(The following story by Susan Kitchens appeared at Forbes.com on June 18.)
NEW YORK — Two dissident shareholders that have been giving CSX a hard time just got a leg-up in their impending proxy fight. Late Tuesday, Children’s Investment Fund and 3G Capital Partners said a major proxy advisory firm is backing their nominees for the railroad company’s board in an election scheduled for next week.
The funds said Risk-Metrics ISS Governance is recommending CSX shareholders vote to elect the funds’ nominees to the railroad concern’s board: Alex Behring, head of 3G and former chief executive of Latin America’s largest railroad and logistics company; Children’s Investment Fund manager Christopher Hohn; Gil Lamphere, a former director of Canadian National Railway; and Timothy O’Toole, managing director of the London Underground, London’s subway system.
The announcement comes just one day after CSX asked shareholders to ignore the hedge funds’ attempt to sway the proxy vote.
In March, CSX sued the funds, asserting that they should not be able to participate in an upcoming proxy vote. The railroad claimed they had violated U.S. Securities and Exchange Commission disclosure rules in order to secretly amass an interest of more than 5.0% in the company. That’s the level at which the SEC requires investors to publicly disclose their stakes in a company. But the funds employed the use of derivatives known as total return swaps to build up a 14.0% economic interest in the railroad concern. The SEC doesn’t require investors to disclose derivatives holdings.
Last week, Judge Lewis Kaplan found that the funds had, indeed violated SEC disclosure rules. But based on earlier rulings, he said he could not prevent them from voting in the June 25 election. CSX has appealed the decision.
On Monday, CSX sent a letter to shareholders asking them to vote for the railroad’s “experienced and highly qualified directors.” CSX said the hedge funds had lied under oath about their intentions to agitate for change at the railroad company.
In its analysis, ISS said that based on CSX’s “lagging operational performance” and “the dissident nominees’ track record, skill sets and experience,” it recommends that shareholders support the hedge funds’ four nominees.
Neither the Children’s Investment Fund nor 3G were available for comment. But on their website, the funds give their rationale for the fight: “In CSX, we see the potential to be the leading railroad in the United States—providing the best service, running the safest network, generating the highest returns, and being able to meet America’s freight transportation needs now and in the future.” Instead, the firms say, CSX last year was average or below average versus its peers on “nearly every major metric of performance.”