Collection: Warren Buffett - #268 'Why Berkshire Issued B Shares?'



[Transcript]

AUDIENCE MEMBER 00:00

Since I am a new shareholder, and because this is my first attendance here, I am not sure if this question has been asked before or not. And if it is addressed in your publications, I may have overlooked it, so please bear with me.


This is on the relationship between the A and the B shares. On page one of the booklet it states, quote, “Each share of Class A stock is entitled to one vote per share, and each class of — each share of Class B stock is entitled to 1/200th of one vote per share,” close quote.


Calculating the voting weight per share would therefore be 200 Class B shares equaling one vote equally weighted of one Class A share. However, the Class B share price is 1/30th, traditionally, of a Class A share.


Given that the B share owners are purchasing into the same corporation and assets as the A share owners, and the cash is just as green no matter which share you buy, therefore it would be logical that the voting weight and price relationship of the shares be proportional all around, either 1/30th or 1/200th of pricing and voting weight, respectively.


The question, therefore, is why are the B shares not given voting weight of 1/30th instead of 1/200th? Or conversely why the B shares are not priced at 1/200th of an A share?


This may or may not be popular depending on with share you own. And I would appreciate your insight on that.


WARREN BUFFETT 01:39

Yeah, thank you. It’s a good question. I — you may not be aware of the history of the issuance, but we issued the B shares — there were no — I mean, they’re just a common share, so we renamed the old shares A shares. But we issued the B shares, whatever it was, what, seven or eight years ago, Charlie? Something like that.


And we did that in response to some people, particularly a fellow in Philadelphia, who we felt was going to induce people who really didn’t understand Berkshire at all into a terribly expensive way of owning tiny pieces of Berkshire, probably sold on the basis of an historical record that we did not think was representative of what could be incurred in the future.


In other words, we were disturbed by somebody who saw a chance to make a lot of money off of people who were really uninformed, using our stock as the vehicle.


And we were going to reap the unhappiness of those people subsequently. They’re going to run into tax problems and various administrative cost problems, and so on.


So, to ward that off, and only to ward that off, I mean, we issued the B stock, which effectively put that fellow out of business, because it was a better vehicle for doing what he was going to try and get people to do, at great profit for himself.


And when we issued it, it had not existed before, and we made — we put two differences in it from the A stock.


A, we wanted to create a lower value per share, so we did it on a 1/30th basis. At the time, it was around $1,100 or thereabouts because the A was selling for in the low 30,000.


But we put on the prospectus, which is a very unusual prospectus in other respects, we put on there we were going to differentiate the stock in only two ways, but we were going to differentiate it in those two ways.


And one was the voting power, because we didn’t want to issue the stock and we didn’t want to change the voting situation much.


And the second way was in terms of the designated charitable contributions, which we — the A was going to continue to enjoy and the B would not participate in.


And the reason the B wasn’t going to participate in it is because the amounts would have gotten to the point where it would have been an administrative nightmare. I mean, this year, we designated $18 on the A shares. We’ve got a lot of one-share B holders, which would be 60 cents. And it just — it does not make any sense.


And we saw that, so we just said if you buy the B shares, you’re buying into an instrument which economically is equal to 1/30th of an A. In voting, it is not equal to 1/30th of an A because we don’t want to change the voting that much.


And it does not — it has a slight economic difference in terms of the fact it doesn’t get to participate in the charitable contributions program, which is a very small item relative to the whole capitalization, but it’s still — it’s something.


But we do not — you’ll notice our A and B, compared to other companies that have different voting arrangements — I was just looking at one the other day where the premium for the voting stock is 10 or 12 percent, or something like that, relative to the economic interests.


That’s because people assume that if, you know, if the company’s ever sold, or anything like that, the guy that owns the A will get treated better than the B. And Charlie and I have been in a situation where we got somewhat taken because of a situation — because of a relationship like that.


We will treat the B exactly as the A, except for those two things, which, at the time of issuance, we set out as being differences. We set — and those two items, everybody saw coming into the picture, and they’re going to stay — they will stay as part of the picture.


Actually, you know, in terms of when the meeting will be held two years from now, you know, we aren’t even going to vote by votes in a sense.


I mean, I’m going to get a sense of what people want to do, but I regard, in that respect, I think that it ought to be the most convenient for the most people, not for the most number of shares.


A will not vote any different than B or anything because, you know, you’re all individual people and I want whatever works best for the most.


But in terms of those two other items, they were set out that way and they’ll stay that way.


If — you know, if we’d set out a different — we would not change the relationship once the — of the two stocks once they were issued. We would not benefit one relative to the other, but those are the terms of the two.


Charlie?


CHARLIE MUNGER 06:16

Yeah, we had to issue the B stock to frustrate the ambitions of this jerk promoter. And — (Laughter) — yet, we didn’t want to split the A stock down into — all of it — down to tiny little fractions, which would have frustrated him, but forced us to have a stock split we didn’t want.


So, we created a vehicle which was — had these two slight disadvantages, and that kept most of our capitalization in its traditional A-stock and also frustrated the promoter. It’s an historical quirk. It’s an accident of life.


WARREN BUFFETT 06:56

And the B is sold at a remarkably consistent relationship to the A. If the discount got as low as — or as high, I should say, as — I think it was over 4 percent for a small period of time — but it’s, generally speaking, the B is sold at parity to slightly, very slightly, below parity.


And indeed, A shares get converted to B, and that would not happen unless the B were at parity. So, it — I think it’s worked out pretty well. I mean, we didn’t — we backed into it, but I don’t think anybody’s been disadvantaged by it. Number 9?


(Source: https://buffett.cnbc.com/2002-berkshire-hathaway-annual-meeting/)

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