CSX hits snag in negotiations with Harrison, investor; asks shareholders to vote on "extraordinary" requests

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JACKSONVILLE, Fla. – CSX Transportation would welcome former Canadian Pacific CEO E. Hunter Harrison as its chief executive but will ask shareholders to vote on the “extraordinary requests” of Harrison and his activist investor partner.

CSX said it would not encourage investors to vote one way or another at a special meeting of shareholders that has yet to be scheduled. But it did raise concerns with the proposals made by Harrison and his hedge fund partner, Mantle Ridge.

Harrison is seeking a four-year contract worth more than $300 million, most of it in an upfront payment and stock grants, CSX says. Harrison, 72, also denied the railroad’s request for an independent physician to review his medical records.

“The CSX Board believes such an employment arrangement for an incoming CEO is exceptionally unusual if not unprecedented,” the railroad said in a statement late Tuesday.

Mantle Ridge, which owns nearly 5 percent of CSX stock, is requesting six seats on the board, which would be expanded to 14 seats from the current 12. Paul Hilal, Mantle Ridge’s founder and CEO, would serve as vice chairman before becoming chairman.

This arrangement would benefit Mantle Ridge at the expense of other shareholders, CSX said.

“The governance requests 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,” the CSX statement said.

CSX took the unusual step of asking shareholders to weigh in on the Mantle Ridge’s proposals in light of these concerns. Typically companies in an activist investor’s crosshairs try to avoid proxy contests.

But CSX stock has surged nearly 30 percent since news surfaced last month that Harrison and Hilal were targeting a management shakeup at the railroad. That put pressure on the CSX board to respond.

“The CSX board is committed to being responsive to the interests of its shareholders and has closely observed the market reaction to Mr. Harrison’s possible employment,” the railroad said.

Mantle Ridge said it was encouraged that CSX will ask shareholders to weigh in on its proposals.

“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,” Hilal said in a statement Tuesday night.

Hilal said negotiations with CSX had been “constructive,” adding that he remains “fully confident in a favorable outcome for CSX and its shareholders.”

Hilal helped lead Pershing Square’s successful 2012 proxy battle that ousted a majority of CP’s board and installed Harrison as CEO. With the full backing of CP’s board, Harrison quickly implemented his precision railroading system at CP, slashing costs and raising revenue.

Hilal said having an “optimal governance and compensation structure” will help ensure a similar transformation at CSX.

“If we create the right conditions for success, we have the best chances for success,” Harrison said Tuesday in a statement issued by Mantle Ridge.

Harrison, who turned Illinois Central, Canadian National, and CP into ultra-efficient and highly profitable railroads over the past three decades, was the industry’s highest-paid CEO while at the helm of CP.

He earned $19.9 million in Canadian dollars in 2015, or about $15.1 million in U.S. dollars based on current exchange rates. The rest of the Class I CEO’s earned between $7.7 million and $10 million in 2015, the last year for which regulatory filings are available.

Harrison’s outsized pay caused a stir at CP’s annual meeting last year. By the slimmest of majorities – 50.1 percent to 49.9 percent – shareholders rejected CP’s executive compensation packages. Companies only rarely lose these say-on-pay votes, which are non-binding resolutions that give investors a voice in how top executives are paid.

CP defended Harrison’s compensation package at the time.

“Although Mr. Harrison’s total compensation is much higher than his peers, the return to shareholders during his tenure is equally impressive,” CP said in a proxy filing. Harrison’s compensation is dwarfed by the $14.2 billion in total additional shareholder value that has been created since Harrison became CEO in June 2012, CP noted.
            
Also on Tuesday, CSX filed its annual report and updated risk factors to include the actions of activist investors. Responding to activist investors, CSX noted, “can be costly and time-consuming, disrupt operations and divert the attention of management and employees.”

NEWSWIRETrains News Wire

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