(The following story by Lisa LaMotta appeared at Forbes.com on May 20.)
JACKSONVILLE, Fla. — The drama at CSX continues as the railroad battles interference from two of its key investor groups, TCI and 3G Capital. The argument over how the railroad should be run continues to escalate, with little progress on either side.
The two activist investors’ latest stunt included sending a letter to shareholders of the CSX to plead with them to vote a slate of five board members on to the company board. The letter, sent Tuesday, said that through the initiatives of TCI, which manages The Children’s Investment Fund, and 3G, CSX could achieve $2.2 billion in annual productivity gains within five years.
The two hedge funds gave the company credit for increasing its buyback program over the last two years and proposing to add a board member with railroad experience, as well as predicting $400.0 million in annual productivity gains, but the funds said they could do better.
Along with increasing productivity gains, the funds want to add board members that have a combined 50-years worth of railroad experience. Shareholders have the opportunity to vote on the slate of nominees at the company’s annual meeting on June 25.
The letter said that the funds, along with the five proposed nominees, own an 8.7% stake in the company worth $2.0 billion, as well as an additional $3 billion in exposure through swap agreements. It ridiculed the management and current board members of the board for not purchasing any of the stock beyond what the company issued them.
In February, CSX wrote a letter to Chris Hohn , the managing partner at the hedge fund, defending its decision to amend its bylaws and calling the investor’s interest in pushing change “not in good corporate governance, but in achieving effective control of the company.” CSX had amended its bylaws to provide that a special meeting would be called only after the company received a written request from shareholders representing at least 15% of its voting power, according to a document filed with the Securities and Exchange Commission.
A month later, CSX filed suit against the hedge funds alleging that they violated federal securities laws by being misleading about swap agreements that effectively vote CSX share in TCI’s favor.
The fund has been pushing for the railroad to shake up management and improve performance, including separating its chairman and chief executive roles, which are both currently held by Michael Ward; to add independent directors to its board ; and to link management compensation to the company’s performance.
Shares of CSX were at $68.0, up 1.6%, in later afternoon trading Tuesday in New York. CSX has not yet returned calls for comment. A spokesperson for TCI and 3G said the fund were not commenting beyond what was said in the letter to shareholders.