July 29, 2008

CSX/TCI: Vote Miscounting?

I think we are gonna hear about more and more about this type of thing, shareholders complaining – and eventually litigating – over how votes are counted at shareholders’ meetings. In the hotly contested deal involving CSX Corp. and The Children’s Investment Fund (TCI) – which resulted in a big Delaware court decision last month – there continues to be fighting over the vote count. Here is an entry from the WSJ Deal Journal:

Remember the 2000 election? The vote recounts. The hanging chads. The bitter opponents and bad feelings that lasted for years? Here is your chance to relive it all–at least, if you’re a merger wonk.

The playing field this time is the continuing battle between railroad CSX and activist hedge fund The Children’s Investment Fund. TCI, you might remember, earned a mixed win in its battle for five CSX board seats: it appeared to win four seats, but a court found that TCI and its ally 3G Capital Partners broke SEC rules by failing to disclose their intentions while amassing a 19% stake in the company, 12% of which was through complex derivatives known as total return swaps.

The current slapfight comes down to those four board seats: CSX still is counting the ballots from the June 25 voting. Several hundred million votes have been cast and, according the company, CSX’s independent vote supervisor has found fault with votes cast electronically. (So they aren’t literal hanging chads, but metaphorical ones). People familiar with the company say the miscounted votes put TCI nominee Chris Hohn a little more than 800,000 votes ahead–a margin of around one-third of 1%.

So the company is pressing on with the vote recounts, while TCI is criticizing CSX for dragging its feet and maintains that the recount won’t change the totals. CSX had said it would announce the final results by this Friday; that looks very unlikely. At the same time, CSX has a lawsuit pending before the U.S. Court of Appeals for the Second Circuit to “sterilize” some of the votes and depose the TCI-nominated directors; the court’s decision is expected Aug. 25.

Now RiskMetrics–the former ISS–has jumped into the fray. The shareholder advisory firm previously supported four of TCI’s slate of five nominees and today released a statement blasting what it called “a poorly conceived ’scorched earth’ defense strategy” by CSX.

The statement is of a piece with the continuing war between CSX and RiskMetrics. When RiskMetrics supported the board nominees, CSX complained that the proxy firm made an “attempt to dismiss the opinion of the federal court” and “substituted its own uninformed judgment for the court’s conclusions.” RiskMetrics fired back that it would question the integrity of the hedge funds’ nominees only if they faced criminal charges for perjury. CSX shot back that it was “a low standard” for membership on the board of a publicly traded company.

The timing of RiskMetrics’ latest volley is peculiar since it appears to have a dissenting voice in its own house: former Securities and Exchange Commissioner Arthur Levitt. Levitt sits on the board of RiskMetrics. On July 18, he also joined several other former SEC chairmen in filing a friend-of-the court brief supporting CSX in the lawsuit against TCI.