(CN) – Railroad shareholders and a pension plan challenged the Burlington Northern Santa Fe’s $26.3 billion sale to Berkshire Hathaway. Both lawsuits in Texas state court say railroad directors engaged in self-dealing and breached fiduciary duties by selling out too cheaply to the company run by legendary investor Warren Buffett. The named class-action plaintiff says he was incensed to hear Buffett boast that he had put the deal together in “about 15 minutes.”
Both suits seek declaratory and injunctive relief and rescission and want Burlington Northern ordered to seek alternative suitors before it can accept Buffett’s bid.
The class action also seeks imposition of a constructive trust upon any benefits the railroad directors received as a result of wrongful conduct.
Class action plaintiff Jim Kinsey said was upset by the deal from the moment he heard about it. Media reports lauded Berkshire Hathaway, saying the railroad had become much more efficient during the recession and its economic outlook had improved.
Kinsey said he was disturbed by an interview Buffett gave to CNBC’s “Squawk Box” program, in which he boasted that he put the deal together in “about 15 minutes” after his initial offer for the railroad a week earlier.
In a transcript of the program available on the CNBC Web site, Buffett said he met with Burlington Northern CEO Matt Rose and other top managers while in Fort Worth in late October for Berkshire Hathaway’s board of directors meeting.
“I said to Matt, ‘If you’re ever looking for a permanent home for BNSF, don’t forget my phone number,’ and he didn’t throw me out of the office,” Buffett told CNBC.
The next day, while touring businesses Berkshire owns in Fort Worth, Buffett had his assistant call Rose and “ask if he would drop by the Ashton Hotel around 6 o’clock, when we were getting back,” Buffett said. “When he dropped by, I made him an offer. He said he would take it to his board.”
It was then Buffett said the deal-making had taken only 15 minutes. He laughed as he paused to hear the reporter’s next question.
The deal, announced Nov. 3, is the biggest Berkshire Hathaway has ever made, according to several media reports.
In his complaint, Kinsey said the speed with which it was accepted suggested the board entered into it after “minor deliberation and due diligence.”
In his complaint in Tarrant County Court, Fort Worth, Kinsey says that in the absence of an open and fair competitive bidding process, the defendants would “reap disproportionate benefits to the exclusion of obtaining the best reasonable shareholder value.”
Defendants in the class action include the railroad, CEO Matthew Rose, and board members Alan Boeckmann, Donald Cook, Marc Racicot, Roy Roberts, Marc Shapiro, Cynthia Telles, J.C. Watts Jr., Robert West, Steven Whisler, and Edward Whitacre Jr.
In Dallas County Court, the New Orleans pension fund claims Buffett’s move to buy the railroad – one of only six Class One railroads in the nation, and one of only two moving containerized goods from West Coast ports to America’s heartland – is coercive because shareholders weren’t provided sufficient information to make an informed decision about whether to tender their shares.
In addition, railroad directors agreed to a no-shop, no-talk provision “before any price-maximizing process took place in a blatant effort to ensure that controlling shareholder Berkshire is their favored partner,” the complaint states.
John Ambler, a spokesman for Burlington Northern, blasted the filing of the pension fund’s lawsuit. He told the Wall Street Journal that “unfortunately it’s become almost a universal occurrence for certain law firms to file lawsuits of this type around any corporate M&A activity.”
Neither Buffett nor any of his lieutenants at Berkshire Hathaway have commented on the lawsuits.
However, perhaps anticipating that complaints would be filed, Buffett told CNBC that to facilitate the deal he decided to split Berkshire’s “baby Class B share 50-for-1.” Financial analysts called the move extraordinary, because Buffett almost never splits shares.
“Yeah, I’m not big on stock splits,” Buffett said during the interview. “But by having this split, it enables anybody that has as little as 1 share of Burlington Northern to opt for the tax-free exchange, the 40 percent share. So those small shareholders can have exactly the same availability that otherwise would only have been available to a big shareholder.”
The main exchange of shares in the deal will be for Class A Berkshire shares, which sell for around $100,000. These shares are not being split.
“It means anybody that had less than that amount of [Burlington Northern stock] would not have the same choice as a big shareholder did,” Buffett said.
Kinsey is represented by Joe Kendall and Hamilton Lindley of the Kendall Law Group in Dallas.
The Employees Retirement System of the City of New Orleans is represented by David Scott with Scott & Scott LLP of Colchester, Conn.
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