(The following story by Fred Pace appeared on the Register-Herald website on March 11.)
HUNTINGTON, W.Va. — When it comes to the transportation systems in the U.S., ownership of only 4 percent of the shares of a railroad company can still cause deep concern in Congress, especially if the shareholder is a foreign-based hedge fund that is trying to achieve effective control of the company.
Rep. Nick Rahall, a Democrat from the 3rd District, expressed his concerns about the future of the railroad industry in southern West Virginia, including the increased influence of a foreign-based hedge fund on CSX Railroad and The Greenbrier resort.
“After many years of decline, the railroad industry is on its way to regaining its status as a crucial component of the American economy,” said Rahall. “Now, more than ever, we must pay careful attention to any investment or business transaction regarding railroads that could jeopardize the transportation infrastructure and economy of our nation.”
Rahall, who is vice chairman and longtime member of the House subcommittee with jurisdiction over the rail industry, made his comments at a hearing in Washington last week to examine foreign control of the nation’s railroads.
During the hearing, Rahall questioned representatives from the Children’s Investment Fund (TCI) about their intentions involving CSX.
“In West Virginia, coal and railroads are bound together like rails and ties — both must succeed for either to prosper,” said Rahall. “Railroads, like CSX, are some of our largest employers — providing good, high-paying jobs for thousands of hard-working railroad employees — and a crucial component of statewide economic development.”
TCI is based in London and registered in the Cayman Islands.
TCI’s increased interest in CSX has raised many concerns, according to Rahall, due to the tendency of hedge funds to focus on the “short-term” financial outlook and the fact that TCI is foreign-owned and, therefore, not regulated by the federal Securities and Exchange Commission (SEC).
TCI urged the railroad operator in a recent letter to boost its lagging stock by overhauling large swaths of its business. Among the proposed changes are splitting the roles of chairman and chief executive; adding independent directors to the entire board; and forging friendlier relations with shareholders and labor unions.
TCI began building up its holdings in CSX over the past year and now holds about 4.1 percent of the company’s outstanding shares.
“Over the past year we have repeatedly, but unsuccessfully, attempted to engage in a constructive dialogue with the board and top management of CSX on concerns we have about the business,” TCI said in its letter. “Except for a single ‘one-on-one’ meeting with Oscar Munoz, top management and the board have refused all our offers to meet privately. Over the past few months, CSX has refused even to return our calls or to allow us to attend meetings at CSX with an analyst and other investors.”
The letter went on to say that CSX management has shown its weakness in recent weeks.
“CSX management has opted to communicate through a paid advertising campaign and an abbreviated investor day,” TCI said in its letter. “The investor day reaffirmed to us the weakness of the CSX management team and strategy. We conclude this weakness must be made public as our attempts to discuss it privately have consistently been rebuffed. We do so in the interest of TCI investors, as well as CSX employees, customers and shareholders.”
The fund acknowledged that it holds stakes in other railroad operations as well, but argued that those companies have been amenable to its suggestions.
Jacksonville, Fla.-based CSX fired back with a letter to The Children’s Investment Fund, accusing it of “unwarranted and disingenuous” criticism of a bylaw change.
Earlier this month, CSX amended its rules, requiring written requests from shareholders representing 15 percent of the company’s shares before calling a special shareholders meeting. TCI, which has nominated five candidates for TCI’s board as part of a proxy fight, has said shareholders should be allowed to request such meetings throughout the year.
“TCI seeks to undermine the functioning of the CSX board in furtherance of TCI’s own purposes,” CSX wrote to the hedge fund. “TCI wants the ability to initiate a perpetual ‘recall’ contest through special meetings as a tool to pressure the board to implement TCI’s proposals, regardless of their merit.”
CSX said the change was designed “to avoid the disruption and diversion of resources associated with the potential for multiple director elections each year.”
It is “clear that TCI’s interest in good corporate governance, but in achieving effective control of the company notwithstanding its ownership of only 4 percent of the shares,” CSX said.
TCI has been agitating for improved corporate governance and financial performance at the railroad.
TCI is also known for its unique profit structure: A portion of its returns goes to The Children’s Fund Foundation, a nonprofit that focuses on children’s health and development in Third World countries.
Meanwhile, Rahall also expressed his concerns for the future of the CSX-owned Greenbrier resort in White Sulphur Springs.
TCI’s increased involvement in management of CSX could lead to the sale of the resort to a hotel chain, bringing the management of the 230-year-old estate into question, Rahall said.
“The Greenbrier is renowned worldwide for offering unmatched old-fashioned southern charm and hospitality, in a luxurious setting, a tradition in which West Virginians take great pride, and one we wish to continue,” said Rahall. “As vice chairman of the Transportation and Infrastructure Committee, I will closely monitor any transactions that could adversely affect The Greenbrier or CSX, so that future generations can experience this historic and cultural landmark for years to come.”