Is Activist Hedge Fund TCI A National Security Risk?

The Committee on Foreign Investment in the U.S., an interagency panel that examines U.S.-foreign deals for national security threats, may just review the activist Children's Investment Fund's large minority stake in railroad operator CSX Inc. But it would be an unusual review, if CFIUS decides to take it on.

TCI, which is based in the U.K., together with 3G Fund LP, another investment fund, own an 8.7% CSX stake. The combo also has financial exposure to an additional 12.3% stake through "cash settled swap agreements" with eight investment banks. The funds are pressing CSX to find a buyer or complete a leveraged buyout.

The intergovernmental agency CFIUS has been under pressure from lawmakers, the public and pundits to review deals involving foreign companies gaining a "controlling interest" in U.S. assets that are well below a 51% stake. CFIUS recently went to great lengths to explain to dealmakers that "controlling interest" could mean a large minority stake, but it would have to look at each transaction on a case-by-case basis to figure out which stakes warrant a review. In other words, there is no minimum threshold below which CFIUS attorneys could count on to avoid a review.

CFIUS practitioners argue that the TCI investment in CSX fits the bill for a CFIUS review. They say the railroad operator falls under the interagency's purview as critical infrastructure because it ships hundreds of carloads of nuclear waste and services military installations. TCI's activist efforts to replace five incumbent directors on the company's 12-member board at its June 25 annual meeting along with its large minority stake could be enough to trigger foreign control.

In practicality, though, this review would be unusual because neither CSX nor TCI have any plans to submit an application to CFIUS for review. Typically, when a foreign company buys a U.S. asset, both companies decide to voluntarily submit a joint application for approval. In this case, CFIUS might send out messages that it wants both companies to submit applications. Since CSX and TCI are opponents, both parties would likely provide separate documents explaining their opposition opinions.

In any case, there is no way a CFIUS review would be completed before CSX's annual meeting.

There are some high-profile lawmakers pushing for such an examination. Sen. Evan Bayh, D-Ind., is chairman of the Senate Banking Committee's Security and International Trade and Finance subcommittee. He and five other senators want Treasury Secretary Henry Paulson to launch a review.

There is reason to make one important distinction regarding this insurgency. Many in Washington are pushing CFIUS to review deals involving sovereign wealth funds, the investment arms of foreign governments, which buy large minority stakes in U.S. assets. TCI is not a sovereign wealth fund, but rather it is an activist hedge fund, very much like the investment vehicles operated by U.S. investors such as Carl Icahn or Jana Partners' Barry Rosenstein , only TCI is operated out of the U.K. The insurgent's pre-eminent goal is for CSX to be sold or taken private. In either case, TCI cashes out with a profit, but most likely the railroad operator remains a U.S. entity by being sold to a U.S. railroad operator. If TCI gets its way and the company remains a U.S. entity, then any CFIUS review may not be warranted. - Ron Orol