Beneficial Ownership, Equity Swaps, and Proxy Contests: CSX v. The Children's Investment Fund (The Second Circuit Rules) (Part 13)

The hedge funds (The Children's Investment Fund and 3G Capital Partners) have opposed the motion for emergency relief and expedited appeal.  As their brief notes:

• That headlong rush to judgment on important issues of first impression makes no sense and is unnecessary.  It would be the paradigm of allowing the tail of this case -- remedy -- to wag the dog -- namely, the district court's novel rulings on liability.  The theory of liability crafted by the district court requires careful consideration by this Court given its sweeping implications for all sorts of equity derivatives.  There is no need for this Court to be rushed into deciding novel issues under the Exchange Act that will affect an entire industry under a timetable allowing less than ten days for briefing, argument, and decision.

The Second Circuit apparently agreed (the reasoning for denying the motion for an injunction pending appeal is not set out in the opinion).  Why?  

Whatever the resolution of the appeal on the merits (the trial judge did seem to take a cramped reading of his equitable authority under Section 13(d)), the Second Circuit had two main reasons for not intervening at this stage.

The first is docket clearance.  The hedge funds might lose the proxy contest, rendering the requested relief moot.  CSX probably knows the probable result through reports from its proxy tabulator.  The court, however, did not.  If the hedge fund candidates were defeated, the appeal could even be terminated.  In other words, by allowing the case to go forward without the requested emergency relief, the Second Circuit assigned the motion may engage in a form of docket clearance.  This is not an irrelevant factor to appellate courts.  See discussion of DC Circuit practices in The Neutral Assignment of Judges at the Court of Appeals. 

The other is that the hedge funds have nominated only a minority of directors.  As a result, even if they win the proxy contest, there will not be a change of control.  While many have argued that the destruction of the consensus style of decision making can be damaging to a board, something that could occur in these circumstances of the funds win, it is a difficult kind of "irreparable" harm to show as a basis for some type of injunctive or emergency relief.  

The briefs before the Second Circuit and the brief opinion setting out the accelerated briefing schedule are all posted on the DU Corporate Governance web site.