The legal battle between the Haslam family and Berkshire Hathaway over the valuation of Pilot Travel Centers will not include the impact of payments made by the Haslams to their loyalists still working at the truck stop giant.
That’s the bottom-line impact from a decision handed down Wednesday by Vice Chancellor Morgan Zurn of the Delaware Chancery Court as the legal battle over heads toward a Jan. 8 trial.
At stake is the valuation of the remaining 20% of PTC — as the court refers to Pilot Travel Centers — that remains in the hands of the Haslam family. In January, Berkshire Hathaway bought a 41.4% stake in PTC from the Haslam family that, combined with the 38.6% stake it acquired from the Haslams in 2017, gave it control of the company.
The Haslams have an annual first-quarter window that if exercised — what the legal documents refer to as the “put right” — would sell the remaining 20% of PTC to Berkshire.
If it isn’t exercised in 2024, the put right then slides to 2025 and continues in future years. But various statements in the legal documents filed in the case strongly suggest the Haslam family plan is to exercise the put right next year.
The formula for determining the value of PTC is 10 times earnings before interest and taxes, with some adjustments. That is not at issue. More broadly, the litigation is over whether a shift in Berkshire Hathaway accounting to what is known as “pushdown accounting” would effectively reduce the value of PTC for determining the value of the put right.
The more immediate question before Zurn was private payments reportedly promised to several executives still at PTC by Jimmy Haslam, son of the founder. Berkshire Hathaway said those payments were leading those executives to take steps that might boost PTC earnings in the short term, thereby aiding the valuation of the put right and boosting the size of their payments, but damaging it in the long run.
The initial lawsuit filed by the Haslam family does recount a conversation with Berkshire Hathaway CEO Warren Buffett in which Buffett reportedly said the PTC valuation would be calculated under the initial terms of the agreement, which did not include pushdown accounting.
The crux of Zurn’s decision was that while the payment promises from Jimmy Haslam do exist — that does not appear to be an issue in the legal battle — it isn’t relevant to the Haslams’ arguments because that focuses on the impact of the accounting change.
Citing earlier precedents, Zurn said the Chancery Court has found in other cases that “a plaintiff’s wrongdoing lacked a sufficient nexus to a breach of contract claim where the wrongdoing did not relate to the plaintiff’s rights or the defendant’s obligations under the relevant agreement.”
Berkshire Hathaway attorneys charged that the Haslams — who filed the suit as Pilot Corp. — had “unclean hands.” That legal term is defined by the Legal Information Institute as “the principle that a party’s own inequitable misconduct precludes recovery based on equitable claims or defenses. A party who has violated an equitable principle, such as good faith, is described as having ‘unclean hands.’”
But Zurn rejected the Berkshire Hathaway argument that the payments were relevant to the question of the accounting changes at Berkshire and how they might impact the value of the put right.
The “allegations” about the payments “add context to the tug-of-war over PTC’s 2013 EBIT that motivates this lawsuit,” Zurn wrote. But beyond that, “neither Pilot’s (the Haslams) goal nor its context can provide an anchor for an unclean hands defense: the anchor must catch on Pilot’s claims.”
Payments undertaken by Jimmy Haslam “do not inform Pilot’s rights or Berkshire’s obligations” under the agreement to value the remaining 20%, according to Zurn. But the court in earlier precedents has “found that an unclean hands defense lacks a sufficient nexus where the plaintiff’s claim and alleged wrongdoing related to separate agreements,” which Zurn sees in the relationship between the question over accounting and the payments.
Zurn said he had “taken the Berkshire allegations as true and made all inferences in their favor, yet still [concluded] their defense could not prevail as a matter of law.”
According to the original counterclaim by Berkshire Hathaway, Jimmy Haslam, at a March dinner, told several executives who were still at PTC that he would pay them “large, one-time bonuses” in lieu of a company-run incentive program that was not going to operate past 2022 and which had paid many of the executives a substantial sum in its final year. And while some media accounts have described the payments as “bribes,” that word does not appear in any of the litigation.
Haslam never informed Berkshire management about the plan, nor did he inform the people running PTC who came out of the Berkshire side of the combination, according to the Berkshire counterclaim.
Berkshire’s objection: “Haslam’s illicit promise of secret bonuses thereby distorted PTC executives’ financial interests to be aligned not with PTC’s interests, but with those of a minority owner anticipating selling its remaining stake.”
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