Class B Shares ("Baby Berkshires")
1. Origin
The concept was introduced in the 1995 Letter and formally implemented in May 1996. It was a direct, defensive response to Wall Street promoters who were setting up "unit trusts" to sell fractional pieces of Berkshire Hathaway to small investors at exorbitant fees.
2. The Core Argument
- The Premise: Wall Street intermediaries will always attempt to exploit a highly successful brand by repackaging it for unsophisticated retail investors, charging heavy commissions and management fees in the process.
- The Mechanism: Instead of fighting these trusts legally, Berkshire altered its own capital structure. It issued Class B shares with 1/30th the economic rights of a Class A share (and 1/200th the voting power), capping the sales commission at extremely low levels.
- The Conclusion: The Class B share acted as a financial "vaccine." By offering a direct, low-cost entry point for smaller investors, Berkshire destroyed the economic viability of the predatory unit trusts and protected its high-quality shareholder base.
3. Chronological Evolution
- 1995 Letter: Buffett announces the intent to create Class B shares to defend against "clone" trusts.
- 1996: Class B shares are officially issued to defeat the predatory unit trusts. Buffett explains that giving them 1/200th the voting power (despite having 1/30th the economic interest) ensures that Berkshire's unique, decentralized culture cannot be disrupted by a fragmented retail shareholder base.
- 2010: In connection with the massive BNSF acquisition, the Class B shares underwent a 50-for-1 split. This changed their economic ratio to 1/1500th of a Class A share, making them highly liquid and paving the way for Berkshire's inclusion in the S&P 500.
4. Primary Source Quotes
🔗 Connections Block
- Related Concepts: Cloning of Class B, Owner-Related Business Principles, Standard Selection of Shareholders
- Related Entities: BNSF
- Key Sources: 1995 Letter, 1996 Letter, 1996 Meeting
- Index: index
🌱 Idea Evolution & Maturity
How this concept developed over time, tracking its transformation from an early practice to a formalized Berkshire pillar.
The Threat
Buffett realizes that the high price of the A-share is allowing 'helpers' to exploit smaller investors.
While Buffett prefers a high share price to attract long-term partners, he cannot allow intermediaries to fleece the public.
We are creating these shares for one reason only: to prevent intermediaries from extracting fees from smaller investors.
The Issuance
Berkshire issues Class B shares at 1/30th the value of an A share, with 1/200th of the voting power.
A pragmatic compromise: offer a lower-priced entry point to defeat the unit trusts, while maintaining the voting dominance of the A shares.
The B shares will allow smaller investors to buy Berkshire directly without paying toll-takers.
The Two-Tier System
The two-tier structure operates smoothly. A-shares can be converted to B-shares, but not vice versa, ensuring the B-share never trades at a premium.
The structure successfully democratizes access to Berkshire without altering its unique governance and long-term shareholder base.
The B shares have served their purpose perfectly, eliminating the unit trusts.
The 50-for-1 Split
To accommodate smaller BNSF shareholders, the B-shares are split 50-for-1 (making them 1/1,500th of an A share).
The split B-share becomes the primary vehicle for retail investors and S&P 500 inclusion, while the A-share remains the ultimate symbol of long-term partnership.
The split was necessary to facilitate the BNSF acquisition, allowing smaller shareholders to receive stock rather than cash.