Second Circuit’s July 2011 Opinion: CSX Corp. v. The Children’s Investment Fund Management

Whether two or more shareholders have formed a group under Section 13(d) of the U.S. Securities Exchange Act of 1934 (“Exchange Act”) has always been a difficult, and well litigated, question. A shareholder or group that owns more than 5% of a public company’s shares must file publicly a Schedule 13D disclosing its affiliates and its intentions with respect to the company. Making an agreement or taking concerted action may transform individual shareholders into a group, forcing them to tip their hand publicly sooner than they would like. Because poison pill agreements borrow the definition of beneficial ownership from Rule 13d-3, the formation of a group may also have economic consequences in addition to public disclosure requirements. A determination that several shareholders constitute a group, with each shareholder beneficially owning each other’s shares, could cause them to cross the ownership threshold under a poison pill, catastrophically reducing the value of their shares.

Shareholder concern about unintentionally forming a group has chilled communications among large holders of shares in U.S. public companies. U.S. and English law both address this subject, but with important differences.