Csx Corp. v. Children's Inv. Fund Management (Uk)

• Decision Date: 11 June 2008
• Docket Number: No. 08 Civ. 2764(LAK).,08 Civ. 2764(LAK).
• Citation: 562 F.Supp.2d 511
• Parties: CSX CORPORATION, Plaintiff, v. THE CHILDREN'S INVESTMENT FUND MANAGEMENT (UK) LLP, et al., Defendants, v. Michael J. Ward, Additional Counterclaim Defendant.
• Court: U.S. District Court — Southern District of New York

562 F.Supp.2d 511

CSX CORPORATION, Plaintiff, v. THE CHILDREN'S INVESTMENT FUND MANAGEMENT (UK) LLP, et al., Defendants, v. Michael J. Ward, Additional Counterclaim Defendant.

No. 08 Civ. 2764(LAK).

United States District Court, S.D. New York.

June 11, 2008.

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Rory O. Millson, Francis P. Barron, David R. Marriott, Cravath, Swaine & Moore LLP, for Plaintiff and Additional Counterclaim Defendant.

Howard O. Godnick, Michael E. Swartz, Yocheved Cohen, Schulte Roth & Zabel LLP, for Defendants The Children's Investment Fund Management (UK) LLP, The Children's Investment Fund Management (Cayman) LTD, The Children's Investment Manager Fund, Christopher Hohn, and Snehal Amin.

Peter Duffy Doyle, Andrew M. Genser, Kirkland & Ellis LLP, for Defendants 3G Capital Partners Ltd., 3G Capital Partners, L.P., 3G Fund, LP and Alexandre Behring (a/k/a Alexandre Behring Costa).

David M. Becker, Edward J. Rosen, Michael D. Dayan, Cleary Gottlieb Steen & Hamilton LLP, for Amici Curiae International Swaps and Derivatives Associations, Inc. and Securities Industry and Financial Markets Association.

Adam H. Offenhartz, Aric H. Wu, J. Ross Wallin, LaShann M. DeArcey, Gibson Dunn & Crutcher LLP, for Amicus Curiae Coalition of Private Investment Companies.

Brian Breheny, Division of Corporation Finance, for Amicus Curiae Division of Corporation Finance, Securities and Exchange Commission.

OPINION

LEWIS A. KAPLAN, District Judge.

Table of Contents

                Background...................................................................... 518
                      I. Parties ............................................................... 518
                

                     II. Proceedings ........................................................... 518
                    III. Total Return Swaps .................................................... 519
                         A.  The Basics ........................................................ 519
                         B.  The Purposes of TRSs............................................... 521
                             1. Short Parties .................................................. 521
                             2. Long Parties ................................................... 522
                     IV. The Events of Mid-2006 Until Late 2007 ................................ 523
                         A.  TCI................................................................ 523
                             1. TCI Develops a Position in CSX ................................. 523
                             2. TCI's Leveraged Buyout Proposal................................. 524
                             3. January through March 2007 ..................................... 525
                             4. TCI Begins Preparing for a Proxy Fight ......................... 526
                             5. CSX Files Its 10-Q and Discloses that TCI Has an Economic
                                  Position...................................................... 527
                             6. Proxy Fight Preparations continue .............................. 528
                             7. TCI Concentrates its Swaps in Deutsche Bank and Citigroup ...... 529
                             8. TCI Enters into Agreements with Two Director-Nominees........... 530
                         B.  3G ................................................................ 530
                             1. 3G Develops a Position in CSX .................................. 530
                             2. 3G Resumes Buying CSX Shares.................................... 531
                             3. 3G's Hart-Scott-Rodino Filing .................................. 531
                             4. 3G Sells Some Shares ........................................... 532
                             5. 3G Rebuilds its Investment in CSX .............................. 532
                             6. 3G Prepares for a Proxy Fight .................................. 532
                         C.  The Relationship Between TCI and 3G................................ 532
                             1. 3G Learns of TCI's Interest in CSX ............................. 533
                             2. 3G and TCI Discuss Activity in CSX ............................. 533
                             3. 3G and TCI Meet on March 29..................................... 534
                             4. TCI and 3G Inquire of CSX Regarding a Shareholder Vote.......... 534
                             5. The August-September Pause ..................................... 534
                             6. TCI and 3G Ramp Up Again ....................................... 535
                             7. TCI and 3G Search for Director Nominees ........................ 535
                      V. The Proxy Contest ..................................................... 535
                         A.  TCI and 3G Disclose the Formation of a Formal Group................ 535
                         B.  The Group Files Its Notice of Intent to Nominate Directors ........ 536
                         C.  CSX and TCI Attempt to Negotiate a Resolution...................... 536
                         D.  CSX and The Group File Proxy Materials ............................ 537
                             1. CSX ............................................................ 537
                             2. The Group's Proxy Statement .................................... 537
                     VI. The Positions of the Parties .......................................... 538
                Discussion ..................................................................... 538
                      I. Section 13(d) ......................................................... 538
                         A.  Beneficial Ownership .............................................. 539
                             1. Rule 13d-3(a) .................................................. 541
                                a. Investment Power ............................................ 541
                                b. Voting Power ................................................ 543
                                c. Synthesis ................................................... 545
                             2. Rule 13d-3(b) .................................................. 548
                         B.  Group Formation ................................................... 552
                         C.  Alleged Schedule 13D Deficiencies ................................. 555
                             1. Legal Standard ................................................. 555
                             2. Beneficial Ownership ........................................... 555
                             3. Group Formation ................................................ 555
                

                             4. Contracts, Arrangements, Understandings, or Relationships....... 556
                             5. Plans or Proposals.............................................. 556
                     II. Section 14(a).......................................................... 556
                    III. Section 20(a).......................................................... 558
                     IV. Notice of Proposed Director Nominee and Bylaw Amendment................ 559
                      V. Counterclaims..................................  ...................... 561
                         A.  Section 14(a) Claim................................................ 561
                             1. Target Awards Under the Long Term Incentive Plan................ 561
                             2. The CSX Board's Compliance With CSX Insider Trading Policy ..... 562
                             3. CSX's Belief that TCI Seeks Effective Control................... 564
                             4. TCI's Proposal Regarding Capital Expenditures................... 564
                             5. The CSX-TCI Negotiations........................................ 565
                             6. CSX's Purposes in Bringing this Lawsuit......................... 566
                         B.  Declaratory Relief Regarding By-Laws Amendment..................... 566
                     VI. Relief................................................................. 567
                         A.  Success on the Merits.............................................. 568
                         B.  Share Sterilization................................................ 568
                             1. Irreparable Harm................................................ 568
                             2. Deterrence...................................................... 571
                         C.  Enjoining Further Disclosure Violations............................ 572
                             1. Probability of Future Violations................................ 572
                             2. Irreparable Injury.............................................. 573
                Conclusion ..................................................................... 573
                Appendix 1 ..................................................................... 574
                Appendix 2 ..................................................................... 583
                

Some people deliberately go close to the line dividing legal from illegal if they see a sufficient opportunity for profit in doing so. A few cross that line and, if caught, seek to justify their actions on the basis of formalistic arguments even when it is apparent that they have defeated the purpose of the law.

This is such a case. The defendants— two hedge funds that seek extraordinary gain, sometimes through "shareholder activism"—amassed a large economic position in CSX Corporation ("CSX"), one of the nation's largest railroads. They did so for the purpose of causing CSX to behave in a manner that they hoped would lead to a rise in the value of their holdings. And there is nothing wrong with that. But they did so in close coordination with each other and without making the public disclosure required of 5 percent shareholders and groups by the Williams Act, a statute that was enacted to ensure that other shareholders are informed of such accumulations and arrangements. They now have launched a proxy fight that, if successful, would result in their having substantial influence and perhaps practical working control of CSX.

Defendants seek to defend their secret accumulation of interests in CSX by invoking what they assert is the letter of the law. Much of their position in CSX was in the form of total return equity swaps' ("TRSs"), a type of derivative that gave defendants substantially all of the indicia of stock ownership save the formal legal right to vote the shares. In consequence they argue, they did not beneficially own the shares referenced by the swaps and thus were not obliged to disclose sooner or more fully than they did. In a like vein, they contend...