Corporate Governance

Beneficial Ownership, Equity Swaps, and Proxy Contests: CSX v. The Children's Investment Fund (The Second Circuit Rules) (Part 12)

By J. Robert Brown

The annual meeting for CSX is this week, June 25.  The two hedge funds that have nominated five directors have somewhere around 8.7% of the shares.  In addition, they presumably still have their large swap position, with the counterparties (mainly Citigroup and Deutsche Bank) holding large positions in CSX.  Further, these two commercial banks will presumably either vote their shares for the hedge fund candidates or not vote, either way benefiting the hedge funds.

In the inevitable litigation, the trial judge found that the funds had violated Section 13(d) by failing to disclose in a timely fashion the existence of a group and the shares accumulated by counterparties in the equity swaps.  The trial judge, however, merely enjoined the hedge funds from future violations but did not take more drastic steps such as the sterilization of the shares acquired by the funds during the period of the violation.

CSX has taken its case to the Second Circuit.  After the trial judge denied an injunction pending appeal, CSX filed an emergency motion for an expedited appeal and interim relief.  The brief challenges the conclusion of Judge Kaplan that the controlling authority (Rondeau v. Mosinee Paper Corp., 422 US 49 (1975) and Treadway Cos., Inc. v. Care Corp., 638 (F.2d 257 (2d Cirl. 1980)) deprive him of the ability to issue the requested relief.  Recognizing that resolution of this issue may take time, CSX asked for emergency relief.

• If the Court is unable to resolve this appeal in advance of the Meeting, we respectfully request that the Court enter interim relief that would preserve the status quo until the Court is able to rule.  . . . Thus if the Court cannot decide this case by June 25, 2008, it should rule that TCS's and 3G's votes be "held in escrow" until the Court has resolved this appeal. Proceeding in this fashion would allow this Court more time to deal with the important issues presented by this case while at the same time protecting CSX and its shareholders against the irreparable harm that the would suffer if TCI's and 3G's votes make the  difference in the upcoming elections.  There is thus no good reason not to hold them in escrow until the Court rules.

On Friday, the court issued a ruling, denying the injunction pending appeal but providing an accelerated briefing schedule.  All of the briefs must be in by July 25 and oral argument will be held the week of August 4.  We'll have a bit more to say about this in a second post today.

In the next post, we shall take a look at the response and then offer a prediction.  The briefs on appeal and the brief Second Circuit opinion can be found on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on June 23, 2008 (boomark / email).