The fate of the final 20% of Pilot Travel Centers not owned by Berkshire Hathaway and still in the hands of the founding Haslam family is at the heart of a lawsuit filed late last month in Delaware, with the Haslams accusing Berkshire Hathaway of adopting new accounting practices that could impact the value of that final one-fifth ownership.
The suit, filed in Delaware Chancery Court, is about the “put right” that enables the Haslams to choose to sell their remaining 20% to Berkshire Hathaway. That right can be exercised beginning Jan. 1, 2024 and is described in the lawsuit as annual but can only be exercised within 60 days after the close of a Pilot Travel Centers (PTC) fiscal year. The entity that would exercise the put right is identified as Pilot Corp., controlled by the Haslams. Pilot Corp. is the plaintiff in the lawsuit.
There is nothing in the lawsuit to suggest that exercising the put right is mandatory.
According to the lawsuit, the formula for determining the value of the put right is the same formula that was used when Berkshire Hathaway (NYSE: BRK.B) bought its two tranches of PTC equity, first in 2017 and the second earlier this year. That formula is 10 times earnings before interest and taxes at PTC, with adjustments for debt and cash on hand.
According to the lawsuit, the accounting process used for the first two purchases is to be utilized in determining the value of PTC and the 20% share if the put right is implemented by the Haslams. That accounting method, according to the suit, is the acquisition method, “which the acquirer recognizes the assets acquired and liabilities assumed at fair value with limited exceptions.”
But the suit says after Berkshire Hathaway acquired controlling interest in the first quarter, it began valuing PTC through “pushdown accounting,” which impacts several valuations of an acquired company.
“Pushdown accounting does nothing to change the value of performance of PTC’s business,” the suit says. “But the application of pushdown accounting, and the various subsidiary changes in accounting policies that necessarily result, artificially depress the reported earnings of PTC by, among other things, increasing depreciation and amortization expenses and by preventing the recognition of gains on derivative instruments and other hedges in the income statement.”
The suit lays out what Pilot sees as the specific hit on the PTC valuation due to the accounting change, but the numbers are redacted in the publicly available document. “Berkshire’s choice to impose pushdown accounting on Pilot Travel Centers thus risks unfairly transferring (amount redacted) or more to Berkshire … from the pocket of minority member Pilot.”
The suit says the Haslams’ representatives on the PTC board proposed a resolution to halt pushdown accounting and revert to the previous methods. But the Berkshire representatives on the board rejected it.
According to the suit, there have been indications from Berkshire personnel that the previously agreed upon accounting methods would be implemented should the put right be triggered by the Haslams. That assurance came from as high up the chain as Berkshire Hathaway Chairman Warren Buffett, according to the lawsuit.
Buffett told James Haslam on Oct. 13 that “Berkshire would abide by the agreement,” according to the lawsuit. James Haslam, the original founder of Pilot, sent Buffett a letter “seeking confirmation that Berkshire would not apply pushdown accounting in calculating the value of Pilot’s Put Right.”
But he didn’t get a straight answer, according to the lawsuit. “Instead, Buffett repeated: ‘I said that Berkshire will comply with the terms of the contract. That’s exactly what the contract says.’”
The suit charges that Buffett’s actions amounted to a “refusal to even disclose Berkshire’s position on the proper method of valuing Pilot’s Put Right.” As a result, the suit says, “litigation [is] inevitable” because it is not clear to the Haslams that Berkshire “will not commit to honor their contractual obligations and fiduciary duties.”
Berkshire Hathaway is a Delaware corporation although based in Omaha, Nebraska, which led to the suit being filed in Delaware Chancery Court. The defendants include Berkshire Hathaway, Pilot Travel Centers (since it is now controlled by Berkshire Hathaway), a Berkshire subsidiary named NICO and several members of the Berkshire board of directors.
More articles by John Kingston
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Haslam family sues Berkshire over valuing of final chunk of Pilot
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