Wall Street LAWYER. U.S. District Court Rules against Hedge Fund in CSX Corp. v. The Children s Investment Fund et al.

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1 LAWYER Securities in the Electronic Age Wall Street CONTINUED ON PAGE 3 August 2008 n Volume 12 n Issue 8 U.S. District Court Rules against Hedge Fund in CSX Corp. v. The Children s Investment Fund et al. Holds that Equity Swaps Were Used to Avoid Disclosure under Rule 13d-3(b) of the Exchange Act B y K e i t h E. G o t t f r i e d & B a r r y H. G e n k i n Keith E. Gottfried is a partner with the law firm Blank Rome LLP. Mr. Gottfried represents public companies and activist shareholders in connection with proxy contests, consent solicitations and unsolicited takeover bids. He also assists public companies in assessing their vulnerabilities to activist shareholders and unsolicited takeover bids and in the implementation of various strategies to ameliorate such vulnerabilities. Barry H. Genkin is a senior partner with the law firm Blank Rome LLP. He also chairs the firm s Business Department and serves as a member of its Executive Committee. Mr. Genkin s practice includes shareholder activism, mergers and acquisitions, capital raising activities and corporate governance. Mr. Genkin is a former Special Counsel at the SEC where he handled numerous proxy fights and other contested solicitations. Contact: gottfried@blankrome.com or genkin@blankrome.com. On June 11, the U.S. District Court for the Southern District of New York issued its much anticipated decision in CSX Corporation v. The Children s Investment Fund Management (UK) LLP, et al. 1 In an 115-page decision by Judge Lewis A. Kaplan, the District Court wasted no time in taking the defendants to task for actions the District Court ultimately decided were violations of Section 13(d) of the Exchange Act. The disdain of the District Court for the defendants conduct was made evident in the opinion s first sentence: 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 Article REPRINT Reprinted from the Wall Street Lawyer. Copyright 2008 Thomson Reuters/West. For more information about this publication please visit ARTICLE REPRINT

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3 August 2008 n Volume 12 n Issue 8 it is apparent that they have defeated the purpose of the law. This is such a case. 2 In this case, CSX Corp., one of the nation s largest railroad and transportation companies, was pitted against two investment firms, The Children s Investment Fund (TCI) and 3G Fund L.P. (3G). Among the questions that faced the District Court was a question of first impression with respect to whether the defendants, as the holders of cash-settled equity total return swap positions, are, pursuant to Rule 13d-3(a) of the Securities Exchange Act of 1934 (Exchange Act), the beneficial owners of the referenced stock held by the short counterparties and, accordingly, required to report such beneficial ownership on a Schedule 13D disclosure statement. While the District Court indicated that it was somewhat persuaded that the answer should be yes, ultimately, the District Court was able to avoid directly addressing that question. 3 Subscribing to the tenet that courts should decide no more than what is essential to resolve their cases, the District Court declined to rule on the legal question of whether the holder of a cash-settled equity total return swap is the beneficial owner under Rule 13d-3(a) of the Exchange Act. Rather, the District Court held that the defendants should be deemed the beneficial owners of the referenced shares pursuant to Rule 13d-3(b) of the Exchange Act because they had used the equity swap transactions as part of a plan or scheme to prevent the vesting of beneficial ownership and to avoid the disclosure that would have been required had they bought shares of CSX s common stock outright. 4 The District Court also held that the defendants had formed a group within the meaning of Section 13(d) months before they had filed their Schedule 13D disclosure statement. 5 Notwithstanding that the District Court held that the defendants had violated Section 13(d), the District Court declined to award CSX all the injunctive relief it had sought. While the District Court did enjoin the defendants from further Section 13(d) violations, it did not grant CSX s request to sterilize the CSX shares held by the defendants that had been acquired during a period of non-compliance with Section 13(d) thereby preventing the defendants from voting their CSX shares at CSX s 2008 annual meeting of shareholders. The District Court concluded that it was foreclosed as a matter of law from granting such injunctive relief, but that, if it could, it would have exercised its discretion to do so. 6 Section 13(d) of the Exchange Act Section 13(d), which was enacted as part of the Williams Act amendments to the Federal securities laws, imposes disclosure and reporting requirements with respect to attempts to acquire control of publicly-traded companies. The purpose of Section 13(d) is to provide investors with adequate disclosure with respect to the accumulation of blocks of stock representing in excess of 5% of a public company s registered equity securities. Pursuant to Rule 13d-1, as promulgated by the Securities and Exchange Commission (SEC), under Section 13(d), any person, who acquires, directly or indirectly, beneficial ownership of more than 5% of an issuer s registered equity securities, is generally required to file with the SEC a statement on Schedule 13D containing information regarding the following: (i) the identity and background of the acquiring person; (ii) the source and amount of funds or other consideration used to purchase the issuer s securities; (iii) the purpose of the transaction, including any plans or proposals which such person may have to effect a change in the present board of directors or management of the issuer, effect a change in the issuer s charter or bylaws, impede the acquisition of control of the issuer by any person, liquidate the issuer, sell its assets to or merge it with any other persons, or make any other major change in its business or corporate structure; (iv) the number of shares of the securities which are beneficially owned by such person; and (v) any contracts, arrangements, understandings or relationships with respect to such securities. 7 The SEC s rules also require the Schedule 13D be filed no later than 10 days from the time that the acquiring person became the beneficial owner of more than 5% of the issuer s registered equity securities and that a copy of the Schedule 13D also be sent to the issuer at its principal executive offices thomson reuters/west

4 Wall Street Lawyer If any material change occurs in the facts set forth in the Schedule 13D, including, but not limited to, any material increase or decrease in the percentage of the class beneficially owned, the person or persons who were required to file the Schedule 13D are required to promptly file or cause to be filed with the SEC an amendment disclosing that change. 9 Pursuant to Rule 13d-2 of the Exchange Act, an acquisition or disposition of beneficial ownership of securities in an amount equal to 1% or more of the issuer s registered equity securities is deemed material for these purposes; acquisitions or dispositions of less than those amounts may be material, depending upon the facts and circumstances. 10 Litigation involving Section 13(d) Litigation involving Section 13(d) is not uncommon between issuers and activist shareholders, and such litigation, while costly, is one of the various quivers in an issuer s arsenal that it may utilize in its attempt to defend itself against a contested solicitation brought by a hedge fund or other activist shareholder. The issues that are typically the subject of Section 13(d) litigation relate to, among others: (i) whether or not the shareholder fully reported its beneficial ownership of the issuer s shares when it was otherwise required to file a Schedule 13D; (ii) whether or not the shareholder timely filed its Schedule 13D; (iii) whether or not the shareholder engaged in an arrangement to prevent the vesting of beneficial ownership as apart of a plan or scheme to avoid the disclosure that would have otherwise been required under Section 13(d); (iv) whether or not the shareholder is a member of a group that should have its ownership aggregated for purposes of meeting the more than 5% beneficial ownership threshold that triggers the requirement to file a Schedule 13D; (v) whether or not the shareholder has made less than accurate and complete disclosure in its Schedule 13D about its holdings, plans and motivations in violation of Section 13(d); and (vi) whether or not the shareholder has made materially false and/or misleading disclosures in its Schedule 13D. CSX Corp., in its complaint, touched on most of these issues. 11 Background In December 2007, TCI and 3G notified CSX of their intention to initiate a proxy contest against CSX pursuant to which they intended to solicit proxies for use at CSX s 2008 annual meeting of shareholders to, among other things, elect their nominees to five of the 12 seats on the CSX board of directors and to amend CSX s bylaws to permit holders of 15% of CSX shares to call a special meeting of shareholders at any time for any purpose permissible under the laws of Virginia, which is CSX s state of incorporation. In connection with that proxy contest, on December 19, 2007, TCI and 3G jointly filed a Schedule 13D disclosure statement. In the Schedule 13D, TCI reported as beneficially owning 17,796,998 CSX shares, constituting approximately 4.2% of the CSX shares outstanding and 3G reported as beneficially owning 17,232,854 CSX shares, constituting approximately 4.1% of the CSX shares outstanding. In addition, TCI had economic exposure to an additional 11% of the CSX shares outstanding as a result of being a party to various total return equity swap arrangements with bank counterparties that held such CSX shares. The equity swap arrangements were disclosed in the Schedule 13D pursuant to Item 6, which requires disclosure of agreements, plans or arrangements regarding the issuer s shares. However, the CSX shares referenced by the equity swap arrangements were not included in TCI s reported beneficial ownership and TCI specifically disclaimed beneficial ownership of such CSX shares in the Schedule 13D. 3G had economic exposure to an additional 0.8% of CSX s outstanding shares as a result of similar equity swap arrangements that it was a party to and, like TCI, also did not include such shares in its reported beneficial ownership of CSX shares and specifically disclaimed beneficial ownership of such CSX shares in the Schedule 13D. According to the Schedule 13D, the impetus for the filing of the Schedule 13D was TCI s execution of a letter agreement on December 12, 2007 with 3G to coordinate certain of their efforts with regard to the proposal of certain actions and/or transactions to CSX. 12 By execution of the letter agree Thomson Reuters/west

5 August 2008 n Volume 12 n Issue 8 ment, and assuming that a group was not earlier formed within the meaning of Section 13(d)(3) of the Exchange Act, and leaving aside the CSX shares referenced in the total return equity swaps, TCI and 3G would be deemed to have formed a group as of December 12, 2007 due to their combined beneficial ownership of CSX shares being in excess of 5%, thus necessitating the filing of the Schedule 13D. On March 17, CSX filed suit against TCI and 3G and alleged in its complaint, 13 among other allegations, that the Schedule 13D jointly filed by the defendants on December 19, was false and misleading because, in reporting their beneficial ownership of the issuer s securities, both TCI and 3G did not include the CSX shares referenced by the equity swap arrangements and disclaimed beneficial ownership of such CSX shares. 15 CSX alleged in its complaint that TCI was the beneficial owner of the shares referenced in the swaps for at least 10 months before it filed its Schedule 13D on December 19, 2007 and, accordingly, violated Section 13(d) of the Exchange Act by waiting until that date to file its Schedule 13D. 16 Among the arguments made by CSX in support of its allegation were the following: 17 The referenced shares were acquired with the purpose or effect of changing or influencing control of CSX; The referenced shares were part of a plan or scheme to evade the reporting requirements of the securities laws; The understandings and relationship that existed between CSX and the swap counterparties, including that the shares will be voted in accordance with the defendants wishes and that the shares will be delivered to the defendants upon settlement of the swaps, give the defendants beneficial ownership of the CSX shares by way of indirect voting or investment power; and The defendants could convert the referenced shares into direct ownership any time because of an understanding between the defendants and the counterparties. In its complaint, CSX also alleged that the representation in the Schedule 13D that a group was formed on December 12, 2007 was false and misleading and alleged that a group was formed no later than November 6, By way of remedies, CSX sought various forms of injunctive relief, the most significant of which was an order from the District Court that would have prevented the defendants from voting CSX shares acquired during a period during which they were not in compliance with Section 13(d). 19 The District Court s Opinion In reaching its opinion, the District Court addressed several important questions, including: Does the holder of a cash-settled equity total return swap arrangement beneficially own the referenced stock held by the bank counterparty pursuant to Rule 13d-3(a) of the Exchange Act? In its opinion, the District Court dedicates close to 20 pages discussing and analyzing the concept of beneficial ownership as used in Rule 13d-3(a) of the Exchange Act and whether, pursuant to Rule 13d-3(a), TCI, as the holder of a cash-settled equity total return swap arrangement, had beneficial ownership of the CSX shares referenced by the swap arrangement and held by various bank counterparties. 20 Under Rule 13d-3(a), which was promulgated by the SEC, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares voting power which includes the power to vote, or to direct the voting of such security; and/or investment power which includes the power to dispose, or to direct the disposition of, such security. The District Court noted that the SEC intended Rule 13d-3(a) to provide a broad definition of beneficial ownership so as to ensure disclosure from all those persons who have the ability to change or influence control of the issuer. 21 Analyzing all of the relevant facts and circumstances, and taking into account the legislative and regulatory history 2008 thomson reuters/west

6 Wall Street Lawyer of Rule 13d-3 that suggests that the concept of beneficial ownership be construed broadly, the District Court noted that there were substantial reasons for concluding that TCI was the beneficial owner of the CSX shares held as hedges by its short counterparties given that TCI had, in the District Court s view, the economic ability to cause its short counterparties to buy and sell the CSX shares they held. 22 As the District Court noted: [t]he definition of beneficial ownership in Rule 13d-3(a) is very broad, as is appropriate to its object of ensuring disclosure from all... persons who have the ability [even] to... influence control. It does not confine itself to the mere possession of the legal right to vote [or direct the acquisition or disposition of] securities, but looks instead to all of the facts and circumstances to identify situations in which one even has the ability to influence the voting, purchase or sale decisions of its counterparties by legal, economic, or other [ ] means. 23 TCI argued against a finding that it had beneficial ownership of the CSX shares, based on the fact that it had no legal right to direct its short counterparties to buy or sell shares or to vote them in any particular way. 24 TCI was joined in this view by the SEC s Division of Corporation Finance which had been invited by the District Court to submit its views as amicus curiae on two questions, including whether an investment fund had beneficial ownership, pursuant to Rule 13d-3 of the Exchange Act, of the issuer s shares held by counterparty banks. In its response letter to the District Court, the SEC expressed its disagreement with CSX s argument that, regardless of whether TCI had any arrangement, understanding or relationship with any of the counterparty banks concerning voting power or investment power, TCI was the beneficial owner of shares held by the counterparty banks because it had voting power and/or investment power over those shares by virtue of certain economic incentives. 25 The SEC offered the following opposing view to the effect that the mere presence of economic incentives that a counterparty may have to vote the shares as the other party wishes or to dispose of the shares to the other party does not equate to voting power and investment power as used in Rule 13d-3 and, accordingly, is insufficient to create beneficial ownership under Rule 13d-3: 26 As a general matter, economic or business incentives, in contrast to some contract, arrangement, understanding, or relationship concerning voting power or investment power, between the parties to an equity swap, are not sufficient to create beneficial ownership under Rule 13d-3. We start with the recognition that a standard cash-settled equity swap agreement, in and of itself, does not confer on a party, here the investment fund, any voting power or investment power over the shares a counterparty purchases to hedge its position. In our view, that conclusion is not changed by the presence of economic or business incentives that the counterparty may have to vote the shares as the other party wishes or to dispose of the shares to the other party. While such incentives may exist, when the counterparty chooses to act in these areas in circumstances where it is unconstrained by either legal rights held by the other party or by any understanding, arrangement, or restricting relationship with the other party, it is acting independently and in its own economic interests. The more reasonable interpretation of the terms voting power and investment power as used in the Rule, which are based on the concept of the actual authority to vote or dispose or the authority to direct the voting or disposition, is that they are not satisfied merely by the presence of economic incentives. The SEC stated that it believed that requiring an investor to include in its beneficial ownership under Rule 13d-3 shares held by a counterparty to a derivative transaction such as a total return equity swap absent unusual circumstances, would be novel and would create significant uncertainties for investors who have used equity swaps in accor Thomson Reuters/west

7 August 2008 n Volume 12 n Issue 8 dance with accepted market practices understood to be based on reasonably well-settled law. 27 The District Court viewed the SEC s position as being inconsistent with the SEC s past statements with respect to the breadth of the definition of beneficial ownership and the focus on TCI s legal rights under its swap contracts as emphasizing form over substance. 28 As the District Court noted: [t]he securities markets operate in the real world, not in a law school contracts classroom. Any determination of beneficial ownership that failed to take account of the practical realities of at world would be open to the gravest abuse... Moreover, this Court is inclined to the view that the Cassandra-like predictions of dire consequences of holding that TCI has beneficial ownership under Rule 13d-(a) have been exaggerated. 29 Notwithstanding an extensive, thoughtful and well written discussion by the District Court on its views as to the breadth of Rule 13d-3(a) and how persuaded it was that TCI had beneficial ownership under Rule 13d-3(a) of the CSX shares referenced by the equity swaps, as noted above, the District Court, clinging to the position that courts should decide no more than is essential to resolve their cases, declined to decide the beneficial ownership question under Rule 13d-3(a). 30 Instead, as discussed below, the District Court opted to find that TCI had created and used the equity swaps, at least in part, for the purpose of preventing the vesting of beneficial ownership of the CSX shares in TCI and as part of a plan or scheme to evade the reporting requirements of Section 13(d). Accordingly, beneficial ownership of the CSX shares referenced by the equity swaps was triggered pursuant to Rule 13d-3(b). 31 Assuming the holder of a cash-settled equity total return swap arrangement is not the beneficial holder of the referenced stock held by the bank counterparty pursuant to Rule 13d- 3(a) of the Exchange Act, should such holder nevertheless be deemed a beneficial owner pursuant to Rule 13d-3(b)? The purpose of Section 13(d) of the Exchange Act is to alert shareholders of large, accumulations of securities which might represent a potential shift in corporate control. Rule 13d-3(b) provides that any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement, or device with the purpose or effect of divesting such person of beneficial ownership of a security or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13(d) or (g) of the Exchange Act shall be deemed for purposes of such sections to be the beneficial owner of such security. As the District Court noted, Rule 13d- 3(b) furthers the purpose of Section 13(d) by preventing investors from circumventing Rule 13d-3 with arrangements designed to avoid disclosure obligations by preventing the vesting of beneficial ownership as defined elsewhere in other words, where there is accumulation of securities by any means with a potential shift in corporate control, but no beneficial ownership. As noted above, the SEC s Division of Corporation Finance had been invited by the District Court to submit its views as amicus curiae on two questions. The first of these questions and the SEC s response thereto was previously discussed. The second of these questions was what mental state is required to establish the existence of a plan or scheme within the meaning of Rule 13d-3(b). In response, the SEC expressed the view that the long party s underlying motive for entering into the swap transaction would not generally be a basis for determining whether there was a plan or scheme to evade the reporting requirements of Section 13(d), unless the long party had entered into the swap arrangement with the intent of creating a false appearance of non-ownership of a security: 32 We believe that the mental state contemplated by the word plan or scheme to evade is generally the intent to enter into an arrangement that creates a false 2008 thomson reuters/west

8 Wall Street Lawyer appearance. Thus a person who enters into a swap would be a beneficial owner under Rule 13d-3(b) if it were determined that the person did so with the intent to create the false appearance of non-ownership of a security. The significant consideration is not the person s motive but rather that the person knew of or was reckless in not knowing that the transaction would create a false appearance. In this regard, taking steps with the motive of avoiding reporting and disclosure generally is not a violation of Section 13(d) unless the steps create a false appearance. The SEC refused to rule out the possibility that there may arise a situation where a plan or scheme to evade the beneficial ownership provisions of Rule 13d-3 could exist in the absence of any evidence suggesting a false appearance or sham transaction. 33 However, notwithstanding the acceptance of this possibility, the SEC opined that a person who does nothing more than enter into an equity swap should not be found to have engaged in an evasion of the reporting requirements of Section 13(d). The District Court, while attempting to find a path for agreeing with the SEC s standard for applying Rule 13d-3(b), applied its own gloss to the SEC s position and refused to allow Rule 13d-3(b) to be limited to situations where the actor intended to create a false appearance of non-ownership. 34 Taking note of the goal of Section 13(d) to alert the marketplace to large accumulations of securities which might represent a potential shift in corporate control, the District Court interpreted Rule 13d-3(b) as creating the following standard: Put another way, Rule 13d-3(b) applies where one enters into a transaction with the intent to create the false appearance that there is no large accumulation of securities that might have a potential for shifting corporate control by evading the disclosure requirements of Section 13(d) or (g) through preventing the vesting of beneficial ownership in the actor. 35 With the foregoing as the standard, the District Court held that each of the elements of Rule 13d- 3(b) were satisfied, that the evidence that TCI created and used the equity swaps, at least in part, for the purpose of preventing the vesting of beneficial ownership of CSX shares in TCI and as part of a plan or scheme to evade the reporting requirements of Section 13(d) was overwhelming 36 and that TCI had concealed precisely what Section 13(d) was intended to force into the open, 37 the disclosure of a large accumulation of CSX s shares that might have the potential for shifting corporate control. Did the defendants make prompt disclosure after they formed a group within the meaning of Section 13(d) of the Exchange Act? In addition to the allegations discussed above relating to interpreting Rule 13d-3, CSX also alleged violations of Section 13(d) of the Exchange Act with respect to when a group should be deemed to have been formed, in this case, between TCI and 3G. 38 While noting that, in cases where the timing of the formation of a group is in dispute, the evidence is usually circumstantial, the District Court held that the evidence showed that TCI and 3G formed a group many months before they filed their disclosure statement on Schedule 13D. 39 The District Court was not persuaded by the defendants arguments that TCI and 3G had not entered into a written agreement. As the District Court noted: Their protestations to the contrary rest in no small measure on the premise that they avoided forming a group by starting conversations by stating that they were not forming a group and by avoiding entry into a written agreement. But the Exchange Act is concerned with substance, not incantations and formalities Thomson Reuters/west

9 August 2008 n Volume 12 n Issue 8 Remedies for violations of Section 13(d) While much of the CSX Corp. decision focused on the issue of beneficial ownership under Rule 13d-3, the District Court s decision is also noteworthy for its discussion of the limited nature of the remedies currently available to an issuer for violations of Section 13(d). The Second Circuit has long held that while an issuer does not have a private cause of action for monetary damages for violations of Section 13(d), an issuer does have a private cause of action and standing to sue for injunctive relief for such violations. 41 Accordingly, it is not a surprise that CSX, in its complaint against TCI, did not seek monetary damages for violations of Section 13(d), only various forms of injunctive relief. 42 Among the injunctive relief sought by CSX from the District Court was an order to prevent TCI from voting at the 2008 annual meeting of CSX shareholders the CSX shares that it had acquired during the time that it was not in compliance with Section 13(d). CSX had argued that its shareholders would be harmed irreparably without such relief and that sterilization of the stock was required to avoid permitting defendants to retain the fruits of their violations and to deter future violations. 43 However, while holding that TCI had violated Section 13(d), the District Court concluded that it was foreclosed as a matter of law from enjoining TCI from voting its CSX shares acquired during a time when it was not in compliance with Section 13(d). 44 The District Court noted its frustration with its limited ability to order injunctive relief for violations of Section 13(d) and indicated that if it were free to so enjoin TCI from voting its CSX shares, it would have exercised its discretion to do so. 45 With respect to any penalties for defendants violations of Section 13(d), the District Court indicated that such relief must come by way of appropriate action by the SEC or the Department of Justice. 46 The Appeals Following the issuance of the District Court s opinion, both CSX and TCI filed appeals with the Federal Court of Appeals for the Second Circuit. CSX, in its appeal, is asking the Second Circuit to opine as to whether federal courts can enforce Section 13(d) by entering a sterilization order that would prevent shareholders from voting shares of the issuer that they had acquired during the time that they were not in compliance with Section 13(d). TCI and 3G, in their appeal, are asking the Second Circuit to review the District Court s holdings that TCI should be deemed the beneficial owner of CSX shares referenced by its cash-settled total return equity swaps, and that TCI and 3G had formed a disclosure-triggering group for purposes of Section 13(d) no later than February 13, The defendants are also seeking to have the Second Circuit overturn the permanent injunction issued by the District Court that prohibits the defendants from violating the disclosure requirements of the Exchange Act with respect to any future transaction. CSX had unsuccessfully sought to have the Second Circuit issue an injunction to hold the votes on the CSX shares held by TCI and 3G in escrow pending the outcome of the appeal. On June 25, CSX held its 2008 annual meeting of shareholders and then adjourned the meeting to allow time for the independent inspector of election to tabulate the voting results. Three weeks after votes had been cast at the annual meeting, CSX announced that, based on the preliminary draft report of the independent inspector of election, four of TCI s five nominees were elected by the shareholders to CSX s 12-person Board of Directors. On July 25, CSX announced that it had asked two of TCI s nominees to join its Board but that it would await the certification of the annual meeting s vote results and its appeal to the Second Circuit before seating any more of TCI s nominees. While the vote certification process is expected to be completed in early August, whether or not any more of TCI s nominees ever get seated as members of the CSX Board, may ultimately depend on the outcome of CSX s appeal to the Second Circuit and its ability to convince the Second Circuit to void a percentage of the votes cast by TCI and 3G thomson reuters/west

10 Wall Street Lawyer Conclusion While litigation brought by an issuer in connection with a proxy contest may have a variety of strategic purposes and may seek various forms of relief, typically injunctive, many issuers look to the litigation option as a way to force a resolution of the proxy contest by creating another battle front on which to engage the activist shareholder and, accordingly, to increase the time and cost to the activist shareholder of continuing its proxy contest. Clearly, if the activist shareholder was faced with the prospect of Section 13(d) litigation that, if decided unfavorably, could result in it being forced to pay substantial compensatory, and perhaps punitive, exemplary and/or special, damages, the activist shareholder may be inclined to consider either (i) full and strict compliance with the requirements of Section 13(d), particularly with respect to its completion and timely filing of its Schedule 13D, such that litigation against it is less likely, as least on the basis of a violation of Section 13(d); or (ii) once litigation has been commenced, an early resolution of the proxy contest to forestall a court decision on the issue of relief. On the other hand, as CSX noted in one of its submissions in support of injunctive relief pending the outcome of its appeal seeking to have a sterilization order entered with respect to a percentage of the defendants CSX shares: Moreover, ruling that federal courts lack the power to enforce Section 13(d) by entering a sterilization order would render compliance essentially voluntary. If the only available remedy for egregious violations such as this is corrective disclosure, there will be little reason to comply with Section 13(d). Would-be violators will be secure in the knowledge that, if caught, they will only be told to announce their scheme s success in a Schedule 13D. 47 The SEC has in the past made a similar argument in support of equitable relief going beyond further disclosure noting that... corrective disclosure is no real deterrent, since it merely requires compliance with the original statutory disclosure obligation and leaves the violator with the profitable fruits on his illegal conduct. 48 Unfortunately for issuers, Section 13(d) does not provide any express right for issuers or even the shareholders that Section 13(d) was enacted to protect to bring a private cause of action seeking monetary damages to redress violations of Section 13(d). Nor is there is an express right for issuers to seek injunctive relief for violations of Section 13(d). While issuers have, on numerous occasions, sought to have federal courts infer that a private cause of action to seek such remedies exists for violations of Section 13(d), these efforts, at least with respect to the right to seek monetary damages, have generally not been successful. While the federal courts have been somewhat more receptive to inferring the right of issuers to seek injunctive relief for violations of Section 13(d), assuming that the issuer can demonstrate that it would be harmed irreparably in the absence of such relief, the District Court s opinion in CSX Corp. and its view that it was foreclosed as a matter of law from enjoining defendants from voting their CSX shares obtained during a period of non-compliance with Section 13(d), reminds us how limited such injunctive relief is likely to be. Whether or not the availability of such injunctive relief continues to remain so limited will depend on the outcome of CSX s appeal to the Second Circuit. Pursuant to an expedited hearing schedule, the Second Circuit is expected to begin hearing oral arguments from CSX and TCI/3G sometime in late August. The views expressed in this article are the authors and do not necessarily represent the views of the partners of Blank Rome LLP or the firm as a whole. This article is intended to provide a general introductory overview of the issues discussed and is not intended to provide a complete analysis of such issues. This article is not intended to provide legal advice or to establish an attorney-client relationship and readers should not act upon the information contained in it without professional counsel. This article may be considered attorney advertising in some jurisdictions. The hiring of an attorney is an important decision that should not be based solely upon advertisements Thomson Reuters/west

11 August 2008 n Volume 12 n Issue 8 Notes 1. See CSX Corporation v. The Children s Investment 2764 (LAK) (S.D.N.Y. June 11, 2008). 2. See CSX Corporation v. The Children s Investment 2764 (LAK) (S.D.N.Y. June 11, 2008), at Id. at Rule 13d-3(b) under the Exchange Act provides in substance that one who creates an arrangement that prevents the vesting of beneficial ownership as part of a plan or scheme to avoid the disclosure that would have been required if the actor had bought the stock outright is deemed to be a beneficial owner of those shares. 5. See CSX Corporation v. The Children s Investment 2764 (LAK) (S.D.N.Y. June 11, 2008), at Id. at See Rule 13d-1 under the Securities Exchange Act of 1934, as amended. 8. Id. 9. See Rule 13d-2 under the Securities Exchange Act of 1934, as amended. 10. Id. 11. See Complaint of CSX Corporation in CSX Corporation v. The Children s Investment Fund Management (UK) LLP, et al. 12. See Item 6 of Schedule 13D of The Children s Investment Fund Management (UK) LLP, et al. filed with the SEC (December 19, 2007). 13. Id. at See Schedule 13D of The Children s Investment Fund Management (UK) LLP, et al. filed with the SEC (December 19, 2007). 15. See Complaint of CSX Corporation in CSX Corporation v. The Children s Investment Fund Management (UK) LLP, et al. at Id. at Id. at See Complaint of CSX Corporation in CSX Corporation v. The Children s Investment Fund Management (UK) LLP, et al. at See Complaint of CSX Corporation in CSX Corporation v. The Children s Investment Fund Management (UK) LLP, et al. at See CSX Corporation v. The Children s Investment 2764 (LAK) (S.D.N.Y. June 11, 2008), at Id. at Id. at Id. at Id. at Amicus curiae letter of the SEC Division of Corporation Finance filed in CSX Corp. v. The Children s Investment Fund Management et al., No. 08-Civ (S.D.N.Y.), at 2 (June 4, 2008). 26. Id. at Id. at See CSX Corporation v. The Children s Investment 2764 (LAK) (S.D.N.Y. June 11, 2008), at Id. at Id. at Id. at Amicus curiae letter of the SEC Division of Corporation Finance filed in CSX Corp. v. The Children s Investment Fund Management et al., No. 08-Civ (S.D.N.Y.), at 3 (June 4, 2008). 33. Id. at See CSX Corporation v. The Children s Investment 2764 (LAK) (S.D.N.Y. June 11, 2008), at Id. at Id. at Id. at See Complaint of CSX Corporation in CSX Corporation v. The Children s Investment Fund Management (UK) LLP, et al. at See CSX Corporation v. The Children s Investment 2764 (LAK) (S.D.N.Y. June 11, 2008), at Id. at See GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971), cert. denied 406 U.S. 910 (1972). 42. See Complaint of CSX Corp. in CSX Corp. v. The Children s Investment Fund Management (UK) LLP, et al., No. 08-Civ (S.D.N.Y. filed March 17, 2008), at p Id. at Id. at Id. at Id. at Reply Memorandum of CSX Corporation in Support of Plaintiff-Appellant s Expedited Appeal and/or Interim Relief to Preserve the Status Quo, at Brief for SEC as Amicus Curiae Supporting Power of Court to Grant Equitable relief in Section 13(d) Actions, General Steel Indus., Inc. v. Walco Nat l Corp., No (8 th Cir. 1981) thomson reuters/west 11