On May 22, in a packed, hushed courtroom in Manhattan, British hedge fund maverick Christopher Hohn made a rare public appearance. The intensely private 41-year-old founder and managing partner of The Children’s Investment Fund Management (UK), a London-based hedge fund firm with more than $15 billion under management, was being grilled by lawyers for CSX Corp., which is suing TCI and a fellow shareholder, New York–based hedge fund 3G Capital Partners. The firms have nominated five directors for election to CSX’s 12-member board at the June 25 annual general meeting, and the U.S. railway and ports company is fighting back.
For more than an hour, Hohn, a boyish-looking graduate of Harvard Business School, parried questions as the legal team tried to prove CSX’s allegations that TCI and 3G violated securities regulations by using swaps and swap arrangements to build up a stake in the company in excess of 5 percent while avoiding outright stock purchases, thereby evading Securities and Exchange Commission reporting requirements. CSX also charges that TCI and 3G had covertly pursued a common investment strategy in CSX — which requires disclosure as well — before they announced on December 19 that they had formed an investment group. CSX, which filed the suit on March 17, wants the court to order corrective disclosure from TCI and 3G and prevent them from voting their shares.
“We regret that the company has made this into an apparent contest,” Hohn tells Institutional Investor. “We are merely seeking to exercise our right to seek board membership by a democratic shareholder vote.” A ruling is expected in mid-June.
A CSX win would hobble Hohn’s plans and deal TCI a rare defeat. Since launching the firm’s flagship fund in January 2004, Hohn has gained a reputation as an intrepid shareholder activist, rising to prominence in 2005 by opposing Deutsche Börse’s bid for the London Stock Exchange and spurring the breakup and sale of giant Dutch bank ABN Amro in 2007. This spring TCI has been grabbing headlines for pressuring the Japanese government to allow it to double its 9.9 percent stake in Electric Power Development Co. (J-Power), one of Japan’s largest energy producers. In April, Japan’s Trade and Finance ministries blocked TCI’s request, citing national security concerns, but J-Power has since said publicly it may consider appointing outside directors in 2009.
The lawsuit is the latest salvo in a proxy battle between CSX and TCI that has been raging for eight months. TCI and 3G denied the allegations in a counterclaim filed last month, asserting that the rail company had sought to prevent shareholders “from even considering proposals that would strengthen CSX’s corporate governance.” At its core, the dispute is over who will shape the company’s future. TCI, which employs a deep-value, fundamental approach, has challenged CSX to separate the roles of chairman and CEO, nominate more directors with transportation experience and boost earnings by releveraging the balance sheet to buy back more shares.
CSX says that’s shortsighted, but in an interview with II, chairman and CEO Michael Ward was at pains to defend the railway’s strategic plans. “We have said publicly that we are going to increase our dividend, do share buybacks and invest for the future,” he says. “We were doing that before TCI arrived, and we are going to continue to do that. But TCI has not made that happen.”
Neither side disputes CSX’s financial health. The company appears poised to deliver greater profitability in the months ahead, given the price of oil, which is making the transportation of goods by rail much cheaper than trucking. CSX says its shareholders — including TCI and 3G, which together own 8.7 percent of the stock and have an additional 12.3 percent of exposure through swap arrangements — can look forward to 18 to 21 percent compound annual growth in earnings per share, the target for 2008 to 2010. CSX’s share price soared 57.8 percent, to $69, in the first five months of 2008.
TCI says its nominees will vote independently and points out that, with the notable exception of Hohn, they all have considerable experience as transportation executives. In addition to 3G’s managing director, Alexandre Behring, former CEO of América Latina Logística, Latin America’s largest independent railroad operator, they include a former chairman of the Illinois Central Railroad, the managing director of the London Underground and the former chairman of Northwest Airlines. “CSX wants to paint the picture that this will be a board at war if our slate of directors gets approved,” Hohn says. “But these are very serious, thoughtful people.”
CSX just received a blow. In a June 4 letter, SEC official Brian Breheny wrote that he did not believe the swap transactions TCI executed with bank counterparties made the hedge fund firm the beneficial owner — with voting powers — of those shares. Even if CSX wins, the ultimate power to decide the company’s future lies not with the court but with the largest shareholders — including Deutsche Bank, Citigroup, Barclays Global Investors and State Street Corp. The vote still belongs to them.
