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U.S. DISTRICT COURT RULES AGAINST HEDGE FUND IN CSX CORP. V. THE
CHILDRENS INVESTMENT FUND ET AL.

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SERVICES
Securities

August 2008

Shareholder Activism

Keith E. Gottfried & Barry H. Genkin

INDUSTRIES
Public Companies

Wall Street Lawyer

PROFESSIONALS

Holds That Equity Swaps Were Used to Avoid Disclosure under Rule 13d3(b) of the Exchange Act

Barry H. Genkin

On June 11, 2008, the U.S. District Court for the Southern District of New York issued its much anticipated
decision in CSX Corporation v. The Childrens Investment Fund Management (UK) LLP, et al.1 In a 115page
decision by Judge Lewis A. Kaplan, the district court wasted no time in taking the defendants to task for actions
the district court ultimately decided were violations of Section 13(d) of the Exchange Act. The disdain of the
district court for the defendants conduct was made evident in the opinions first sentence:

MATERIALS

Some people deliberately go close to the line dividing legal from illegal if they see a sufficient opportunity
for profit in doing so. A few cross that line and, if caught, seek to justify their actions on the basis of
formalistic arguments even when it is apparent that they have defeated the purpose of the law. This is
such a case.2
In this case, CSX Corp., one of the nations largest railroad and transportation companies, was pitted against two
investment firms, the Childrens Investment Fund (TCI) and 3G Fund L.P. (3G). Among the questions that faced
the district court was a question of first impression with respect to whether the defendants, as the holders of
cashsettled equity total return swap positions, are, pursuant to Rule 13d3(a) of the Securities Exchange Act of
1934 (Exchange Act), the beneficial owners of the referenced stock held by the short counterparties and,
accordingly, required to report such beneficial ownership on a Schedule 13D disclosure statement. While the
district court indicated that it was somewhat persuaded that the answer should be yes, ultimately, the district
court was able to avoid directly addressing that question.3 Subscribing to the tenet that courts should decide no
more than what is essential to resolve their cases, the district court declined to rule on the legal question of
whether the holder of a cashsettled equity total return swap is the beneficial owner under Rule 13d3(a) of the
Exchange Act. Rather, the district court held that the defendants should be deemed the beneficial owners of the
referenced shares pursuant to Rule 13d3(b) of the Exchange Act because they had used the equity swap
transactions as part of a plan or scheme to prevent the vesting of beneficial ownership and to avoid the
disclosure that would have been required had they bought shares of CSXs common stock outright.4 The district
court also held that the defendants had formed a group within the meaning of Section 13(d) months before
they had filed their Schedule 13D disclosure statement.5 Notwithstanding that the district court held that the
defendants had violated Section 13(d), the district court declined to award CSX all the injunctive relief it had
sought. While the district court did enjoin the defendants from further Section 13(d) violations, it did not grant
CSXs request to sterilize the CSX shares held by the defendants that had been acquired during a period of
noncompliance with Section 13(d), thereby preventing the defendants from voting their CSX shares at CSXs
2008 annual meeting of shareholders. The district court concluded that it was foreclosed as a matter of law
from granting such injunctive relief, but that, if it could, it would have exercised its discretion to do so.6
Section 13(d) of the Exchange Act
Section 13(d), which was enacted as part of the Williams Act amendments to the federal securities laws,
imposes disclosure and reporting requirements with respect to attempts to acquire control of publicly traded
companies. The purpose of Section 13(d) is to provide investors with adequate disclosure with respect to the
accumulation of blocks of stock representing in excess of 5% of a public companys registered equity securities.
Pursuant to Rule 13d1, as promulgated by the Securities and Exchange Commission (SEC), under Section 13(d),

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any person, who acquires, directly or indirectly, beneficial ownership of more than 5% of an issuers registered
equity securities is generally required to file with the SEC a statement on Schedule 13D containing information
regarding the following: (i) the identity and background of the acquiring person; (ii) the source and amount of
funds or other consideration used to purchase the issuers securities; (iii) the purpose of the transaction,
including any plans or proposals which such person may have to effect a change in the present board of
directors or management of the issuer, effect a change in the issuers charter or bylaws, impede the acquisition
of control of the issuer by any person, liquidate the issuer, sell its assets to or merge it with any other persons,
or make any other major change in its business or corporate structure; (iv) the number of shares of the
securities which are beneficially owned by such person; and (v) any contracts, arrangements, understandings, or
relationships with respect to such securities.7 The SECs rules also require the Schedule 13D be filed no later
than 10 days from the time that the acquiring person became the beneficial owner of more than 5% of the
issuers registered equity securities and that a copy of the Schedule 13D also be sent to the issuer at its principal
executive offices.8
If any material change occurs in the facts set forth in the Schedule 13D, including, but not limited to, any
material increase or decrease in the percentage of the class beneficially owned, the person or persons who
were required to file the Schedule 13D are required to promptly file or cause to be filed with the SEC an
amendment disclosing that change.9 Pursuant to Rule 13d2 of the Exchange Act, an acquisition or disposition of
beneficial ownership of securities in an amount equal to 1% or more of the issuers registered equity securities
is deemed material for these purposes; acquisitions or dispositions of less than those amounts may be
material, depending upon the facts and circumstances.10
Litigation Involving Section 13(d)
Litigation involving Section 13(d) is not uncommon between issuers and activist shareholders, and such
litigation, while costly, is one of the various quivers in an issuers arsenal that it may utilize in its attempt to
defend itself against a contested solicitation brought by a hedge fund or other activist shareholder. The issues
that are typically the subject of Section 13(d) litigation relate to, among others: (i) whether or not the
shareholder fully reported its beneficial ownership of the issuers shares when it was otherwise required to file a
Schedule 13D; (ii) whether or not the shareholder timely filed its Schedule 13D; (iii) whether or not the
shareholder engaged in an arrangement to prevent the vesting of beneficial ownership as apart of a plan or
scheme to avoid the disclosure that would have otherwise been required under Section 13(d); (iv) whether or
not the shareholder is a member of a group that should have its ownership aggregated for purposes of meeting
the more than 5% beneficial ownership threshold that triggers the requirement to file a Schedule 13D; (v)
whether or not the shareholder has made less than accurate and complete disclosure in its Schedule 13D about
its holdings, plans, and motivations in violation of Section 13(d); and (vi) whether or not the shareholder has
made materially false and/or misleading disclosures in its Schedule 13D. CSX Corp., in its complaint, touched on
most of these issues.11
Background
In December 2007, TCI and 3G notified CSX of their intention to initiate a proxy contest against CSX pursuant to
which they intended to solicit proxies for use at CSXs 2008 annual meeting of shareholders to, among other
things, elect their nominees to five of the 12 seats on the CSX Board of Directors and to amend CSXs bylaws to
permit holders of 15% of CSX shares to call a special meeting of shareholders at any time for any purpose
permissible under the laws of Virginia, which is CSXs state of incorporation.
In connection with that proxy contest, on December 19, 2007, TCI and 3G jointly filed a Schedule 13D disclosure
statement. In the Schedule 13D, TCI reported as beneficially owning 17,796,998 CSX shares, constituting
approximately 4.2% of the CSX shares outstanding and 3G reported as beneficially owning 17,232,854 CSX
shares, constituting approximately 4.1% of the CSX shares outstanding. In addition, TCI had economic
exposure to an additional 11% of the CSX shares outstanding as a result of being a party to various total return
equity swap arrangements with bank counterparties that held such CSX shares. The equity swap arrangements
were disclosed in the Schedule 13D pursuant to Item 6, which requires disclosure of agreements, plans, or
arrangements regarding the issuers shares. However, the CSX shares referenced by the equity swap
arrangements were not included in TCIs reported beneficial ownership; and TCI specifically disclaimed
beneficial ownership of such CSX shares in the Schedule 13D. 3G had economic exposure to an additional
0.8% of CSXs outstanding shares as a result of similar equity swap arrangements that it was a party to and, like
TCI, also did not include such shares in its reported beneficial ownership of CSX shares and specifically
disclaimed beneficial ownership of such CSX shares in the Schedule 13D. According to the Schedule 13D, the
impetus for the filing of the Schedule 13D was TCIs execution of a letter agreement on December 12, 2007,
with 3G to coordinate certain of their efforts with regard to the proposal of certain actions and/or transactions
to CSX.12 By execution of the letter agreement, and assuming that a group was not earlier formed within the
meaning of Section 13(d)(3) of the Exchange Act, and leaving aside the CSX shares referenced in the total return
equity swaps, TCI and 3G would be deemed to have formed a group as of December 12, 2007, due to their
combined beneficial ownership of CSX shares being in excess of 5%, thus necessitating the filing of the Schedule
13D.
On March 17, CSX filed suit against TCI and 3G and alleged in its complaint,13 among other allegations, that the
14

Schedule 13D jointly filed by the defendants on December 19, 2007,14 was false and misleading because, in
reporting their beneficial ownership of the issuers securities, both TCI and 3G did not include the CSX shares
referenced by the equity swap arrangements and disclaimed beneficial ownership of such CSX shares.15 CSX
alleged in its complaint that TCI was the beneficial owner of the shares referenced in the swaps for at least 10
months before it filed its Schedule 13D on December 19, 2007, and, accordingly, violated Section 13(d) of the
Exchange Act by waiting until that date to file its Schedule 13D.16 Among the arguments made by CSX in support
of its allegation were the following17:
The referenced shares were acquired with the purpose or effect of changing or influencing control of CSX;
The referenced shares were part of a plan or scheme to evade the reporting requirements of the securities
laws;
The understandings and relationship that existed between CSX and the swap counterparties, including that the
shares will be voted in accordance with the defendants wishes and that the shares will be delivered to the
defendants upon settlement of the swaps, give the defendants beneficial ownership of the CSX shares by way
of indirect voting or investment power; and
The defendants could convert the referenced shares into direct ownership any time because of an
understanding between the defendants and the counterparties.
In its complaint, CSX also alleged that the representation in the Schedule 13D that a group was formed on
December 12, 2007, was false and misleading and alleged that a group was formed no later than November 6,
2007.18 By way of remedies, CSX sought various forms of injunctive relief, the most significant of which was an
order from the district court that would have prevented the defendants from voting CSX shares acquired during
a period during which they were not in compliance with Section 13(d).19
The District Courts Opinion
In reaching its opinion, the district court addressed several important questions, including:

Does the holder of a cashsettled equity total return swap arrangement beneficially own the referenced stock
held by the bank counterparty pursuant to Rule 13d3(a) of the Exchange Act?
In its opinion, the district court dedicates close to 20 pages discussing and analyzing the concept of beneficial
ownership as used in Rule 13d3(a) of the Exchange Act and whether, pursuant to Rule 13d3(a), TCI, as the
holder of a cashsettled equity total return swap arrangement, had beneficial ownership of the CSX shares
referenced by the swap arrangement and held by various bank counterparties.20 Under Rule 13d3(a), which
was promulgated by the SEC, a beneficial owner of a security includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise has or shares voting power which
includes the power to vote, or to direct the voting of such security; and/or investment power which includes the
power to dispose, or to direct the disposition of, such security. The district court noted that the SEC intended
Rule 13d3(a) to provide a broad definition of beneficial ownership so as to ensure disclosure from all those
persons who have the ability to change or influence control of the issuer.21 Analyzing all of the relevant facts
and circumstances, and taking into account the legislative and regulatory history of Rule 13d3 that suggests
that the concept of beneficial ownership be construed broadly, the district court noted that there were
substantial reasons for concluding that TCI was the beneficial owner of the CSX shares held as hedges by its
short counterparties given that TCI had, in the district courts view, the economic ability to cause its short
counterparties to buy and sell the CSX shares they held.22 As the district court noted:
[t]he definition of beneficial ownership in Rule 13d3(a) is very broad, as is appropriate to its object of
ensuring disclosure from all . . . persons who have the ability [even] to . . . influence control. It does not
confine itself to the mere possession of the legal right to vote [or direct the acquisition or disposition of]
securities, but looks instead to all of the facts and circumstances to identify situations in which one even
has the ability to influence the voting, purchase or sale decisions of its counterparties by legal, economic,
or other [ ] means.23
TCI argued against a finding that it had beneficial ownership of the CSX shares, based on the fact that it had no
legal right to direct its short counterparties to buy or sell shares or to vote them in any particular way.24 TCI was
joined in this view by the SECs Division of Corporation Finance which had been invited by the district court to
submit its views as amicus curiae on two questions, including whether an investment fund had beneficial
ownership, pursuant to Rule 13d3 of the Exchange Act, of the issuers shares held by counterparty banks. In its
response letter to the district court, the SEC expressed its disagreement with CSXs argument that, regardless of
whether TCI had any arrangement, understanding, or relationship with any of the counterparty banks
concerning voting power or investment power, TCI was the beneficial owner of shares held by the counterparty
banks because it had voting power and/or investment power over those shares by virtue of certain economic
incentives.25 The SEC offered the following opposing view to the effect that the mere presence of economic
incentives that a counterparty may have to vote the shares as the other party wishes or to dispose of the shares
to the other party does not equate to voting power and investment power as used in Rule 13d3 and,
accordingly, is insufficient to create beneficial ownership under Rule 13d326:
As a general matter, economic or business incentives, in contrast to some contract, arrangement,

understanding, or relationship concerning voting power or investment power, between the parties to an
equity swap, are not sufficient to create beneficial ownership under Rule 13d3. We start with the
recognition that a standard cashsettled equity swap agreement, in and of itself, does not confer on a
party, here the investment fund, any voting power or investment power over the shares a counterparty
purchases to hedge its position. In our view, that conclusion is not changed by the presence of economic
or business incentives that the counterparty may have to vote the shares as the other party wishes or to
dispose of the shares to the other party. While such incentives may exist, when the counterparty chooses
to act in these areas in circumstances where it is unconstrained by either legal rights held by the other
party or by any understanding, arrangement, or restricting relationship with the other party, it is acting
independently and in its own economic interests. The more reasonable interpretation of the terms
voting power and investment power as used in the Rule, which are based on the concept of the
actual authority to vote or dispose or the authority to direct the voting or disposition, is that they are
not satisfied merely by the presence of economic incentives.
The SEC stated that it believed that requiring an investor to include in its beneficial ownership under Rule 13d3
shares held by a counterparty to a derivative transaction such as a total return equity swap absent unusual
circumstances, would be novel and would create significant uncertainties for investors who have used equity
swaps in accordance with accepted market practices understood to be based on reasonably wellsettled law. 27
The district court viewed the SECs position as being inconsistent with the SECs past statements with respect to
the breadth of the definition of beneficial ownership and the focus on TCIs legal rights under its swap contracts
as emphasizing form over substance.28 As the district court noted:
[t]he securities markets operate in the real world, not in a law school contracts classroom. Any
determination of beneficial ownership that failed to take account of the practical realities of that world
would be open to the gravest abuse. . . Moreover, this Court is inclined to the view that the Cassandra
like predictions of dire consequences of holding that TCI has beneficial ownership under Rule 13d(a)
have been exaggerated.29
Notwithstanding an extensive, thoughtful, and well written discussion by the district court on its views as to the
breadth of Rule 13d3(a) and how persuaded it was that TCI had beneficial ownership under Rule 13d3(a) of the
CSX shares referenced by the equity swaps, as noted above, the district court, clinging to the position that
courts should decide no more than is essential to resolve their cases, declined to decide the beneficial
ownership question under Rule 13d3(a).30 Instead, as discussed below, the district court opted to find that TCI
had created and used the equity swaps, at least in part, for the purpose of preventing the vesting of beneficial
ownership of the CSX shares in TCI and as part of a plan or scheme to evade the reporting requirements of
Section 13(d). Accordingly, beneficial ownership of the CSX shares referenced by the equity swaps was triggered
pursuant to Rule 13d3(b).31

Assuming the holder of a cashsettled equity total return swap arrangement is not the beneficial holder of the
referenced stock held by the bank counterparty pursuant to Rule 13d3(a) of the Exchange Act, should such
holder nevertheless be deemed a beneficial owner pursuant to Rule 13d3(b)?
The purpose of Section 13(d) of the Exchange Act is to alert shareholders of large accumulations of securities
which might represent a potential shift in corporate control. Rule 13d3(b) provides that any person who,
directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement, or any other
contract, arrangement, or device with the purpose or effect of divesting such person of beneficial ownership of
a security or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the
reporting requirements of Section 13(d) or (g) of the Exchange Act shall be deemed for purposes of such
sections to be the beneficial owner of such security. As the district court noted, Rule 13d3(b) furthers the
purpose of Section 13(d) by preventing investors from circumventing Rule 13d3 with arrangements designed
to avoid disclosure obligations by preventing the vesting of beneficial ownership as defined elsewherein other
words, where there is accumulation of securities by any means with a potential shift in corporate control, but no
beneficial ownership.
As noted above, the SECs Division of Corporation Finance had been invited by the district court to submit its
views as amicus curiae on two questions. The first of these questions and the SECs response thereto was
previously discussed. The second of these questions was what mental state is required to establish the existence
of a plan or scheme within the meaning of Rule 13d3(b). In response, the SEC expressed the view that the long
partys underlying motive for entering into the swap transaction would not generally be a basis for determining
whether there was a plan or scheme to evade the reporting requirements of Section 13(d), unless the long
party had entered into the swap arrangement with the intent of creating a false appearance of nonownership
of a security:32
We believe that the mental state contemplated by the word plan or scheme to evade is generally the
intent to enter into an arrangement that creates a false appearance. Thus a person who enters into a
swap would be a beneficial owner under Rule 13d3(b) if it were determined that the person did so with
the intent to create the false appearance of nonownership of a security. The significant consideration is
not the persons motive but rather that the person knew of or was reckless in not knowing that the

transaction would create a false appearance. In this regard, taking steps with the motive of avoiding
reporting and disclosure generally is not a violation of Section 13(d) unless the steps create a false
appearance.
The SEC refused to rule out the possibility that there may arise a situation where a plan or scheme to evade the
beneficial ownership provisions of Rule 13d3 could exist in the absence of any evidence suggesting a false
appearance or sham transaction.33 However, notwithstanding the acceptance of this possibility, the SEC opined
that a person who does nothing more than enter into an equity swap should not be found to have engaged in an
evasion of the reporting requirements of Section 13(d). The district court, while attempting to find a path for
agreeing with the SECs standard for applying Rule 13d3(b), applied its own gloss to the SECs position and
refused to allow Rule 13d3(b) to be limited to situations where the actor intended to create a false appearance
of nonownership.34 Taking note of the goal of Section 13(d) to alert the marketplace to large accumulations of
securities which might represent a potential shift in corporate control, the district court interpreted Rule 13d
3(b) as creating the following standard:
Put another way, Rule 13d3(b) applies where one enters into a transaction with the intent to create the
false appearance that there is no large accumulation of securities that might have a potential for shifting
corporate control by evading the disclosure requirements of Section 13(d) or (g) through preventing the
vesting of beneficial ownership in the actor.35
With the foregoing as the standard, the district court held that each of the elements of Rule 13d3(b) were
satisfied, that the evidence that TCI created and used the equity swaps, at least in part, for the purpose of
preventing the vesting of beneficial ownership of CSX shares in TCI and as part of a plan or scheme to evade the
reporting requirements of Section 13(d) was overwhelming36 and that TCI had concealed precisely what
Section 13(d) was intended to force into the open,37 the disclosure of a large accumulation of CSXs shares that
might have the potential for shifting corporate control.

Did the defendants make prompt disclosure after they formed a group within the meaning of Section 13(d) of
the Exchange Act?
In addition to the allegations discussed above relating to interpreting Rule 13d3, CSX also alleged violations of
Section 13(d) of the Exchange Act with respect to when a group should be deemed to have been formed, in
this case, between TCI and 3G.38 While noting that, in cases where the timing of the formation of a group is in
dispute, the evidence is usually circumstantial, the district court held that the evidence showed that TCI and 3G
formed a group many months before they filed their disclosure statement on Schedule 13D.39 The district court
was not persuaded by the defendants arguments that TCI and 3G had not entered into a written agreement. As
the district court noted:
Their protestations to the contrary rest in no small measure on the premise that they avoided forming a
group by starting conversations by stating that they were not forming a group and by avoiding entry into
a written agreement. But the Exchange Act is concerned with substance, not incantations and
formalities.40
Remedies for Violations of Section 13(d)
While much of the CSX Corp. decision focused on the issue of beneficial ownership under Rule 13d3, the district
courts decision is also noteworthy for its discussion of the limited nature of the remedies currently available to
an issuer for violations of Section 13(d). The Second Circuit has long held that while an issuer does not have a
private cause of action for monetary damages for violations of Section 13(d), an issuer does have a private cause
of action and standing to sue for injunctive relief for such violations.41 Accordingly, it is not a surprise that CSX,
in its complaint against TCI, did not seek monetary damages for violations of Section 13(d), only various forms of
injunctive relief.42
Among the injunctive relief sought by CSX from the district court was an order to prevent TCI from voting at the
2008 annual meeting of CSX shareholders the CSX shares that it had acquired during the time that it was not in
compliance with Section 13(d). CSX had argued that its shareholders would be harmed irreparably without such
relief and that sterilization of the stock was required to avoid permitting defendants to retain the fruits of
their violations and to deter future violations.43 However, while holding that TCI had violated Section 13(d), the
district court concluded that it was foreclosed as a matter of law from enjoining TCI from voting its CSX shares
acquired during a time when it was not in compliance with Section 13(d).44 The district court noted its
frustration with its limited ability to order injunctive relief for violations of Section 13(d) and indicated that if it
were free to so enjoin TCI from voting its CSX shares, it would have exercised its discretion to do so.45 With
respect to any penalties for defendants violations of Section 13(d), the district court indicated that such relief
must come by way of appropriate action by the SEC or the Department of Justice.46
The Appeals
Following the issuance of the district courts opinion, both CSX and TCI filed appeals with the Federal Court of
Appeals for the Second Circuit. CSX, in its appeal, is asking the Second Circuit to opine as to whether federal

courts can enforce Section 13(d) by entering a sterilization order that would prevent shareholders from voting
shares of the issuer that they had acquired during the time that they were not in compliance with Section 13(d).
TCI and 3G, in their appeal, are asking the Second Circuit to review the district courts holdings that TCI should
be deemed the beneficial owner of CSX shares referenced by its cashsettled total return equity swaps, and that
TCI and 3G had formed a disclosuretriggering group for purposes of Section 13(d) no later than February 13,
2007. The defendants are also seeking to have the Second Circuit overturn the permanent injunction issued by
the district court that prohibits the defendants from violating the disclosure requirements of the Exchange Act
with respect to any future transaction. CSX had unsuccessfully sought to have the Second Circuit issue an
injunction to hold the votes on the CSX shares held by TCI and 3G in escrow pending the outcome of the appeal.
On June 25, CSX held its 2008 annual meeting of shareholders and then adjourned the meeting to allow time for
the independent inspector of election to tabulate the voting results. Three weeks after votes had been cast at
the annual meeting, CSX announced that, based on the preliminary draft report of the independent inspector of
election, four of TCIs five nominees were elected by the shareholders to CSXs 12person Board of Directors. On
July 25, CSX announced that it had asked two of TCIs nominees to join its board but that it would await the
certification of the annual meetings vote results and its appeal to the Second Circuit before seating any more of
TCIs nominees. While the vote certification process is expected to be completed in early August, whether or not
any more of TCIs nominees ever get seated as members of the CSX board may ultimately depend on the
outcome of CSXs appeal to the Second Circuit and its ability to convince the Second Circuit to void a percentage
of the votes cast by TCI and 3G.
Conclusion
While litigation brought by an issuer in connection with a proxy contest may have a variety of strategic purposes
and may seek various forms of relief, typically injunctive, many issuers look to the litigation option as a way to
force a resolution of the proxy contest by creating another battle front on which to engage the activist
shareholder and, accordingly, to increase the time and cost to the activist shareholder of continuing its proxy
contest. Clearly, if the activist shareholder were faced with the prospect of Section 13(d) litigation that, if
decided unfavorably, could result in it being forced to pay substantial compensatory, and perhaps punitive,
exemplary, and/or special damages, the activist shareholder may be inclined to consider either (i) full and strict
compliance with the requirements of Section 13(d), particularly with respect to its completion and timely filing
of its Schedule 13D, such that litigation against it is less likely, as least on the basis of a violation of Section
13(d); or (ii) once litigation has been commenced, an early resolution of the proxy contest to forestall a court
decision on the issue of relief. On the other hand, as CSX noted in one of its submissions in support of injunctive
relief pending the outcome of its appeal seeking to have a sterilization order entered with respect to a
percentage of the defendants CSX shares:
Moreover, ruling that federal courts lack the power to enforce Section 13(d) by entering a sterilization
order would render compliance essentially voluntary. If the only available remedy for egregious
violations such as this is corrective disclosure, there will be little reason to comply with Section 13(d).
Wouldbe violators will be secure in the knowledge that, if caught, they will only be told to announce
their schemes success in a Schedule 13D.47
The SEC has in the past made a similar argument in support of equitable relief going beyond further disclosure,
noting that . . . corrective disclosure is no real deterrent, since it merely requires compliance with the original
statutory disclosure obligation and leaves the violator with the profitable fruits on his illegal conduct. 48
Unfortunately for issuers, Section 13(d) does not provide any express right for issuersor even the shareholders
that Section 13(d) was enacted to protectto bring a private cause of action seeking monetary damages to
redress violations of Section 13(d). Nor is there is an express right for issuers to seek injunctive relief for
violations of Section 13(d). While issuers have, on numerous occasions, sought to have federal courts infer that
a private cause of action to seek such remedies exists for violations of Section 13(d), these efforts, at least with
respect to the right to seek monetary damages, have generally not been successful. While the federal courts
have been somewhat more receptive to inferring the right of issuers to seek injunctive relief for violations of
Section 13(d). While issuers have, on numerous occasions, sought to have federal courts infer that a private
cause of action to seek such remedies exists for violations of Section 13(d), these efforts, at least with respect to
the right to seek monetary damages, have generally not been successful. While the federal courts have been
somewhat more receptive to inferring the right of issuers to seek injunctive relief for violations of Section 13(d),
assuming that the issuer can demonstrate that it would be harmed irreparably in the absence of such relief, the
district courts opinion, in CSX Corp. and its view that it was foreclosed as a matter of law from enjoining
defendants from voting their CSX shares obtained during a period of noncompliance with Section 13(d), reminds
us how limited such injunctive relief is likely to be. Whether or not the availability of such injunctive relief
continues to remain so limited will depend on the outcome of CSXs appeal to the Second Circuit. Pursuant to an
expedited hearing schedule, the Second Circuit is expected to begin hearing oral arguments from CSX and
TCI/3G sometime in late August.
NOTES
1. See CSX Corporation v. The Childrens Investment Fund Management (UK) LLP, et al., No. 08 Civ 2764

(LAK) (S.D.N.Y. June 11, 2008).

2. See CSX Corporation v. The Childrens Investment Fund Management (UK) LLP, et al., No. 08 Civ 2764
(LAK) (S.D.N.Y. June 11, 2008), at 1.
3. Id. at 2.
4. Rule 13d3(b) under the Exchange Act provides in substance that one who creates an arrangement that
prevents the vesting of beneficial ownership as part of a plan or scheme to avoid the disclosure that
would have been required if the actor had bought the stock outright is deemed to be a beneficial owner
of those shares.
5. See CSX Corporation v. The Childrens Investment Fund Management (UK) LLP, et al., No. 08 Civ 2764
(LAK) (S.D.N.Y. June 11, 2008), at 2.
6. Id. at 115.
7. See Rule 13d1 under the Securities Exchange Act of 1934, as amended.
8. Id.
9. See Rule 13d2 under the Securities Exchange Act of 1934, as amended.
10. Id.
11. See Complaint of CSX Corporation in CSX Corporation v. The Childrens Investment Fund Management
(UK) LLP, et al.
12. See Item 6 of Schedule 13D of The Childrens Investment Fund Management (UK) LLP, et al. filed with the
SEC (December 19, 2007).
13. Id. at 1819.
14. See Schedule 13D of The Childrens Investment Fund Management (UK) LLP, et al. filed with the SEC
(December 19, 2007).
15. See Complaint of CSX Corporation in CSX Corporation v. The Childrens Investment Fund Management
(UK) LLP, et al., at 18.
16. Id. at 18.
17. Id. at 1416.
18. See Complaint of CSX Corporation in CSX Corporation v. The Childrens Investment Fund Management
(UK) LLP, et al., at 17.
19. See Complaint of CSX Corporation in CSX Corporation v. The Childrens Investment Fund Management
(UK) LLP, et al., at 30.
20. See CSX Corporation v. The Childrens Investment Fund Management (UK) LLP, et al., No. 08 Civ 2764
(LAK) (S.D.N.Y. June 11, 2008), at 4864.
21. Id. at 49.
22. Id. at 60.
23. Id. at 60.
24. Id. at 61.
25. Amicus curiae letter of the SEC Division of Corporation Finance filed in CSX Corp. v. The Childrens
Investment Fund Management et al., No. 08Civ. 2764 (S.D.N.Y.), at 2 (June 4, 2008).
26. Id. at 2.
27. Id. at 4.
28. See CSX Corporation v. The Childrens Investment Fund Management (UK) LLP, et al., No. 08 Civ 2764
(LAK) (S.D.N.Y. June 11, 2008), at 62.
29. Id. at 62.
30. Id. at 64.
31. Id. at 72.
32. Amicus curiae letter of the SEC Division of Corporation Finance filed in CSX Corp. v. The Childrens
Investment Fund Management et al., No. 08Civ. 2764 (S.D.N.Y.), at 3 (June 4, 2008).
33. Id. at 3.
34. See CSX Corporation v. The Childrens Investment Fund Management (UK) LLP, et al., No. 08 Civ 2764
(LAK) (S.D.N.Y. June 11, 2008), at 69.
35. Id. at 69.
36. Id. at 65.
37. Id. at 69.
38. See Complaint of CSX Corporation in CSX Corporation v. The Childrens Investment Fund Management
(UK) LLP, et al. at 1618.
39. See CSX Corporation v. The Childrens Investment Fund Management (UK) LLP, et al., No. 08 Civ 2764
(LAK) (S.D.N.Y. June 11, 2008), at 2.
40. Id. at 2.
41. See GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971), cert. denied 406 U.S. 910 (1972).
42. See Complaint of CSX Corp. in CSX Corp. v. The Childrens Investment Fund Management (UK) LLP, et al.,
No. 08Civ. 2764 (S.D.N.Y. filed March 17, 2008), at 2930.
43. Id. at 105.
44. Id. at 115.
45. Id. at 115.
46. Id. at 3.
47. Reply Memorandum of CSX Corporation in Support of PlaintiffAppellants Expedited Appeal and/or
Interim Relief to Preserve the Status Quo, at 4.
48. Brief for SEC as Amicus Curiae Supporting Power of Court to Grant Equitable Relief in Section 13(d)
Actions, General Steel Indus., Inc. v. Walco Natl Corp., No. 812345 (8th Cir. 1981).
Originally published in the August 2008 issue of Wall Street Lawyer (vol. 12., no. 8). 2008 Thomson/West.
Reprinted with permission.

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