Two hedge funds sought to take control of CSX without making the required disclosures mandated by the Williams Act. But what is the remedy for the violation? The trial court felt it was not legally empowered to enjoin the hedge funds from voting the stock they had acquired. Consequently, an election of directors was held under the cloud of this litigation.
The NAM, the Washington Legal Foundation and the Business Roundtable filed an amicus brief arguing that prohibiting the voting of shares in an ongoing proxy fight is an appropriate remedy. Shareholders should be protected from corporate raiders who schemed to evade the reporting requirements and concealed their agreement to work together in order to gain an advantage in their efforts to put their own slate of directors on the board. Other shareholders were thus unaware of this hidden effort to change the direction of the company.
Our brief underscored the power of federal courts to redress violations of the securities laws, including the power to grant relief that deters wrongdoing and protects shareholders. The hedge funds might not have been able to gain as large a portion of shares had others known their intentions, since the price of the stock could have been affected. Consequently, other shareholders' ability to influence the outcome was diminished. Appropriate relief could include barring the hedge funds from voting their shares at the annual meeting.
The brief also highlighted the increasing frequency with which hedge funds have been mounting challenges to the incumbent board and management of publicly traded companies, and the relatively short-term investment horizons of those fund managers. Courts should have the tools needed to prevent hedge funds from gaining an unfair advantage over shareholders.
On 7/18/2011, the court sent the case back to the trial court for further proceedings, including reconsideration of the appropriateness and scope of injunctive relief. An open question is whether "total-return equity swaps" should be considered an ownership interest that would trigger the Williams Act disclosure requirements. The court also ruled that whether separate entities should be considered a "group" for determining reporting obligations depends on the definition of a group, and it overturned the trial court's broad interpretation of that word. Instead, it limited the term to groups whose actions are intended to acquire stock in a target corporation.