the Banbury Fund’s charitable giving dropped by 86%, from an average of $2.4 million per year before the lawsuit to just $271,000 in 2004.3

The underlying dispute originated out of the disagreement between plaintiff William Robertson and the University-appointed trustees regarding how to manage the investment of the Foundation’s substantial endowment, which had grown to approximately $550 million by 2002. In November 2003, the Foundation Board voted to retain the Princeton University Investment Company (PRINCO) to provide an additional layer of investment management for the Foundation’s assets, subject to the continued oversight of the Foundation’s Investment Committee and Board. William Robertson opposed the engagement of PRINCO from the outset, and the family-appointed trustees voted against PRINCO’s appointment. Nonetheless, since PRINCO’s appointment, the Foundation’s endowment has climbed to over $850 million (while, of course, funding expenditures annually).

In their lawsuit, the plaintiffs asserted a number of claims individually and derivatively (ostensibly on behalf of the Foundation), including allegations relating to the retention of PRINCO as well as allegations that Princeton has “failed to fulfill the Foundation’s specific mission,” “has never truly tried to fulfill its fiduciary duty to advance the Foundation’s mission,” “is institutionally incapable of fulfilling the Foundation’s mission,”4 and has used Foundation assets in a manner that is inconsistent with the Foundation’s Certificate of Incorporation and outside the scope of the donor’s intent.5 Five years later, the core of this contentious litigation is the family’s insistence that a New Jersey court should transform the Foundation from a supporting organization controlled by Princeton and committed to the Woodrow Wilson School graduate program into a private foundation controlled by the Robertsons, in effect severing the 45-year relationship between Princeton and the Foundation, and delivering control of the Foundation’s endowment to the heirs of the donor.

2 The Banbury Fund’s Form 990-PF submissions to the Internal Revenue Service are available

online at: http://www.guidestar.org/. 3 In 2005, after the Princeton defendants raised the issue of plaintiffs’ using charitable funds to

pay for the litigation, the Banbury Fund’s non-litigation charitable giving rose to $1.45 million.

4 Pls. “Sole Benef.” Opp. Br. at Section II.F.

5 See, e.g., Amended Complaint at paragraphs 10-13.

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This paper provides: (1) a brief description of the Robertson Foundation and its governance structure; (2) a sense of some of the key issues in the litigation; (3) an overview of pending summary judgment motions; and (4) a list of Princeton’s expert witnesses. We attach the Foundation’s Certificate of Incorporation (Tab A); frequently asked Q & As relating to the lawsuit that appear on the University’s website (Tab B); a white paper that clarifies frequently misreported facts regarding the litigation and highlights several issues that may affect the governance and operations of a wide variety of nonprofit organizations (Tab C); and an overview of programs, faculty and activities at the Woodrow Wilson School (Tab D).6

1. The Robertson Foundation

More than a decade before Marie Robertson’s gift and the creation of the Robertson Foundation in 1961, Princeton University embarked upon the development of a graduate program in its School of Public and International Affairs. As described by Robert F. Goheen, Princeton’s President 45 years ago, in supporting the School’s graduate program the Foundation aspired to “bring about the development of a whole new level of post-graduate, professional education in the Woodrow Wilson School” amidst “the changing requirements of a shifting world.”7

Article 3 of the Robertson Foundation’s Certificate of Incorporation states:

3. This corporation is organized and shall be operated exclusively for charitable, scientific, literary, or educational purposes and for no other purpose. In furtherance of such purposes its objective is to strengthen the Government of the United States and increase its ability and determination to defend and extend freedom throughout the world by improving the facilities for the training and education of men and women for government service and to contribute, lend, pay over, or assign the income of the corporation and/or the funds or property of the corporation (any payments of principal being subject to the limitations of article 11(c) hereof) to or for the use of Princeton University for any one or more or all of the following uses:

(a) To establish or maintain and support at Princeton

University, and as a part of the Woodrow Wilson School, a

6 These items are also available on the University’s website pertaining to the Robertson lawsuit: Tab A: http://www.princeton.edu/robertson/documents/docs/Robertson_Certificate_of_Incorporation.pdf

Tab B: http://www.princeton.edu/robertson/documents/docs/20070611-PU-Robertson-QA.doc Tab C: http://www.princeton.edu/robertson/documents/docs/Nonprofit_Forum.pdf Tab D: http://www.princeton.edu/robertson/documents/docs/WWS_Highlights.pdf

7 June 12, 1973 Remarks by President Goheen on Unveiling of Robertson Foundation, available on the University’s website pertaining to the Robertson lawsuit: http://www.princeton.edu/robertson/documents/docs/Pres_Goheen_remarks_6-12-73.pdf

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Graduate School, where men and women dedicated to public service may prepare themselves for careers in government service, with particular emphasis on the education of such persons for careers in those areas of the Federal Government that are concerned with international relations and affairs;

(b) To establish and maintain scholarships or fellowships,

which will provide full, or partial support to students admitted to such Graduate School, whether such students are candidates for degrees, special students, or part-time students;

(c) To provide collateral and auxiliary services, plans and

programs in furtherance of the object and purpose above set forth, including but without limitation, internship programs, plans for public service assignments of faculty or administrative personnel, mid-career study help, and programs for foreign students or officials training.

By focusing on the graduate program within the existing Woodrow Wilson

School of Public and International Affairs -- itself an integral part of an integrated research university -- the Certificate recognizes that the Foundation’s goals can not be realized in a vacuum. Rather, they are best effectuated through the support of a world-renowned public policy program that enrolls students dedicated to public service and provides them with knowledge and skills that qualify them for careers in government service. Consequently, the Certificate, by its terms, authorizes support for the entire graduate program at the Woodrow Wilson School, including “scholarships or fellowships” and “collateral and auxiliary services, plans and programs.” While that graduate program is envisioned as a place where students “may prepare themselves for careers in government service,” the Foundation’s support is clearly not restricted to some subset of costs directly related to, for instance, vocational training for United States foreign service officers.

Since 1961, Princeton University’s near- and long-term planning, actions and

decisions have been significantly impacted and guided by the unequivocal, binding obligation of the Robertson Foundation to provide ongoing financial support for the expanded graduate program of the Woodrow Wilson School. The University has constructed buildings, created and developed academic programs, incubated centers of intellectual community, hired faculty who have life tenure, made scholarship and other funding commitments (including multi-year commitments) to graduate students, and taken a multitude of other actions of long-term and substantial financial consequence to the University -- all in reliance upon the certainty of Foundation funds being available to support such commitments and obligations.

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The School has a public policy-oriented faculty of exceptional teachers who are also leading scholars and practitioners in a variety of disciplines such as politics, economics, sociology, psychology, physics, molecular biology and geosciences. Individually and as members of a variety of world-class research centers and programs, these faculty examine and influence the international and domestic policy environment through research and outreach efforts, which in turn add depth and vitality to the teaching program. (See Tab D for highlights of the School’s recent programs.)

Marie Robertson’s husband, Charles, chaired the Robertson Foundation Board

from 1961 until his passing in 1981. Their son, plaintiff William Robertson, has served on the Board since 1974. The vast majority of decisions made by the Foundation in its 45-year history were made with the consensus of the Board. Between them, Charles and William Robertson have attended every single one of the Foundation’s Board meetings. (In addition, William Robertson has served as one of the three members of the Foundation’s Investment Committee, since its founding in 1978, and had attended more than 60 of its meetings by the time he filed the lawsuit in 2002.)

2. Key Issues in the Robertson Lawsuit

Central to the Robertson lawsuit is a dispute over the interpretation of the Certificate of Incorporation, including the breadth of the Foundation’s mission as well as the scope of spending authorized by the Certificate. The plaintiffs have attempted to characterize this lawsuit as one involving a “restricted gift”, and while the plaintiffs attempt to sensationalize their “improper expenditure” claims by alleging “fraud” and “self-dealing,” all these claims fundamentally arise from a disagreement between the parties regarding what kinds of spending are authorized by the Certificate.8 Thus, the plaintiffs complain about how Princeton and the University-appointed trustees have interpreted the Certificate and how, in the plaintiffs’ estimation, Princeton has gone about the business of running and supporting an educational enterprise funded in substantial part (but not totally) by the Foundation.

Among other things, the plaintiffs have sought to substitute their judgment for the

judgment of the educators at Princeton and the Woodrow Wilson School with respect to how Foundation funds should be used to prepare students for careers in government and public affairs. For instance:

• The plaintiffs contend that more faculty of the Woodrow Wilson

School should be appointed solely within the School. The School has a small number of “School only” appointments. By way of example, Robert Keohane, considered by many to be the most respected international relations scholar of his generation, has a sole appointment to the School. For most of the faculty, however, Princeton vigorously embraces “joint appointments” (i.e., appointments to the Woodrow Wilson School and to a related

8 See, generally, Amended Compl.

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academic department such as politics or economics). Joint appointments enable the School to build a top-notch multidisciplinary faculty that is drawn from fields such as economics, law, political science, psychology, sociology, demography, history and the natural sciences. The School’s ability to attract such superb public policy-oriented faculty enhances the School’s curriculum, which extends across these disciplines and aids in drawing the very best students to the School’s graduate program.

• The plaintiffs contend that the Woodrow Wilson School does not hire enough government affairs practitioners. Princeton believes that, while such practitioners play an important role at the School, its core faculty is, and should remain, world-class scholars and teachers. Governments and public service employers recruit the School’s students largely because of the education that this faculty provides. Recently complementing this core faculty have been practitioners such as Joschka Fischer, former Foreign Minister of Germany and one of the most influential policy leaders in Europe; Frederick Hitz, former CIA Inspector General; and Ambassador Robert Hutchings, former Chairman of the U.S. National Intelligence Council and former Director for European Affairs at the National Security Council. Dr. Bill Frist, former United States Senator from Tennessee, Senate majority leader and a Princeton alumnus, will also join the faculty of the School this Fall.

• The plaintiffs contend that research in and of itself does not further the mission of the Robertson Foundation; consequently, they challenge the Foundation’s support of certain research centers on campus. Princeton believes that first rate education and cutting-edge research are mutually reinforcing enterprises that attract the best faculty and the best students, thereby contributing to the preparation, education and training of future leaders in government and public affairs. Accordingly, the School includes, for example, a diverse array of research centers and programs that focus on important policy areas such as international migration, urbanization, science and technology, and environmental policy. Princeton believes that these research centers support the Foundation’s mission by attracting world-class faculty and policy makers who bring the vital and important public policy issues into the classroom.

Professor Joseph S. Nye, Jr., former Dean of the Kennedy School of Government at Harvard University and an expert witness retained by Princeton in this lawsuit, offered the following conclusions about the Woodrow Wilson School in his July 18, 2005 Rebuttal Expert Report, which has been provided to the plaintiffs in this lawsuit (in

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rebuttal to the report of plaintiffs’ expert, John L. Palmer, former Dean of Syracuse University’s Maxwell School of Citizenship and Public Affairs):

1. The Woodrow Wilson School’s efforts and success at recruiting students with a commitment to public service did not lag behind its peer institutions. Indeed, under the leadership of Dean Anne-Marie Slaughter, the School has renewed and reinforced that commitment to public service in a myriad of ways.

2. The faculty of the Woodrow Wilson School is first rate, and the curriculum is well designed to prepare graduate students for future leadership positions in public service in general and in the federal government (especially in international affairs) in particular.

3. The first jobs taken by graduates is only one of a number of criteria to consider in evaluating the “success” of the Woodrow Wilson School graduate program, and the product of a number of factors which are beyond the control of any one educational institution. Even judged by this single criterion, the Woodrow Wilson School does as well as (or better than) its peers, and has even improved upon this record under Dean Slaughter’s leadership.

4. The use of joint appointments has enabled the Woodrow Wilson School to attract a world class faculty committed to public policy and the mission of the School, which in turn attracts first rate students. The Robertson Foundation’s support of research and research centers is critical to the recruitment and retention of that world class faculty; and their research enriches good teaching. Moreover, the School’s research centers promote interdisciplinary research, provide opportunities for student involvement (as well as certificate programs), and create communities of faculty, visiting fellows (often practitioners) and students focused around important policy issues.

5. The Woodrow Wilson School is one of the most respected schools of public and international affairs in the world. As demonstrated by the words and actions of Princeton University President Shirley Tilghman and Woodrow Wilson School Dean Anne-Marie Slaughter, the University and School are fully committed to the mission of the Robertson Foundation and more than capable of fulfilling it.

Expert Report of Joseph S. Nye, Jr., dated July 18, 2005, at 1-2.

On the governance front, the plaintiffs claim that the University-appointed

trustees have an inherent and disabling conflict of interest because three of them are also trustees or officers of the University itself. Harvey P. Dale, Professor of Philanthropy and the Law and Director of the National Center for Philanthropy and the Law at New York University Law School, who has been retained by Princeton as an expert in the

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litigation, has concluded that the structure of the Board, with four University-appointed trustees in the majority, does not render the University-appointed trustees “interested” or “disabled” for purposes of board governance or the business judgment rule. Expert Report of Harvey P. Dale, dated July 18, 2005, at 3. Indeed, such structural control by University representatives was explicitly intended and provided for in the Foundation’s Certificate of Incorporation and By-Laws and also required by the University as a condition to accepting the gift. Moreover, it was required by the IRS as a condition for issuing its ruling that the gift was deductible by Marie Robertson for gift and income tax purposes. Such structural control was also grounds for qualifying the Foundation as a Type I support organization under Section 509 when that section was subsequently added to the Internal Revenue Code.

Other issues raised in the lawsuit include the plaintiffs’ challenge regarding the

definition of spendable income under the Certificate as well as the Board’s decision to retain PRINCO:

• Plaintiffs contend that the Certificate of Incorporation limits

Foundation spending to dividends and interest earned by its endowment. Thus, despite the fact that William Robertson and the other family-appointed trustees are suing derivatively on behalf of the Foundation, they actually seek judicially to force the Foundation into a sub-optimal investment program geared toward maximizing dividends and income, and to reduce dramatically from current levels the funds available annually from the Foundation. They also have demanded that Princeton reimburse the Foundation for realized gains spent in support of the School since 1992. Princeton contends that the plain language of the Foundation’s Certificate of Incorporation, as well the Uniform Management of Institutional Funds Act (“UMIFA”) in Delaware and New Jersey, permit spending realized capitalized gains, that such spending is consistent with the routine practices of other managers of charitable corporations, and that prudent and proper exercise of fiduciary duties by Foundation trustees require them to encourage optimal investing of the Foundation’s endowment and appropriate availability of its funds for the organization it supports.

• Plaintiffs seek to reverse the Foundation’s decision to retain

PRINCO as an investment manager of the Foundation’s assets. Princeton contends that the contested decision to retain PRINCO, which gave rise to the lawsuit, was authorized under the Certificate of Incorporation, made after a full and fair evaluation of alternative endowment managers, and sensible in the extreme. Indeed, since that decision, the Foundation’s endowment has increased nearly $300 million, net of funds disbursed to support the WWS graduate program.

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Ultimately at stake in the lawsuit is the continued support of Princeton University by the Robertson Foundation. Some press reports erroneously suggest that the plaintiffs seek only to force Princeton to return misspent funds to the Foundation so that they can be spent by the Woodrow Wilson School consistent with the plaintiffs’ cramped interpretation of the Foundation’s mission. As stated in their pleadings, 45 years after the Foundation’s creation, the plaintiffs seek a judicial “amendment” of “the Certificate of Incorporation and By-Laws of the Robertson Foundation . . . to make the Robertson Foundation a private foundation with all of its Trustees appointed by the Robertson Family. . . .”9

3. Summary Judgment Motions

After nearly four years of discovery involving depositions (totaling more than 125 days) of approximately 80 individuals, the parties argued several motions for partial summary judgment as well as a motion by the University to strike the plaintiffs’ jury demand. The parties are awaiting decisions on these motions, which Princeton hopes will more practically organize, and perhaps streamline, a factually and legally complex case.

Among the issues that the motions address are:

• Fiduciary Duty/Business Judgment Rule. This issue pertains to the plaintiffs’ contention that the University-appointed Trustees of the Foundation are inherently conflicted for purposes of all transactions with Princeton, and that each and every transaction between the Foundation and Princeton is therefore subject to judicial evaluation for “entire fairness,” rather than reviewed, as necessary, under the business judgment rule.

• Sole Beneficiary. This issue pertains to the plaintiffs’ request that the

court sever the organizational ties, and flow of support, between Princeton and the Robertson Foundation.

• Laches or Limitations Period. This issue pertains to the fact that the

plaintiffs have asked the court to find that various expenses dating back to 1965 were improper and should be repaid to the Foundation.

• Article 11(c). This issue pertains to the plaintiffs’ contention that,

under Article 11(c) of the Foundation’s Certificate of Incorporation, the Foundation may only spend dividends and interest.

• PRINCO. This issue pertains to the Foundation Board’s selection in

2003 (by 4-3 vote) of the Princeton University Investment Company to provide an additional layer of professional investment management for the Foundation’s assets and supplement the work of the Foundation’s long-standing Investment Committee.

9 Amended Compl., Prayer for Relief, paragraph 1 (emphasis added).

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• Overcharges/Offset. This issue pertains to the plaintiffs’ contention

that in the course of the litigation Princeton has purportedly “admitted” that certain expenses paid by the Robertson Foundation were improper and should be repaid, and to the question of whether any such “overcharges” that might finally be determined to be ultra vires should be equitably offset by amounts that the Robertson Foundation should have or could have paid in support of the Woodrow Wilson School under the terms of its Certificate of Incorporation, but did not do so.

• Plaintiffs’ Jury Demand. This issue arises from the fact that the

plaintiffs commenced this lawsuit in the Chancery Division of the Superior Court of New Jersey, asserting equitable causes of action, and did not request a jury trial until nearly two years later, when they filed an amended pleading and asked that a subset of their claims asserted against only one of the defendants, Princeton University, be tried to a jury (with the chancery judge deciding the other claims).

The pending motions do not encompass all of the issues in the litigation.

Therefore, there is no chance that they can dispose of the lawsuit in its entirety without a subsequent trial.

4. Expert Witnesses

The complexity and breadth of this litigation are underscored by the number and nature of the expert witnesses whom Princeton has engaged to address the following areas:

Standards and Practices within Academia Relating to Graduate Programs in Public Policy, Admissions, Graduate Placement and Joint Appointments (including Woodrow Wilson School Mission), and Academic Freedom:

• Joseph S. Nye, Jr. Professor at Harvard University, specializing in

government and international affairs; former Dean of the Kennedy School of Government at Harvard (1995-2004).

• Robert M. O’Neil. Professor of Law at the University of Virginia and

Director of the Thomas Jefferson Center for the Protection of Free Expression, a non-profit organization affiliated with the University of Virginia. Former President of the University of Virginia (1985-90) and former President of the University of Wisconsin System (1980-85).

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Standards and Practices in the Administration and Management of Charitable Trusts and Charitable Corporations (Including Corporate Governance, Conflict of Interest and Business Judgment Rule): • Harvey P. Dale. Professor of Philanthropy and the Law and Director of the

National Center for Philanthropy and the Law at New York University School of Law; serves on numerous other committees that develop policy and draft legislation directed at non-profit entities; advisor to the American Law Institute’s “Principles of the Law of Nonprofit Organizations” project.

• Joseph T. Walsh. Former Justice of the Delaware Supreme Court, the highest

appeals court in Delaware (1985-2003). Justice Walsh currently is Of Counsel to the firm of McCarter & English in its Wilmington, Delaware office.

Tax Issues, Spending Limits for the Robertson Foundation, Plaintiffs’ Request for Reclassification of the Robertson Foundation to a Private Foundation, and Banbury Fund Issues: • Marcus S. Owens. Former Director of the Exempt Organizations Division of

the IRS (1990-2000); currently a member of the law firm of Caplin & Drysdale. Mr. Owens was the highest-ranking official within the Internal Revenue Service with exclusive line responsibility for federal tax administration matters relating to tax-exempt organizations.

Historical Spending of Robertson Foundation Funds (Forensic Accounting), Standards and Practices Generally Accepted in the Accounting Industry for Higher Education, and Damage Assessments: • Bradley A. Massam. Partner in the Investigative & Dispute Services practice

of Ernst & Young LLP in New York City; certified public accountant, licensed by the states of Pennsylvania and New York with more than 21 years of experience in the profession.

• Henry G. Kirschenmann. Consultant with BearingPoint, Inc., President of

Support Groups, Inc.; Director of the National Education Institutes, a non-profit training organization; Certified Public Accountant with a masters degree in public administration; Deputy Assistant Secretary for Acquisitions & Grants Policy in the U.S. Department of Health and Human Services (1981-88) (where he oversaw the setting of federal indirect cost rates to grant recipients including colleges and universities).

• Stephen Nemphos. Founder and principal of a Maryland-based professional

consulting firm which assists colleges, universities, and non-profits in the area of facilities and administrative cost recovery (often referred to as “overhead” or “indirect cost” recovery); former chief accountant and controller at The

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Johns Hopkins University, where he was responsible for the University’s financial statements as well as the development and negotiation of its facilities & administrative rates.

Endowment Investment Management:

• Eugene J. McDonald. Principal and Chief Investment Officer of a division of Quellos Capital Management; founding President of Duke University’s investment management affiliate, the Duke Management Company (“DUMAC”); and former Vice President and General Counsel of Duke.