Beneficial Ownership, Equity Swaps, and Proxy Contests: CSX v. The Children's Investment Fund (Part 4)

We are addressing the ongoing litigation between CSX, the railroad company, and a number of hedge funds, including The Children's Investment Fund and 3G Capital Partners. The case revolves around the obligation of the Funds to disclose certain equity swaps involving shares of CSX.  The Funds have launched a proxy contest, with the annual meeting scheduled for June 25.  The district court issued an opinion in the case on June 9.  The opinion is posted on the DU Corporate Governance web site.  

One of the more interesting developments in the case was the Judge's decision (not the parties) to ask for the views of the Commission and the responses that were provided. 

On May 22, 2008, the SEC received a letter inviting the submission of views as amicus on two questions concerning beneficial ownership under Section 13(d).  The response was filed on June 4 in the form of a letter by the general counsel, Brian Cartwright, with a letter from the Deputy Director of the Division of Corporation Finance, Brian Breheny, attached. 

According to Cartwright's letter, "the schedule for submitting a matter to the Court did not afford enough time for the Commission's staff to present this matter for a vote of the Commission."  As a result, the submission could not be construed as the views of the Commission.  Indeed, they could not even be construed as the views of the staff of the Commission, only the views of one particular Division (Cartwright did not specify that he concurred in the views).  The letter, therefore, noted that "these staff views are not accorded the deference that would be accorded the views of the Commission itself." 

Cartwright is suggesting lower deference.  In fact, the views are entitled to no deference.  Deference is generally given to agency interpretations of their own rules.  See Long Island Care at Home, Ltd. v. Coke, 127 S. Ct. 2339  (2008) ("Where, as here, an agency's course of action indicates that the interpretation of its own regulation reflects its considered views -- the Department has clearly struggled with the third-party-employment question since at least 1993 -- we have accepted that interpretation as the agency's own, even if the agency set those views forth in a legal brief.").  Deference does not, therefore, automatically apply to the views of an isolated pocket of the staff.  

As a result, the position taken in the memorandum is not entitled to any deference by the court and can easily be disavowed later, whether by the Commission or a subsequent director of the relevant division.  As the trial court concluded in footnote 205:  "As a staff interpretation, the Division's views are entitled to no greater weight than flows from their persuasive qualities." 

The inadequate time to obtain the position of the Commission had another consequence.  Some on the Commission have been critical of hedge funds.  Because the letter ultimately favors the defendants (some of which are hedge funds), the procedural posture allows the commissioners to avoid any appearance that they are supporting this disfavored group. 

In the next post we will look at the actual legal analysis. 

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.