IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`
`PILOT CORPORATION, a Tennessee
`corporation,
`Plaintiff,
`
`v.
`
`GREG ABEL, KEVIN CLAYTON, MARC
`HAMBURG, MARK HEWETT, SCOTT
`THON, BERKSHIRE HATHAWAY, INC.,
`a Delaware corporation, NATIONAL
`INDEMNITY COMPANY, a Nebraska
`corporation, and PILOT TRAVEL
`CENTERS, LLC, a Delaware company,
`
`Defendants.
`
`C.A. No.
`
`VERIFIED COMPLAINT
`Plaintiff Pilot Corporation (“Pilot”), by and through its undersigned counsel,
`
`brings the following complaint against Defendants Greg Abel, Kevin Clayton, Marc
`
`Hamburg, Mark Hewett, Scott Thon, Berkshire Hathaway, Inc., National Indemnity
`
`Company (“NICO,” and together with Berkshire Hathaway, Inc., “Berkshire”), and
`
`Pilot Travel Centers, LLC (“PTC”), and alleges as follows:
`
`
`
`
`
`Redacted Public Version
`
`eFiled: October 26, 2023
`
`2023-1068-MTZ
`
`EFiled: Oct 26 2023 03:40PM EDT
`Transaction ID 71204658
`Case No. 2023-1068-MTZ
`
`
`
`PILOT CORPORATION, a Tennessee
`corporation,
`Plaintiff,
`
`v.
`
`GREG ABEL, KEVIN CLAYTON, MARC
`HAMBURG, MARK HEWETT, SCOTT
`THON, BERKSHIRE HATHAWAY, INC.,
`a Delaware corporation, NATIONAL
`INDEMNITY COMPANY, a Nebraska
`corporation, and PILOT TRAVEL
`CENTERS, LLC, a Delaware company,
`
`Defendants.
`
`C.A. No.
`
`VERIFIED COMPLAINT
`Plaintiff Pilot Corporation (“Pilot”), by and through its undersigned counsel,
`
`brings the following complaint against Defendants Greg Abel, Kevin Clayton, Marc
`
`Hamburg, Mark Hewett, Scott Thon, Berkshire Hathaway, Inc., National Indemnity
`
`Company (“NICO,” and together with Berkshire Hathaway, Inc., “Berkshire”), and
`
`Pilot Travel Centers, LLC (“PTC”), and alleges as follows:
`
`
`
`
`
`Redacted Public Version
`
`eFiled: October 26, 2023
`
`2023-1068-MTZ
`
`EFiled: Oct 26 2023 03:40PM EDT
`Transaction ID 71204658
`Case No. 2023-1068-MTZ
`
`
`
`NATURE OF THE ACTION
`In 2017, Berkshire acquired a 38.6% interest in PTC from Pilot and
`
`1.
`
`other entities. The agreed price for the transaction was $2.758 billion, a figure
`
`calculated by multiplying PTC’s earnings before interest and taxes (“EBIT”) by ten,
`
`with adjustments for cash and debt.
`
`2.
`
`In conjunction with that investment, the parties entered into several
`
`related agreements. These agreements obligated Berkshire to acquire an additional
`
`41.4% interest in PTC on January 31, 2023, bringing Berkshire’s interest in PTC to
`
`80% (the “2023 Control Purchase”). They also gave Pilot an annual 60-day put
`
`right, beginning on January 1, 2024, to sell the remaining 20% interest in PTC to
`
`Berkshire (the “Put Right”). Berkshire proposed, and Pilot agreed, that the price for
`
`Berkshire’s 2023 Control Purchase and for Berkshire’s purchase of the 20% interest
`
`in PTC upon exercise of the Put Right would be determined by the same formula for
`
`valuing PTC used to set the price for Berkshire’s initial investment.
`
`3. When Berkshire initially invested in PTC, the parties also entered into
`
`an LLC agreement governing PTC that contained protections for the minority
`
`investor—i.e., Berkshire before it made the 2023 Control Purchase and Pilot
`
`thereafter. These protections included the right to veto any “select[ion]” or
`
`“change” of PTC’s “accounting policies” not required by applicable law or GAAP.
`
`-2-
`
`
`
`
`
`
`
`4.
`
`Five years later, in accordance with the parties’ agreement, Berkshire
`
`made the 2023 Control Purchase, acquiring an additional 41.4% interest in PTC for
`
`a total ownership interest of 80%. The price was $8.2 billion, determined according
`
`to the contractually agreed formula for valuing PTC.
`
`5.
`
`The first monthly financial statement PTC issued after Berkshire’s
`
`assumption of control covered February 2023. The February 2023 statement was
`
`consistent with PTC’s historical accounting conventions.
`
`6.
`
`The March 2023 monthly statement, however, applied—for the first
`
`time—“pushdown accounting.” Berkshire adopted this change without seeking or
`
`obtaining Pilot’s consent. Pushdown accounting is an optional accounting decision
`
`that allows an acquirer (such as Berkshire) to “push down” its own basis for the
`
`acquired company’s assets and liabilities to the financial statements of the acquired
`
`company. The acquirer’s basis is the “stepped-up basis” of assets and liabilities at
`
`the time of the acquisition, rather than their historical basis. Under accounting rules,
`
`an acquiree that maintains its own financial statements—like Pilot here—may, but
`
`is not required to, “step up” the basis of its assets and liabilities after the acquisition.
`
`7.
`
`Pushdown accounting does nothing to change the value or performance
`
`of PTC’s business. But the application of pushdown accounting, and the various
`
`subsidiary changes in accounting policies that necessarily result, artificially depress
`
`-3-
`
`
`
`
`
`
`
`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.
`
`8.
`
`Accordingly, the artificial decrease in reported earnings due to the
`
`application of pushdown accounting reduces PTC’s EBIT, which in turn reduces the
`
`value of Pilot’s Put Right. The economic results are dramatic. Based on PTC’s
`
`projected 2023 earnings, Pilot could lose as much as $
`
` from the
`
`devaluation of its Put Right resulting from PTC’s artificially lower earnings.
`
`Berkshire’s choice to impose pushdown accounting on PTC thus risks unfairly
`
`transferring
`
` or more to Berkshire, the LLC’s controlling member,
`
`from the pocket of minority member Pilot.
`
`9.
`
`Pilot has not only repeatedly registered its refusal to consent to
`
`Berkshire’s unilateral and self-interested imposition of pushdown accounting, but
`
`also repeatedly requested assurances that Berkshire will not apply pushdown
`
`accounting in calculating the value of the Put Right. Berkshire has refused to stop
`
`applying pushdown accounting to PTC’s financial statements or to provide the
`
`assurances Pilot has sought, notwithstanding Pilot’s veto rights and the duties of care
`
`and loyalty that Berkshire and its board designees owe the minority member of PTC.
`
`-4-
`
`
`
`
`
`
`
`10.
`
`To remedy and prevent these continuing breaches of contract and
`
`fiduciary duties, Pilot seeks (among other relief) a declaration that the use of
`
`pushdown accounting in PTC’s financial statements was and is unauthorized, as well
`
`as related injunctive relief. In addition, Pilot seeks an expedited adjudication of its
`
`entitlement to relief to ensure that Berkshire’s imposition of pushdown accounting,
`
`in breach of the LLC Agreement, will not be applied to determine the value of the
`
`Put Right before Pilot’s 2024 right to exercise the Put Right expires.
`
`JURISDICTION, VENUE, AND GOVERNING LAW
`The Court of Chancery has subject-matter jurisdiction pursuant to 6
`
`11.
`
`Del. C. § 18-111, 10 Del. C. § 341, and the Delaware Declaratory Judgment Act, 10
`
`Del. C. § 6501, et seq.
`
`12. Under § 14.11 of the LLC Agreement and § 3.11 of the Investor Rights
`
`Agreement, the parties consented to the exclusive jurisdiction of the Courts of the
`
`State of Delaware or the United States District Court for the District of Delaware.1
`
`Section 14.09 of the LLC Agreement and § 3.9 of the Investor Rights Agreement
`
`provide that all issues and questions concerning the construction, validity,
`
`enforcement, and interpretation of the agreements are governed by the laws of the
`
`State of Delaware.
`
`1 The LLC Agreement and Investor Rights Agreement (as defined below) are attached
`hereto as Exhibit A and Exhibit B, respectively.
`-5-
`
`
`
`
`
`
`
`PARTIES
`Plaintiff Pilot is a member of PTC and owns a 20% stake. Pilot is a
`
`13.
`
`party to the LLC Agreement. Its principal executive offices are located at 5508
`
`Lonas Drive, Knoxville, Tennessee.
`
`14. Defendant PTC is a Delaware limited liability company. Its principal
`
`executive offices are located at 5508 Lonas Drive, Knoxville, Tennessee. PTC is
`
`the largest operator of travel centers in North America (primarily under the names
`
`Pilot or Flying J) with more than 650 travel center locations across 44 U.S. states
`
`and six Canadian provinces. PTC also has 135 retail locations in the United States
`
`and Canada where it sells diesel fuel through various arrangements with third(cid:173)party
`
`travel centers. PTC sold over 13 billion gallons of fuel in 2022 (primarily diesel and
`
`gasoline). PTC has approximately 30,000 employees and is one of the largest
`
`privately owned companies in the United States.
`
`15. Defendant Berkshire is a Delaware corporation. Its principal executive
`
`offices are located at 3555 Farnam Street, Omaha, Nebraska. Berkshire is a holding
`
`company owning subsidiaries engaged in numerous diverse business activities.
`
`Berkshire owns a controlling 80% stake in PTC through its subsidiary, NICO.
`
`Berkshire is a party to the LLC Agreement.
`
`-6-
`
`
`
`
`
`
`
`16. Defendant NICO is a Nebraska insurance company. Its principal
`
`executive offices are located at 1314 Douglas Street, Suite 1400, Omaha, Nebraska.
`
`NICO is a subsidiary of Berkshire. NICO is a member of PTC, owns a controlling
`
`80% stake in PTC, and is a party to the LLC Agreement.
`
`17. Defendant Greg Abel, Berkshire’s Vice Chairman, serves as PTC’s
`
`Board Chair. Berkshire appointed Abel to the PTC Board, and used its control of
`
`PTC to name him Board Chair on March 31, 2023, replacing Jimmy Haslam, the
`
`chairman of Pilot, in that role.
`
`18. Defendant Marc Hamburg, Berkshire’s Chief Financial Officer, has
`
`served on the PTC Board since his appointment by Berkshire in 2018.
`
`19. Defendant Kevin Clayton, CEO of Clayton Homes, a Berkshire
`
`company, has served on the PTC Board since his appointment by Berkshire in 2018.
`
`20. Defendant Mark Hewett, President and CEO of Berkshire Hathaway
`
`Energy’s Pipeline Group, has served on the PTC Board since his appointment by
`
`Berkshire in 2023.
`
`21. Defendant Scott Thon, President and CEO of Berkshire Hathaway
`
`Energy, has served on the PTC Board since his appointment by Berkshire in 2023.
`
`22. Abel, Hamburg, Clayton, Hewett and Thon are referred to herein as the
`
`“Board Defendants.”
`
`-7-
`
`
`
`
`
`
`
`A.
`
`FACTUAL ALLEGATIONS
`The founding and history of Pilot and PTC
`23.
`Jim Haslam II founded Pilot in 1958 with a single gas station he
`
`purchased for $6,000 in Gate City, Virginia. Over the next two decades, Pilot
`
`developed a regional network of gasoline stations and convenience stores. In
`
`November 1981, Pilot opened its first truck stop, in Corbin, Kentucky. Through a
`
`combination of acquisitions and organic growth, Pilot evolved from a regional
`
`convenience store operator into a leading national operator of truck stops. By 1996,
`
`Pilot operated 96 travel centers and 50 convenience stores, and its total fuel sales
`
`had reached 1.2 billion gallons. That year, Jimmy Haslam was named president and
`
`chief executive officer, taking the reins from his father.
`
`24.
`
`In 2001, Pilot and Marathon Ashland Petroleum LLC (Speedway Truck
`
`Stops) created PTC, a nationwide network of 232 travel centers, as a joint venture.
`
`By 2018, PTC had expanded to more than 550 travel centers and created a new
`
`division called PFJ Energy, which today is one of the largest wholesalers of gasoline
`
`and diesel and the largest seller of biodiesel and renewable diesel in the United
`
`States. By 2023, PTC was the fifth-largest privately held company in the United
`
`States and the country’s biggest seller of biodiesel, renewable diesel, and over-the-
`
`road diesel fuel.
`
`-8-
`
`
`
`
`
`
`
`25. More than fifty years after founding Pilot, Jim Haslam II and the
`
`Haslam family considered selling a controlling interest in Pilot’s travel center
`
`business for the first time. Because of their respect for Berkshire, the Haslam family
`
`chose to engage seriously only with Berkshire as a possible acquirer of PTC.
`
`B.
`
`Berkshire agrees to buy an 80% stake in PTC in two stages
`26.
`In October 2017, Berkshire agreed to buy an 80% interest in PTC in
`
`two stages. The terms of the sale and the parties’ respective rights in PTC were
`
`governed by several related agreements.
`
`27.
`
` Pursuant to the Investment Agreement executed on October 3, 2017,
`
`NICO, a wholly owned subsidiary of Berkshire, bought a 38.6% interest in PTC for
`
`$2.758 billion. In conjunction with the Investment Agreement, the parties entered
`
`into the Sixth Amended and Restated Limited Liability Company Agreement
`
`governing PTC (including as subsequently amended, the “LLC Agreement”), the
`
`2023 Sale Agreement, and the Fourth Amended and Restated Investor Rights
`
`Agreement (the “Investor Rights Agreement”).2
`
`28. Under the 2023 Sale Agreement, NICO was obligated to buy an
`
`additional 41.4% interest in PTC, for a total interest of 80%, on January 31, 2023—
`
`2 The parties entered into the current Seventh Amended and Restated Limited Liability
`Company Agreement as of August 13, 2021, but none of the relevant contract provisions
`relating to this dispute were changed.
`
`-9-
`
`
`
`
`
`
`
`the 2023 Control Purchase. Beginning on January 1, 2024, the Investor Rights
`
`Agreement gives Pilot an annual right to sell its remaining 20% interest in PTC to
`
`NICO—the Put Right. The Put Right must be exercised within 60 days of the end
`
`of a PTC fiscal year.
`
`29.
`
`To set the price for NICO’s initial investment, the 2023 Control
`
`Purchase, and the Put Right, Berkshire proposed, and Pilot agreed to, a single
`
`formula that was based on PTC’s earnings—ten times EBIT, with adjustments for
`
`debt and cash. Accordingly, the 2023 Sale Agreement and the Investor Rights
`
`Agreement set the price of the 2023 Control Purchase and the Put Right using the
`
`same formula.
`
`30.
`
`Section 8.08(i) of the LLC Agreement bars PTC from “select[ing] or
`
`chang[ing] the accounting policies of the Company, except as required by
`
`Applicable Law or GAAP” without the approval of the PTC Board, Berkshire, and
`
`Pilot. Unless otherwise permitted by § 8.08(i), § 1.02 of the LLC Agreement
`
`requires PTC to use the “same methodologies, principles and policies used in the
`
`preparation of the Company’s annual audited consolidated financial statements for
`
`the most recently ended Fiscal Year.” And § 7.01(a) of the LLC Agreement states
`
`that PTC’s “books of account shall be kept using the method of accounting
`
`determined by the Board of Managers, subject to Section 8.08(i).”
`
`-10-
`
`
`
`
`
`
`
`31.
`
`Section 12.02 of the LLC Agreement provides that the PTC Board
`
`Representatives “shall have the fiduciary duties of loyalty and care (similar to the
`
`fiduciary duties of loyalty and care of directors of a business corporation governed
`
`by the General Corporation Law of the State of Delaware) to each of the Members,”
`
`with certain limited exceptions. Section 12.01 of the LLC Agreement provides
`
`additional limited exceptions to fiduciary duties but does not purport to generally
`
`disclaim fiduciary duties otherwise owed by PTC’s members and directors.
`
`32.
`
`In accordance with the 2023 Sale Agreement, Berkshire executed the
`
`2023 Control Purchase on January 31, 2023, paying $8.2 billion for the additional
`
`interest in PTC.
`
`33.
`
`In February 2023, Berkshire reappointed two of its representatives, and
`
`appointed three new representatives, to PTC’s seven-member board, leaving Pilot
`
`representatives in the remaining two seats. In March 2023, Berkshire removed Pilot
`
`appointees as PTC Board Chair, CEO, and CFO and installed Greg Abel, its Vice
`
`Chairman, as the PTC Board Chair, Adam Wright as the CEO, and Joe Lillo as the
`
`CFO.
`
`C.
`
`Berkshire breaches the LLC Agreement by imposing pushdown
`accounting on PTC without Pilot’s consent
`34. As a matter of accounting, acquisitions of controlling interests are
`
`recorded using the acquisition method, under which the acquirer recognizes the
`
`-11-
`
`
`
`
`
`
`
`assets acquired and liabilities assumed at fair value with limited exceptions. If the
`
`acquired business prepares separate financial statements, Accounting Standards
`
`Codification 805-50-25-4 gives the acquired business a choice between using the
`
`historical basis of the acquired company or the “stepped-up basis” of the acquirer in
`
`those separate financial statements. “Pushdown accounting” refers to the use of the
`
`basis of the acquirer in the acquired company’s separate financial statements—
`
`because the acquirer’s basis is “pushed down” to the acquired company’s financial
`
`statements.
`
`35.
`
`The “step up” in basis and goodwill recognition that occurs when
`
`pushdown accounting is applied typically results in higher net assets for the acquired
`
`company, which in turn usually results in lower net income in periods subsequent to
`
`the acquisition due to higher amortization and higher depreciation, among other
`
`changes.
`
`36.
`
`In March 2023, Berkshire caused PTC to adopt pushdown accounting
`
`in the preparation of PTC’s separate financial statements—without obtaining Pilot’s
`
`consent as required under § 8.08(i) of the LLC Agreement. The adoption of
`
`pushdown accounting did nothing to change the results, revenue, or profitability of
`
`PTC. But, as expected, the switch to pushdown accounting nevertheless resulted in
`
`-12-
`
`
`
`
`
`
`
`lower reported income in the periods following Berkshire’s acquisition of a
`
`controlling interest in PTC.
`
`37.
`
`In the March 2023 financial statement, pushdown accounting
`
`deductions related to depreciation and amortization resulted in nearly $
`
`
`
`being eliminated from PTC’s pre-tax income. And a further $
`
` related to
`
`interest rate swaps and ethanol hedges that would have otherwise been recognized
`
`as earnings was instead recognized as equity (and did not increase pre-tax income).
`
`Together, these adjustments reduced PTC’s pre-tax income from approximately
`
`$
`
` to $
`
`. Accordingly, the downward adjustment resulting from
`
`Berkshire’s improper imposition of pushdown accounting in March 2023 translates
`
`to a $
`
` reduction in EBIT (or
`
`).
`
`38.
`
`This exercise yields similar results looking at year-to-date performance.
`
`Pushdown accounting adjustments through September reduced PTC’s earnings by
`
`roughly $
`
`.
`
`39. Because pushdown accounting rejects the use of the historical basis of
`
`the acquired company, the introduction of pushdown accounting also resulted in
`
`numerous changes to the “Significant Accounting Policies” as disclosed and applied
`
`in PTC’s prior financial statements.
`
`-13-
`
`
`
`
`
`
`
`40.
`
`For example, Note 2(c) of PTC’s 2022 Consolidated Financial
`
`Statements states that under PTC’s accounting policy, “acquired assets and
`
`liabilities” were recorded at “fair value determined on the acquisition date,” i.e.,
`
`when the assets were initially acquired by PTC. PTC’s shift to pushdown accounting
`
`changes this policy to instead value these acquisitions at “fair value” as of when
`
`pushdown accounting was applied. While the underlying economic value of these
`
`assets and health of the company is identical, this change in accounting policy
`
`artificially reduces EBIT through increased depreciation or amortization, or both.
`
`41.
`
`Similarly, Note 2(h) states that PTC’s accounting policy was to value
`
`property and equipment “at cost.” PTC’s shift to pushdown accounting changes this
`
`policy to instead value property and equipment at “fair value” as of when pushdown
`
`accounting was applied. Again, while the underlying economic value of these assets
`
`and health of the company is identical, this change in accounting policy artificially
`
`reduces EBIT through increased depreciation or amortization, or both.
`
`42.
`
`The accounting policy disclosed in Note 2(q) of PTC’s 2022
`
`Consolidated Financial Statements, governing derivative instruments, is also altered
`
`by the adoption of pushdown accounting. The policy as described in PTC’s 2022
`
`Consolidated Financial Statements required derivative instrument hedges to be
`
`accounted for under “Other Comprehensive Income,” and for gains and losses
`
`-14-
`
`
`
`
`
`
`
`resulting from those hedges to “be recognized in earnings when the hedged
`
`forecasted transactions occur.” Under pushdown accounting, those gains and losses
`
`are not reflected in earnings (or EBIT), but instead are contained in the equity
`
`reported on the acquired company’s balance sheet. As a result, gains (and losses)
`
`on those derivative instruments no longer increase (or decrease) EBIT on future
`
`income statements.
`
`43.
`
` A number of other Significant Accounting Policies disclosed in PTC’s
`
`prior financial statements also change based on the application of pushdown
`
`accounting, including, but not limited to, accounting policies described in Notes 2(f),
`
`2(j), 2(k), 2(s), 2(u), 2(v), and Items 6-9 of the footnotes to PTC’s 2022 audited
`
`financial statements.
`
`44. Note 2(f), “Accounts Receivable,” previously required an estimate of
`
`uncollectible amounts based on historic collections. Under pushdown accounting,
`
`the accounts receivable would be reported at current fair value, which could differ
`
`from the estimated collectible amounts reported under PTC’s historic accounting
`
`policies.
`
`45. Note 2(j), “Other Noncurrent Assets,” including “franchise fees,”
`
`“deposits,” and “interest rate swaps,” would all be updated to reflect current fair
`
`value as opposed to historical value.
`
`-15-
`
`
`
`
`
`
`
`46. Note 2(k), “Asset Retirement Obligations” previously allowed PTC to
`
`not recognize certain obligations when “the fair value cannot be reasonably
`
`estimated due to an indeterminate settlement date of the obligation.” After the
`
`application of pushdown accounting, PTC may be required to estimate fair value for
`
`these assets and list those obligations on the balance sheet.
`
`47. Note 2(s), “Estimates,” will change as a general matter. While prior
`
`financial statements utilized historical cost to create certain estimates and
`
`assumptions, pushdown accounting will require these estimates and assumptions to
`
`consider current fair value. Section 2(u), “Purchase Price Allocation,” will change
`
`in a similar way, as the methodology used to measure “certain assets and liabilities,”
`
`including intangible assets, will look to current fair value instead of historical cost.
`
`48. And the accounting policy described in Note 2(v), “Leases,” could
`
`change significantly if third parties who transact with PTC have lease covenants
`
`based on certain financial performance metrics or ratios, because pushdown
`
`accounting will significantly change a host of those measures.
`
`49.
`
`Finally, Notes 6-9 to PTC’s 2022 Consolidated Financial Statements
`
`would also change: Note 6, “Goodwill and Intangible Assets,” previously valued
`
`those assets at historical cost; pushdown accounting would value those assets at
`
`current fair value, which would increase the associated amortization expense (with
`
`-16-
`
`
`
`
`
`
`
`a corresponding drop in income). Note 7, “Equity Affiliates,” previously called for
`
`the carrying amount of equity affiliates to be calculated at cost, plus earnings, minus
`
`losses. Pushdown accounting would result in the revaluation of those affiliates at
`
`current fair value. Note 8, “Debt,” would result in debt service payments being
`
`recalculated at current (higher) interest rates. And Note 9, “Members’ Capital,”
`
`would also be recalculated at current fair value.
`
`D.
`
`Berkshire’s imposition of pushdown accounting threatens to grossly
`devalue Pilot’s bargained-for Put Right
`50. Berkshire’s self-interested decision to switch to pushdown accounting
`
`has thus predictably and necessarily resulted in a reduction of PTC’s recorded
`
`income, compared to PTC’s income calculated using PTC’s historical basis—but
`
`that change has nothing to do with any change in the financial performance of PTC.
`
`51. Berkshire is intent on using the accounting change to justify grossly
`
`underpaying Pilot for its 20% interest upon Pilot’s exercise of its Put Right.
`
`52. Because the pricing formula for the Put Right utilizes PTC’s recorded
`
`earnings, Berkshire’s unilateral imposition of pushdown accounting for PTC’s
`
`financial statements, in breach of the LLC Agreement, threatens to reduce the value
`
`of Pilot’s Put Right by potentially more than
`
`. Under PTC’s
`
`historical accounting policies, the formula for calculating the Put Right exercise
`
`price is based on 10x multiple of EBIT. But application of pushdown accounting
`
`-17-
`
`
`
`
`
`
`
`could, effectively result in the use of 6x multiple of EBIT in calculating the Put Right
`
`exercise price.
`
`53. Based on PTC’s projected 2023 earnings, the amount in dispute from
`
`the unauthorized application of pushdown accounting to fiscal year 2023 EBIT is
`
`potentially as much as $
`
`. If pushdown accounting is applied, the Put Right
`
`exercise price could be as low as % of the price that Pilot would have obtained
`
`were the pricing formula applied based on PTC’s historical accounting policies. As
`
`much as $
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` will instead be captured by controller Berkshire as an unfair
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`and self-interested windfall.
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`54.
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`PTC’s financial statements have also made clear that the Put Right is to
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`be determined based on the contractual pricing formula, without adjustments for
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`pushdown accounting—i.e., the same formula used for both Berkshire’s initial
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`investment in PTC and the 2023 Control Purchase. PTC’s 2022 Consolidated
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`Financial Statements, for example, state that Berkshire’s purchase prices were
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`“based on a predetermined contractual formula that is intended to reflect fair value
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`on the date that NICO purchases the equity interest in PTC,” and that the Put Right
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`“allows Pilot to require NICO to purchase the remaining 20% Class A member
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`interests in PTC for the same formula.”
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`-18-
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`55.
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`This description eliminates any possible ambiguity that the parties
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`always intended for the price of the 20% interest in PTC subject to the Put Right to
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`be calculated in the same way as the price for Berkshire’s initial investment in PTC
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`and its subsequent 2023 Control Purchase. This same language has been
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`consistently included in the notes appearing in PTC’s prior consolidated financial
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`statements, for as long as Berkshire has been an investor in PTC.
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`56.
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`Indeed, Berkshire’s Form 10-Q for the quarter ended June 30, 2023, as
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`filed with the Securities and Exchange Commission, lists Pilot’s “redeemable
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`noncontrolling interest” at approximately $3.2 billion. On information and belief
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`this valuation was calculated without downward adjustments resulting from
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`pushdown accounting. See Berkshire Hathaway Inc., Quarterly Report (Form 10-
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`Q) (June 30, 2023), pp. 3, 10. The disclosure notes that the amount disclosed for the
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`noncontrolling interest reflects “fair value as of the acquisition date.” Id. at 10.
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`Berkshire has thus conceded that the “fair value” of Pilot’s remaining 20% interest
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`in PTC should be calculated consistently with the calculation of the price for
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`Berkshire’s previous purchases of interests in PTC.
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`57.
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`The unambiguous language in PTC’s consolidated financial statements
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`and in the Berkshire Form 10-Q puts in writing what should be common sense:
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`When Berkshire made its initial investment in PTC, the parties agreed to a consistent
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`-19-
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`
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`formula to value PTC for the purpose of pricing Berkshire’s subsequent purchases
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`of interests in PTC, and Berkshire is not free to change that formula to its own
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`advantage by causing PTC to adopt new accounting policies that artificially reduce
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`EBIT.
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`E.
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`Berkshire refuses to recognize Pilot’s repeated objections to the
`imposition of pushdown accounting and devaluation of its Put Right
`58.
`Pilot has repeatedly objected to Berkshire’s unauthorized imposition of
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`pushdown accounting in PTC’s monthly and quarterly financial statements—
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`including in direct communications by Jimmy Haslam to Greg Abel, Berkshire Vice
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`Chairman and recently appointed Chairman of PTC, and to Mark Hamburg,
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`Berkshire’s CFO and a PTC Board Representative.
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`59.
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`Pilot has also specifically requested assurances that Berkshire will not
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`impose pushdown accounting on PTC’s audited financial statements for fiscal year
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`2023 or otherwise use pushdown accounting to value the Put Right exercise price.
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`60. Rather than remedy its improper imposition of pushdown accounting at
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`PTC or provide the requested assurances, Berkshire has instead continued to cause
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`PTC to issue financial statements using pushdown accounting and has refused to
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`confirm that it will comply with its contractual obligation by refraining from
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`imposing pushdown accounting on PTC’s audited financial statements for fiscal year
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`2023. Without contractual justification, Berkshire has asserted that it need not
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`-20-
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`determine the accounting policies applicable to those statements unless and until
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`Pilot exercises its Put Right. Abel has also expressly informed Pilot that Berkshire
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`will determine the relevant accounting and valuation issues only after Pilot exercises
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`its Put Right.
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`61. On information and belief, Berkshire is seeking to force Pilot to
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`exercise its Put Right before resolution of which accounting policies are applicable
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`to PTC’s audited financial statements for fiscal year 2023 so that Berkshire can avoid
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`Court scrutiny of its conduct and instead assert that the dispute should be resolved
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`by an accounting arbitrator under § 2.04(d) of the Form of Pilot Put Sale Agreement
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`attached as an exhibit to the Investor Rights Agreement.
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`62.
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`The parties’ dispute over Pilot’s veto rights, including which
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`accounting policies may be applied to PTC’s audited financial statements, however,
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`is governed by the LLC Agreement—and that agreement does not provide for any
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`disputes over its terms to be decided by an arbitrator. To the contrary, § 14.11 of the
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`LLC Agreement provides that “any and all suits, legal actions or proceedings arising
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`out of this agreement shall be brought in the courts of the State of Delaware or the
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`United States District Court for the District of Delaware and each party hereby
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`submits to and accepts the exclusive jurisdiction of such courts for the purpose of
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`such suits, legal actions or proceedings.”
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`-21-
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`63.
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`In another attempt to amicably and fairly resolve the parties’ dispute,
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`the two Pilot directors (Jimmy Haslam and his father and PTC founder Jim
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`Haslam II) proposed a resolution (the “Pushdown Accounting Resolution”) at a PTC
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`Board meeting on August 24, 2023. The Pushdown Accounting Resolution provided
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`that the financial statements of PTC, including the audited financial statements for
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`the fiscal year ending December 31, 2023, shall be prepared in accordance with the
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`accounting policies, practices, methods and elections used in the preparation of
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`PTC’s audited consolidated financial statements for the fiscal year ended
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`December 31, 2022, and that pushdown accounting would therefore not be utilized
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`for those statements, and that, in any event, pushdown accounting would not be used
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`to calculate fiscal year 2023 EBIT for the purposes of determining the value of the
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`Put Right.
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`64.
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`The purpose of the Pushdown Accounting Resolution was to end PTC’s
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`ongoing breach of contract related to the preparation and distribution of
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`unauthorized financial statements and to confirm that PTC’s future financial
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`statements, including the 2023 yearly financial statements, would not improperly
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`reduce PTC’s recorded earnings and consequently dramatically undervalue the Put
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`Right, effectuating an unfair transfer of value from minority investor Pilot to
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`controlling investor Berkshire in breach of the LLC Agreement.
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`-22-
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`65. Without explanation, the five Berkshire representatives on the PTC
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`Board—all of whom work for Berkshire companies—voted against the Pushdown
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`Accounting Resolution and it was not adopted. Upon information and belief, the
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`five Berkshire representatives on the PTC Board voted against the resolution to
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`benefit controller Berkshire at the expense of minority investor Pilot.
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`66.
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`Following the August 24, 2023 PTC Board meeting, Pilot has
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`repeatedly sought to confirm Berkshire’s position on the application of pushdown
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`accounting to PTC’s fiscal year 2023 financial statements and to the calculation of
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`the value of its Put Right. After Berkshire’s Chairman, Warren Buffett, informed
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`the elder Haslam in an October 13, 2023 phone call that Berkshire would abide by
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`the LLC Agreement, the elder Haslam sent Buffett a letter seeking confirmation that
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`Berkshire would not apply pushdown accounting in calculating the value of Pilot’s
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`Put Right. Buffett refused to provide a straight answer to Haslam’s simple question.
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`Instead, Buffett repeated: “I said that Berkshire will comply with the terms of the
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`contract. That’s exactly what will happen,” and that “when and if the Haslam family
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`decides to exit, we will do exactly what the contract says.” Buffett’s refusal to even
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`disclose Berkshire’s position on the proper method of valuing Pilot’s Put Right has
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`not only made litigation inevitable, but also made clear that Berkshire and the Board
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`-23-
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`Defendants will not commit to honor their contractual obligations and fiduciary
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`duties.
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`CLAIMS FOR RELIEF
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` FIRST CLAIM: BREACH OF CONTRACT
`(against PTC)
`Plaintiff repeats and incorp
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