CSX Seeks Shareholder Input on Activist Investor's Requests -- 2nd Update

By David Benoit, Jacquie McNish and Paul Ziobro 

CSX Corp. turned the tables on an activist investor that threatened a fight for control of the railroad operator's board, revealing the investor's demands and calling for its shareholders to vote on the matter.

The company said it made a written offer last week to hire railroad veteran Hunter Harrison as chief executive and to allow activist investor Paul Hilal to nominate five directors. But the company said talks fell apart over Mr. Hilal's demand that CSX reimburse his fund, Mantle Ridge LP, for "exceptionally unusual if not unprecedented" compensation benefits for Mr. Harrison.

The company said it would ask shareholders to vote on Mr. Harrison's employment terms and Mantle Ridge's reimbursement request at a meeting that hasn't yet been scheduled. They will also vote on Messrs. Harrison and Hilal's proposed governance arrangements.

CSX's board doesn't plan to take a side ahead of the vote. After the special meeting, the company will call its normal annual meeting to elect directors.

In a statement, Mantle Ridge and Mr. Harrison said that while they had hoped to reach a deal with the company, "we appreciate that CSX shareholders will have the opportunity to make their voices heard."

CSX's direct appeal to shareholders is an unusual show of resistance and a role reversal of sorts for an activist target. Activist investors often ask shareholders to choose a new slate of directors when their demands aren't met. Companies, for their part, usually try to avoid shareholder votes, which are viewed as risky, expensive and time-consuming distractions.

But several large institutional investors, including State Street Global Advisors, recently have complained that companies are bowing to activists without getting input from other shareholders.

CSX's board has come under pressure from shareholders to hire Mr. Harrison. The company's stock has risen more than 30% since The Wall Street Journal first reported on his campaign with Mr. Hilal.

The company Tuesday took the rare step of disclosing the pair's demands in detail.

Mantle Ridge, CSX said, agreed to compensate Mr. Harrison, 72 years old, for benefits he surrendered when he resigned as CEO of Canadian Pacific Railway Ltd. last month to join forces with Mr. Hilal. When he left CP, Mr. Harrison gave up some $89 million in compensation and unspecified tax benefits.

CSX said Mantle Ridge wants CSX to take on those costs. The total compensation package, including reimbursement for sacrificed pay and stock options, could exceed $300 million, the company said.

In a letter to Mr. Hilal last week, CSX said the proposed benefit package for Mr. Harrison would benefit Mantle Ridge "at the expense of all other CSX shareholders."

CSX is at odds with Messrs. Hilal and Harrison over other matters, including allowing an independent physician, chosen by CSX's board, to review Mr. Harrison's medical records. Mr. Harrison in 2015 took several weeks off from running CP to recover from surgery and a bout of pneumonia.

CSX, based in Jacksonville, Fla., has been negotiating for nearly four weeks primarily with Mr. Hilal. Mr. Harrison has met twice with CSX directors to outline his plans for overhauling the railroad.

The timing of the activist's approach was opportune. CSX said Tuesday that it was close to announcing a successor to current CEO Michael Ward when Mr. Harrison approached the company and said he was interested in running CSX in a bid to turnaround a North American railroad operator for the fourth time.

At CP and other railroads he has led, Mr. Harrison deployed his precision railroad strategy that runs fewer trains and sticks to tighter schedules, while implementing tight cost controls. The strategy helped drive down CP's operating ratio, a closely watched measure of expenses as a percentage of revenue.

On Tuesday, CSX updated the risk factors in its annual report, warning that an activist campaign could disrupt operations, divert management attention from running the company and lead to significant legal and other fees.

--Maria Armental contributed to this article.

Write to David Benoit at [e-mail], Jacquie McNish at [e-mail] and Paul Ziobro at [e-mail]

(END) Dow Jones Newswires

February 14, 2017 22:12 ET (03:12 GMT)

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