It's very difficult for boards to push back on activist shareholders: Author of 'Railroader'
One of the main players behind a U.K.-based hedge fund's threat to launch a proxy battle against Canadian National Railway Ltd. is taking a few cues from some high-profile previous activist campaigns launched against major North American railroad operators.
"We've taken inspiration from [Bill Ackman's proxy fight against Canadian Pacific Railway Co. in 2011] but more importantly, at TCI, we did our own proxy battle with CSX Corp. about 14 years ago," said Ben Walker, partner at TCI Fund Management Ltd., in an interview.
"So we've taken a lot of lessons learned from that experience and put them into practice in this case as well."
TCI is gearing up for an activist campaign against CN Rail at a key moment for the Montreal-based railroad operator. On Sunday, Kansas City Southern said its board formally determined that a rival takeover offer from CN Rail's main rival, CP Rail, was superior, leaving CN with five business days to decide if it wants to amend its bid for the Kansas City-based company.
That announcement came two weeks after a key U.S. regulator rejected CN Rail's proposed voting trust arrangement for its KCS bid because the acquisition wasn't in the public interest, a decision that spurred TCI to begin seeking sweeping management and board changes at CN.
TCI stated Monday that it requested a special shareholder meeting to address its concerns, including replacing CN Rail Chief Executive Officer Jean-Jacques Ruest with former CN and Union Pacific executive Jim Vena, as well as proposing a slate of four new independent directors to the company's board.
"We need CN to walk away from that ill-conceived, ill-considered bid for Kansas City Southern. We should know that by the end of the week," Walker said. "After that, our demands are clear. We want a refreshed board and we want a new CEO. We think Jim Vena would be a great candidate for the board to consider."
Walker said he's received "a lot of calls" from other CN Rail shareholders supporting TCI's demands, but declined to specify how much support it has received. TCI owns approximately 5.2 per cent of CN Rail's outstanding stock, making it the company's second-largest shareholder behind Bill Gates' Cascade Investment LLC.
"We haven't received a single message from the shareholders saying that they're not supportive," Walker said.
TCI's slate of independent board nominees for CN Rail includes Gilbert Lamphere, a former CN Rail and CSX board member; Allison Landry, a former Credit Suisse transportation analyst; Rob Knight, former CFO of Union Pacific; and Paul Miller, a former CN executive who worked at the railroad between 1978 and 2011 in several key operating roles. TCI said it wants those nominees to replace current CN Rail directors Kevin Lynch, James O'Connor, Laura Stein, and Robert Pace, who is also chair of the railroad operator.
Vena had a five-decade career at CN Rail, joining the company as a brakeman in 1977 before rising through the ranks into senior management positions when he studied the precision scheduled railroading concept - which focused on cutting costs to maximize efficiencies - created by industry legend Hunter Harrison. Vena stepped down from an advisory role at Union Pacific in June following a two-year stint as the company's chief operating officer when he helped implement the precision scheduled railroading strategy at the Omaha-based operator.
"We wanted [the directors to have] a broad range of skills in the railroad industry," said Walker.
"[Lamphere] is an all-rounder. He's got huge experience in the North American railroad industry and he's one of the most experienced railroad executives in North America. He's got everything."
Walker said that TCI has yet to speak with CN Rail's board about its demand for management and board-level changes, but expects to be able to do so once a special shareholder meeting is announced. CN Rail said in a statement Monday that it has not yet received a formal requisition from TCI but once it does, it will "review it and comment further in due course."
While it's unknown whether CN Rail will opt to adjust its bid for Kansas City Southern in light of CP's current "superior proposal,” one Bay Street analyst gives it less than a 10 per cent chance of happening after CN’s voting trust proposal was rejected.
"It can certainly proceed without a voting trust but we think success rate could be even lower when the voting trust has been rejected," said Scotiabank Analyst Konark Gupta in a report to clients Monday. "As such, we think CN Rail is more likely to walk away than to take on more risk or face more activism."