(The Associated Press circulated the following on June 12.)
NEW YORK — Shares of railroad operator CSX Corp. may trade actively Thursday after a federal judge’s ruling opened the doors to a proxy battle later this month.
On Wednesday afternoon, the judge ruled that dissident shareholders broke the law in their effort to change CSX’s corporate structure, but did not block them from voting for their nominees to the company’s board.
Jacksonville, Fla.-based CSX had sued the two hedge funds in March, accusing them of using share swap contracts to evade federal securities filing requirements.
The suit sought an injunction and sanctions against lead defendant TCI that would force the hedge fund to divest itself of all the railroad company’s shares and terminate all swaps involving the company, and block it from voting shares it controlled at CSX’s annual meeting this month.
U.S. District Court Judge Lewis A. Kaplan of the Southern District Court of New York did rule that TCI, which manages The Children’s Investment Master Fund, and 3G Capital knowingly committed violations of what is known as Section 13(d) of the Exchange Act.
Both hedge funds failed to disclose in a timely manner that they were working together as a group, and TCI did not file in time disclosing that it effectively owned more than 5 percent of CSX shares, Kaplan ruled.
“These violations were not products of ignorance,” he wrote in the 126-page ruling. Kaplan added that the hedge funds’ “past violations have advanced significantly the achievement of their objectives.”
The court issued an injunction blocking the hedge funds from further violations of the securities law at issue, but said it could not stop the companies from voting their shares and did not agree to other penalties CSX requested.
Any such penalties, Kaplan wrote, would have to come from the Securities and Exchange Commission or the Department of Justice.
“It didn’t give CSX all that it was looking for,” said Robert Zimet, a litigation attorney at New York-based law firm Skadden, who was not involved with the case but agreed to comment on the decision.
“And that’s been the dilemma for years,” Zimet said. “The court’s been very reluctant to convert 13(d) violations into means for (target companies) to make bad guys go away.”
CSX issued a statement highlighting aspects of the judge’s decision but did not provide further comment.
“We think the court’s ruling speaks for itself,” CSX spokesman Andrew Siegel said.
The lead attorney representing London-based TCI did not immediately respond to a request for comment.
CSX is urging shareholders to reject the hedge funds’ slate of five candidates to its 12-seat board at its shareholder meeting on June 25.
TCI and 3G have said they and their nominees to the company’s board own 8.7 percent of CSX shares outright. The swap contracts boosted their economic exposure to an additional 12.3 percent of CSX stock.