Corporate Governance

Beneficial Ownership, Equity Swaps, and Proxy Contests: CSX v. The Children's Investment Fund (Part 8)

By J. Robert Brown

A second amicus brief was filed by the Coalition of the Private Investment Companies (CPIC).  CPIC argued that "cash-settled equity swaps, standing alone, have been uniformly understood by regulators, investors and corporate legal advisors alike not to constitute 'beneficial ownership' of a security."  The Brief also took issue with the allegation that a party could become a beneficial owner by entering into an equity swap as part of a scheme to evade the reporting requirements of Section 13(d).  "While there may be in the unique circumstances of a particular case an equity swap which is a component of a 'scheme to evade,' any ruling to such effect should be narrowly limited to the facts of that case."

With respect to the latter argument, the Brief emphasized that the swaps do not require an underlying equity position.  As a result, an "equity swap, without more (such as an additional agreement for the dealer to both match shares with the swap position and vote the shares at the direction of the swap holder), thus does not evidence a bad faith intent to conceal control over 'beneficial ownership' of a security." 

While the Brief discussed swaps generically (where the purchase of the underlying security might or might not happen), it did not provide much insight into the circumstances where the party knows that the swap dealer has purchased the underlying shares.  Moreover, the Brief did not discuss circumstances such as the one in this case where the swap dealers accumulated a very large position (12% of the voting shares of CSX), an amount of business that would provide economic incentives beyond those present in a typical swap involving a much smaller position.  Moreover, with a large position, the swap dealer would have considerable incentive to sell them all at once to a single party (rather than sell them slowly and take the risks associated with changes in share prices). 

The amicus brief, therefore, addressed the issue of swaps in a generic manner, without examining any of the specifics present in this case.   

Numerous documents filed in the case, including the complaint, various motions and legal memorandum, and an assortment of amicus briefs (including one from the Division of Corporation Finance at the SEC) and legal opinions, can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on June 16, 2008 (boomark / email).