The Ballad of Clayton Homes

An episode recounted in First a Dream adds to those doubts. About a decade ago, an independent board member enraged Clayton by demanding an investigation into a dispute with an outside auditor. Dismissing the investigation as a pretext for steering business to a local law firm,

Clayton persuaded the board to vote, six to two, to suspend it. The two dissenters resigned. From then on, the board was peopled with friendlier types, all of whom supported the Buffett offer.After the failure of separate attempts by Orbis and others to block the sale or require that it go through only if a majority of independent shareholders voted for it, the Clayton shareholders meeting was set for July 16, 2003 at 11 a.m. The sense was that the vote would be very close. Strangely, proxy adviser Institutional Shareholder Services supported the deal while its own subsidiary, Proxy Voting Services, opposed it. No one knew what to expect when they walked past the two black stone lions proudly guarding the Clayton Homes headquarters that morning.

What followed was a shareholder meeting like no other. The appointed hour came and went with no executives to be found. The crowd began to grow restless, until finally, at about 11:25, Jim Clayton entered the room. Gone was the fun-loving man who enjoyed getting people in the mood with a tune or two. This time, says Steve Parham, a shareholder and attendee, he looked "somber." "These things can get complicated," Clayton said, explaining that Kevin wasn't there because he was on the phone with some shareholders.

Although the first item on the agenda was the vote, Clayton suddenly decided to take investor questions. "He was clearly nervous and clearly stalling," says William B. Gray, president of Orbis. According to attendees, virtually all of the questions that followed were negative in tone. Finally, Tash, the head of the firm that held a chunk of Clayton stock, stood up. "The purpose of this meeting was to have a vote," he announced, "and I'm asking you to call for a vote." Clayton's reaction, according to the affidavits of several people there, was bizarre. He looked at a colleague standing by the door and asked, "Is there any change?" The man shook his head no. Clayton, rather than responding to Tash's request, immediately announced an adjournment for lunch. In a deposition, Clayton later testified that he had no recollection of the request for a vote. (The August 13 deposition was remarkable for Clayton's lack of memory: He failed to recall certain events 103 times in the two-and-a-half-hour interview.)

The company picked up the tab for the meal, then reconvened the meeting a little after 1 p.m. Kevin Clayton announced that three large institutional shareholders had asked for a two-week adjournment so the company could have a chance to attract other bidders. Gray later said he talked to two of the investors and they both denied making the request. He also charges that Clayton set voting rules on the motion to adjourn that guaranteed it would pass. Gray, furious, asked for a vote on the merger itself, but Clayton said that the motion to adjourn superseded that vote. The meeting ended in confusion.

Behind the scenes, it turned out, Kevin Clayton had learned that Fidelity--which as of March 31 had been the second largest shareholder with 8.5% of the vote--had accidentally voted in favor of the deal, despite its policy in contested mergers of withholding votes until the last second, and wanted to pull back its support. Suddenly, the Claytons were looking at possible defeat rather than a narrow victory. That day, according to the deposition of Berkshire CFO Marc Hamburg, Clayton executives spoke with Buffett's people, who agreed to put off the deal a little bit longer in return for a $5 million fee. Buffett reiterated that he wasn't going higher. The company hadn't pressed him before. Why should he change now?

Allen Goolsby, an attorney representing Clayton Homes at Hunton & Williams based in Richmond, Virginia, says the adjournment was simply a way to be responsive to shareholders and give other bidders a chance. But angry shareholders believe that Clayton adjourned the meeting rather than hold a vote the company knew it was about to lose. "We came prepared on the 16th and we won," says Tash. "We played by their rules, and they moved the goal line."

"It was interesting to hear Warren Buffett say how bad a business it was, and he's paying $1.7 billion."