Berkshire Annual Letter 1995 (Part 9)
In 1996, Warren Buffett proposed having two classes of stock for Berkshire. A class “B” share will be created that has 1/30th of the rights of the existing (or “A”) shares but 1/200th of the voting rights.
In addition, class “B” shares will not be entitled to participate in Berkshire’s shareholder-designated charitable contributions program.
Everyone holding on to the class A share can convert it them into class B shares. This makes it easier for them to use Berkshire shares as gifts.
The motivation behind this exercise is the emergence of many (expense laden) unit trusts aggressively marketed as low priced clones of Berkshire.
Warren Buffett has the view that these Berkshire funds will be mass marketed with huge promises. The not so sophisticated buyers might be mislead by the potential of the funds.
It is likely that commissions and other expenses will eat into the performance, and these investors will be disappointed.
Through the creation of the class B shares, investors can invest directly into Berkshire.
The tradeoffs for Berkshire is that there will be additional costs associated with handling a greater number of shareholders.
A thing to take note for both current and prospective Berkshire shareholders is that the market price of Berkshire and the intrinsic value will not be the same all the time.
Ideally, they should be the same but in reality, there are times when the market value is higher than the intrinsic value and vice versa.
The more informed investors are, the smaller the gap between market value and intrinsic value. By creating class B shares, the merchandising efforts of the Berkshire unit trusts will be blunted and the market value of Berkshire will be closer to the intrinsic value.