Court Requires Activist Hedge Funds to Disclose Swaps in CSX
Client Newsflash

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A federal district court in New York recently ruled that an activist hedge fund that had acquired “long” positions in cash-settled equity swaps of CSX Corporation in advance of an upcoming proxy contest had entered into the swaps “for the purpose of preventing the vesting of beneficial ownership in CSX shares. . . and as part of a plan or scheme to evade the reporting requirements.” Under the anti-avoidance provision of Rule 13d-3(b), the court found that, the hedge fund was deemed to be a beneficial owner of the shares held by its counterparties by reason of its avoidance purpose. While the court sidestepped deciding whether a holder of cash-settled equity swaps is otherwise a “beneficial owner” under Section 13(d) of the 1934 Act, the court’s analysis suggested that it believed such arrangements did constitute beneficial ownership. Most notably however, the remedy ordered by the court was limited to an injunction against future Section 13(d) violations—it did not prevent defendants from voting their CSX shares in the upcoming proxy contest.