M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, March 31, 2011

Insider trading at the top of Berkshire Hathaway?

If what people are saying is true ... well ... wow.   Here's Berkshire Hathaway's press release and excerpts:

Finally, Dave brought the idea for purchasing Lubrizol to me on eitherJanuary 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts.

That brings us to our second set of facts. In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings.

Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on December 14, which he then sold on December 21. Subsequently, on January 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price.

Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest.  Furthermore, he knew he would have no voice in Berkshire’s decision once hesuggested the idea; it would be up to me and Charlie Munger, subject to ratificationby the Berkshire Board of which Dave is not a member.

As late as January 24, I sent Dave a short note indicating my skepticismabout making an offer for Lubrizol and my preference for another substantial acquisition for which Mid American had made a bid. Only after Dave reported on the January 25 dinner conversation with James Hambrick did I get interested in theacquisition of Lubrizol.

Neither Dave nor I feel his Lubrizol purchases were in any way unlawful.  He has told me that they were not a factor in his decision to resign.

Dave’s letter was a total surprise to me, despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters andreceived no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation.

Berkshire Hathaway announced its acquisition of Lubrizol on March 14, 2011 for $135/share.  Just last week, the WSJ lauded Sokol's early role in helping Berkshire make the Lubrizol deal happen and pointed to that as evidence that Sokol would eventually succeed Buffet:

David Sokol, considered a possible successor to Warren Buffett at Berkshire Hathaway Inc., identified chemicals maker Lubrizol Corp. as a potential acquisition and took the lead in early negotiations to buy the company, according to a regulatory filing late Friday that detailed how last week's $9 billion deal came about.

It was Mr. Sokol, a Berkshire executive, who plucked Lubrizol from a list of 18 chemical companies that bankers at Citigroup Global Markets had compiled in December 2010 as possible acquisitions at Mr. Sokol's request, according to the filing. ...

Mr. Sokol's early involvement in the deal is further evidence that he has become an important lieutenant for Mr. Buffett in recent years, and may give more ammunition to followers of Berkshire who consider him the front runner to eventually succeed Mr. Buffett as Berkshire's CEO. Mr. Buffett had already tapped Mr. Sokol to turn around Berkshire's fractional-jet business, NetJets, and sent him to China to meet with executives at battery-maker BYD Inc. before investing in that company.

 Dennis K. Berman of the WSJ attributed Sokol with the following previous quotation:

“Integrity is not complicated. If it seems to be, you probably do not belong on our team."

If nothing else, Sokol may be liable for usurping a corporate opportunity with his early purchases.  For a guy like Sokol it's small money, but really embarrassing for him at the very least.





Update:  Not all that impress with the "Well...Charlie did it, too" defense.


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