Thursday, August 4, 2011

Guest Contributor: Activist Investor Phil Goldstein Says "CSX Opinion is Not About Swaps"

Phil Goldstein - Bulldog Investors
I think that for most activist shareholders the most significant takeaway from the Second Circuit's CSX opinion is not about swap contracts.  See Blog Post on CSX Decision

More important is that it reduces the fear that mere communication between like minded shareholders can subject them to a lawsuit alleging that they formed an undisclosed 13d group. The Court significantly narrowed the ability of an issuer (or the SEC) to allege that such a group exists.  Merely alleging "concerted action" is not enough.  Instead, applying the statute literally requires that coordinated  purchases must be alleged (and proven). It said:

As we have noted, the statute and the implementing rule are both concerned with groups formed for the purpose of acquiring shares of an issuer. See 15 U.S.C. § 78m(d)(3); 17 C.F.R. § 240.13d-5(b)(1). The District Court recognized that whether a group exists under section 13(d)(3) “turns on ‘whether there is sufficient direct or circumstantial evidence to support the inference of a formal or informal understanding between [members] for the purpose of acquiring, holding, or disposing of securities.’” CSX I, 562 F. Supp. 2d at 552 (quoting Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286F.3d 613, 617 (2d Cir. 2002) (emphasis added).

Endeavoring to meet the statutory standard, the District Court found that TCI and 3G formed a group, within the meaning of section 13(d)(3), “with respect to CSX securities,” and that this group was formed no later than February 13, 2007. See id. at 555. Then, after identifying the Defendants’ “activities and motives throughout the relevant period,” id. at 553, the Court stated, “These circumstances . . . all suggest that the parties’ activities from at least as early as February 13, 2007, were products of concerted action . . . .” Id. at 554 (emphasis added).

These findings are insufficient for proper appellate review. Although the District Court found the existence of a group “with respect to CSX securities,” the Court did not explicitly find a group formed for the purpose of acquiring CSX securities. Even if many of the parties’ “activities” were the result of group action, two or more entities do not become a group within the meaning of section 13(d)(3) unless they “act as a . . . group for the purpose of acquiring . . . securities of an issuer.” 15 U.S.C. § 78m(d)(3).


[A] precise finding, adequately supported by specific evidence, of whether a group existed for purposes of acquiring CSX shares outright during the relevant period needs to be made in order to facilitate appellate review."

Presumably, the same requirement would apply to a group formed for the purpose of either selling or of holding shares.  However, it is unlikely that a group would ever be formed for either of those purposes after the shares were independently acquired (which is presumably why the Circuit Court focused on acquisitions.) The bottom line is that general allegations of shareholders acting "in concert" are no longer sufficient to survive a motion to dismiss IMO.  There must be a specific allegation that their purchases were coordinated.

Judge Winter, in his concurrence, was even more emphatic about the requirement to prove a plan to coordinate purchases by the group members.  He said:

The district court’s finding of a group also suffers from a second error. That finding was that “the parties activities from at least as early as February 13, 2007, were products of concerted action.” Id. However, Rule 13d-5(b)(1) applies only to groups formed “for the purpose of acquiring, holding, voting or disposing” of “securities” of the target firm. The Rule does not encompass all “concerted action” with an aim to change a target firm’s policies even while retaining an option to wage a proxy fight or engage in some other control transaction at a later time. Indeed, the Rule does not encompass “concerted action” with a change of control aim that does not involve one or more of the specified acts.


There is no evidence that 3G’s purchases at this time were more than the result of this sharing of information, which hardly amounts to an agreement to buy CSX shares.

Thus, two large stockholders that independently acquired their positions can discuss their investment and the company with each other and possible actions they might take separately or together to enhance shareholder value but the existence of such discussions alone is insufficient to support a finding of the formation of a 13d group.  In almost all cases such shareholders independently determine how they will vote their shares so there is no reason to form a group for voting them.  Unless they actually agree to do something together that suggests a voting agreement, e.g. to fund a proxy solicitation, there is no group.

Guest Contributor Phil Goldstein