Commentary by David F. Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.
Warren Buffett raised the question of whether corporate directors have an obligation to disclose whether they believe a company’s shares are overvalued or undervalued when selling shares to the public. In an interview with CNBC, Buffett made the following comments regarding the proposed acquisition of Cadbury by Kraft, which includes the sale of stock:
“Kraft issued a 78-page proxy statement close to a month ago. And the sole issue was the issuance of 370 million shares of Kraft stock. That was the only thing to be voted on. And in 78 pages, they told you about the deal […], and they told you a lot of other things about how the directors recommended this and everything else. There’s one thing that they didn’t tell you. They didn’t tell you […] how the directors felt about the value of Kraft stock. Now, after I came out and said Kraft stock was significantly undervalued, the directors immediately came out and said they thought it was significantly undervalued, too. What point could possibly be more important when asking shareholders to vote on issuing 370 million shares [than] the directors’ views on whether they were going to get fair value for these shares? In other words, if the directors thought those shares were significantly undervalued, when they issued that proxy statement, I think they had the duty to tell shareholders that they felt that way.”
Companies are required to receive a fairness opinion from third-party professionals that attest to the value of an acquisition. And yet they do not issue a fairness opinion in conjunction with the sale of their own shares. One exception: Buffett himself and his partner Charlie Munger who wrote the following in the prospectus materials associated with the sale of Berkshire Hathaway Class B shares in 1996: “Berkshire’s stock is not undervalued at the current market price. Neither Mr. Buffett nor Mr. Munger would buy shares at that price, nor would they recommend that their families or friends do so.” (Warren Buffett interview with CNBC, January 20, 2010.)