Despite a tongue-lashing from a federal judge, two activist hedge funds have been given the green light to pursue their proxy battle with railroad CSX Corp.
U.S. District Judge Lewis Kaplan said yesterday he can’t stop The Children’s Investment Fund and 3G Capital Management from voting their shares—which constitute a combined 8.7% stake—at CSX’s annual meeting on June 25. The hedge funds are seeking to elect three candidates to the Jacksonville, Fla.-based company’s board.
Kaplan had no kind words for the hedge funds, which he enjoined from future violations of securities laws. He also dismissed their countersuit against CSX, which had alleged a whole variety of corporate misdeeds.
“This court holds that a threat of irreparable injury is essential to obtain an injunction sterilizing any of defendants’ voting rights and that plaintiff has failed to establish such a threat,” Kaplan said. “Were the court free as a matter of law, however, to grant such an injunction, whether on basis that such relief is warranted to afford deterrence or on another basis, it would do so.”
Kaplan said there was “overwhelming” evidence that TCI and 3G sought to evade reporting requirements through the use of total-return swaps—though he declined to rule on whether TCI should be considered a beneficial owner of the underlying shares of those swaps—as well as finding that the two hedge funds worked together as a group “for many months before they filed the necessary disclosure statement.” But he also ruled that the hedge funds’ belated disclosure of the stake was not “false, misleading or otherwise inadequate as to a material fact,” and that penalties for the violations they did commit must come from the Securities and Exchange Commission or U.S. Justice Dept.
In a letter to Kaplan, the SEC backed the hedge funds’ interpretation of reporting requirements, saying that holders of swaps should not be considered beneficial owners.
Unsurprisingly, the two sides issued dueling press releases in the wake of Kaplan’s decision.
“Importantly, the court found that TCI and 3G violated the law by using swaps for the purposes of evading the regulatory filing requirements, creating a false impression that there was no large-scale accumulation of CSX stock taking place,” CSX offered.
“This decision should not obscure the substance of the debate: CSX shareholders have been fully informed for six months through our SEC filings that TCI and 3G are acting as a group and that we have nominated five highly-qualified directors for election to CSX’s board of directors,” the hedge funds shot back.
Those director candidates are garnering more and more support, suggesting that the hedge funds may just prevail on June 25.
Five major shareholders—with a combined 6.7% stake in CSX—are backing TCI and 3G’s candidates, Reuters reports. The five include hedge funds TPG Axon Capital Management, which owns a 2.4% stake, and Egerton Capital, which owns less than 1% of CSX.
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