The history of playground fights and corporate takeovers shows that winners don't have to play nice.
Add another chapter to that book with the announcement Wednesday that two activist hedge funds, represented by Schulte Roth & Zabel and Kirkland & Ellis, succeeded in getting four of their five nominees elected to CSX Corp.'s 12-person board. (The vote was held at the company's June 25 annual meeting, but the preliminary results were not announced until Wednesday.)
Last month those funds had been verbally bludgeoned by Manhattan federal district Judge Lewis Kaplan for their aggressive tactics in the takeover battle for railroad company CSX. Kaplan berated the funds -- The Children's Investment Fund (TCI) and 3G Capital Partners Ltd. -- for "crossing the line" dividing legal from illegal activity and then using "formalistic arguments" to justify their bad acts.
In this case of first impression, Kaplan disapproved of the funds' tactic of hiding huge positions they had taken in CSX by using derivative swaps.
CSX, represented by Rory Millson and Francis Barron of Cravath, Swaine & Moore, had sued the funds to try to stop them from voting the shares that they acquired through positions called "total return equity swaps." Cravath claimed the funds had violated the Williams Act, which governs takeovers, by failing to make a public disclosure of these swaps. The swaps allowed the funds to control large blocks of CSX stock without actually owning the stock.
The defendants countered that they didn't have to make any disclosure until they converted these swaps into more than 5 percent of CSX's stock.
British fund TCI is represented by Howard Godnick of Schulte Roth; 3G, a Cayman Island firm, is advised by Kirkland's Peter Doyle.
The funds were able to proceed with their proxy fight because Judge Kaplan regretfully concluded that despite the defendants' wrongdoing, he did not have the power to stop them from voting their shares. Only the Securities and Exchange Commission or the Justice Department could do that. In the end, he simply ordered an injunction barring them from violating the law in the future.
"We're pleased with the result that the shareholders have chosen to elect four members of our slate and ensure CSX can be the best train company in America," Schulte Roth's Godnick told the AmLaw Daily. Cravath's Barron declined to comment.
CSX hasn't given up, though. The company is appealing the remedy portion of Kaplan's decision to the 2nd Circuit.
The hedge funds are appealing other aspects of the ruling. In their brief, they object to Kaplan's ruling that swap ownership confers beneficial stock ownership.
Oral arguments are set for July 25.
