CSX Corp. v. The Children's Investment Fund Management (UK) LLP

United States Court of Appeals for the Second Circuit · 2011 · Corporations

CorporationsSecurities disclosureWilliams ActSection 13(d)Group formationInjunctive relief15 U.S.C. § 78m(d)Section 13(d)(3)

Facts

TCI and 3G purchased CSX shares outright and also entered into cash-settled total-return equity swaps referencing CSX stock while pursuing changes in CSX policy and later a proxy contest. They communicated with each other during 2007 and on December 19, 2007 filed a Schedule 13D disclosing that they had formed a group to coordinate certain efforts regarding purchases, sales, and proposals concerning CSX. The district court found that they had formed a Section 13(d) group no later than February 13, 2007 and that they had violated Section 13(d), then broadly enjoined future violations. The funds' outright ownership together crossed the 5 percent threshold by April 10, 2007.

Issue

Whether the district court's findings were sufficient to support a Section 13(d) group violation based on TCI and 3G's outright ownership of CSX shares, and whether the injunctions entered or requested were appropriate. Also, whether CSX was entitled to an injunction preventing the Funds from voting shares acquired during the alleged nondisclosure period.

Rule

A Section 13(d)(3) group violation requires a finding, supported by specific evidence, that parties acted together for the purpose of acquiring, holding, voting, or disposing of the issuer's securities; concerted activity alone is not enough. For injunctive relief, an issuer must satisfy traditional equitable requirements, including irreparable harm and some cognizable danger of recurrent violation. An injunction sterilizing shares from voting is inappropriate where the required Section 13(d) disclosures were made sufficiently in advance of the shareholder vote to permit informed voting.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Harbor Capital and Red Mesa Partners each bought common stock of a publicly traded manufacturing company based in Cleveland, Ohio. The two funds exchanged frequent emails criticizing management, discussed possible operational changes, and jointly drafted talking points for meetings with executives, but the record shows no understanding that they would acquire, hold, vote, or sell their shares together. Their combined outright holdings exceeded 5%.

If the issuer sues for a Section 13(d) violation based on group formation, which is the strongest argument for the funds?

Explanation. Section 13(d)(3) and Rule 13d-5(b)(1) require more than parallel activism or concerted conduct. The necessary finding is an agreement or understanding to act together for the statutory purpose of acquiring, holding, voting, or disposing of the issuer’s securities. Findings that parties acted together 'with respect to' the issuer or coordinated general activism are insufficient standing alone. (Derived from CSX Corp. v. The Children's Investment Fund Management (UK) LLP (n.d.).)