A Jacksonville judge may soon decide if CSX shareholders have the right to take the Jacksonville railroad giant’s board of directors to task for its decision to spend $84 million to hire former CEO Hunter Harrison even though he was in poor health and would die eight months later.
Three shareholders filed suit this year against the board, arguing it committed misconduct in hiring Harrison and not sharing information about Harrison’s health with shareholders before a 2017 vote to pay for an $84 million benefits package for Harrison.
The board of directors has pushed back, asking a judge to dismiss the lawsuit because, it argues, the shareholders don’t have the right to sue.
The type of lawsuit is called a derivative shareholder suit. Essentially, the shareholders are trying to sue on behalf of CSX because they believe the board of directors haven’t been representing the company well. Meanwhile, the board of directors is arguing it does represent the company. To boil down the complicated legal matters: the lawsuit is essentially CSX vs. CSX.
To bring one of these lawsuits about under Virginia law, where CSX is incorporated, the shareholders must first make a demand on the board to take action and allow the board to appoint a committee of “disinterested directors” to review the demand. In essence, the board of directors was tasked with investigating itself. The committee report exonerated itself.
Shareholders John Robertson, James Ekis and George Triefenbach argue that the board of directors shouldn’t be considered disinterested since they were tasked with investigating themselves.
The lawsuit says the committee report did not explain what steps it took to ensure it was avoiding conflicts of interest. Meanwhile, the CSX board’s motion to dismiss says that the committee report’s exoneration must be final.
A hearing on the motion to dismiss is scheduled for next month. Before then, the two sides are arguing over whether Florida’s or Virginia’s trial rules should dictate what information the board of directors has to turn over.
Harrison was hired by CSX in March as a change agent who would implement a concept called “precision-scheduled railroading.” But before he was hired, Mantle Ridge, an activist investment fund, bought five percent of the company’s shares. CSX then placed five people selected by the fund to the board of directors, including the fund’s CEO.
Mantle Ridge then bought out Harrison’s previous non-compete contract with Canadian Pacific Railway and urged CSX to hire Harrison. After the company hired him, Harrison and Mantle Ridge said he would quit unless the company paid $84 million back for the contract reimbursement, according to the lawsuit.
Large portions of the lawsuit that talk about Harrison’s health and what the board knew about his health are redacted. Some parts of the lawsuit, of which only portions were redacted, indicate the board was aware of information it didn’t disclose to shareholders.
“CSX’s Board knew about, hid, and outright deceived shareholders about Harrison’s ill health and physical infirmities,” the lawsuit said. “This deception is outrageous considering that the Board has trumpeted Harrison’s singular resume and expertise as a railroad ‘turnaround expert’ who would personally lead turnaround as he had done at other companies.”
The shareholders say it wasn’t until after 93 percent of shareholders voted to pay $84 million for Harrison that a Wall Street Journal story mentioned that Harrison was working from home several days a week and used oxygen. That story said board members were aware of his condition and intentionally misled shareholders about his health.
By July, Harrison mentioned on a quarterly call that “I’m a short-timer here” and he viewed himself as an “interim” CEO. The lawsuit said the company’s stocks plunged.
In December, he died.
While the shareholders call the decision to hire Harrison “outrageous,” “reckless” and “grossly negligent,” the board of directors casts the decision differently. The board says that the lawsuit ignores the company’s financial successes since Harrison was hired, including an overall surge in stock prices and a rise in market value.
“Plaintiffs contend that the Board’s supposed failure to vet Mr. Harrison’s medical condition led to his compensation and the reimbursement being ‘lost and wasted’ because ‘a vibrant and fully functioning Harrison was necessary for any possible chance of success,’ even though CSX’s market capitalization has continued to grow by the billions in the months after Mr. Harrison’s passing,” the board’s motion reads.
If Circuit Judge Kevin Blazs grants the board’s motion, then the lawsuit is dead. If he rejects it, then the shareholders might be able to proceed to a jury trial where they will argue that the board of directors should pay restitution and damages.
