(Reuters circulated the following story by Nick Carey on June 26.)
NEW ORLEANS — U.S. railroad CSX Corp’s unusual decision to postpone releasing results of a shareholder vote looked to some like a desperate attempt to delay the inevitable appointment of several dissident nominees to its board.
But the company has bought itself a month before it has to announce whether any of the five dissident nominees of activist hedge funds The Children’s Investment Fund (TCI) and 3G Capital Partners made it onto the board — the two funds claim they won four seats on the 12-member board — giving it time to rethink its strategy, and perhaps alter the vote.
“A delay is in the interest of the incumbents as it gives them continued control of the corporate machinery to seek fresh options,” said Stephen Bainbridge, a professor of law at UCLA. “(CSX) may have lost narrowly and will need to go back out there to persuade select shareholders to change their vote.”
If that were the case, the Jacksonville, Florida-based railroad’s rarely used strategy to put off publishing the vote results until July 25 would look more like a shrewd move than a desperate gamble.
“This has the appearance of giving existing management some time to figure out a strategy to affect the outcome,” said Kent Greenfield, a law professor at Boston College. “If they lost by a close margin, they could approach shareholders who haven’t voted and seek their support.”
This strategy carries some legal risks, but if managed well it could ensure victory for CSX, law professors said.
The railroad’s shareholder meeting came after a nasty six-month proxy battle.
TCI and 3G maintain that CSX has underperformed and could be more profitable, touting a five-member slate they say has the railroad experience needed to make CSX run better. Management has argued that the hedge funds would saddle CSX with debt and cause it to cut back on vital infrastructure projects.
ABRUPT END
Held in an air conditioned tent set up in a rail yard in New Orleans that was badly damaged by flooding after Hurricane Katrina in 2005, the CSX meeting was full of foreboding.
Apart from the periodic rain storms that pounded the tent, causing a couple of short-lived leaks and temporarily drowning out comments by CSX Chief Executive Michael Ward, the company kept voter polls open for nearly five hours.
To fill time, there were a couple of lengthy company presentations, then a long question and answer session that included a number of operational questions from CSX employees.
This caused frustration among the assembled members of TCI’s and 3G’s entourage, who claimed CSX was using stall tactics, and led to a frosty exchange between Ward and TCI founding partner Snehal Amin.
“Are you keeping the polls open right now in an attempt to solicit votes?” Amin asked Ward at one point.
“I know you feel rather impatient at this point … But shareholders are still voting … and we are going to fully vet all questions from our shareholders in the meantime,” Ward responded.
When the polls finally closed, Ward abruptly adjourned the meeting, said the results of the vote would be certified when it reconvened on July 25 and walked offstage — briskly.
“It is highly unusual to take that length of time to certify the results of a corporate vote,” said Paul Mahoney, a professor of law at the University of Virginia.
Afterward, CSX said the vote was “too close to call” and the extra month was needed to tally up all the votes. TCI and 3G claimed victory, saying that “preliminary results” had shown four of their five nominees were elected to CSX’s board.
But law professors say that as Ward adjourned the meeting rather than ending it, the meeting is still in session and votes could still be changed or added. This provides CSX with time and room to maneuver, but also opens up the risk of lawsuits from TCI and 3G over the delay.
“CSX is treading a fine line,” said Trey Drury, a law professor at Loyola University in New Orleans. “If you adjourn a meeting without a compelling explanation, you may be in violation of your fiduciary responsibilities and that could lead to litigation.”
Lawrence Hamermesh, a professor at Widener Law in Wilmington, Delaware, said that at this point the cards are stacked in CSX’s favor. If the contested vote ended up in court, CSX could argue that several large shareholder blocs needed more time to make up their minds and should not be disenfranchised.
“The company would argue that this was a blow for democracy, not against democracy,” Hamermesh said.
“In the meantime, it is a well-known fact that close elections tend to be won by management,” he added. “Management has control over timing, and that makes all the difference.”