Thursday, June 12, 2008

CSX: Activists TCI and 3G Continue to Fight for Board Seats With Big Win in Federal Court

Company CSX Corp. (CSX)
Activist Hedge Funds The Children's Investment Fund (TCI) and 3G
Ownership 8.7% at a cost of $41.99/share plus 12.3% economic interest in swaps
Other Activists Icahn, Jana, Ramius, Clinton
Annual Meeting June 25th
Demand Replace 5 of 12 Directors

The Situation: Activist investors TCI and 3G Capital (the "Funds") together purchased 8.7% of CSX's stock at an average cost of $41.99 per share. In addition, the Funds disclosed that they have an "economic interest" in an additional 12.3% of CSX through their ownership of various derivatives known as cash settled equity swaps. Following the ownership disclosure, TCI and 3G launched a proxy contest to replace 5 of the 12 board members up for election at the annual meeting scheduled for June 25th.

The Controversy: Since investors do not own shares in swap agreements, they technically do not own the voting rights that accompany those share. As a result, TCI and 3G did not feel legally obligated to disclose their ownership in CSX with the SEC until they owned more than 5% of the equity (this disclosure is required under SEC Rule 13-d).

CSX sued the activists claiming that the swap agreements were part of a scheme to evade the reporting requirements of the SEC and requested the Court block the Funds from voting their shares at the annual meeting.

The Outcome (so far): On June 11th a federal judge ruled that TCI is allowed to vote their shares at the annual meeting - but left the door wide open for an appeal by CSX.
On June 17th both sides petitioned the 2nd U.S. Circuit Court of Appeals to review the decision by Judge Kaplan.

Interesting News Articles and Legal Notes on the CSX - TCI Battle

The New York Times: Hedge Funds Can Vote at CSX Meeting


June 12, 2008

A federal judge ruled Wednesday that two hedge funds seeking to win a proxy fight at the CSX Corporation had violated securities laws by not disclosing their positions and intentions many months before they did.

But Judge Lewis A. Kaplan of Federal District Court in Manhattan nonetheless ruled that there was nothing effective that he could do. He refused to bar the hedge funds from voting their shares, as CSX had requested, at the annual meeting on June 25.

“Some people deliberately go close to the line dividing legal from illegal if they see a sufficient opportunity for profit in doing so,” Judge Kaplan wrote in his 115-page decision.

“A few cross that line and, if caught, seek to justify their actions on the basis of formalistic legal arguments even when it is apparent that they have defeated the purpose of the law. This is such a case.”

Read the Full article at The New York Times

Wachtell Lipton's Memo on the Court's decision
Link to Wachtell's memo

From Blank Rome's
The Guardian: Company-Side Shareholder Activism Alert
SEC Opines That Cash-Settled Equity Swaps Do Not Confer Beneficial Ownership within the Meaning of Regulation 13D of the Exchange Act

United States District Court Southern District of New York
Link to the Court's Opinion

US Senator Chuck Schumer Urges Law to Punish Hedge Funds For Hiding Ownership

WASHINGTON, June 17 (Reuters) - Legislation might be needed to impose stiffer penalties against hedge funds that improperly conceal their corporate holdings through the use of equity swaps, a senior member of the Senate Banking Committee said on Tuesday.

New York Democrat Sen. Charles Schumer urged the U.S. Securities and Exchange Commission to clarify what is required of equity swap holders who seek to influence the voting decisions of their counterparties.

Schumer said in a letter to SEC Chairman Christopher Cox that he was "disturbed" that a federal judge ruled last week that two investment firms waging a proxy battle at railroad CSX Corp violated securities law in acquiring large stakes in the rail company, but did not impose any significant penalties.

Read the Full Article at Reuters