(Reported in Forbes.com by Susan Kitchens on June 26, 2008)
Big corporations are on the defensive against activist shareholders due to the bitter, and ongoing, proxy battle between railroad concern CSX and hedge fund The Children’s Investment Fund.
CSX shareholders voted Wednesday in a still unclear proxy vote about whether four hedge fund-nominated dissident board members would be elected. CSX said it was too early to draw any conclusions about the results of the vote.
The battle stems from a lawsuit pitting CSX against the activist funds–3G Capital Partners is the other one-and has been closely watched by those on both sides of the debate. As a result of the unfolding drama, a number of companies are beefing up their bylaws to rein in control of would-be activist shareholders. Among the provisions getting the most attention are the so-called advance notice bylaws, historically used to keep order at shareholder meetings, says Keith Gottfried, partner at the Blank Rome law firm in Washington, D.C. “This used to be something that was pretty insignificant,” he said.
The reason: Companies want to spell out, in detailed terms, the rules of issues such as nominating someone to its board of directors. The more specific the terms, the less likely, the thinking goes, the company will be subject to a surprise attack by an activist shareholder. In most cases, shareholders have the right to make proposals, such as nominating a board member, as late as the day of the annual meeting. “But companies now are restructuring these bylaws” so they can eliminate any last-minute notifications, Gottfried said. Companies are also re-writing these bylaws to solicit more information about shareholders wishing to make proposals–including whether they may have formed an investing group with another shareholder, for instance.
In the case of CSX against The Children’s Investment Fund and 3G Capital Partners Judge Lewis Kaplan of the Southern District Court of New York found earlier in June that while the funds had violated Securities and Exchange Commission disclosure rules, he couldn’t keep them from voting in a proxy vote. The hedge funds had acquired economic interest in the railroad through derivatives known as total return swaps. The SEC does not require disclosure of derivatives holdings. The vote took place Wednesday.
The hedge funds sought to replace five of CSX’s 12 board members with their own dissident nominees in the vote, the results of which were inconclusive. The Children’s Investment Fund, so named because it gives a portion of its profits to help children in poor countries, claimed a victory, stating that, according to a preliminary count, four of the five recommended nominees had been elected to the board. CSX, meanwhile, said the vote was “too close to call.” It added that the results would be announced on July 25, at the company¹s annual meeting.
Since the judge permitted the hedge funds to vote, even though he said they’d violated SEC rules, companies are doing what they can to keep activist investors at bay, said Gottfried. “For the hedge funds, it doesn’t seem that the SEC violation is that significant, since they were still able to vote,” he said. That means companies will work out ways to try and exert more control.