Two Union Funds Support Management
Two transportation-affiliated unions, the Brotherhood of Locomotive Engineers and Trainmen (BLET) and the Brotherhood of Railroad Signalmen (BRS), have come out against the dissident slate.

In a May 30 bulletin, the BLET warned that TCI would increase investor returns by “disinvestment in capital improvements.” CSX likewise has criticized TCI’s call for freezing capital expansion; the company voiced its objection to such a strategy in a November letter to TCI. During the June 9 forum, however, Hohn sought to clarify, saying that TCI did suggest a capital freeze, but only in the case of Congressional re-regulation of the rail industry in order to avoid damaging shareholder value.

The BLET also contends that hedge funds like TCI often seek to break up companies and sell the pieces to benefit shareholders, while company workers suffer. The union cites an article in the Jacksonville-based Florida Times-Union that linked TCI’s role in the sale of ABN Amro to the layoff of 550 Jacksonville-area Amro employees. TCI founding partner Snehal Amin dismisses this claim as “totally untrue,” telling R&GW that Amro sold that branch of its business to Citigroup--in which TCI held no shares at the time--and had no connection to the Florida layoffs.

The BRS has questioned the experience of the dissident nominees. However, one of the foundations of TCI’s proxy challenge is that none of the incumbent board members, aside from CEO Michael Ward, have railroad management experience. One new director on the management ballot this year, John McPherson, is a former president of Florida East Coast Railway.

The union echoes CSX’s claim that dissident nominee Behring, of 3G, presided over a railroad with an “abysmal” safety record. Behring noted, however, that the safety record of the Latin American railway he managed experienced an overall dip in safety when it acquired a smaller and poorly maintained track network, which he said the company brought up to excellent safety standards within a year.

Another labor investor, the United Transportation Union (UTU), is remaining neutral in the proxy fight as part of a wage agreement with CSX. The union originally backed TCI’s reform requests, though. “The hired hands who manage CSX railroad should be given their walking papers,” UTU International President Paul Thompson said in an October statement on the union’s Web site. The statement also goes on to criticize CSX’s treatment of workers and its safety record.

“If CSX had devoted more attention to running its railroad as efficiently as other railroads do, they wouldn’t be in the position they’re in,” UTU spokesman Frank Wilner told R&GW.

Large public pension funds have also said they will weigh in on the contest. The California Public Employees’ Retirement System plans to release its vote recommendation the week before the June 25 meeting, fund spokesman Clark McKinley told R&GW. The public pension funds of New York City also have holdings in CSX, but reported that the city comptroller’s office, which controls the funds, has not yet taken a position.

Meanwhile, hedge fund TPG Axon Capital, which owns 2 percent of CSX, plans to support the dissident slate, according to the Reuters news service.

Lawmakers Scrutinize TCI
Lawmakers in Washington have also joined the debate. The House of Representatives Committee on Transportation and Infrastructure called a hearing in March to discuss foreign investment in the railroad industry. Michael Ward and Snehal Amin both testified at the March 5 proceeding. CSX is well-connected in Washington; according to the Associated Press, the company spent approximately $3.2 million in 2007 lobbying for issues such as legislation that would require hedge fund managers to register with U.S. securities regulators.

Rep. Corrine Brown, a Democrat who represents the district in Florida where CSX is based and chairs the House subcommittee dealing with railroads, accused TCI of trying to execute a “short-term money grab” in the case of CSX, the New York Post reported. Both Brown and fellow Democrat Rep. Nick Rahall of West Virginia repeatedly questioned Amin about TCI’s attempted “hostile takeover” of the rail firm, according to the Post.

Just prior to the hearing, CSX donated $20,000 to the Nick J. Rahall Appalachian Transportation Institute at West Virginia-based Marshall University, and an additional $25,000 to Edward Waters College, a Jacksonville-based historically black university with ties to Rep. Brown, news reports indicate. Just after the hearing, Michael Ward donated an additional $1 million to Waters College. The CSX chief executive told R&GW that he has been a patron of the college for 17 years, and that the million-dollar donation was a personal one, unaffiliated with the company.

More recently, six U.S. senators sent a letter to Treasury Secretary Henry Paulson Jr., asking for a review of TCI’s acquisition of CSX stock by the Committee on Foreign Investment in the United States (CFIUS). In the June 3 letter, Democratic Senators Evan Bayh (Indiana), Sherrod Brown (Ohio), Thomas Carper (Delaware), and Robert Menendez (New Jersey), along with Republicans Jim Bunning (Kentucky) and Mel Martinez (Florida), said the agenda of TCI’s investors is invisible to government regulators. “They could be charities and university endowments, but they could also be foreign governments’ sovereign wealth funds,” the lawmakers write. They call on Paulson and CFIUS to determine who TCI’s investors are and whether they threaten national security or the “vital asset” that is CSX.

Corporate Governance Concerns
TCI also is targeting what it sees as lax corporate governance at CSX. Before the proxy contest was launched, TCI sent a letter to the board, urging the company to separate the roles of chairman and CEO (both of which are held by Ward), refresh the board with independent directors, and align management pay with investor interests.

Early in the negotiations, the company said it offered TCI three board seats and a fourth mutually agreed-upon director. TCI wrote in its white paper, “CSX: The Case for Change,” that it accepted the board seats, but asked that the issue of chairman/CEO separation be put to a shareholder vote. The company wanted a commitment to an ongoing joint chairman/CEO position, TCI said, and when the dissidents objected, the company abruptly broke off negotiations. “Not saying ‘thank you very much,’ when we [offered the board seats] was unreasonable,” CSX lead director Kelly said at the June 9 forum.

The dissidents are still pushing for Ward to give up his chairmanship. Kelly noted that the board went against Ward’s wishes when offering the seats to TCI, proving that the directors had the autonomy to oppose management.

The company adopted a bylaw in February that allows shareholders owning 15 percent or more of the company’s outstanding stock to call special meetings. An investor proposal on this topic, submitted by the Rossi family, won 69.6 percent support at CSX’s 2007 annual meeting. “This is very much cutting-edge best practice [in corporate governance],” Ward told R&GW.

However, TCI says the new bylaw is flawed. Under the provision, shareholders cannot call special meetings to elect or remove directors, or call meetings to discuss issues on the agenda at an annual meeting within the 12 months of the special meeting date. CSX representatives said that the bylaw seeks to prevent “continuous recall elections” that would disrupt the board. TCI dismisses this rationale. “Management doesn’t want its actions to be scrutinized by … a better informed board,” Hohn said at the June 9 forum.

CSX’s proxy statement asks shareholders to approve the special meeting bylaw. TCI, which opposes that resolution, is asking investors to vote for its own special meeting proposal that would allow a 15 percent shareowner to request a meeting to address any issue, including director elections. In addition, the fund is seeking to repeal all bylaw amendments made by the board since Jan. 1. TCI is also urging shareholders to abstain from ratifying the company’s auditors.

Court Fight Over Swaps Disclosure
CSX and the dissidents also have engaged in litigation over the disclosure of “total return equity swaps,” which are cash-settled swaps that allow hedge funds and other investors to gain economic exposure to a stock (and tax advantages) without actually owning it. Under such an arrangement, a counterparty (such as a brokerage firm) holds and vote the underlying shares. However, some companies complain that hedge funds use these “stealth swaps” to avoid filing Schedule 13D reports to disclose equity stakes over 5 percent.

In a federal lawsuit in New York, CSX argued that the dissidents should have disclosed sooner the 12.3 percent stake that they maintain through equity swaps. The rail company asked U.S. Judge Lewis Kaplan to bar the dissidents’ slate and force them to sell part of their holdings. According to court documents, TCI began entering into swap arrangements in October 2006 and had amassed swaps that related to 10.5 percent of CSX's stock by January 2007. The dissidents ultimately negotiated swaps with eight investment banks.

Kaplan asked the Securities and Executive Commission for its opinion on the issue. In a June 4 letter, Brian Breheny, deputy director of the Division of Corporation Finance, concluded that a swap arrangement between a hedge fund and a counterparty is not sufficient to trigger Schedule 13D obligations. “In our view, the conclusion is not changed by the presence of economic or business incentives that the counterparty may have to vote the shares as the other party wishes,” Breheny wrote. He also noted that SEC is considering whether to propose a rule to address swaps.

The Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association weighed in for the dissidents, arguing in a court brief that subjecting swaps to 13D rules would “chill” the market for those instruments. Two University of Texas law professors who have jointly written articles on securities lending and “empty voting” issues reached opposite conclusions on the issue. Professor Bernard Black asserted in a court filing that no disclosure was required, while Professor Henry T.C. Hu concluded that disclosure should be mandated in those cases where there is a clear intent to influence the company, The New York Times reported.

On June 11, Judge Kaplan ruled that the dissidents had violated federal disclosure rules, but he said he was barred by U.S. appeals court precedent from blocking the funds from voting at CSX’s annual meeting. The judge criticized the dissidents for trying “to justify their actions on the basis of formalistic legal arguments even when it is apparent that they have defeated the purpose of the law.”

CSX responded to the court’s decision with a June 12 letter urging shareholders to “consider … these violations and the patterns of deceptive conduct from the TCI Group--including false testimony under oath--as you evaluate whether the TCI Group nominees are fit to serve on the board of a U.S. public company.”

Upcoming Proxy Contests
While the traditional U.S. proxy season is winding down, there still are several notable proxy fights on the horizon. Billionaire investor Carl Icahn is seeking board seats at pharmaceutical firm Biogen Idec, trying to replace three of the four directors up for re-election to the classified board at the company’s June 19 meeting. Icahn argues that current leadership at Cambridge, Mass.-based Biogen deliberately failed to find an acquirer for the company despite saying it was in search of a buyer.

Shareholders at Yahoo are scheduled to vote on Icahn’s 10-nominee slate on Aug. 1. He is seeking to unseat the entire board, including CEO Jerry Yang. The diverse dissident slate includes Harvard Law School professor and shareholder activist Lucian Bebchuk, and Internet billionaire Mark Cuban, owner of the Dallas Mavericks basketball team. The proxy challenge is aimed at forcing Yahoo to resume negotiations with Microsoft, which withdrew a $44.6 billion takeover offer in May.

Several contests will go to a vote at smaller firms in the coming weeks. Investors Ronald Gutstein and Scott Frisoli are seeking two seats at the June 16 meeting of Keweenaw Land Association, an Ironwood, Mich.-based hardwood logging firm. The following day, shareholders in Mahwah, N.J.-based footwear manufacturer Footstar will vote on a two-seat challenge by hedge fund Outpoint Group. Former Team Financial board member Keith Edquist is seeking three seats at the Overland Park, Kan.-based banking firm’s June 17 meeting. On June 20, former TVI directors will challenge management for two board seats. TVI, based in Glenn Dale, Md., manufactures emergency first-responder equipment and collapsible shelters for industry and the military.

Ted Allen contributed to this article.