Paul Newman established the foundation to donate all royalty rights to the sale of Newman’s Own products, focusing on supporting children and their families. According to the foundation, it has distributed more than $570 million since 1982.
In the lawsuit, his daughters allege the foundation disregarded their late father’s wishes, including his desire that they direct their own funds to donations. This is an interesting case with many angles, and the complaint raises several fiduciary issues, including whether donor intent or the business judgment rule is more important.
Two Key Changes to Distributions
Among other things, the complaint alleges that Mr. Newman deliberately created the financial structure of Newman’s Own, in which he licensed his intellectual property rights in exchange for a royalty payment that would fund Newman’s Own Foundation donations. This structure provided a guaranteed revenue stream and created significant tax savings for the corporation. However, due to a change in the excess holdings rule in 2018, the foundation seemed compelled to change the structure to distributions of a percentage of net income, as opposed to the original royalty rights.
Additionally, Mr. Newman appeared to have wanted his daughters to be involved in philanthropic activities. However, the structure of the distributions also changed a few months before her death, changing from “girls’ foundation rules” to “grant recommendation”.
Trustees and their fiduciary duty
While there are other issues in the Complaint, the above two items opened the discussion about trustees, their decision-making latitude and their fiduciary duty. One of the defenses available to trustees is the business judgment rule. The business judgment rule gives the board discretion to make corporate decisions for the benefit of all stakeholders. The board of directors of a not-for-profit corporation is generally protected from liability, so long as the decisions or actions were taken in good faith, after proper investigation, and with the rational belief that they were in the best interests of the society.
The Trustees of the Newman’s Own Foundation make decisions about the operations of the foundation, and the Board of Trustees makes decisions about the organization of Newman’s Own. The board was required to make the appropriate decisions regarding the excess business holdings rule.
Communication can help prevent disputes
Whatever the final decision in the Newman’s Own case, the principles of fiduciary risk management are evident in this case: Communication and the relationship with beneficiaries are of the utmost importance. Almost all trustee disputes stem from misunderstandings.
Trustees have a legal obligation to communicate and document this communication with beneficiaries. This communication can take many forms, such as annual or quarterly written documentation, or through formal or informal meetings. Trustees should be available to answer any questions from beneficiaries regarding the decisions they have made. This is where the strength of the relationship can impact the alliance with the recipient.
When there is open communication and mutual respect between trustees and beneficiaries, problem-solving mechanisms are usually in place to avoid disputes. However, disputes often arise when there is a gap in trust and communication.
In the Newman’s Own case, we have no way of knowing how decisions were made or what was communicated to Paul Newman’s daughters. However, open communication and problem-solving strategies may have helped avoid disputes.
In this case, the claims against the trustees of Newman’s Own Foundation are likely arguable based on the latitude afforded by the business judgment rule. In most cases, if trustees act diligently and make decisions that are in the best interests of all stakeholders and free of conflict of interest, the business judgment rule should prevail over donor intent.
Ensure adequate liability coverage
This lawsuit highlights not only how critical it is for trustees and beneficiaries to communicate well, but also how important it is to choose the right trustee. This can be one of the most difficult parts of creating an estate plan. When choosing a trustee, make sure the person or company:
- Will act in the best interests of the trust
- Has the versatility to adapt to the changing legal, tax, financial and business climate
- Understands asset complexity
- Is ready to take on the tasks and responsibilities associated with achieving your goals
At the same time, it highlights the need for trustees to have adequate indemnification agreements, training, and insurance coverage for lawsuits. There are risks in being a fiduciary, as they are held to the highest standard of law – fiduciary duty – and may be personally liable.
Directors and Officers (D&O) and Errors and Omissions (E&O) policies provide valuable protection for trustees – they are complementary, but different policies. D&O insurance is the policy that responds when corporate directors, officers and trustees are sued in their capacity as directors, officers and trustees. It can be considered as malpractice insurance for the management of an entity. Errors and omissions insurance protects management and employees against errors made in the performance of their professional duties. Trustees should continually assess their liability risks as family needs and dynamics change over time.