Risk & Governance Weekly

TCI Claims Victory at CSX

By L. Reed Walton and Ted Allen

The Children’s Investment Fund (TCI) and 3G Capital Partners are claiming they have won four board seats at CSX after a protracted proxy contest.

The dissident investors are citing preliminary tallies, but the rail company's management is labeling the vote “too close to call,” news reports indicate. Snehal Amin, a partner at TCI, told The Wall Street Journal that TCI nominees Gilbert Lamphere, Christopher Hohn, and Timothy O’Toole, as well as 3G nominee Alexandre Behring won enough votes to be elected to the board--though a fifth candidate, Gary Wilson, did not.

The apparent victory by the activist hedge funds is noteworthy because it is not easy for dissidents to obtain board seats at S&P 500 firms. On June 19, billionaire investor Carl Icahn fell short in his bid for three seats at Biogen Idec. However, dissidents won three directorships at H&R Block last September and two seats at H.J. Heinz in August 2006. 

Michael Ward, CEO of Jacksonville, Fla.-based CSX, said at the June 25 annual meeting that voting results may not be finalized for a month, Bloomberg News reported.

“Several weeks is very unusual and will raise suspicions that CSX is going to try to get shareholders to change their votes and somehow backdate them,” John Coffee, a Columbia University law professor, told Bloomberg News.

The shareholder meeting at a remote rail yard in New Orleans marked the culmination of a six-month fight between TCI and the nation’s third largest railroad company. The London-based activist investor, which together with 3G owns at least 8.7 percent of CSX, launched a bid for five seats on the company’s 12-member board in December. The dissidents claimed that Ward and the CSX board members repeatedly refused meetings to discuss ways to increase productivity and reform corporate governance.

CSX has maintained throughout the proxy battle that TCI is aiming to increase shareholder returns in the short term, possibly at the expense of CSX employees and long-term shareholders. The company asked a court to block the dissidents from voting their shares, contending that they tried to “ambush” CSX by failing to disclose equity swap arrangements on a timely basis. A U.S. appeals court declined to block the vote and has scheduled arguments in the case for the week of Aug. 4. (For more information on the legal dispute and the TCI proxy fight, please see the June 13 issue of Risk & Governance Weekly.)

The contentious nature of the proxy contest was evident at the meeting, according to news reports. Ward refused to close the polls during the four-hour meeting despite repeated requests by Amin. “The company left the polling open in an attempt to get people to change their votes,” Amin told the Journal.

Ward countered that he was only trying to make sure that all shareholders had a chance to vote. “Our view is, we think all voters should be enfranchised,” he told The New York Times. While noting that the outcome won’t be known until the results are certified, Ward told The Wall Street Journal that he is willing to work with any new board members.

J-Power Investors Reject TCI Proposals

In other news this week, TCI was less successful in an activist campaign at Japan’s Electric Power Development Co., which is known as J-Power.

At the company’s June 25 meeting, more than 60 percent of investors sided with management and rejected five TCI proposals, J-Power President Yoshihiko Nakagaki said at a press conference, according to the Reuters news service. The hedge fund’s proposals include resolutions to double J-Power’s dividend and limit cross-shareholdings.

“Despite being defeated, we’re proud to have done our best,” John Ho, head of TCI's Asia division, said after the meeting, according to Bloomberg News. Ho said the vote results were “distorted” because of J-Power’s cross-shareholding arrangements with other companies. Nakagaki denied that claim. “We did not invest in other companies simply to win votes,” he said after the meeting. “My understanding is that the majority of retail and institutional investors agreed with company policy and that’s why they supported our proposals.”

TCI said it will ask J-Power to disclose the votes by its business partners, Bloomberg News reported. The hedge fund said it estimates that 30 percent of investors voted against Nakagaki's election.