March 25, 2008

The Section 162(m) Workshop

Tune in today for this webcast: “The Section 162(m) Workshop.” This webcast will be held in a “workshop” style, where experts provide analysis of the numerous issues raised for specific types of employment arrangements, including guidance on what well-designed plans should look like under the IRS’ latest guidance. Join these experts:

– Christine Daly, Partner, Holme Roberts & Owen LLP
– Elizabeth Drigotas, Principal, Washington National Tax, Deloitte Tax LLP
– Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz
– Mike Kesner, Head of Deloitte Consulting’s Executive Compensation Practice
– Paula Todd, Managing Principal, Towers Perrin

You may want to print out these “Course Materials,” which consist of notes regarding hypothetical 162(m) scenarios (courtesy of Regina Olshan of Skadden Arps).

What We Got Here is a Failure to Communicate…

If a company doesn’t respond timely to an SEC comment letter, it likely is more than a failure to communicate (I just love using that line from “Cool Hand Luke”). Since the end of 2006, the SEC Staff has sent more than 50 threatening letters that tell companies to respond to outstanding comments now – or else the Staff will post the correspondence relating to the Staff’s review. Not meaning to pick on any particular company, but here is a sample of these letters.

A Focus on Swaps and 13D Reporting in CSX Litigation

For the past year, CSX Corp. has been locked in a battle with an activist investor – The Children’s Investment Fund (TCI) and its affiliates – over governance reforms and now that battle has gone to court over the issue of swaps and Section 13(d) reporting.

Last fall, TCI called on the CSX Board to undertake a number of initiatives, including separating the Chairman and CEO roles, adding new independent directors, allowing shareholders to call special meetings, aligning management compensation with shareholder interests, presenting a detailed operating plan with specific long-term operational and cost targets to address under-performance, justifying the capital spending plan, and improving relations with labor, shippers and shareholders.

By the end of 2007, TCI had formed a group with 3G Capital Partners and filed a Schedule 13D indicating that they intended to nominate five directors for election at CSX’s 2008 annual meeting scheduled for June 25th – and in a subsequent Schedule 13D/A, the group indicated plans to present a proposal to amend the company’s bylaws to permit 15% or greater shareholders to call a special meeting.

Last week, CSX filed a complaint in the Southern District of New York seeking injunctive and declaratory relief against the group based on allegations that the funds are seeking to change or influence control of CSX through the use of swaps and secretly coordinated efforts while failing to comply with the Schedule 13D and Schedule 14A reporting requirements.

The complaint alleges that 37 million shares of CSX common stock were transferred to financial institutions that were counterparties to swaps referencing shares of CSX common stock in anticipation of the company’s February 28, 2008 record date, indicating the existence of understandings that those counterparties would vote the shares in accordance with TCI’s and 3G’s wishes, or alternatively indicating that the counterparties would vote with TCI and 3G because of their relationships with those funds.

CSX also challenges, among other things. the funds’ disclaimer of beneficial ownership of shares referenced in swap arrangements, the timely filing of their initial Schedule 13D and the adequacy of their disclosure regarding their intentions and arrangements, understandings or relationships. CSX wants the court to order, among other relief, that the funds divest their interests and terminate their swap arrangements, or that the funds be prohibited from voting their shares (or be subject to proportional voting) at the annual meeting.

The funds filed a Schedule 13D/A indicating that the allegations in the complaint are without merit and that they intend to defend themselves vigorously.

In this case, CSX is taking on one of the most vexing problems that is faced today with respect to beneficial ownership reporting and contests for control – that swaps and other similar instruments which provide investors solely with economic exposure (and arguably without any voting or investment power) for the most part fall outside of today’s Section 13(d) reporting requirements. Thanks to Jonathan Levy of Lindquist & Vennum for pointing this case out!

– Broc Romanek