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E-MailThis post is from Theodore Mirvis of Wachtell, Lipton, Rosen & Katz. We also learned from our Guest Contributor John F. Olson that his firm, Gibson, Dunn & Crutcher LLP, has also just issued a memo on this important decision.
“The 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.” That is just a teaser of an opinion in which every page is a gem. Judge Kaplan’s opinion in the CSX/TCI case is long but well worth reading wholly apart from those with interest in the particular facts of that particular case. It treats with great insight and expertise the activist stockholder tactic of using swaps to gain increased leverage and potential advantage while staying below (they think, or better, thought) the 5% public reporting threshold of Section 13(d) of the Williams Act.
The decision comes to the brink of holding that the long side of a cash-settled total return swap conveys old-fashioned “beneficial ownership” (voting or investment power) of the shares held in the counterparty’s hedge position in the typical case where the long knows and intends that the financial institution on the other side will perfectly hedge by buying the shares and holding them until the unwind (whether that is effected ultimately in cash or in kind). While making a persuasive case for that conclusion, Judge Kaplan rests the beneficial ownership conclusion on the oft-ignored-but-nevermore “anti-evasion” SEC Rule 13d-3(b) which is an effective tool to prevent devices to prevent beneficial ownership from doing so. As to relief, the Court deemed itself constrained by prior precedent not to sterilize the shares bought under cover of 13(d) violation (it did enjoin future violations), but virtually invited the Second Circuit to revisit the question by declaring that the Court would have granted that relief had it discretion to do so. While there will likely be an appellate ruling in the case (an expedited appeal is being taken), Judge Kaplan’s opinion will undoubtedly stand as must reading.
Our short memo on the decision is here, and the Court’s opinion is available here.
