(The Associated Press circulated the following story by Alan Sayre on June 24.)
NEW ORLEANS — CSX Corp. stockholders meet Wednesday in New Orleans amid a fight between the freight railroad company and dissident shareholders who want to put their own slate of five directors on the CSX board.
The Children’s Investment Fund and 3G Capital Partners want to shake up CSX’s board, in part by making it easier for shareholders to propose the election of directors at special meetings. The funds want the company to increase rates and cut expenses in order to boost earnings.
CSX has defended its board, pointing to increased earnings and improvements to its stock price.
It claims the hedge funds are trying to gain control of the CSX board. The two funds say they own 8.7 percent of CSX shares, and swap contracts boosted their economic exposure to an additional 12.3 percent of CSX stock.
Jacksonville, Fla.-based CSX provides rail, intermodal and rail-to-truck services. The company’s transportation network spans approximately 21,000 miles, with service to 23 eastern states and the District of Columbia, and connects to more than 70 ocean, river and lake ports.
In October, TCI asked CSX’s board to separate the roles of chairman and chief executive, add new directors with railroad experience and present a plan to improve operations. In December, the two funds jointly nominated a minority slate of five directors to the 12-member board.
In March, CSX sued the two hedge funds in federal court in New York accusing them of using swap agreements – exchanging one security for another – to evade federal securities filing requirements. CSX claimed TCI acquired more than 5 percent of its common stock without making disclosures required by law.
On June 11, U.S. District Judge Lewis A. Kaplan ruled that he could not stop the funds from voting their shares at Wednesday’s meeting even though the funds violated securities laws in gaining enough shares to nearly control the company.
However, Kaplan issued a ban on future violations, saying the battle may not end with the shareholders meeting and further violations “could allow defendants to increase their position to a point of working control.” The judge said any penalties would have to be issued by the Justice Department and the Securities and Exchange Commission. The agencies have not taken any action and the funds have said they plan to appeal.
Advisory firm Proxy Governance recommended that shareholders elect two of the dissident candidates – 3G Managing Director Alexandre Behring and Gilbert Lamphere, managing director of private investment firm Lamphere Capital Management and a former director at Canadian National Railway Co.
The other three TCI nominees are TCI founder Chris Hohn, London Underground managing director Timothy O’Toole and Gary Wilson, a former chairman of Northwest Airlines Corp.
Proxy Governance said that while it does believe the current board has delivered strong results, it said it sees a benefit in adding more directors with railroad operating experience.
Another advisory firm, RiskMetrics Group, recommended the election of Hohn, O’Toole, Behring and Lamphere, saying CSX’s performance had been lagging. RiskMetrics also touted the track record and experience of the funds’ nominees.
But another proxy adviser, Egan-Jones Proxy Services, recommended re-election of all CSX nominees.
For the first quarter, CSX said it earned $351 million, or 85 cents per share, compared with $240 million, or 52 cents per share, in the same period last year.
In afternoon trading Tuesday, CSX shares fell 75 cents at $63.29. The shares have traded in a 52-week range of $38.09 to $70.70.