CSX / TCI Court Documents: Thoughts on "Disclosure"

Not sure if anyone has seen this but it is a must read.

Click to read the whole document:

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 it is apparent that they have defeated the purpose of the law.

This is such a case. The defendants – two hedge funds that seek extraordinary gain,
sometimes through “shareholder activism” – amassed a large economic position in CSX Corporation (CSX), one of the nation’s largest railroads. They did so for the purpose of causing CSX to behave in a manner that they hoped would lead to a rise in the value of their holdings. And there is nothing wrong with that. But they did so in close coordination with each other and without making the public disclosure required of 5 percent shareholders and groups by the Williams Act, a statute that
was enacted to ensure that other shareholders are informed of such accumulations and arrangements.

They now have launched a proxy fight that, if successful, would result in their having substantial influence and perhaps practical working control of CSX. Defendants seek to defend their secret accumulation of interests in CSX by invoking
what they assert is the letter of the law. Much of their position in CSX was in the form of total return equity swaps (“TRSs”), a type of derivative that gave defendants substantially all of the indicia of stock ownership save the formal legal right to vote the shares. In consequence, they argue, they did not beneficially own the shares referenced by the swaps and thus were not obliged to disclose sooner
or more fully than they did. In a like vein, they contend that they did not reach a formal agreement to act together, and therefore did not become a “group” required to disclose its collaborative activities, until December 2007 despite the fact that they began acting in concert with respect to CSX far earlier. But these contentions are not sufficient to justify defendants’ actions.

This is a must read because it goes to disclosure. Hedge funds are constantly all over management (for the good of all) to be more transparent. But actions such as those by TCI, while technically legal, smack of hypocrisy. The same goes to short sellers who are short but refuse to disclose how short they are because "they are not legally required to".

Disclosure is disclosure, and if it is good for some it has to be good for all. It cannot be a piece by piece game. Personally, I think if you can be short through ownership of puts and be forced to disclose it then if you have sold shares short you ought to be forced to disclose it also.

If you are acquiring interest via swaps, the same ought to hold. One cannot hold the management of a company to a higher standard than themselves and then stand there a "tisk tisk" management for not "disclosing fully".

Disclosure: None

Comments

[Waldyr Prado]

Dear all,
As a CSX shareholder, you should pay attention to what this President has been doing to CSX. He's been there for more than ten years, earning a fat paycheck to elect some Directors with an enormous conflict of interest with him. Lately one of those was caught giving USD 1MM to a politician in order to favor CSX current Directors. Only now he is implementing company changes to increase our stock value. By the way, those were changes suggested by the Hedge Funds business plans. They are on their websites. So, i think as a shareholder I should protect and vote in favor someone who's looking to increase the company competitiveness, not on a Directors group that has been there for these years doing almost nothing! The stock went up because of the market conditions and its sector.
I am in favor of my stock value!