TCI: Four of our Five Nominees Are Elected to CSX's Board

When a federal appeals court on Monday dealt CSX Corp. a major setback by refusing to block activist investor The Children's Investment Fund from voting its stock at the company's annual meeting, it was easy to see that a pending proxy contest between the insurgent investor and railroad operator could become messy. The meeting and proxy contest took place Wednesday, and it looks like the messy prognosticators were right.

TCI and another hedge fund were permitted to vote the disputed 6.4% of their 8.7% stake for their five-member slate of dissident candidates for positions on the company's 12-person board. Wednesday afternoon, TCI has issued a statement explaining gleefully that based on preliminary voting results, shareholders have elected at least four of their slate. The two sides are battling over the future of the railroad company and its operational and investment priorities.

However, the news from the CSX camp was very different: "The outcome of the election of directors at CSX's 2008 annual meeting of shareholders is too close to call at this time. The annual meeting will reconvene at 10 am ET on Friday July 25."

It's unclear at this stage exactly how close the election was, but CSX is likely banking on the possibility that the appeals court, the U.S. Court of Appeals for the 2nd Circuit in New York, will ultimately decide to "sterilize" or disqualify TCI's shares at some point down the road.

The court did provide for a middle-of-the-road type expedited hearing, leading observers to speculate that a ruling could come by August or September.

It's less likely, but a decision could still be made by the appeals court before July 25. Should the court decide to disqualify TCI's shares, the company could conceivably, retroactively, reinstall management-backed director candidates if they lost in Wednesday's election by a margin of less than 6.4% of TCI's 8.7% stake. That would be unprecedented, and many observers aren't so sure a recount would be permitted.

There is still a long way to go before the appeals court rules. It is weighing whether TCI violated securities laws by using the swaps to get around Securities and Exchange Commission disclosure rules. A lower New York district court ruled June 11 that that was exactly the case. The court already rejected CSX's petition to have TCI's shares disqualified at the meeting pending its ruling. It also rejected CSX's petition to have the whole court case expedited so that a ruling would have taken place before the annual meeting.

What the 2nd Circuit does now and when it does it are key questions that need to be answered. - Ron Orol