The Jacksonville, Fla.-based Class I railway is asking for shareholder input after talks with hedge fund Mantle Ridge, which seeks to install outgoing Canadian Pacific Chief Executive E. Hunter Harrison as CEO of CSX, hit a wall this week.
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CSX is asking for shareholder input on negotiations with hedge fund Mantle Ridge to install outgoing Canadian Pacific CEO E. Hunter Harrison to the Class I railway’s top executive spot.
The board room battle to install outgoing Canadian Pacific Railway (CP) President and Chief Executive Officer E. Hunter Harrison as CEO of CSX Corp. may have just begun in earnest.
The Jacksonville, Fla.-based Class I railway has called a special shareholder meeting to discuss what it calls “extraordinary” requests by Harrison and hedge fund Mantle Ridge LP, CSX said in a statement.
Harrison in January signaled his intent to take over the top spot at CSX, stepping away from the CEO post at CP six months ahead of the previously announced schedule and forfeiting millions in benefits and equity awards in the process.
At the same time, activist investor Paul Hilal’s Mantle Ridge was buying up a 4.9 percent minority stake in CSX and alerted the company that Harrison was interested in becoming CEO.
Hilal knows Harrison well from his time at billionaire Bill Ackman’s Pershing Square Capital Management, which won a proxy fight to install Harrison as CEO at CP in 2012, following the firm’s acquisition of a minority stake in the company. Ackman’s college roommate and a former CP board member, Hilal left Pershing Square in January 2016 and started Mantle Ridge in November.
After Harrison announced his early exit from CP, Mantle Ridge began discussions with CSX about installing him as the next chief executive. The company earlier this week announced it would extend the deadline to nominate directors and to propose other business to be considered at its 2017 Annual Meeting of shareholders, from Feb. 10, 2017 until Feb. 24, 2017, ostensibly to continue negotiations with Harrison and Mantle Ridge.
But it seems talks have hit a wall this week, with CSX choosing to go public with a blow-by-blow account of the negotiations.
“In the course of these discussions, Mantle Ridge consistently requested first, that it receive substantial representation on the CSX Board, and second, that Mr. Harrison be engaged immediately as CEO of CSX on terms dictated by Mantle Ridge and Mr. Harrison,” CSX said in a statement Tuesday.
In addition to salary and other compensation demands, CSX said Mantle Ridge has proposed that current CSX CEO Michael Ward retire immediately and the firm would be given control of six of the total 14 seats on the board of directors. The company would install Hilal as vice chairman of the board to succeed current director Edward J. Kelly, III in 2018.
CSX estimates the total cost of employing Harrison under Mantle Ridge’s terms to be in the neighborhood of $300 million, including $84 million to compensate for the benefits and equity awards forfeited when he left CP.
Harrison has also declined CSX’s request to have an independent physician designated by the board conduct a pre-hire review of the 72-year-old railroad veteran’s medical records, according to the company.
Given concerns that the proposal would “grant effective control of CSX to a less than 5 percent shareholder, which would be receiving additional benefits from CSX that may substantially exceed $100 million,” and the “extraordinary” size and nature of the compensation package, CSX said it has countered Mantle Ridge’s offer with a proposal that would include five board seats.
That offer has not been accepted, however, leading the company to “seek guidance from shareholders on whether CSX should agree to Mr. Harrison’s and Mantle Ridge’s proposals” at the special meeting, scheduled for March 16, 2017.
“At the special meeting, and as will be described in further detail in CSX’s proxy statement relating to the special meeting, each shareholder will be asked to vote on whether the shareholder approves of (a) the employment arrangements proposed by Mr. Harrison and Mantle Ridge (including the requested reimbursement) and (b) if Mr. Harrison is hired as CEO, the governance arrangements proposed by Mr. Harrison and Mantle Ridge,” the railway said. “The CSX Board does not intend to recommend for or against either item of business.”
Reached for comment, Hilal said in a statement, “We are pleased that CSX agrees that change is needed, and note that CSX enjoyed a $10.4 billion increase in market value since Jan. 18, 2017, reflecting optimism that Mr. Harrison may join as Chief Executive Officer, and effect a transformation of CSX to a Precision Scheduled Railroading model.
“We have been engaged in constructive dialogue with CSX’s Board for several weeks,” he said. “While we had hoped to reach a negotiated agreement, we appreciate that CSX shareholders will have the opportunity to make their voices heard on the optimal governance and compensation structure that will create the conditions for a successful transformation. We remain fully confident in a favorable outcome for CSX and its shareholders and are excited for the future.”
“If we create the right conditions for success, we have the best chances for success,” added Harrison.