CSX DECISION CAUTIONS ACTIVISTS

AGAINST RELYING ON DERIVATIVES TO AVOID SEC DISCLOSURE REQUIREMENTS

CSX Corporation v. The Children’s Investment Fund Management (UK) LLP, et al., 08 Civ. 2764 (SDNY, June 11, 2008), currently on appeal to the Second Circuit, could have significant consequences for activist and other investors who build their stakes by acquiring derivatives referenced on a target’s shares. The appeal is scheduled for argument in early August of this year.

In CSX, the district court found that a hedge fund’s conduct in accumulating swaps on a target’s shares constituted a scheme to evade the reporting provisions of Section 13(d) of the Exchange Act. In a highly fact-based decision, the court held that the hedge fund was deemed the beneficial owner of the target’s shares by reason of the anti-evasion provisions of Rule 13d-3(b) and violated Section 13(d) by failing to timely file a Schedule 13D when its ownership passed the five percent threshold. Perhaps even more important was the court’s dicta, which suggested a person’s derivative holdings may make it a beneficial owner of the target’s shares regardless of any scheme or intent.

For our readers, we have prepared a brief overview of the issues surrounding the CSX case. Please read it here.

DLA Piper’s Alternative Asset Management practice represents hedge funds, private equity funds, broker-dealers, asset management firms and service providers to the hedge fund market in their corporate needs.

For more information, please contact:

Drew G.L. Chapman, Chair, Alternative Asset Management Group

Theodore Altman

Matthew McDermott

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