Monday, June 02, 2008

Tampa Bay Business Journal: Warning lights shine as railroad giant CSX engages in proxy fight

Friday, May 23, 2008

Tampa Bay Business Journal - by Tony Quesada Jacksonville Business Journal Staff Writer

JACKSONVILLE -- The campaign rhetoric is getting more biting, and the expenses are reaching tens of millions of dollars as the time for voting draws near.

The deadline for those with a stake in CSX Corp. to decide the class 1 railroad's fate is June 25, the day of its rescheduled annual meeting in New Orleans.

If the activist hedge funds The Children's Investment Fund Management LLP and 3G Capital Partners Ltd. succeed in getting five members on CSX's 12-member board and gaining approval for various shareholder proposals, it will likely change the company's culture. The hedge funds are seeking greater shareholder ability to call special meetings for any reason and to nullify bylaws changes made recently by the board.

CSX (NYSE: CSX) warns TCI/3G's ideas for maximizing shareholder value threaten the company's long-term health.

CSX and TCI/3G have released proxy filings almost daily in advance of the railroad's annual meeting. Each carefully crafted and legally reviewed filing is geared toward convincing shareholders that the company is or isn't on track and that each side's plans will secure CSX's future while the others will derail it.

"In many ways a proxy contest is like a political campaign," said Andrew Siegel, an investor relations consultant with Joele Frank Wilkinson Brimmer Katcher, a nationally known firm retained by CSX.

Whoever prevails, the proxy fight over the Fortune 500 company will be among the most expensive involving a railroad. CSX had spent about $10 million related to the proxy fight -- expenses not normally incurred for a typical annual shareholder meeting -- and expects to spend about $22 million total before it's done, according to its proxy statement. That includes up to $1.25 million being paid to Innisfree M&A Inc. as a proxy solicitation consultant, but it doesn't include the salaries and wages of employees who are working on the proxy fight.

TCI/3G's proxy bill also is substantial. It has retained D.F. King & Co. as its proxy solicitor for up $1.5 million. It estimates it will spend $9 million for services such as legal, accounting, public relations, advertising, printing and transportation. As of April 28, it had spent $3.5 million.
Filings flowing

In every year since 1995, CSX has made one proxy filing before its annual meeting; in 2006, the company filed a preliminary proxy statement 13 days before the final one. This year -- actually beginning in December with proxy soliciting materials filed by TCI/3G -- there have been 43 proxy filings by the two sides combined as of May 20.

Keeping the filings flowing, even at the risk of inducing proxy fatigue among shareholders, is typical, said Eric Jackson, president of Naples-based activist investment fund IronFire Capital LLC. "Most shareholders tend to mail in the last thing they receive."

Besides making multiple filings, both sides are counting on their proxy solicitation consultants to help them press their messages with large proxy holders.

Many institutional shareholders, because they hold many companies' stock and lack the resources to research every proxy contest in a given year, rely on proxy advisory companies to help them decide.

Under the shadow of litigation

CSX filed a lawsuit in the U.S. District Court for the Southern District of New York alleging violations of federal securities laws. The lawsuit alleges TCI and 3G have employed swap agreements to evade certain filing requirements and that TCI's disclosures regarding its 11.5 percent swap position in CSX shares are materially misleading because they don't disclose that swap counterparties intend to vote their shares with TCI.

CSX cited concerns for voting integrity being undermined by alleged violations as a reason for rescheduling its annual shareholder meeting from early May to June 25.

TCI and 3G responded with a countersuit accusing CSX of misleading shareholders and violating its corporate insider trading policy. Alleged violations include setting "spring-loaded" stock grants for "CSX insiders" while knowing material nonpublic information.

A bench trial was scheduled to begin May 21, and a decision could be rendered before CSX's annual meeting. The outcome could have implications on future reporting requirements, said Keith Gottfried of Blank Rome LLP in Washington.

Besides rescheduling its annual meeting, CSX is holding it in a rail yard in New Orleans, a departure from the usual hotel conference space. Company spokesman Garrick Francis said CSX is looking to showcase the work that's been done there recovering from Katrina's damage. 265-2220

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