AN AMERICAN court has ordered MidAmerican Energy Holdings Co., a subsidiary of the Warren Buffet-led Berkshire Hathaway, Inc. to pay $32 million to a Philippine partner supposedly booted out of an irrigation project in Nueva Ecija after a “miscalculation” of profits.In a decision, dated April 2, a copy of which was obtained by BusinessWorld, Douglas County, Nebraska District Court Judge Gary B. Randall said “the court finds [MidAmerican Energy’s] miscalculation of the internal rate of return, by using values that did not represent ‘actual project economics’ ... resulting in the elimination of all minority shareholders’ interest in the project company.”
The court ordered the firm to pay Oscar Violago-led San Lorenzo Ruiz Builders & Developers Group, Inc. “$32,288,198.22 plus 9% until fully paid and to perform the balance of its obligations to [the local firm] under the shareholders agreement, including but not limited to the delivery of 115,000 shares of common stock in the project company.”
The 115,000 shares could pay dividends of a $12 million to $15 million a year until 2021 when the $670-million Casecnan Hydroelectric and Irrigation Project will be transferred to the Philippine government under a build-operate-transfer agreement, the local company said.
The Casecnan multipurpose project collects water from the Casecnan and Taan Rivers. The water is then transported through a 16-mile tunnel towards the Pantabangan Reservoir. It provides about 150 megawatts of electricity and irrigates a total of 350,000 hectares of farmland.
In a phone interview, Anthony Violago, San Lorenzo Ruiz Builders executive vice-president and chief operating officer, described the case as a “David versus Goliath tale.”
On April 20, 1994, the local firm entered into a memorandum of understanding with MidAmerican Energy’s predecessor California Energy, Inc. and Canadian firm La Prairie Group Contractors (International), Inc. The agreement provided that San Lorenzo and La Prairie would each be receiving 15% of the project company’s shares of stock.
San Lorenzo and La Prairie’s ownership interests were subject to a dilution clause -- a downward adjustment based on the project’s internal rate of return.
By 1998, San Lorenzo Builders had sold most of its shares to CalEnergy, with the understanding that it could buy back the shares. It wanted to exercise this feature but CalEnergy said the value of the shares had already been diluted.
The other minority shareholder, La Prairie, suffered the same fate in 2002 and went to a San Francisco, California court to question MidAmerican Energy’s computation of the internal rate of return. The case was decided in La Prairie’s favor.
Mr. Violago explained San Lorenzo Builders did not get anything after being promised that “whatever La Prairie will get, we will get.”
San Lorenzo Builders claims MidAmerican Energy jumped the gun and instead filed a case against it before the Omaha court. San Lorenzo Builders said it was accused of violating several provisions of the 1994 agreement.
“[MidAmerican Energy] said we borrowed against our shares, so our option to buy it back is no longer valid,” Mr. Violago explained.
He said the decision was a victory for a small company that stood little chance of winning against a firm owned by billionaires like Warren Buffet.
“The Omaha court is their home court. It was a truly fair decision. It was their territory and we should be the one who should be aggrieved,” Mr. Violago said.
He pointed out that after losing, MidAmerican Energy tried to ask the judge to inhibit from the case.
“Since 2005, the case has already been with Judge Randall. They said the decision should be made by the jury. It was MidAmerican Energy, in fact, who asked first that the case be decided based on a directed verdict,” he said. This means that the judge can decide if “no reasonable minds can disagree [on the outcome of the case],” Mr. Violago said.
Asked if San Lorenzo Builders was willing to enter into a settlement with MidAmerican Energy, Mr. Violago said: “If it’s a reasonable settlement, why not? This can be done instead of us filing for other cases. Easily, we could file for damages with the results of this decision.”
Asked if the case would strain the Violago family’s friendship with MidAmerican Energy’s Chairman Dave Sokol, he said: “We still have 12 years to go, so I don’t think we should be fighting.”
Mr. Sokol is supposedly close to family patriarch, Oscar Violago. -- Ira P. Pedrasa
Share Investor LinksDownload the 2009 Warren Buffett Letter & 2009 Annual Report to Berkshire Hathaway Shareholders
Download the 1977 - 2009 Warren Buffett Letter's to Berkshire Hathaway Shareholders
Recommended Amazon Reading
|Warren Buffett's Management Secrets: Proven Tools for Personal and Business Success by Mary Buffett |
Buy new: $16.50 / Used from: $13.20
Usually ships in 24 hours
|The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham|
Buy new: $14.77 / Used from: $10.49
Usually ships in 24 hours