CSX v. TCI; Sacre Bleu! Christopher Hohn Elects Not to Stand for Re-Election to the CSX Board

After over a year of effort, the expenditure of over $10 million in legal fees, the burden of engaging in bare-knuckles litigation, and the humiliation of being “dressed down” by an outraged Judge Lewis Kaplan (CSX v. TCI, 562 F. Supp. 2d 511 (S.D.N.Y. 2008)), Christopher Hohn won his proxy contest with CSX, seating himself and three others on the CSX board at the shareholders’ meeting held June 25, 2008 (CSX did not sit Hohn until September 2008).

Hohn, whose hedge fund, the Children’s Investment Master Fund, rose like a shooting star among activist hedge funds, carefully examined CSX and the opportunity a change in management at the company might represent, and presented a well researched and effective campaign for shareholder votes. In its “case for change,” TCI stated its belief that:

• CSX could be the best railroad in America; and

• Its earnings power could be double what the management of CSX had targeted to achieve.

The question, TCI asked, “shouldn’t be ‘Where has CSX come from?’ but ‘Where should CSX be?’” Hohn’s nominees would “refresh” the CSX board, and bring more railroad experience and more business experience to CSX than the five directors TCI’s group hoped to supplant, and bring to the CSX board “the perspectives of large and engaged shareholders.”

This was slick stuff. Given TCI’s reputation for shaking things up, which Hohn had done with Deutsche Börse and ABN Amro, the campaign succeeded.

But “engaged” Hohn no longer is: in a brief announcement on February 10, 2009, CSX disclosed that Hohn had notified the Governance Committee of CSX’s Board that he did not wish to be included as a nominee for re-election as a director at the annual meeting scheduled for May 6, 2009. CSX reports that Hohn “informed the Company that this decision resulted from his responsibilities in managing his business interests.”

Hohn’s possible burnout with activist investing was foreshadowed last fall in an article in Alpha (September 19, 2008), entitled “Christopher Hohn Rethinks Activism.” Spending over $10 million going against incumbent management, and losing money, as TCI has done with Deutsche Börse, will do that to you. Given the current economy, TCI has not done too well at CSX either. On June 25, 2008, the date of CSX’s 2008 annual meeting, CSX closed at $63.23. Yesterday, February 18, 2009, CSX closed at $27.83, a 56% decline since the shareholder meeting. And Hohn’s perception of the CSX opportunity — that its monopolistic position would benefit from a combination of global economic growth and higher energy costs, has vaporized in the current downturn.

Hohn, and other activist investors, have undoubtedly grown to appreciate the power of incumbency. As Hohn ruefully observed for the Alpha article:

“Buffett has always said that he looks for good management teams, because they’re easier to work with,” Hohn says. “We’ve often done just the opposite. We’ve frequently looked for excellent companies with underperforming management — Deutsche Börse, Euronext, CSX. Activism has been profitable for us, but it’s getting much harder; the political and regulatory environment is changing.”

In with a big bang, out with a whimper.

And we are still awaiting the decision of the Second Circuit Court of Appeals on Judge Kaplan’s searing decision finding TCI had violated the Exchange Act in its campaign to replace five members of the CSX board (the panel promptly ruled with Judge Kaplan that, even if TCI had violated the Exchange Act, the votes that it obtained for its slate would not be nullified, but its full opinion on this issue and on Judge Kaplan’s judgment on liability has yet to be handed down).

For my prior commentary on this case, see my posts of November 11, September 15, August 23, August 13, August 1, July 30, July 26, July 17, June 24, and June 23, 2008.