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How Warren Buffett Gives Away Stock but Keeps Control of Berkshire Hathaway

Warren Buffett.

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Warren Buffett has been able to give away more than half his stake in
Berkshire Hathaway
over the past 16 years while ceding little voting control of the giant conglomerate.

That reflects a share-class structure that gives outsize weighting to the company’s supervoting Class A stock, in which Buffett’s stake is concentrated. Corporate founders like Mark Zuckerberg of
Meta Platforms
(ticker: META) and
Alphabet
‘s (GOOG) Sergey Brin and Larry Page have used similar arrangements to sell stock and give up little or no control.

The result is that the 92-year-old CEO has retained unassailable control of Berkshire Hathaway (BRK/A, BRK/B). The arrangement may help ensure that the CEO’s wishes—he hopes to avoid a breakup of the business—will be followed for a period after his death.

Berkshire had no immediate comment.

The share-class structure was highlighted last week when Buffett gave away about $759 million of stock to four Buffett family foundations. After the gift, Buffett holds 227,416 Class A shares worth $107 billion: a 15.5% economic stake in Berkshire and a 31.4% voting interest.

Before 2006, when Buffett started giving stock annually to the Bill and Melinda Gates Foundation and four family foundations, he held 474,998 Class A shares. He held a 31% economic stake in the company and had a 37% voting interest, just six percentage points higher than the current voting stake.

Berkshire’s dual-class share structure makes it possible. Class A shares in the company have one vote each, while the Class B stock is economically equivalent to 1/1,500th of a class A share but has just 1/10,000th of a vote.

 This effectively give the Class A shares nearly seven times the voting power of the B shares. Other companies like Alphabet and Meta Platforms have dual-class stocks with the supervoting shares carrying 10 times the vote of the ordinary voting shares.

Since Berkshire created the Class B shares in 1996, ownership has migrated to the more liquid Class B stock, which represented about 2/3 of the shares outstanding as of late October. The B shares as a class however control only about 17% of the vote.

Buffett’s stake is almost entirely concentrated in the supervoting Class A stock. When he makes donations of Berkshire stock, he converts his Class A stock to Class B stock, which means recipients get shares with little voting power. Buffett now owns nearly 40% of Class A stock.

Class A shares can be converted to Class B stock, but not the other way around.

Of course, Buffett’s control of Berkshire likely would be total even if he owned no stock in the company. His stature is such that as CEO, he is given more autonomy by Berkshire’s board than any other major corporate leader.

Buffett has written that about 98% of his wealth is in Berkshire stock and that all of that equity is destined for philanthropy, with none needed to pay any estate taxes. He wrote in Berkshire’s Owner’s Manual in 2018 that his remaining stock at the time of his death would be donated to foundations “in roughly equal installments over a dozen or so years.”

This will give the trustee or trustees overseeing that stock considerable influence over Berkshire for at least several years after Buffett’s death. The CEO views Berkshire as better together, but realizes that pressure for a breakup will begin the moment he dies.

Some think Berkshire carries a conglomerate discount and would be worth more in separate pieces, including a stand-alone Burlington Northern Santa Fe railroad and Geico, the auto insurer.

At the 2017 annual meeting, he countered the notion that the stock would fall after his death because of the difficulty in replacing him. “I think the stock is more likely to go up but if I died tonight, I think the stock would go up tomorrow and there’d be speculation about breakups and all that sort of thing,” he said.

 One factor that could prevent any breakup is opposition from whoever is overseeing the trust that holds Buffett’s stock.

Looking further into the future, at some point in the post-Buffett era, Berkshire might opt to equalize the votes of the A and B shares to prevent any investor from gaining outsize influence by buying up the A stock.

Write to Andrew Bary at andrew.bary@barrons.com

Credit: marketwatch.com

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