CSX/TCI Arguments

Yesterday, the second circuit court of appeals heard arguments from lawyers on both sides of the CSX/TCI case.

There are several issues at stake. I am especially interested inone: the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.

Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc.

When can contracting parties break up the bundle and redistribute elements of ownership to their hearts content? when are they stuck with a stick simply becauise they're holding another stick thereof?

The trial court judge in this case rendered a decision that strongly implies that the bundle isn't arbitrary, and thus isn't infinitely malleable. Not, at any rate, in the matter of the ownership of shares of stock. Now we'll see how well that inference does at the next level up the judicial hierarchy.

That's an amateur historian/philosopher's view of the case, not the way the lawyers will describe the issues. What lawyers will tell you is that the fund is obligated to report beneficial ownership of equity securities, AND the refrain from engaging in any "scheme to evade" that requirement. The railroad pitched two different theories to the trial court: that the cash-settled derivatives that TCI owned are in effect equity securities, or that for quite specific reasons that may not apply in a lot of other cases the fund was employing those derivatives as part of a scheme to evade. There is, in short, both a broad and a narrow theory at stake.

The trial court judge indicated that if he feels sympathetic toward the broader theory. But that was as lawyers say "dicta." He actually ruled against TCI, to the extent that he did, only on the narrower theory.

The appeals court could, for all I know to the contrary, reject both theories and find that TCI's actions were as pure as the driven snow. Or it could accept the broad theory.

The betting line at the moment, though, is that the appellate court like the trial court will "split the difference" and go with the narrower theory. Although even within the narrower theory there's a lot of room for differences between the two courts and there will certainly be some. A simple "judgment affirmed" isn't in the cards. That is the one point on which I am bold enough to make a prediction.

We'll see how things shake themselves out.