Berkshire: Haslam made secret payments for quick financial boost at Pilot

Repeatedly using words like “illicit” and “secret,” Berkshire Hathaway has fired back at Jimmy Haslam III, the former chairman of Pilot Travel Centers and son of its founder, over what began as an accounting dispute and now can only be described as a nasty battle with personal overtones.

Berkshire Hathaway’s allegations against Haslam III were in response to a suit filed in Delaware Chancery Court in late October about valuing the largest trucking and travel center in the country, 80% of which is now owned by Berkshire Hathaway (NYSE: BRK.B). It took majority control in January after taking an earlier minority position in 2017.

What’s at stake is the remaining 20%. There is a provision in the sale agreement between Berkshire Hathaway and Pilot that allows Haslam to exercise a “put option” that would require Berkshire Hathaway to purchase the remaining 20%. But the Haslam family cannot exercise that option anytime it chooses to; it must do so within 60 days at the close of the Pilot fiscal year, which is Dec. 31. If the Haslam family doesn’t exercise it in that window in one year, the option rolls over to the following year.

The heart of the Haslam complaint — filed as an action by Pilot Corp. — is that in violation of an earlier agreement, Berkshire Hathaway, upon taking control of Pilot Travel Centers (PTC), switched its accounting to a “pushdown” method. Haslam says this is reducing the value of Pilot, which would impact what Berkshire Hathaway would pay for the remaining 20%; he wants the valuation to be on the accounting in place when the sale was agreed upon.

Berkshire does not dispute the change in accounting and that it would impact earnings before interest and taxes (EBIT). But its response is that for purposes of the 20% valuation, it would abide by earlier agreements regarding the accounting to be used for setting the price in the put option if it is exercised.  

Berkshire’s response filed this week concedes that “pushdown accounting enabled PTC to avoid recognizing some expenses (increasing earnings before interest and taxes), but had other effects that reduced EBIT.” EBIT is the basis for determining the value of the put option. Berkshire said there is an Investor Rights Agreement to settle the dispute.

In the original suit by the Haslam family — which has PTC as a defendant, along with several Berkshire Hathaway executives — Berkshire Hathaway Chairman Warren Buffett was quoted as telling founder James Haslam II: “I said that Berkshire will comply with the terms of the contract. That’s exactly what will happen.” Or as Berkshire said in its filing: “Buffet wrote back the same day and set the record straight.”

But the case has taken a new turn with the filing earlier this week by Berkshire in response to the original Haslam/Pilot Corp. suit.

The gist of the counterargument is that Haslam III told his key managers at Pilot to act in such a way as to give a short-term boost to Pilot’s 2023 EBIT and persuaded them to do so by offering what Berkshire Hathaway said were “[secret] massive side payments … structured to improperly inflate PTC’s short term profits in 2023 at the expense of PTC’s long-term profitability and value.”

Those payments were to come from Haslam III directly, according to the Berkshire response. But he would cash in to a larger level than the payouts because the 2023 EBIT would presumably be inflated by these managers’ actions, and that EBIT would become the basis for valuing the put option.

“By secretly distorting the incentives of PTC’s employees for personal gain, Haslam breached the fiduciary duties he owes to PTC and NICO (a Berkshire Hathaway subsidiary) and jeopardized PTC’s long-term profitability and value,” the Berkshire lawsuit says.

The response also says Haslam III concealed those payments from Pilot management that was not chosen to receive them, mostly executives who came out of Berkshire Hathaway.

Berkshire Hathaway goes on to call Haslam III’s actions an “outrageous and illegitimate scheme.”

The response has several other nuggets that paint a picture of the relationship between Haslam III and executives at Berkshire, who now control the company founded in 1958.

• At a dinner March 29 hosted by Haslam for a small group of Pilot executives, Haslam III said he and Berkshire “had philosophical differences in terms of the business and 2023 would likely be his last year with PTC.” As the filing notes, that suggested he would exercise the put option in 2024.
• The bonus to be paid by Haslam III in 2023 — the one Berkshire describes as “illicit” — would be based on the formula for the Growth Partners Plan that paid out in 2023 based on the 2022 EBIT. But an aspect of GPP, the Special Distribution Growth United, ceased to exist after that payout.
• Virtually everybody in the room at the March dinner received “a very large check” under the GPP’s Special Distribution Growth plan, “in many cases an order of magnitude greater than the executives’ annual salaries.” That fact was a direct function of the Berkshire Hathaway ramp-up to a controlling interest in PTC that took place that quarter.
• The alleged under-the-table payments were not retention agreements. The Berkshire response said many of the executives already had those agreements in place with PTC.
• EBIT at PTC was the highest in its history in 2022. It topped earnings projections by 50%, though no specific figures are disclosed.
• This year, PTC CEO Adam Wright, who came into his role from the Berkshire side of the business and so did not have ties to Haslam III, “noticed an unwarranted urgency among certain employees to close deals in 2023.” The Berkshire response cites several of them but the specifics are redacted. But there were too many of them for the CEO; “Wright was not in a position to police the huge number of transactions that could have been influenced by Haslam’s improper promise of under-the-table compensation,” Berkshire Hathaway says in its response.

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