Berkshire Hathaway Audit Committee Report On Trading in Lubrizol Corporation Shares by David L. Sokol
Berkshire Hathaway Audit Committee Report On Trading in Lubrizol Corporation Shares by David L. Sokol
Berkshire Hathaway Audit Committee Report On Trading in Lubrizol Corporation Shares by David L. Sokol
A. Summary.
and its subsidiaries to uphold those standards. The Audit Committee has
considered1 the conduct of David Sokol in connection with his trading in the shares
1
This report is the product of the Committee’s deliberations at its meetings of April 6, April 21 and April 26, 2011,
as well as discussions during the meeting of the full Board of Directors on March 30, 2011 and communications on
other dates between the Chair of the Audit Committee and Company management and legal counsel.
His misleadingly incomplete disclosures to Berkshire Hathaway
conduct that comes close to, or strays over, the line of propriety. To
B. Facts.
In 2010, David Sokol was encouraged to scout for, and to bring to the
Hathaway. Mr. Sokol was not authorized to make acquisition decisions for
Berkshire Hathaway; that power remained with Mr. Buffett in consultation with
That fall, Mr. Sokol met with investment bankers at Citi, discussed
Berkshire’s acquisition criteria, and suggested that Citi send him information about
acquisition criteria. In October, Citi sent Mr. Sokol a list of 18 companies in the
2
Mr. Sokol. Citi’s data concerning Lubrizol and the other companies were derived
On Monday, December 13, 2010, Mr. Sokol met with Citi investment
bankers to discuss the list. Mr. Sokol said the only company on Citi’s list he found
interesting was Lubrizol. A Citi representative said Citi had an investment banking
relationship with Lubrizol and its CEO, James Hambrick. Mr. Sokol asked Citi to
ask Mr. Hambrick if he was willing to speak with Mr. Sokol concerning Berkshire
Hathaway and Lubrizol. Mr. Sokol added that Berkshire Hathaway does not do
hostile transactions, and that if Mr. Hambrick met him and nothing came of their
meeting to Mr. Hambrick. Mr. Hambrick told Citi he would inform the Lubrizol
On Tuesday, December 21, Mr. Sokol sold the 2,300 shares of Lubrizol.
3
On January 10 or 11, a Citi banker told Mr. Sokol to expect a call from Mr.
Hambrick.
On January 14, Mr. Hambrick phoned Mr. Sokol and they agreed to meet.
On January 14 or 15, Mr. Sokol proposed to Mr. Buffett the idea for
purchasing Lubrizol, and told Mr. Buffett that he had an opportunity to meet with
potential acquisition, but told Mr. Sokol to let him know what he learned at the
meeting. He also told Mr. Sokol that he was unfamiliar with the lubricants and
additives part of the chemicals industry. During the conversation, Mr. Buffett
asked Mr. Sokol how he had become familiar with Lubrizol. Mr. Sokol mentioned
the fact that he bought the shares after discussing Lubrizol with Citi and
after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals
the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior
asked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss
4
the fact that Mr. Sokol bought shares after learning that Citi had discussed
his request for a meeting with Lubrizol’s CEO, who told Citi that he would
Lubrizol board.
It did not cross Mr. Buffett’s mind at that time that Mr. Sokol might have
of Lubrizol. Because Mr. Sokol’s comment about owning the shares was in
response to Mr. Buffett’s question how Mr. Sokol had come to know the
company, it implied that Mr. Sokol had been following Lubrizol as an owner of its
Hathaway acquisition.
candidate through January 25. On January 25, Mr. Sokol met with Mr. Hambrick,
and he briefed Mr. Buffett on that meeting the following day. Mr. Buffett began
to warm to the idea of the acquisition of Lubrizol. On January 27, Mr. Buffett
phoned Roger Altman of Evercore (an investment banker for Lubrizol), and Mr.
Buffett met with Mr. Hambrick on February 8. Mr. Buffett, not Mr. Sokol,
5
On the morning of March 14, Berkshire Hathaway and Lubrizol announced
the signing of the merger agreement. A Citi representative with whom Berkshire
Hathaway did business congratulated Mr. Buffett on the merger agreement, and
told Mr. Buffett that Citi’s investment bankers had brought Lubrizol to Mr.
Sokol’s attention. This was the first time Mr. Buffett heard that investment
bankers played any role in introducing Lubrizol to Mr. Sokol, and did not square
with Mr. Sokol’s remark in January that he had come to know Lubrizol by owning
the stock.
Mr. Sokol on March 15. Mr. Hamburg asked Mr. Sokol for the details of his
Lubrizol stockholdings. Mr. Sokol provided the dates and amounts of his
Lubrizol purchases. Mr. Hamburg also asked about Citi’s role in introducing Mr.
Sokol to Lubrizol. Mr. Sokol answered that he thought he had called a banker he
knew at Citi to get Mr. Hambrick’s phone number. When Mr. Hamburg
commented that it sounded as if the banker must have exaggerated his role when
he spoke with his colleagues, Mr. Sokol did not contradict him.
Hathaway learned more about the role of Citi, and learned that Mr. Sokol’s
Lubrizol purchases took place after Citi had presented him information about
6
Lubrizol responsive to his request for information about chemicals companies that
might be acquisition candidates for Berkshire Hathaway, and after he had asked
Citi to ask Mr. Hambrick for a meeting to discuss Berkshire and Lubrizol.
Mr. Buffett returned from an Asian trip on Saturday, March 26. Late in the
day on Monday, March 28, he received Mr. Sokol’s letter of resignation. Mr.
Buffett accepted Mr. Sokol’s resignation, and in a call he had with Mr. Sokol, Mr.
Sokol reiterated that his resignation was for the reason stated in his letter, namely
review for accuracy a draft Mr. Buffett had prepared of a press release announcing
Mr. Sokol’s resignation and disclosing Mr. Sokol’s Lubrizol trades. At Mr.
Sokol’s request, Mr. Buffett deleted from the release the one passage Mr. Sokol
said was inaccurate: a passage that implied that Mr. Sokol had resigned because he
must have known the Lubrizol trades would likely hurt his chances of being Mr.
Buffett’s successor. Mr. Sokol told Mr. Buffett that he had not hoped to be Mr.
Buffett’s successor, and was resigning for reasons unrelated to those trades.
Except for that deletion, Mr. Sokol concurred in the accuracy of the press release.
For example, Mr. Sokol left unchanged the statement that when Mr. Sokol made
his purchases, he “did not know what Lubrizol’s reaction would be” if Mr. Buffett
7
developed an interest in a transaction. Mr. Sokol also left unchanged Mr. Buffett’s
Lubrizol’s revised preliminary proxy statement was filed on April 11, 2011.
statement disclosed that on December 17, 2010, Citi informed Mr. Sokol that Mr.
Hambrick had said he would discuss Berkshire Hathaway’s possible interest with
the Lubrizol Board. This information had not been disclosed by Mr. Sokol to
Berkshire Hathaway.
and its subsidiaries are required to certify their familiarity with, and adherence to,
the company’s Insider Trading Policies and Procedures (the “Trading Policy”).
Mr. Sokol signed such a certification in May 2010. The Trading Policy expressly
forbids the trading of securities of any public companies while the trader is in
considered close to the line, the Trading Policy identifies several specific
8
policy--even if the information might not be material as insider trading law defines
material.”
aware that Berkshire did not take and is no longer actively considering such
action).”2
from Citi’s list of chemicals companies and asked Citi to ask Lubrizol’s CEO for a
2
Italics have been added in this report to quotations from internal policies to emphasize words and phrases
particularly relevant to the Committee’s discussion.
9
meeting, and even more so from the day Citi told him that they had delivered his
message and that the CEO would discuss Berkshire’s possible interest with his
“anticipated” or under active consideration, and should have refrained from trading
We appreciate that at the time Mr. Sokol traded, he did not know whether
also recognize that Mr. Sokol did not know how Lubrizol would respond to an
view that those uncertainties might have kept Mr. Sokol’s information below the
finding a violation of federal insider trading law. But the Trading Policy requires a
higher standard of conduct than what is required to avoid being charged with a
used in the Trading Policy, should be read to prohibit a key employee from trading
the employee’s own efforts to initiate merger talks between that company and
10
Berkshire Hathaway. Particularly in light of the often-repeated Berkshire
Hathaway policy that employees should conduct themselves as if any act they
contemplate would be reported in their local paper, the Committee does not believe
narrowly that the prohibition on trading would apply only to transactions involving
companies whose acquisition has already earned the endorsement of Mr. Buffett,
permitted to use or share that information for stock trading purposes or for
When Mr. Sokol bought Lubrizol stock, he knew that it was the one
Hathaway) from Citi’s list of 18 companies in the chemicals industry; he knew that
he had asked Citi (which said it had an investment banking relationship with
11
Lubrizol) to ask Mr. Hambrick whether he would meet with Mr. Sokol to discuss
Berkshire Hathaway and Lubrizol; and by the time of his January purchases he
knew that his message had been delivered and that Mr. Hambrick had told Citi he
would discuss Berkshire Hathaway’s possible interest with the Lubrizol Board.
Even if this information was not material, it was indisputably confidential. The
trading price of its shares. Any opportunity to profit from the possibility of such
an event belonged to Berkshire Hathaway, not Mr. Sokol. This violates the Code.
12
agreement, and that Mr. Sokol’s purchases did not deprive Berkshire Hathaway of
the opportunity to trade had it chosen to do so. Berkshire Hathaway had the
opportunity and the right not to trade the shares of a company it is considering
acquiring, and there are good reasons why it might elect not to trade (e.g., to
enhance its reputation for not making hostile acquisitions). If its representatives
Hathaway, they could undermine the trust that Berkshire Hathaway strives to earn
Every two years, Mr. Buffett writes to the CEOs of all Berkshire Hathaway
Berkshire’s reputation.” The letter instructs the CEOs: “If it’s questionable
whether some action is too close to the line, just assume it is outside and forget
about it.”
Even if it were assumed that Mr. Sokol’s trading could be reconciled with
the precise language of the provisions of the Trading Policy and the Code
discussed above, it could not be reconciled with the obligation to stay well within
Berkshire Hathaway’s reputation--or would have done so had he remained with the
Company.
13
D. Mr. Sokol Failed To Fulfill His Duty of Full Disclosure to the Company.
Inherent in all the Company policies discussed above is the expectation that
employees, and particularly those entrusted with great responsibility, will fully
disclose to those to whom they report all the facts they need. Thus, the Code
instructs:
ensure that all actions they take on behalf of the Company honor this
commitment.”
The expectation of full disclosure is particularly crucial when the facts relate
any way with the interests of the Company. A conflict can arise when a
Covered Party takes actions or has interests that may make it difficult to
perform his or her work for the Company objectively or effectively. . . . All
directors and executive officers of the Company, and the chief executive
14
be expected to give rise to such a conflict to the Chairman of the Company’s
or party unless and until such action has been approved by the Audit
Committee.”
And the biennial letter to CEOs reminds them that candor is especially
legality is doubtful.
All of these internal policies are underscored by the law of Delaware, where
representatives owe their company a duty of loyalty. The duty of loyalty includes
a duty of candor, which requires them to disclose to the corporation all material
facts concerning corporate decisions, especially decisions from which they might
derive a personal benefit. Mr. Sokol’s actions did not satisfy the duty of full
disclosure inherent in the Berkshire Hathaway policies and mandated by state law.
His remark to Mr. Buffett in January, revealing only that he owned some Lubrizol
stock, did not tell Mr. Buffett what he needed to know. In the context of Mr.
Buffett’s question how Mr. Sokol came to know Lubrizol, its effect was to
mislead: it implied that Mr. Sokol owned the stock before he began considering
Lubrizol as an acquisition candidate, when the truth was the reverse. A candid
15
disclosure would have revealed the timing and size of the purchases, and the
facts would likely have prompted further questions by Mr. Buffett and could have
allowed Berkshire Hathaway to evaluate measures that could have been taken to
concerning the investment bankers similarly fell short of the degree of candor
required of a corporate fiduciary, and suggests his answer to Mr. Buffett’s earlier
potential transaction with Berkshire Hathaway, he should also have treated his
which the Code required him, as a senior executive, to disclose in advance to the
Chair of the Audit Committee. The Committee does not believe that, in fact, Mr.
acquisition of Lubrizol was anything but sincere, nor is it aware of any evidence
that Mr. Sokol lobbied for Berkshire Hathaway to offer a higher price. But it was
not for Mr. Sokol to decide whether buying $10 million worth of Lubrizol stock
16
might distort his judgment as a representative of Berkshire Hathaway. That was a
decision for the Audit Committee to make. By not disclosing in advance his
intention to trade, Mr. Sokol took that decision away from the Audit Committee.
E. Remedies.
action “up to and including removal from office or dismissal.” Failure to adhere to
the Trading Policy can also “result in dismissal by Berkshire for cause. . . .” Mr.
Sokol has voluntarily resigned from all the positions he held with Berkshire
Hathaway companies. His voluntary resignation had the effect of preventing him
which he would have been entitled if he were terminated for cause on the same
effective date. He has thus suffered a severe consequence from his violations of
Company policy.
The Audit Committee authorizes Mr. Buffett to release this report. Such a
public statement will demonstrate to all who work for Berkshire Hathaway, as well
as the other constituencies Berkshire Hathaway serves, that the Company takes its
policies very seriously, and that its instruction to all its representatives to play in
the middle of the court is Company policy, not public relations. We expect this
report to send a loud message that those policies are designed to be read broadly,
17
and to deter anyone who may be contemplating a violation of the spirit or letter of
This is not the end of the Audit Committee’s work. Still under way are:
against Mr. Sokol to recover any damage the Company has sustained, or his
18