Mantle Ridge fires back at CSX

Activist investor Paul Hilal’s hedge fund was looking for a swift and amicable transition for outgoing Canadian Pacific President and CEO E. Hunter Harrison to join U.S. Class I railroad CSX, but negotiations have taken a decidedly hostile turn this week.    Activist investor Paul Hilal’s Mantle Ridge LP has sent a letter to CSX Corp. to clarify its position in negotiations to install outgoing Canadian Pacific President and Chief Executive Officer E. Hunter Harrison as CEO of the U.S. Class I railroad.
   CSX took the board room battle public earlier this week, and called a special shareholder meeting to discuss what it referred to as “extraordinary” requests by Mantle Ridge and Harrison.
   Harrison in January announced his early exit from CP, forfeiting millions in benefits and equity awards in the process, at which time Mantle Ridge purchased a 4.9 percent stake in CSX and began discussions about installing him as the next chief executive.
   Talks appeared to be proceeding amicably, but have since stalled over issues of compensation and company governance. The primary points of contention are an $84 million payment to Harrison to recoup the lost benefits and equity from CP, which CSX contends is Mantle Ridge’s responsibility, and the number of board seats CSX would grant the fund.
   CSX claims the firm is seeking six of the 14 positions on the CSX board of directors, which would “grant effective control of CSX to a less than 5 percent shareholder,” but Mantle Ridge says in its letter it is only actually looking for one board seat that would be controlled by the firm. The others would be occupied by Harrison, who is not an employee of Mantle Ridge, and four “independent” persons not related to Hilal or the fund.
   “In fact, you and I were engaged in a process to identify high quality independent people that the Board and Mantle Ridge could embrace,” Hilal wrote. “As part of that process, I gave you a list (including lengthy bios) of 11 exceptional individuals with broad and relevant experience.  None of them has any relationship with me outside of my efforts to recharge the CSX Board. Each one is entirely independent of me and is committed to acting in the best interests of all of the shareholders. Each one would make a superb board member.”
   With regard to Harrison’s compensation, Mantle Ridge also took issue with the $300 million figure cited by CSX.
   “In our view, that’s a major mischaracterization,” said Hilal. “Regrettably, it has confused the shareholders.
   “Hunter’s compensation package adds up to approximately $32 million per year for four years, of which approximately $20 million per year is explicitly performance based and should therefore be discounted in the customary and substantial way performance based grants normally get discounted for compensation and accounting  purposes,” he added.
   “In addition to Hunter’s compensation package, there is a one-time cost of extraction from CP (i.e. the value Hunter forfeited in order to free him up from his two-year non-compete and allow him to work at CSX), which should not be viewed as compensation.  That cost is $84 million plus a gross up of somewhere between $0 and $23 million (depending on Hunter’s tax position).”
   CSX released the following statement in response to Mantle Ridge’s letter.
   “As demonstrated by our recent actions, the CSX Board of Directors is always willing to engage in constructive dialogue with our shareholders and to consider their views on our Company’s business and strategy. The Board will carefully review the letter sent to us this evening by Mantle Ridge and continue to act in the best interests of all CSX shareholders.”