(Reuters circulated the following story by Martha Graybow on May 21.)
NEW YORK — The chief executive of CSX Corp. said in court on Wednesday he felt targeted by activist investors seeking to get seats on the board of directors, but the rail company negotiated with them in good faith to try to find common ground.
CSX sued The Children’s Investment Fund Management, a hedge fund known as TCI, and another fund, 3G Capital Partners, in March, contending they violated securities laws in their efforts to nominate a slate of directors for election at the company’s annual shareholder meeting.
The funds are trying to get five directors onto the 12-member CSX board.
But CSX wants the court to block the funds from nominating their slate, bar them from voting some of their shares and force them to sell part of their CSX stake.
TCI and 3G deny CSX’s accusations. In counterclaims, they accuse the railroad of securities law breaches including illegally enriching corporate directors. They say CSX engaged in bad faith discussions with TCI and that the company has sought to stifle dissenters seeking to shake up the board.
Under questioning in U.S. District Court in Manhattan at the start of the civil trial, CSX Chairman and CEO Michael Ward said he and presiding director Edward Kelly negotiated in good faith during discussions with money manager Christopher Hohn of TCI in January 2008.
When asked whether he felt he was a target of the investors, Ward said, “I do feel targeted by TCI, yes,” and believed that the fund had intended to remove him as CEO.
“They’ve expressed that in prior meetings with Mr. Kelly,” Ward said.
The trial is being heard by U.S. District Judge Lewis Kaplan without a jury. Oral testimony is expected to conclude on Thursday, with a decision expected from the judge before CSX’s annual meeting on June 25.
TCI has formed a shareholder group with 3G. It says that the funds and their board nominees collectively own 8.7 percent of CSX’s outstanding stock. Including swap contracts, the investment equates to a stake of 12.3 percent, according to TCI, a $15 billion fund based in London.
The investors have accused CSX of awarding stock grants to senior executives a week before announcing a $1 billion increase in its stock repurchase plan, a dividend increase, and optimistic earnings forecasts.
In a letter to CSX shareholders on Tuesday, TCI said the railroad could achieve $2.2 billion in annual productivity gains within five years, far more than the $400 million the company has targeted. The fund cited improvements such as improving scheduling and yard operations, cutting engine maintenance costs and boosting labor efficiencies.
The investors said in the letter that no incumbent directors or senior CSX executives have bought CSX stock in the open market with their own money in recent years, and that executives have actually been reducing exposure to the shares.
In response, Jacksonville, Florida-based CSX said it has held several meetings with TCI and is responsive to constructive ideas from shareholders.
“However, the TCI Group has offered an endless stream of ill-conceived suggestions — including an LBO at $50 per share and a ‘junk’ recapitalization — which, if implemented, we believe would be damaging to the company and would deprive shareholders of significant value,” CSX said.
CSX shares were up 4.1 percent to $70.47 in early afternoon trading on the New York Stock Exchange on Wednesday.