CSX v. TCI et al.

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Counsel for CSX Corporation retained Cornerstone Research and Professor Marti Subrahmanyam of New York University to analyze The Children’s Investment Fund’s (TCI’s) effective ownership in CSX at different points in time.

Retained by Cravath, Swaine & Moore

Counsel for CSX Corporation retained Cornerstone Research and Professor Marti Subrahmanyam of New York University to analyze The Children’s Investment Fund’s (TCI’s) effective ownership in CSX at different points in time. TCI, a hedge fund, believed that its investment in CSX would be profitable if TCI could either alter CSX’s policies or its management. TCI wanted CSX to undergo a leveraged buyout and attempted to organize an effort to elect board members of its choosing at the annual shareholders’ meeting.

CSX alleged that TCI violated the Securities and Exchange Act of 1934 by not reporting its significant ownership in CSX shares. TCI argued that it did not have direct stock holdings in CSX exceeding 5 percent of total shares outstanding and was therefore not subject to reporting requirements.

The court agreed with Professor Subrahmanyam’s opinions regarding effective ownership.

Professor Subrahmanyam addressed how the fact that TCI had engaged in cash-settled total return swap agreements with various counterparties for CSX shares affected this claim. He demonstrated that the counterparties hedged their positions one-for-one with actual CSX common shares. He also discussed how TCI’s existing business relationships with the counterparties, in conjunction with these total return swap agreements, gave TCI the ability to influence the voting of the underlying shares by the counterparties. Professor Subrahmanyam demonstrated that TCI had the ability to control when the total return swap agreements would be terminated, at which point the counterparty would sell its CSX common shares. Many of these sales coincided with shares purchased by TCI or other hedge funds.

The court agreed with Professor Subrahmanyam’s opinions regarding effective ownership.

Case Expert

Marti G. Subrahmanyam

Charles E. Merrill Professor of Finance, Economics and International Business,
Stern School of Business,
New York University