Opinion ID: 221139
Heading Depth: 1
Heading Rank: 6

Heading: Group Formation

Text: I turn now to the issue of group formation, which governs the determination of which of the many participants in the events described above may be subject to Section 13(d)'s disclosure requirements. Rule 13d-5(b)(1) provides that the Section 13(d) disclosure requirements apply to the aggregate holdings of any group formed for the purpose of acquiring, holding, voting or disposing of those securities. 17 C.F.R. § 240.13d-5(b)(1). Many of the concerns about the use of swaps to avoid Section 13(d)'s disclosure requirements are allayed by the group concept. Any agreement or understanding between various funds for the purposes set out in Rule 13d-5(b)(1) would cause the aggregation of shares beneficially owned by each member of the group for purposes of Section 13(d). Also, any agreement or understanding between long and short swap parties regarding: (i) the purchase of shares by the short party as a hedge; (ii) the sale of such shares to the long party when the swaps are unwound (as in settled-in-kind equity swaps); or (iii) the voting of such shares purchased by the short party, would cause the shares purchased as a hedge and any shares owned by the long party to be aggregated and counted in determining the 5 percent trigger. (Of course, as discussed supra, such an understanding might also render the long party a beneficial owner under Rule 13d-3(a). See 17 C.F.R. § 240.13d-3(a).) [17] With respect to whether there was such an agreement or understanding between the Funds, the district court found that TCI and 3G formed a group with respect to CSX securities no later than February 13, 2007. CSX Corp., 562 F.Supp.2d at 555. [18] As noted by my colleagues, the district court enumerated the circumstances, including the existing relationship, the admitted exchanges of views and information regarding CSX, 3G's striking patterns of share purchases immediately following meetings with [TCI officials], and the parallel proxy fight preparations that persuaded it to find that TCI and 3G had formed a group by February 13, 2007. Id. at 553-55. The district court's finding as to the formation of a group between TCI and 3G in February 2007 cannot be upheld without adopting the district court's legal conclusions regarding swaps. It was necessarily based in part on the premise that TCI's purchase of swaps rendered TCI a beneficial owner of shares bought by the short parties as a hedge. It was that premise that led the court to conclude that TCI's goal in February 2007 was at that time to seek control of CSX through the use of swaps. Indeed, on February 13, 2007, TCI and 3G did not own in the aggregate 5% of CSX's actual shares. The district court's finding of a group also suffers from a second error. That finding was that the parties activities from at least as early as February 13, 2007, were products of concerted action. Id. However, Rule 13d-5(b)(1) applies only to groups formed for the purpose of acquiring, holding, voting or disposing of securities of the target firm. The Rule does not encompass all concerted action with an aim to change a target firm's policies even while retaining an option to wage a proxy fight or engage in some other control transaction at a later time. Indeed, the Rule does not encompass concerted action with a change of control aim that does not involve one or more of the specified acts. The overwhelming evidence is that TCI, while understanding that a hostile proxy fight might ultimately be necessary, first sought to change CSX's policies without a control change and to profit through swaps. In fact, TCI was negotiating with CSX management at the end of March, and the strongest evidence relied upon by the district court in support of the TCI-3G group finding was the parallel proxy fight preparations, which occurred in late September-October 2007. CSX Corp., 562 F.Supp.2d at 553-54. The finding of a group formation in February 2007 is, therefore, flawed. There are only two pieces of evidence supporting the February 2007 finding. One is the fact of the relationship between TCI and 3G  a 3G affiliate was an investor in TCI. The other is that, on two occasions, 3G purchased shares after conversations with TCI. These are the only concrete acts relied upon by the district court that might reflect a February 2007 agreement requiring aggregation of TCI/3G shareholdings. As to the ongoing relationship between TCI and 3G, it surely demonstrates an opportunity to form a group, but it also provides an explanation for frequent conversations that do not involve CSX. With regard to 3G's purchases of stock, there is no claim that TCI increased its shareholdings at the same time, that is, no evidence of concerted action in buying actual shares. In fact, there is no evidence whatsoever that 3G's and TCI's purchases of CSX stock were coordinated in February 2007. Indeed, the district court found that, at this time, TCI was informing other funds of TCI's interest in altering CSX's business plans in the hope of steer[ing] CSX shares into the hands of like-minded associates. CSX Corp., 562 F.Supp.2d at 553. There is no evidence that 3G's purchases at this time were more than the result of this sharing of information, which hardly amounts to an agreement to buy CSX shares. The finding of a group owning 5% of CSX shares in February 2007 is clearly erroneous, and I concur in order to seek clarification on a remand.