(Dow Jones circulated the following story by Chad Bray on October 29.)
NEW YORK — A shareholder has sued CSX Corp. (CSX) and two hedge funds over sales of CSX shares before the funds publicly disclosed plans to shake up the railroad operator’s board in a proxy fight earlier this year.
The lawsuit, filed in U.S. District Court in Manhattan on Tuesday, is seeking recovery of so-called “short-swing” profits related to sales by The Children’s Investment Fund Management LLP, or TCI; 3G Capital Partners LP and their principals between August and September 2007 on behalf of the company and its shareholders. CSX is a nominal defendant in the case.
The complaint alleges the funds or their principals purchased large numbers of shares and derivatives equivalent to CSX shares within six months of their prior share sales and at lower prices.
The lawsuit, filed by CSX shareholder Deborah Donoghue, claims the funds formed a group by Feb. 13, 2007, to exert influence over or gain control of CSX and beneficially owned, directly or through derivatives, more than 10% of the Jacksonville, Fla., railroad operator’s common stock.
“Such profits are recoverable on behalf of CSX by plaintiff as a shareholder of CSX, the latter having failed or refused to act in its own right and for its own benefit,” the complaint said.
In June, U.S. District Judge Lewis A. Kaplan in Manhattan said he agreed with CSX that the hedge funds skirted certain disclosure requirements in the months before a bitter and public proxy fight over CSX’s board, including finding the funds worked together as a group “many months before they filed the necessary disclosure statement.”
However, the judge said he was precluded from stopping TCI and 3G from voting their shares at CSX’s annual meeting in June because the disclosures, while belated, didn’t cause irreparable harm to the company’s shareholders. The 2nd Circuit Court of Appeals upheld the judge’s decision last month.
CSX had hoped to block the voting of 6.4% of CSX shares acquired by the funds during a period when the judge found they hadn’t satisfied their disclosure obligations.
TCI and 3G Capital won four seats on CSX’s 12-member board in the proxy contest in June. CSX agreed to seat two of the director nominees put forward by the hedge funds last month.
The railroad operator had claimed the funds “secretly coordinated” their efforts to gain effective control of the company’s board and didn’t properly disclose their full stake in CSX as required under federal securities laws – namely their holdings through swap transactions.
The case was closely watched by the financial community – particularly hedge funds – because CSX had alleged that TCI used derivatives known as total-return swaps to influence the way underlying shares were voted in the proxy battle.
A spokeswoman for the funds and a CSX spokesman didn’t immediately have a comment when reached Wednesday.