(Reuters circulated the following story by Martha Graybow on May 22.)
NEW YORK — Testimony concluded on Thursday in a battle between CSX Corp. and two money managers who denied in court that they secretly discussed a joint strategy to acquire stakes in the rail company and shake up its board of directors.
The presiding judge is expected to rule before CSX’s June 25 annual shareholder meeting, where 3G Capital Partners and The Children’s Investment Fund Management (TCI), a London-based hedge fund known for its shareholder activism, hope to propose a slate of five alternate candidates to the 12-member board.
The Jacksonville, Florida-based railroad wants the court to block the funds from running their candidates, bar them from voting some shares and force them to sell part of their stake.
The funds countersued, accusing CSX of breaches of securities law including illegally enriching corporate directors. They contend in court papers that CSX’s lawsuit is the latest in “a long series of scorched earth tactical maneuvers” by the board and CEO Michael Ward to entrench themselves.
CSX sued the funds in March, saying that because they did not properly disclose their holdings in the company, they had violated federal securities laws aimed at preventing groups of investors from secretly coordinating their efforts.
Under questioning by a lawyer for CSX on the second and last day of a civil trial in U.S. District Court in Manhattan, TCI Managing Partner Christopher Hohn and 3G Managing Director Alexandre Behring testified they had discussions in early 2007 but had not given each other details on the sizes of their stakes or their plans.
The funds officially announced in December 2007 that they had formed a group and intended to nominate a minority slate of directors.
Both Hohn and Behring, a former CEO of Latin American railroad America Latina Logistica, are among the funds’ proposed board nominees. They say they want to improve CSX’s operating performance and corporate governance.
TCI has said 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 12.3 percent stake.
The trial was heard by U.S. District Judge Lewis Kaplan without a jury. Kaplan did not say how he was going to rule, although he said he did believe that a large position in CSX “was assembled that was opaque to the broader market.”
The judge also said that “neither side has had very much to say on the question of what relief would be appropriate in this case, and why, in the event I find violations.”
A day earlier, CSX’s CEO Ward testified that he felt targeted by the hedge funds but had negotiated with them in good faith to try to find common ground. The funds, however, contend that Ward and others at CSX had a clear strategy to quell the dissenting shareholders.
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.
TCI, whose full name refers to a charity that receives some of the fund’s profits, has waged other battles with companies. It was instrumental in promoting a bidding war for ABN AMRO that ended with a consortium led by Royal Bank of Scotland buying the Dutch bank for 70 billion euros.
On Wednesday, TCI said it would launch a proxy fight against Japan’s J-Power in its push to boost returns from its investment in the electricity wholesaler.
CSX shares closed down $1.30, or 1.9 percent, at $67.55 on the New York Stock Exchange.