CSX Takes Fight to Shareholders -- WSJ
February 15 2017 - 3:02AM
Dow Jones News
Railroad company reveals activist investor's demands and calls
for vote
By David Benoit, Jacquie McNish and Paul Ziobro
CSX Corp. turned the tables on an activist investor that
threatened a fight for control of the railroad operator's board,
revealing the investor's demands and calling for its shareholders
to vote on the matter.
The company said it made a written offer last week to hire
railroad veteran Hunter Harrison as chief executive and to allow
activist investor Paul Hilal to nominate five directors. But the
company said talks fell apart over Mr. Hilal's demand that CSX
reimburse his fund, Mantle Ridge LP, for "exceptionally unusual if
not unprecedented" compensation benefits for Mr. Harrison.
The company said it would ask shareholders to vote on Mr.
Harrison's employment terms and Mantle Ridge's reimbursement
request at a meeting that hasn't yet been scheduled. They will also
vote on Messrs. Harrison and Hilal's proposed governance
arrangements.
CSX's board doesn't plan to take a side ahead of the vote. After
the special meeting, the company will call its normal annual
meeting to elect directors.
In a statement, Mantle Ridge and Mr. Harrison said that while
they had hoped to reach a deal with the company, "we appreciate
that CSX shareholders will have the opportunity to make their
voices heard."
CSX's direct appeal to shareholders is an unusual show of
resistance and a role reversal of sorts for an activist target.
Activist investors often ask shareholders to choose a new slate of
directors when their demands aren't met. Companies, for their part,
usually try to avoid shareholder votes, which are viewed as risky,
expensive and time-consuming distractions.
But several large institutional investors, including State
Street Global Advisors, recently have complained that companies are
bowing to activists without getting input from other
shareholders.
CSX's board has come under pressure from shareholders to hire
Mr. Harrison. The company's stock has risen more than 30% since The
Wall Street Journal first reported on his campaign with Mr.
Hilal.
The company Tuesday took the rare step of disclosing the pair's
demands in detail.
Mantle Ridge, CSX said, agreed to compensate Mr. Harrison, 72
years old, for benefits he surrendered when he resigned as CEO of
Canadian Pacific Railway Ltd. last month to join forces with Mr.
Hilal. When he left CP, Mr. Harrison gave up some $89 million in
compensation and unspecified tax benefits.
CSX said Mantle Ridge wants CSX to take on those costs. The
total compensation package, including reimbursement for sacrificed
pay and stock options, could exceed $300 million, the company
said.
In a letter to Mr. Hilal last week, CSX said the proposed
benefit package for Mr. Harrison would benefit Mantle Ridge "at the
expense of all other CSX shareholders."
CSX is at odds with Messrs. Hilal and Harrison over other
matters, including allowing an independent physician, chosen by
CSX's board, to review Mr. Harrison's medical records. Mr. Harrison
in 2015 took several weeks off from running CP to recover from
surgery and a bout of pneumonia.
CSX, based in Jacksonville, Fla., has been negotiating for
nearly four weeks primarily with Mr. Hilal. Mr. Harrison has met
twice with CSX directors to outline his plans for overhauling the
railroad.
The timing of the activist's approach was opportune. CSX said
Tuesday that it was close to announcing a successor to current CEO
Michael Ward when Mr. Harrison approached the company and said he
was interested in running CSX in a bid to turnaround a North
American railroad operator for the fourth time.
At CP and other railroads he has led, Mr. Harrison deployed his
precision railroad strategy that runs fewer trains and sticks to
tighter schedules, while implementing tight cost controls. The
strategy helped drive down CP's operating ratio, a closely watched
measure of expenses as a percentage of revenue.
On Tuesday, CSX updated the risk factors in its annual report,
warning that an activist campaign could disrupt operations, divert
management attention from running the company and lead to
significant legal and other fees.
--Maria Armental contributed to this article.
Corrections & Amplifications The record date for a special
shareholders meeting that CSX Corp. seeks to schedule is March 16.
An earlier version of this article incorrectly stated the meeting
was scheduled for that date. Also, the investor's proposal is to
install a new CEO and take six board seats. An earlier version
incorrectly stated the investor sought five seats. (Feb. 14,
2017)
Write to David Benoit at david.benoit@wsj.com, Jacquie McNish at
Jacquie.McNish@wsj.com and Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
February 15, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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