Legal action is expected to start next month in the dispute between billionaires Warren Buffett and Jimmy Haslam over the sale of Pilot Travel Centers.
The hearing before the Delaware Chancery Court will focus on claims by Haslam and his family that Buffett's Berkshire Hathaway, Inc., improperly changed accounting practices at the truck stop chain in an effort to reduce the cost of buying Haslam's remaining stake in the company.
A hearing on a counter-claim by Berkshire Hathaway that alleges Haslam offered payments to multiple Pilot employees to boost short-term earnings at the expense of the chain's long-term value to increase the price of the family's remaining stake, will be scheduled at a future date, a judge ruled on Friday.
The fight between the billionaires began in October, when Haslam's Pilot Corp. sued Berkshire Hathaway and others over the terms of the travel center chain sale.
Berkshire began its acquisition of Pilot Travel Centers in 2017, when it acquired a 38.6% stake in the company for $2.758 billion. The purchase price was calculated by multiplying by 10 Pilot's earnings before interest and taxes, with adjustments for cash and debt, according to the suit.
As part of the sale agreement, Berkshire purchased an additional 41.4% stake in the company using the same calculation for $8.2 billion in January, bringing its total stake to 80%. The agreement also gave Pilot an annual 60-day put right, beginning on Jan. 1, 2024, to sell its remaining 20% stake in the chain to Berkshire, with the price determined by the same earnings-based formula, according to the suit.
That purchase agreement also allowed the minority owner to veto changes in accounting policies at the chain.
But, the suit says, Berkshire in March began employing "pushdown accounting" at Pilot, a move the suit said artificially depressed earnings "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 said Pilot Corp. was not consulted about the change as required by the sale agreement and asked the court to halt the pushdown accounting and ensure the method will not be used to determine the price of the final stake in the company.
Berkshire in its response denied that the switch in accounting methods reduced the company's reported income, saying the suit "misleadingly characterizes the effect of pushdown accounting on PTC's pre-tax income for the first quarter of 2023."
In a November counterclaim Berkshire alleged that Pilot Corp. and Haslam "have done far worse to inflate Pilot's payout than file this lawsuit."
Berkshire said that after it took control of the company in January, Haslam "secretly promised massive side payments, from his own pocket," to at least 16 high-level Pilot employees and at least 10 employees in the company's fuel division to induce them to prioritize the company's short-term 2023 earnings over its long-term value. The payments, based on the price received for the remaining 20% stake, would be outside the travel center chain's regular compensation plan and would exceed the employees' annual pay "by an order of magnitude," Berkshire said in its counterclaim.
"The purpose and effect of Haslam's disloyal scheme was to artificially boost PTC's 2023 earnings, which dictate Pilot's 2024 payout- and to do so in an insidious and largely undetectable way," it said.
Among the instances of business moves that could have been the result of the alleged payment promise, the counterclaim pointed to "unwarranted urgency by certain employees to close transactions in 2023, with employees recommending selling assets likely to continue appreciating, releasing hedge positions with significant, ongoing value, and divesting from businesses to yield one-time gains while sacrificing long-term income streams."
"While those efforts were rejected, countless other compromised decisions on matters large and small - such as discretionary trading decisions within the Fuel Division - have almost certainly gone undetected," according to the counterclaim.
Berkshire asked the court to prevent Pilot Corp. from exercising its put option in January, since Berkshire doesn't have "the ability to untangle which of countless business and operational decisions at PTC during 2023 improperly favored Pilot and Haslam's interests over PTC's interests."
Pilot Corp.'s attorneys have called Berkshire's allegations "wild inventions" and on Thursday filed a motion to dismiss the company's counterclaim.
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--Reporting by Steve Cronin, scronin@opisnet.com; Editing by Jeff Barber, jbarber@opisnet.com
(END) Dow Jones Newswires
12-08-23 1359ET
