UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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CSX CORPORATION,
Plaintiff,
v.
THE CHILDREN’S INVESTMENT FUND
MANAGEMENT (UK) LLP, THE CHILDREN’S
INVESTMENT FUND MANAGEMENT
(CAYMAN) LTD., THE CHILDREN’S
INVESTMENT MASTER FUND, 3G CAPITAL
PARTNERS LTD., 3G CAPITAL PARTNERS, L.P.,
3G FUND, L.P., CHRISTOPHER HOHN, SNEHAL
AMIN, AND ALEXANDRE BEHRING, A/K/A
ALEXANDRE BEHRING COSTA,
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Defendants. :
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THE CHILDREN’S INVESTMENT MASTER
FUND,
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Counterclaim and Third-
Party Plaintiff,
ECF CASE
08 Civ. 02764 (LAK) (KNF)
DEFENDANTS’ POST-TRIAL REPLY
TO THE PROPOSED FINDINGS OF
FACT AND CONCLUSIONS OF LAW
OF CSX CORPORATION AND
MICHAEL WARD REGARDING
COUNTERCLAIMS AND THIRD
PARTY CLAIMS
v.
CSX CORPORATION AND MICHAEL J. WARD,
Counterclaim and Third-
Party Defendants.
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3G CAPITAL PARTNERS LTD., 3G CAPITAL
PARTNERS, L.P. AND 3G FUND, L.P.
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Counterclaim Plaintiffs, :
v. :
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CSX CORPORATION AND MICHAEL WARD, :
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Counterclaim Defendants. :
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Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 1 of 18
Although CSX criticizes Defendants for “announc[ing] [their counterclaims] in a
press release when filed,” CSX fails to note that it also announced the commencement of this
lawsuit in a press release -- one that, as discussed below, contained a series of false statements
designed to paint Defendants in a negative light and thus influence the proxy contest. It is
therefore ironic that CSX charges Defendants with asserting counterclaims for reasons “entirely
driven by the proxy contest” when influencing the outcome of the proxy contest is precisely why
CSX brought suit, albeit under the pretext of seeking to provide shareholders with full
information. In any event, try as CSX might to dismiss Defendants counterclaims as “entirely
without merit,” CSX cannot explain away the underhanded dealings and false statements that
they have liberally employed in their year-long scorched earth effort to keep the incumbent board
intact.
Those underhanded dealings and false statements are supported by the ample
discovery record in this case. And Defendants’ decision to rely on that carefully developed
record, rather than cross examine certain CSX witnesses live at trial -- a decision with which
CSX for some reason takes issue -- is irrelevant. That Defendants recognized that live cross-
examination of their witnesses was unnecessary given the damning admissions they obtained in
deposition does nothing to bolster CSX’s defense to the Counterclaims.
Accordingly, Defendants respectfully request that this Court grant the declaratory
and injunctive relief requested.
I. THE CSX PROXY’S DESCRIPTION OF THE 2007-2009 LTIP IS FALSE AND
MISLEADING.
In its proposed findings of fact and conclusions of law, CSX attempts to excuse
its failure to provide full disclosure to shareholders by fundamentally mischaracterizing the
nature of its LTIP grants. CSX claims that LTIP grants “are not grants of stock” and “are not
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 2 of 18
3
like options, where the price on the grant date is determinative of the value of the option.” (CSX
Proposed Findings of Fact and Conclusions of Law Regarding Counterclaims and Third Party
Claims (“CSX CC PFF”) ¶¶ 3, 19.) From those erroneous predicates, CSX concludes that “the
relationship between the price of CSX stock on the day of the original target grant of
performance units and the ultimate payout of CSX stock three years later is attenuated at best”
and, accordingly, that CSX need not have disclosed that those LTIP grants were made at a time
when the CSX was in possession of material non-public information. (CSX CC PFF ¶ 19.)
CSX’s premise, however, ignores both economic reality and CSX’s own proxy
statement. When the LTIP grants are properly understood, the direct relationship between the
price of CSX stock on the day of the original target grant and the ultimate payout of CSX stock
becomes clear. That understanding also leads to the conclusion that that the ultimate payout
under the LTIP was artificially enhanced by the timing of the release of material non-public
information. And yet those facts are wholly absent from CSX’s proxy statement.
First, contrary to CSX’s claim that LTIP grants are “not grants of stock,” the
performance units that the Compensation Committee establishes under the LTIP translate, on a
one-to-one basis, into shares of CSX common stock. (JX 5 at 27.) For example, if Michael
Ward earned all of the 92,347 performance units that he was granted when the 2007-2009 LTIP
was established, he would be awarded 92,347 shares of CSX common stock. The fact that the
number of shares that may eventually be awarded is subject to adjustment -- i.e. the shares are
not fully vested -- does not change the simple fact that the LTIP performance unit grants are, for
all intents and purposes, grants of stock.
Second, the price of CSX stock on the grant date is determinative of the value of
the LTIP grants and is directly and materially related to the ultimate payout of CSX stock that
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 3 of 18
4
LTIP participants receive. As an initial matter, in stark contrast to CSX’s assertion, its Proxy
Statement calculates the value of the 2007-2009 LTIP using the price of CSX stock on the grant
date -- May 1, 2007. The CSX Proxy states that, with respect to the value of the 2007-2009
LTIP, “[s]ince the awards are paid in shares, all values are based on the grant date fair value of
shares” -- that is, the average of the high and low price of CSX stock -- “which could potentially
be earned.” (JX 5 at 34 n.1.)
Perhaps more importantly, however, the price of CSX stock on the date of the
grant determines the number of shares that can potentially be earned. That is so because, under
the LTIP, the target performance grants that the Compensation Committee approves are dollar
values, which are then translated into a number of performance units based on the trading price
of CSX stock on the grant date. The lower the trading price of CSX stock on the grant date, the
more performance units each participant receives.
To take CSX’s own example, Michael Ward was awarded 92,347 performance
units, which was based on a $4 million performance grant divided by $43.32, the average of the
high and low trading prices on May 1, 2007. If the LTIP grants had been awarded on May 8,
2007, however, Mr. Ward’s $4 million performance grant would have to be divided by $46.52,
for a total of 85,984 performance units. Mr. Ward received 6,363 -- or 7.4 percent -- more
performance units by virtue of the May 1, 2007 grant date. Based on the closing price of CSX
stock on May 27, 2008, those additional 6,363 performance units are worth $428,802.57. But
Mr. Ward, like every other plan participant, also has the potential to earn up to 240 percent of his
performance units. Thus, those 6,363 additional performance units may become as many as
15,271 shares of CSX stock. Again, using the closing price of CSX stock on May 27, 2008,
15,271 shares of CSX stock would be worth $1,029,112.69.
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 4 of 18
5
As this example makes clear, to characterize the relationship between the price of
CSX stock on the day of the original target grant and the ultimate payout of CSX stock as
“attenuated,” (CSX CC PFF ¶ 19), is disingenuous. And given the importance of this
relationship, CSX’s failure to disclose even the fact that its May 1, 2007 grants were made while
in possession of material non-public information is untenable. For one thing, that information
would have allowed a reasonable investor to appreciate fully the chart describing the 2007-2009
LTIP that appears on page 36 of the CSX Proxy. (JX 5 at 36.)
That chart purports to describe the number of shares of stock -- and the value of
that stock -- that Mr. Ward and four other CSX officers may earn under the 2007-2009 LTIP.
But CSX’s representation of the “Grant Date Fair Value of Stock and Option Awards” -- which
is the “target” number of shares multiplied by the grant date stock price -- understates the true
value of the “target” number of shares. Again, using Mr. Ward as an example, the chart
represents that Mr. Ward’s 92,347 target shares have a value of $4,000,010. In reality, scarcely a
week later, those 92,347 shares were actually worth $4,295,982.44. Moreover, because CSX
fails to disclose that it possessed material information that was to be announced one week after
the LTIP grant date, CSX shareholders are not given the information necessary to come to their
own conclusions about the true value of the 2007-2009 LTIP.
The law requires more transparency than that. In the context of stock options, the
SEC requires that companies disclose whether the grant date for stock options is set “in
coordination with the release of material non-public information,” or whether the company has
timed “its release of material non-public information for the purpose of affecting the value of
executive compensation.” Executive Compensation and Related Person Disclosure, Exchange
Act Release Nos. 33-8732A, 34-54302A, 71 Fed. Reg. 53,158, 53,164 (Sept. 8, 2006). As
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 5 of 18
6
discussed above, the LTIP grants are similar to options in that the price of CSX stock on the
grant date is determinative of the value of the LTIP grants and is directly related to the ultimate
payout of CSX stock.1
Indeed, regardless of the propriety of setting LTIP grants while in possession of
material non-public information, a corporation has a duty to disclose that fact. In a recent case
from the Delaware Court of Chancery, In re Tyson Foods, Inc. Consolidated Shareholder Litig.,
the court rejected the notion that because “a preternaturally-attentive shareholder might have
focused in upon the grant dates, matched them to Tyson press releases, and inferred from the
relationship between them that the directors intended to issue what amounted to in the money
options,” the corporation was not required to disclose those facts in its proxy statement. No.
1106-CC, 2007 WL 2351071, at *4 (Del. Ch. Aug. 15, 2007).
Equally unavailing is CSX’s argument that it need not disclose that the LTIP
grants were made while the company was in possession of material non-public information
because the LTIP participants’ ultimate award is contingent on the corporation’s performance,
subject to further reduction, or that participants may not receive any award at all. (CSX CC PFF
¶¶ 11-13.) That argument proves too much, as it would permit CSX to omit any discussion at all
of the LTIP in its compensation discussion and analysis. But even CSX was unwilling to go that
far. When asked whether the contingent nature of the grant of performance units meant that
CSX did not have to disclose material information about the LTIP, Ellen Fitzsimmons, CSX’s
30(b)(6) designee on matters related to the LTIP, testified that it was “not CSX’s position that
1 This similarity to stock options also brings the LTIP grants within the ambit of CSX’s insider trading policy.
(See JX 25 (defining transaction to include “the sale of shares obtained from an exercise of options”).)
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 6 of 18
7
information [about the LTIP] can be withheld from public filings.” (DX 154 (Fitzsimmons Dep.
167:13-168:3).)
Indeed, the ultimate value of stock options also is contingent on a corporation’s
performance, the vesting schedule, and other factors. Yet the SEC still requires that all material
facts, including whether the grant date of the stock options was set in coordination with the
release of material non-public information, be disclosed to shareholders.
Lastly, CSX asserts that it was not in possession of material nonpublic
information on the LTIP grant date because the Board supposedly did not give final approval to
implementing the May 8 Announcements until May 7, 2007. But the absence of a “formal”
resolution approving the May 8 Announcements is irrelevant. CSX cannot dispute that
management had planned to recommend each of the items disclosed in the May 8
Announcements well before the May 1, 2007 CSX Board meeting. (DX 22 at 8.) And CSX
management also knew that the Board was all but certain to approve its recommendations. In
fact, Mr. Ward could not recall a single instance in which the Board rejected one of
management’s recommendation. (DX 154 (Ward Dep. 280:7-11).) So confident was CSX
management of board approval of the May 8 Announcements, that David Baggs started
preparing for their public release two to three weeks before that date. (DX 154 (Baggs Dep.
164:9-22).) CSX management assumed its recommendations would be approved. (DX 154
(Richardson Dep. 148:6-18).) In those circumstances, as CSX’s Compensation Committee
Chairman has acknowledged, it would have been inappropriate insider trading for a member of
CSX management to trade in CSX stock as of May 1, 2007. (DX 154 (Richardson Dep. 149:12-
151:7).)
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 7 of 18
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Accordingly, the Court should conclude that CSX’s proxy statement fails to
provide full and complete disclosure of all material facts of the 2007-2009 LTIP.
II. THE CSX PROXY FALSELY DESCRIBES CSX’S DISCRETIONARY GRANT
OF 5,000 SHARES OF STOCK TO DIRECTORS.
The CSX Proxy includes just a single sentence about the discretionary stock grant
to directors: “On December 15, 2007, each non-employee director also received a grant of 5,000
shares of CSX stock, which had a market value of $217,625 (based on an average of the high and
low price per share on the date of grant of $43.525) and was required to be deferred.” (JX 5 at
15.) In fact, the discretionary grants were not made on December 15, 2007, but on December 12,
2007. (DX-66 at 8.) The Proxy does not disclose that this grant was made during the CSX
“blackout period.” (JX 5 at 15.) CSX’s only response is to argue that it had been CSX’s practice
to make such a grant of shares in December. (CSX CC PFF at 28.) But that is no excuse for
failing to appropriately disclose all of the material facts related to the grant of stock.
Similarly, CSX asserts, without support, that the grant is not a purchase, sale or
other transaction covered by its Insider Trading Policy. (CSX CC PFF at 29). But CSX’s
Insider Trading Policy prohibits directors from engaging in “transactions” in CSX securities
during the blackout period, and defines “transactions” broadly to “include not only open market
purchases and sales, including those through a broker, but also the sale of shares obtained from
an exercise of options, including in connection with a cashless exercise option” and covers
securities within Company employee benefit plans. (JX 25.) Notably, the definition does not
limit “transactions” to the examples in the definition, but rather states that covered transactions
“include” those examples. Id. A Board of Directors who exercises its discretion to award its
members company stock engages in a “transaction” within this definition, which specifically
contemplates transactions that are not made on the open market or through a broker. This
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 8 of 18
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conclusion is further buttressed by the fact that the grants were reported to the SEC on Form 4,
(see, e.g., sec.gov/Archives/edgar/data/277948/000027794807000106/xslF345X02/edgar.xml),
which is the form on which insiders are required to report all transactions in the Issuer's
securities. 17 C.F.R. § 240.16a-3(g)(1).
Moreover because Directors are covered persons under the policy they have
special pre-clearance obligations for all transactions, whether within or without the blackout
period. (DX 25 at 3.) There is no evidence that these pre-clearance procedures were complied
with, which would have required the Directors to receive clearance from the Board’s Presiding
Director. (Id. at 4.) Even then, pre approval would be conditioned on the Directors not actually
being aware of any material non-public information (Id. at 3.) Of course, during a blackout
period, awareness of material non-public information is presumed.
CSX’s proxy statement fails to disclose that its directors awarded themselves
stock during the blackout period and in violation of CSX’s Insider Trading Policy. Accordingly,
the Court should conclude that CSX’s description of the December 2007 grant of 5,000 shares of
CSX stock to directors was materially incomplete.
III. CSX’S ADDITIONAL FALSE PROXY MATERIALS
In its post-trial submission CSX seeks to justify its willful smear campaign
against TCI and 3G as reflecting “accurate” statements of the “honestly held” opinions of CSX
management. (CSX CC PFF at 11.) In so doing, CSX simply repeats the offending statements
and does nothing to refute the evidence, cited in TCI/3G’s Post-Trial Brief, that shows they are
neither accurate nor honestly held. CSX’s abject failure to address that evidence is yet further
proof that those false statements were willful smears made in the service of CSX’s larger goal of
ensuring that “zero dissidents” are elected to its Board.
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 9 of 18
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A. The Ward Editorial
In his March 11, 2008 editorial, Michael Ward, CSX’s CEO, broadly and falsely
accused TCI of advocating capital expenditure policies for CSX that would jeopardize rail safety.
Mr. Ward’s motive was obvious: to cast TCI as an irresponsible, “short sighted” investor that
poses a danger to the public and shareholders, in the hopes of scaring shareholders into voting
for CSX’s entrenched slate of directors at the upcoming annual meeting. (See PX 184.)
As demonstrated in Defendants' post-trial brief, Mr. Ward’s public
characterization of TCI’s position on capital expenditures and safety is directly contrary to TCI’s
actual position, and Mr. Ward knew that on March 11 when he published his editorial, as well as
when he swore to his witness statement in this litigation. Mr. Ward defends his preposterous
distortion by cutely parsing each phrase while ignoring the larger accusation that they comprise.
(See CSX CC PFF at 11-12.) Thus, CSX cites to evidence that TCI in fact advocated a freeze of
capital spending and for the increase in leverage by CSX as supportive of the accuracy and good
faith of Mr. Ward’s statements. (Id.) CSX then argues that Mr. Ward in fact believes the non-
controversial point in his editorial that “railroads require constant investment to ensure high
levels of safety ….” (Id.)
But CSX glosses over the fact that the editorial repeatedly juxtaposes those two
statements and others like them and thereby implies that TCI is advocating for proposals that will
jeopardize safety.2 In fact, as Mr. Ward knew throughout, TCI never advocated for freezing
2 For example, Mr. Ward’s editorial includes the following statements:
“It would be a real shame if we let the rail system fall prey to the whims of short-sighted investors”
“One hedge fund, for example, actually demanded that CSX freeze investment in its rail system and pile on
large amounts of debt on the eve of the recent credit crisis. Keep in mind, the CSX railroad delivers essential
(Continued…)
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 10 of 18
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capital spending or increasing leverage in a manner that would adversely affect railroad safety.
Rather, TCI advocated for freezing capital spending only on railroad expansion -- not on safety
and maintenance of existing assets. (See PX 147 at 13 (stating that CSX should “[f]reeze growth
investment until the fate of the re-regulation bill is known”).) And TCI never suggested that its
proposal for increasing leverage (a proposal that CSX has in fact adopted in response to TCI’s
public statements, (DX 154 (Richardson Dep. 127:6-19))), should come at the expense of
spending on maintenance or safety. Indeed, just days prior to Mr. Ward’s calumnious editorial
was published, Mr. Ward sat next to Mr. Amin of TCI when he testified to Congress that TCI has
“never, . . . nor would we ever suggest that railroads cut any spending in maintenance or safety.”
(DX 82 at 109).
The Ward editorial is particularly galling because one of TCI’s primary criticisms
of CSX management has been its unacceptable safety record. Indeed, in its post-trial brief and
repeatedly throughout this litigation, CSX quotes Mr. Amin out of context as stating that “you
don’t need cap-ex to pull up handbrakes” in order to suggest that TCI is indifferent to or cavalier
about rail safety. (See, e.g., CSX CC PFF at ¶ 88.) In fact, that oft-quoted phrase is part of a
larger speech that Mr. Amin gave at the May 8, 2007 Bear Stearns Investor Conference, in which
he criticized CSX’s safety record and called on management to address the problem. In that
speech, Mr. Amin stated:
products to two thirds of the American population . . . . By their very nature, railroads require constant
investment to ensure high levels of safety … ”
“A common criticism of corporate managers is that they ‘live for the quarter.’ But that is precisely what some
activist investors are demanding of railroads, regardless of the impact on safety . . . .”
(PX 184.)
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 11 of 18
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We believe that, relative to potential, these rails are failing, and it’s costing all of
us. It’s costing labor because the trains aren’t as safe as they should be. It’s
costing shippers because the trains aren’t as reliable as they should be. It’s
costing shareholders because the trains aren’t as profitable as they should be.
. . . .
Why does CSX say that safety is a cap-ex issue when it has 50% more human
caused accidents per mile than Norfolk Southern? And when 17 of the 20 safety
faults that the FRA highlighted were human or management failures. You don’t
need cap-ex to pull up hand brakes in rail cars.
(PX 96). Thus, the record evidence shows that, contrary to his denial, Mr. Ward willfully and
cynically mischaracterized TCI’s positions on capital spending and leverage as posing a threat to
rail safety in order to defend his entrenched position and clubby board at CSX. Promulgation of
such falsity in the context of a proxy solicitation should not be tolerated.
B. The March 17 Press Release
As the evidence cited in TCI and 3G’s Post-Trial brief demonstrates, CSX’s
March 17 Press Release announcing this lawsuit contained a number of knowingly false
statements.
First, Defendants demonstrated that CSX’s claim that it had undertaken
negotiations with TCI “in an effort to find common ground” was false because CSX had in fact
adopted a goal of “zero dissidents” and had plotted to kill any deal with TCI regardless of its
willingness to acquiesce to CSX’s offer of four board seats. On January 10, 2008 (less than ten
days after the parties first began negotiating and a mere two days after Mr. Ward first met with
Mr. Hohn), he instructed Mr. Kelly “that we [CSX] needed to let Mr. Hohn know that we were
done negotiating.” (DX 154 (Ward Dep. 344:7-14); Trial Tr. at 13:18-20.) Mr. Ward also told
Mr. Kelly that “if Mr. Hohn came back with a yes” to CSX’s offer of three board seats “that he,
Mr. Kelly, should still try to kill the deal by using the standstill.” (DX 154 (Ward Dep. 349:8-
13); Trial Tr. at 16:21-24.)
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In its proposed findings of fact and conclusions of law, CSX avoids taking this
evidence head on and instead argues that Mr. Kelly’s statement that he undertook discussions
with Mr. Hohn “in an effort to avoid the disruption and expense of a proxy contest” was
supported by the record. (CSX CC PFF at 33.) But whatever initially motivated CSX to engage
in discussions with Mr. Hohn, the fact remains that those discussions were not undertaken in an
effort to find common ground with Defendants. Instead, the fix had been in since CSX created
the Project Blue Ridge working group, whose goal was to keep TCI from achieving any board
representation. (Trial Tr. at 22:2-23:7; DX 109; DX 307.) Mr. Ward admitted that CSX had
intended to “deploy offense and defense with the goal of zero dissidents.” (DX 307; Trial Tr. at
22:2-4.) Indeed, when Mr. Hohn indicated to Mr. Kelly that TCI would accept a one-year
standstill in exchange for obtaining agreement on a slate of directors, Mr. Kelly simply
terminated discussions. (DX 75.)
Second, Defendants demonstrated the falsity of CSX’s statement that it had
brought this lawsuit “to ensure that all of our shareholders receive complete and accurate
information about the group’s holdings, agreements, plans and motivation.” (DX 86.) The facts
show that CSX believed as early as May 22, 2007 that TCI had beneficial ownership of the
shares referenced in its swap arrangements and CSX believed as early as December 21, 2007 that
TCI and 3G had formed a group earlier than their Schedule 13D reported. (DX 154
(Fitzsimmons Dep. at 93:6-19; 102:11-104:9).)
CSX’s feeble attempt to explain that it only came to believe that “TCI’s
statements disclaiming beneficial ownership of CSX shares hedging the swaps were not true”
when it received information from Innisfree regarding the movement of CSX stock, (CSX CC
PFF at 33), contradicts the sworn testimony of its 30(b)(6) designee on this issue. Ellen
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 13 of 18
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Fitzsimmons testified that as of December 21, 2007 CSX believe that there was a substantial
likelihood “that TCI and 3G had understandings and agreements with counterparties that were
tantamount to beneficial ownership.” (DX 154 (Fitzsimmons 109:3-14).). It also ignores the
fact that CSX itself recognized that Innisfree merely speculated that the share movement
“suggested the possibility” that swap counterparties were taking steps to be able to vote the
shares underlying TCI’s swap contracts but “did not reach a conclusion or say that’s what
happened.” (DX 154 (Fitzsimmons Dep. 209:11-19).) Mr. Miller himself admitted that he was
“speculating” as to the cause underlying the movement of shares in February 2008. (DX 154
(Miller Dep. 77:10-17).) Moreover, nothing about the movement of shares was at all relevant to
CSX’s allegations of early group formation, which CSX also believed at least as of December
21, 2007. (DX 154 (Fitzsimmons Dep. 109:15-22).)
CSX’s explanations fail to explain why, if CSX was truly interested in ensuring
that its shareholders received “complete and accurate information,” CSX never approached TCI
with its concerns or sought to disclose the information itself to shareholders. Nor do those
explanations account for CSX’s decision not to bring the lawsuit until after the date for TCI or
3G to correct its disclosures had passed. CSX cannot explain its behavior because the only
plausible explanation -- which directly contradicts the statements contained in the March 17
Press Release -- is that CSX brought this lawsuit as part of its “zero dissidents” policy and in the
hope of knocking out Defendants’ slate of directors.
Third, Defendants have proposed a minority slate of directors (five out of twelve),
only one of whom is affiliated with 3G and one of whom is affiliated with TCI. Thus, CSX’s
unfounded accusation that TCI is seeking “effective control” of CSX, both in a February 14,
2008 letter to Mr. Hohn and in the March 17, 2008 Press Release are materially false and
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 14 of 18
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misleading. To support its claim, CSX cites to a litany of unrelated and irrelevant evidence,
none of which supports the conclusion that TCI and 3G were seeking effective control of CSX.
In essence, CSX simply reads into the evidence whatever it wants to in support of its ultimate
contention, without regard to whether that evidence lends any support to its claim.
Among the more egregious examples is CSX’s claim that TCI “made a number of
proposals and demands to CSX management and its advisors.” (CSX CC PFF ¶¶ 99.) The idea
that a shareholder’s submission of business proposals to a company could give rise to an
inference that the shareholder was seeking “effective control” of that company is laughable.
Similarly flawed is CSX’s argument that Mr. Hohn’s negotiating position that Defendants’ board
candidates be placed on certain committees somehow supports the notion that Defendants were
seeking effective control. (CSX CC PFF ¶ 109.) To the contrary, that simply indicates an
interest on Defendants’ part to identify the committees where their nominees -- who collectively
have over 50 years of railroad experience -- would be most helpful in increasing the value of
CSX.
CSX’s willful distortion of Defendants’ goals in this proxy contest -- i.e. to
improve CSX -- and its willingness to graft a nefarious motive onto TCI’s every action or
statement cannot shield it from liability. See Virginia Bankshares, Inc. v. Sandberg, 501 U.S.
1083, 1093, 111 S.Ct. 2749, 2758 (1991) (statements of belief are “reasonably understood to rest
on a factual basis that justifies them as accurate, the absence of which renders them
misleading.”). Accordingly, this Court should find that the Ward Editorial and CSX’s March
17th Press Release were false and misleading proxy solicitations.
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IV. THE CSX FEBRUARY BYLAW AMENDMENT CONTRAVENES VIRGINIA
LAW.
As Defendants’ noted in their proposed findings of fact and conclusions of law,
Virginia law explicitly grants shareholders the right to “remove one or more directors with or
without cause, unless the articles of incorporation provide that directors may be removed only
with cause.” Va. Code Ann. § 13.1-680(A). This right of removal may be exercised “only at a
meeting called for the purpose of removing the director.” Va. Code Ann. § 13.1-680(D). It is
equally clear that this “meeting” is not the corporation’s regularly scheduled annual meeting.
See Va. Code Ann. § 13.1-680(E) (noting that the corporation may file an amended annual
report upon the removal of a director.) The CSX articles of incorporation contain no limit on the
circumstances under which directors may be removed. Accordingly, CSX shareholders have the
right to remove one or more directors with or without cause.
Since the power to remove directors necessitates the power to call a meeting for
that purpose, any limit on the right to call a meeting is also a limit on the right to remove
directors. Here, CSX’s February Bylaw Amendment has placed an absolute bar on the ability to
call “a meeting for the purpose of removing the director” as contemplated by Section 13.1-
680(D).
In response, CSX claims that Va. Code. Ann. § 13.1-655, which limits the
circumstances in which a “special meeting” may be called, abrogates the rights granted under
Section 13.1-680. (CSX CC PFF at 35-36.) In essence, CSX is asking this Court to read Section
13.1-680 out of existence. If Section 13.1-655 does grant CSX the right to eliminate the right of
a shareholder to call a meeting for the purpose of removing a director, it also eliminates the right
to remove directors granted under Section 13.1-680. The most basic rule of statutory
construction does not permit such a result. See Lillard v. Fairfax County Airport Auth., 155
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 16 of 18
17
S.E.2d 338, 342 (Va. 1967) (statutes should be construed so as to harmonize and force and effect
should be given the provisions of each); Commonwealth v. Jones, 74 S.E.2d 817, 820 (Va. 1953)
(“A statute should be construed so as to give effect to its component parts.”).
Fortunately, the two sections can easily be harmonized. Section 13.1-655 refers
only to special meetings. But Section 13.1-680(D) does not refer to a “special meeting,” even
though many other provisions in the Virginia Stock Corporation Act do. See, e.g., Va. Code
Ann. §§ 13.1-658, 684, 686 and 728.5. Thus, the structure and language of the Virginia Stock
Corporation Act makes clear that Section 13.1-655 does not apply to the meeting referred to in
Section 13.1-680(D).
Accordingly, because CSX’s February Amendment is inconsistent with Section
13.1-680 of the Virginia Stock Corporation Act, it is void ab initio.
V. MR. WARD IS LIABLE FOR CSX’S VIOLATIONS OF SECTION 14(a).
Third-Party Defendant Michael Ward is liable under Section 20(a) of the
Exchange Act because he directly or indirectly controls CSX and was a culpable participant in
each of the primary violations. There is no dispute that Mr. Ward is a controlling person of
CSX. (See Answer ¶¶ 29, 144.) Moreover, contrary to CSX’s claims, the evidence establishes
that Mr. Ward was a culpable participant in the violations because he chaired the Board that
awarded the LTIP stock grants while in possession of material non-public information, as well as
when it awarded discretionary stock grants to directors during a blackout period. (See PX 7; PX
8; PX 14, at 8.) Moreover, Mr. Ward authored the March 11, 2008 editorial, and is quoted in the
March 17, 2008 press release, in which he made false and misleading statements about TCI. (PX
184; DX 86.) Accordingly, Mr. Ward is a controlling person within the meaning of Section
20(a) of the Exchange Act and is liable for CSX’s violations of Section 14(a).
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 17 of 18
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CONCLUSION
For the foregoing reasons, Defendants respectfully request that the Court grant
Defendants the declaratory and injunctive relief sought.
May 29, 2008
SCHULTE ROTH & ZABEL LLP
By: _/s/ Howard O. Godnick_____________
Howard O. Godnick
Michael E. Swartz
919 Third Avenue
New York, New York 10022
Telephone: (212) 756-2000
Facsimile: (212) 593-5955
howard.godnick@srz.com
michael.swartz@srz.com
Attorneys for Defendants The Children’s
Investment Fund Management (UK) LLP,
The Children’s Investment Fund
Management (Cayman) Ltd., The
Children’s Investment Master Fund,
Christopher Hohn and Snehal Amin
KIRKLAND & ELLIS LLP
By: _/s/ Peter D. Doyle__________________
Peter D. Doyle
Andrew Genser
Citigroup Center
153 East 53rd Street
New York, New York 10022-4611
Telephone: (212) 446-4800
Facsimile: (212) 446-4900
pdoyle@kirkland.com
agenser@kirkland.com
Attorneys for Defendants 3G Capital
Partners Ltd., 3G Capital Partners, L.P.,
3G Fund, L.P., and Alexandre Behring
Case 1:08-cv-02764-LAK Document 65 Filed 05/29/2008 Page 18 of 18
