Full opinion text
OPINION LEWIS A. KAPLAN, District Judge. Table of Contents Background.518 I. Parties.518 II. Proceedings.518 III. Total Return Swaps.519 A. The Basics.519 B. The Purposes of TRSs .521 1. Short Parties.521 2. Long Parties.522 TV. The Events of Mid-2006 Until Late 2007.523 A TCI 523 1. TCI Develops a Position in CSX.523 2. TCI’s Leveraged Buyout Proposal.524 3. January through March 2007 .525 4. TCI Begins Preparing for a Proxy Fight.526 5. CSX Files Its 10-Q and Discloses that TCI Has an Economic Position.527 6. Proxy Fight Preparations Continue .528 7. TCI Concentrates its Swaps in Deutsche Bank and Citigroup.529 8. TCI Enters into Agreements with Two Director-Nominees.530 B. 3G.530 1. 3G Develops a Position in CSX.530 2. 3G Resumes Buying CSX Shares.531 3. 3G’s Hart^SeotlARodino Filing.531 4. 3G Sells Some Shares .532 5. 3G Rebuilds its Investment in CSX.532 6. 3G Prepares for a Proxy Fight.532 C. The Relationship Between TCI and 3G.532 1. 3G Learns of TCI’s Interest in CSX.533 2. 3G and TCI Discuss Activity in CSX.533 3. 3G and TCI Meet on March 29.534 4. TCI and 3G Inquire of CSX Regarding a Shareholder Vote.534 5. The August-September Pause.534 6. TCI and 3G Ramp Up Again .535 7. TCI and 3G Search for Director Nominees.535 V. The Proxy Contest.535 A. TCI and 3G Disclose the Formation of a Formal Group.535 B. The Group Files Its Notice of Intent to Nominate Directors.536 C. CSX and TCI Attempt to Negotiate a Resolution.536 D. CSX and The Group File Proxy Materials .537 1. CSX.537 2. The Group’s Proxy Statement.537 VI. The Positions of the Parties.538 Discussion.538 I. Section 13(d).538 A. Beneficial Ownership.539 1. Rule 13d-3(a).541 a. Investment Power.541 b. Voting Power.543 c. Synthesis .545 2. Rule 13d-3(b) .548 B. Group Formation.552 C. Alleged Schedule 13D Deficiencies.555 1. Legal Standard.555 2. Beneficial Ownership.555 3. Group Formation.555 4. Contracts, Arrangements, Understandings, or Relationships cn en 05 5. Plans or Proposals. Cn cn 05 II. Section 14(a). cu cn 05 III. Section 20(a). cn cn 00 IV. Notice of Proposed Director Nominee and Bylaw Amendment. 05 LO IlO V. Counterclaims. A. Section 14(a) Claim. 1. Target Awards Under the Long Term Incentive Plan. 2. The CSX Board’s Compliance With CSX Insider Trading Policy 3. CSX’s Belief that TCI Seeks Effective Control.. 4. TCI’s Proposal Regarding Capital Expenditures 5. The CSX-TCI Negotiations. 6. CSX’s Purposes in Bringing this Lawsuit. B. Declaratory Relief Regarding By-Laws Amendment 05 VI. Relief. 05 A. Success on the Merits. 05 CO B. Share Sterilization. 05 00 1. Irreparable Harm. 05 00 2. Deterrence. K C. Enjoining Further Disclosure Violations. W 1. Probability of Future Violations. to 2. Irreparable Injury. CO cc iO Appendix 1 . .574 Appendix 2. .583 Some people deliberately go close to the line dividing legal from illegal if they see a sufficient opportunity for profit in doing so. A few cross that line and, if caught, seek to justify their actions on the basis of formalistic arguments even when it is apparent that they have defeated the purpose of the law. This is such a case. The defendants— two hedge funds that seek extraordinary gain, sometimes through “shareholder activism” — amassed a large economic position in CSX Corporation (“CSX”), one of the nation’s largest railroads. They did so for the purpose of causing CSX to behave in a manner that they hoped would lead to a rise in the value of their holdings. And there is nothing wrong with that. But they did so in close coordination with each other and without making the public disclosure required of 5 percent shareholders and groups by the Williams Act, a statute that was enacted to ensure that other shareholders are informed of such accumulations and arrangements. They now have launched a proxy fight that, if successful, would result in their having substantial influence and perhaps practical working control of CSX. Defendants seek to defend their secret accumulation of interests in CSX by invoking what they assert is the letter of the law. Much of their position in CSX was in the form of total return equity swaps (“TRSs”), a type of derivative that gave defendants substantially all of the indicia of stock ownership save the formal legal right to vote the shares. In consequence, they argue, they did not beneficially own the shares referenced by the swaps and thus were not obliged to disclose sooner or more fully than they did. In a like vein, they contend that they did not reach a formal agreement to act together, and therefore did not become a “group” required to disclose its collaborative activities, until December 2007 despite the fact that they began acting in concert with respect to CSX far earlier. But these contentions are not sufficient to justify defendants’ actions. The question whether the holder of a cash-settled equity TRS beneficially owns the referenced stock held by the short counterparty appears to be one of first impression. There are persuasive arguments for concluding, on the facts of this case, that the answer is “yes” — that defendants beneficially owned at least some and quite possibly all of the referenced CSX shares held by their counterparties. But it ultimately is unnecessary to reach such a conclusion to decide this case. Rule 13d-3(b) under the Exchange Act provides in substance that one who creates an arrangement that prevents the vesting of beneficial ownership as part of a plan or scheme to avoid the disclosure that would have been required if the actor bought the stock outright is deemed to be a beneficial owner of those shares. That is exactly what the defendants did here in amassing their swap positions. In consequence, defendants are deemed to be the beneficial owners of the referenced shares. As for the question whether defendants made prompt disclosure after they formed a “group” within the meaning of Section 13(d) of the Exchange Act, the evidence, as in virtually all such cases, is circumstantial. But it quite persuasively demonstrates that they formed a group many months before they filed the necessary disclosure statement. Their protestations to the contrary rest in no small measure on the premise that they avoided forming a group by starting conversations by stating that they were not forming a group and by avoiding entry into a written agreement. But the Exchange Act is concerned with substance, not incantations and formalities. This is not to say that CSX is entitled to all of the relief that it seeks. The Williams Act was intended not only to prevent secret accumulation and undisclosed group activities with respect to the stock of public companies, but to do so without “tipping the balance of regulation either in favor of management or in favor of the person making the takeover bid.” It must be applied, especially in private litigation, with due regard for the principle that the purpose of private equitable relief is “to deter, not to punish.” Moreover, the Court’s ability to formulate a remedy is sharply constrained by precedent. Accordingly, while the Court will enjoin defendants from further Section 13(d) violations, it may not preclude defendants from voting their CSX shares and declines to grant any of the other drastic relief that CSX seeks. Any penalties for defendants’ violations must come by way of appropriate action by the Securities and Exchange Commission (“SEC”) or the Department of Justice. Background I. Parties Plaintiff CSX Corporation (“CSX”) is incorporated in Virginia and headquartered in Jacksonville, Florida. Its shares are traded on the New York Stock Exchange, and it operates one of the nation’s largest rail systems through its wholly owned subsidiary, CSX Transportation, Inc. Its chairman, president, and chief executive officer is Michael J. Ward, who is named here as an additional defendant on the counterclaims. Defendants The Children’s Investment Fund Management (UK) LLP (“TCIF UK”) and The Children’s Investment Fund Management (Cayman) LTD. (“TCIF Cayman”) are, respectively, an English limited liability partnership and a Cayman Islands company. Defendant The Children’s Investment Master Fund (“TCI Fund”) also is a company organized under the laws of the Cayman Islands and is managed by both TCIF UK and TCIF Cayman. These entities are run by defendant Christopher Hohn, who is managing partner and a controlling person of TCIF UK and the sole owner and a controlling person of TCIF Cayman. Defendant Snehal Amin is a partner of TCIF UK. These five defendants are referred to collectively as TCI. Defendants 3G Fund L.P. (“3G Fund”) and 3G Capital Partners L.P. (“3G LP”) are Cayman Islands limited partnerships. Defendant 3G Capital Partners Ltd. (“3G Ltd.”) is a Cayman Islands company and the general partner of 3G LP, which in turn is the general partner of 3G Fund. They are run by defendant Alexandre Behring, also known as Alexandre Behring Costa, who is the managing partner of 3G Ltd. These four defendants are referred to collectively as 3G. II. Proceedings TCI and 3G currently are engaged in a proxy fight in which they seek, inter alia, to elect their nominees to five of the twelve seats on the CSX board of directors and to amend its by-laws to permit holders of 15 percent of CSX shares to call a special meeting of shareholders at any time for any purpose permissible under Virginia law. The CSX annual meeting of shareholders, which is the object of the proxy fight, is scheduled to take place on June 25, 2008. CSX brought this action against TCI and 3G on March 17, 2008. The complaint alleges, among other things, that defendants failed timely to file a Schedule 13D after forming a group to act with reference to the shares of CSX and that both the Schedule 13D and the proxy statement they eventually filed were false and misleading. It seeks, among other things, an order requiring corrective disclosure, voiding proxies defendants have obtained, and precluding defendants from voting their CSX shares. TCI Master Fund, 3G Fund, 3G LP, and 3G Ltd. filed counterclaims against CSX and Ward asserting various claims under the federal securities laws. With the consent of the parties, the Court consolidated the preliminary injunction hearing with the trial on the merits. Following the conduct of a great deal of expedited discovery, the case was tried on May 21 to 22, 2008. The Court subsequently has had the benefit of more than 500 pages of post-trial submissions by the parties, two amicus briefs, an amicus letter on behalf of the Division of Corporation Finance of the SEC, and two lengthy letters by professors, one of whom is a former commissioner of the SEC. The parties have urged the Court to render a decision by this week in order to permit an expedited appeal prior to the meeting. This opinion contains the Court’s findings of fact and conclusions of law. III. Total Return Swaps A. The Basics The term “derivative,” as the term is used in today’s financial world, refers to a financial instrument that derives its value from the price of an underlying instrument or index. Among the different types of derivatives are swaps, instruments whereby two counterparties agree to “exchange cash flows on two financial instruments over a specific period of time.” These are (1) a “reference obligation” or “underlying asset” such as a security, a bank loan, or an index, and (2) a benchmark loan, generally with an interest rate set relative to a commonly used reference rate (the “reference rate”) such as the London Inter-Bank Offered Rate (“LIBOR”). A TRS is a particular form of swap. The typical — or “plain vanilla” — TRS is represented by Figure l. Figure 1 Counterparty A — the “short” party— agrees to pay Counterparty B — the “long” party — cash flows based on the performance of a defined underlying asset in exchange for payments by the long party based on the interest that accrues at a negotiated rate on an agreed principal amount (the “notional amount”). More specifically, Counterparty B, which may be referred to as the “total return receiver” or “guarantor,” is entitled to receive from Counterparty A the sum of (1) any cash distributions, such as interest or dividends, that it would have received had it held the referenced asset, and (2) either (i) an amount equal to the market appreciation in the value of the referenced asset over the term of the swap (if the TRS is cash-settled) or, what is economically the same thing, (ii) the referenced asset in exchange for its value on the last refixing date prior to the winding up of the transaction (if the TRS is settled in kind). Counterparty A, referred to as the “total return payer” or “beneficiary,” is entitled to receive from Counterparty B(l) an amount equal to the interest at the negotiated rate that would have been payable had it actually loaned Counterparty A the notional amount, and (2) any decrease in the market value of the referenced asset. For example, in a cash-settled TRS with reference to 100,000 shares of the stock of General Motors, the short party agrees to pay to the long party an amount equal to the sum of (1) any dividends and cash flow, and (2) any increase in the market value that the long party would have realized had it owned 100,000 shares of General Motors. The long party in turn agrees to pay to the short party the sum of (1) the amount equal to interest that would have been payable had it borrowed the notional amount from the short party, and (2) any depreciation in the market value that it would have suffered had it owned 100,000 shares of General Motors. In practical economic terms, a TRS referenced to stock places the long party in substantially the same economic position that it would occupy if it owned the referenced stock or security. There are two notable exceptions. First, since it does not have record ownership of the referenced shares, it does not have the right to vote them. Second, the long party looks to the short party, rather than to the issuer of the referenced security for distributions and the marketplace for any appreciation in value. The short party of course is in a different situation. It is entitled to have the long party place it in the same economic position it would have occupied had it advanced the long party an amount equal to the market value of the referenced security. But there are at least two salient distinctions, from the short party’s perspective, between a TRS and a loan. First, the short party does not actually advance the notional amount to the long party. Second, it is subject to the risk that the referenced asset will appreciate during the term of the TRS. As will appear, the institutions that make a business of serving as short parties in TRSs deal with this exposure by hedging, a fact pivotal to one of CSX’s claims here. The swap agreements at issue in this case are cash-settled TRSs entered into by TCI with each of eight counterparties, most significantly Deutsche Bank AG (“Deutsche Bank”) and Citigroup Global Markets Limited (“Citigroup”), and by 3G with Morgan Stanley. B. The Purposes of TRSs The goals of those who enter into TRSs vary. 1. Short Parties As a generic matter, a short party may be motivated to enter into a TRS simply to obtain the cash flow generated by the long party’s payment of the negotiated rate on the notional amount over the term of the swap. But the quid pro quo for that cash flow is the exposure to the risk of market appreciation in the referenced security. As a matter of theory and on occasion in practice, a short party may accept that exposure either because it thinks the risk of appreciation is small — in other words, it is making its own investment decision with respect to the referenced security — or because it has a more or less offsetting long exposure that it wishes to hedge. But that is not what we are dealing with in this case. The defendants’ counterparties in this case are major financial service institutions that are in the business, among others, of offering TRSs as a product or service and seeking an economic return via the pseudo-interest, if it may be so called, that they receive on the notional amount and from other incidental revenue sources. They are not, in this aspect of their endeavors, in the business of speculating on the market fluctuation of the shares referenced by the TRSs into which they enter as short parties. Accordingly, they typically hedge their short exposures by purchasing the referenced securities in amounts identical to those referenced in their swap agreements. Institutions that hedge short TRS exposure by purchasing the referenced shares typically have no economic interest in the securities. They are, however, beneficial owners and thus have the right to vote the referenced shares. Institutional voting practices appear to vary. As noted below, some take the position that they will not vote shares held to hedge TRS risk. Some may be influenced, at least in some eases, to vote as a counter-party desires. Some say they vote as they determine in their sole discretion. Of course, one may suppose that banks seeking to attract swap business well understand that activist investors will consider them to be more attractive counterparties if they vote in favor of the positions their clients advocate. In any case, however, the accumulation of substantial hedge positions significantly alters the corporate electorate. It does so by (1) eliminating the shares constituting the hedge positions from the universe of available votes, (2) subjecting the voting of the shares to the control or influence of a long party that does not own the shares, or (3) leaving the vote to be determined by an institution that has no economic interest in the fortunes of the issuer, holds nothing more than a formal interest, but is aware that future swap business from a particular client may depend upon voting in the “right” way. 2. Long Parties A long party to a TRS referencing equity in a public company gains economic exposure to the equity. In other words, it is exposed to essentially the same potential benefits and detriments as would be the case if it held the referenced security, and it gains that exposure without the need for the capital to fund or maintain such a purchase directly. This may permit such investors to operate with greater leverage or a lower cost than might be the case if they bought the security directly. But those are by no means the only reasons motivating long parties to engage in TRSs. There can be tax advantages. Most importantly for purposes of this case, if the long party to a cash-settled TRS is not the beneficial owner of the referenced shares — a question hotly contested here— one interested in amassing a large economic exposure to the equity of a registered company may do so without making the public disclosure that is required when a person or group acquires 5 percent .or more of the outstanding shares. The avoidance of public disclosure can confer significant advantages on the long party. By concealing its activities, it may avoid other investors bidding up the referenced stock in anticipation of a tender offer or other corporate control contest and thus maximize the long party’s profit potential. Second, it permits a long party who is interested in persuading an issuer to alter its policies, but desirous of avoiding an all-out battle for control, to select the time of its emergence to the issuer as a powerful player to a moment of its choosing, which may be when its exposure is substantially greater than 5 percent. In other words, it permits a long party to ambush an issuer with a holding far greater than 5 percent. One other point bears mention here. TRSs, like all or most derivatives, are privately negotiated contracts traded over the counter. Their terms may be varied during their lives as long as the counter-parties agree. In consequence, a TRS that in its inception contemplates cash settlement may be settled in kind — i.e., by delivery of the referenced shares to the long party — as long as the parties consent. This confers another potential advantage on a long party that contemplates a tender offer, proxy fight, or other corporate control contest. By entering into cash-settled TRSs, such an investor may concentrate large quantities of an issuer’s stock in the hands of its short counterparties and, when it judges the time to be right, unwind those swaps by acquiring the referenced shares from those counterparties in swiftly consummated private transactions. Moreover, even if such TRSs were settled in cash, the disposition by the short coun-terparties of the referenced shares held to hedge their swap exposures would afford a ready supply of shares to the market at times and in circumstances effectively chosen and known principally by the long party. The long party therefore likely would have a real advantage in converting its exposure from swaps to physical shares even if it does not unwind the swaps in kind. IV. The Events of Mid-2006 Until Late 2007 The events preceding this lawsuit are best understood by first considering the conduct of TCI and 3G separately. The Court then will analyze the relationship between TCI and 3G and their conduct in order to determine whether they in fact acted independently. A TCI 1. TCI Develops a Position in CSX TCI began to research the United States railroad industry in the second half of 2006 and rapidly focused on Norfolk Southern and CSX, the two largest railroads in the eastern portion of the country. It decided to concentrate on CSX because it “had more legacy contracts that were below market value prices” and, in TCI’s view, “ran less efficiently” than did Norfolk. In short, it felt that changes in policy and, if need be, management could bring better performance and thus a higher stock price. That insight, if insight it was, however, would be worthless or, at any rate, less valuable if CSX did not act as TCI thought appropriate. So TCI embarked on a course designed from the outset to bring about changes at CSX. TCI made its initial investment in CSX on October 20, 2006, by entering into TRSs referencing 1.4 million shares of CSX stock. By the end of that month, it was .party to TRSs referencing 1.7 percent of CSX shares. TCI almost immediately contacted CSX and informed it that TCI had accumulated approximately $100 million of CSX stock. Two weeks later, it advised CSX that it had $300 million invested in CSX, “with the potential to scale that further,” and sought a meeting with senior management at the Citigroup Transportation Conference, which was scheduled to take place on November 14, 2006. In the meantime, TCI continued accumulating TRSs referencing CSX throughout November, engaging in seventeen swap transactions with various financial institution counterparties. By the middle of the month, it had increased its exposure to approximately 2.7 percent. On November 14, 2006, TCI’s Hohn and Amin attended the Citigroup conference. During the course of the day, they approached CSX representatives, including David Baggs, the assistant vice president of treasury and investor relations. Amin later told Baggs that TCI’s swaps, the only type of investment exposure TCI then had in CSX, could be converted into direct ownership at any time. Following the conference, TCI continued to build its position through additional swaps throughout December, reaching 8.8 percent by the end of 2006. 2. TCI’s Leveraged Buyout Proposal TCI’s belief that it could profit substantially if it could alter CSX’s policies or, if need be, management manifested itself when, during December 2006, it began to investigate the possibility of a leveraged buyout (“LBO”). It explored this possibility with Goldman Sachs, sending its LBO model. Its email “re-iterate[d]” the need to keep the communication highly confidential, as TCI “ha[d] not taken the idea to anyone else, nor [was its] holding publicly disclosed so any leakage of our conversations with you would be damaging for our relations with the company.” On January 22, 2007, by which date TCI had amassed TRSs referencing 10.5 percent of CSX, TCI met with one of CSX’s financial advisors, Morgan Stanley, to discuss the LBO proposal. It noted during its presentation that a “ ‘perfect storm’ of conditions makes a private equity bid [for a major U.S. railroad] nearly inevitable” and that “CSX [was] logically the prime candidate” because of its “valuation, size, [and] quality of franchise.” TCI urged Morgan Stanley to back the plan and suggested that CSX “formally hire an investment bank to proceed urgently.” Morgan Stanley relayed the substance of its conversation to CSX. TCI then approached CSX directly about the issue on February 8 at an investor conference organized by J.P. Morgan. Amin asked Baggs for CSX’s views on the LBO proposal. Baggs confirmed that Morgan Stanley had relayed the proposal but said that CSX was not in a position to respond. S. January through March 2007 TCI continued to build its TRS position in CSX. In the meantime, CSX was not idle. On February 14, 2007, it filed a Report of Form 8-K in which it announced a plan to buy back $2 billion worth of its common stock. By February 15, 2007, the date of the BB & T Transportation Conference, which was attended by CSX, TCI, and others, TCI had increased its position, still entirely via TRSs, to 13.6 percent. At the conference, Amin approached Baggs and Oscar Munoz, CSX’s chief financial officer, to inquire as to how CSX intended to conduct its share repurchase program. Baggs and Munoz declined to discuss the specifics in light of Regulation FD under the securities laws. During the course of the brief conversation, however, Amin stated that TCI “owned” 14 percent of CSX. Following the BB & T Transportation Conference, TCI began to contact other hedge funds about CSX. Hohn told Mala Gaonkar, a partner of Lone Pine Capital, to “[t]ake a look” at CSX and Vinit Bo-das, managing director of Deccan Value Advisors, that “csx is the best to us. keep this confidential [sic ].” On March 2, 2007, Hohn told Bodas to “[b]uy csx [sic ].” These contacts, the Court finds, were intended to promote the acquisition of CSX shares by hedge funds that TCI regarded as favorably disposed to TCI and its approach to CSX in an effort to build support for whatever course of action it ultimately might choose with respect to the company. Moreover, the evidence convinces the Court that it is likely that TCI made similar approaches to other such funds. Hohn contended in his witness statement that he had conversations with hedge funds such as Deccan Value Advis-ors, Lone Pine Capital, 3G, Seneca, Icahn, TWC, and Atticus, but only concerning the railroad industry generally, not CSX in particular. Given the evidence to the contrary regarding Hohn’s discussions with Deccan Value and Lone Pine, the Court’s assessment of Hohn’s credibility, and TCI’s clear interest in doing so, the Court finds that Hohn did not limit his conversations with other hedge funds to industry-level topics. He suggested, in one way or another, that they buy CSX shares and alerted them to the fact that CSX had become a TCI target. Up to this point, TCI had not acquired directly even a single share of CSX stock. But it decided to begin such acquisitions to place more pressure on the company and to lay the groundwork for a proxy fight. On March 2, 2007, TCI filed a premer-ger notification report under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) in which it stated that it intended to acquire an undetermined number of CSX common shares in an amount that would meet or exceed $500 million. A few days later, Amin advised CSX of the filing by letter. TCI, in the meantime, had not abandoned the idea of taking CSX private in an LBO. Moreover, the circumstances suggest, and the Court finds, that it continued to discuss its interest in CSX and this and other possibilities for altering CSX’s practices in a manner that TCI believed would cause its stock to rise, at least at some level of specificity, with other like-minded hedge funds. The record demonstrates that TCI in March was invited by Austin Friars, a Deutsche Bank proprietary hedge fund, to listen in on a phone call that Austin Friars had arranged with John Snow, a former CSX chief executive officer, to review a list of questions that Austin Friars had compiled for him, and to submit questions of their own. This of course suggests, and the Court finds, that TCI had made Austin Friars aware of its investment in and interest in provoking basic change at CSX, else Austin Friars would have been unlikely to extend this invitation. Among the questions proposed by Austin Friars for Mr. Snow was whether railroad companies could “lend themselves to being ru[n] by private equity.” TCI responded that this, among other questions, was “great,” thus making clear to Austin Friars, even if it had not specifically done so earlier, that TCI was looking at the possibility of trying to take CSX private. And this was not its only interaction with Deutsche Bank on the subject. It subsequently enlisted Deutsche Bank to analyze its LBO proposal, and Deutsche Bank concluded that CSX was a “terrific LBO candidate.” TCI continued to exert pressure on CSX management through the end of March. They met in New York on March 29, at which time Amin criticized management for failing to take certain actions and pressed it to implement TCI’s proposals. He indicated that TCI held up to 14 percent of CSX’s stock, the bulk of it in swaps that could be converted to physical shares, and that there were “no limits” to what TCI would do absent CSX’s ácquiescence in its demands. The day after the meeting, March 30, TCI entered into additional swaps that brought its economic exposure to approximately 14.1 percent. Ip. TCI Begins Preparing for a Proxy Fight In early April, TCI sent its LBO model to Evercore, another CSX advisor, and reached out to Hunter Harrison, the chief executive officer of Canadian National, a Class I railroad like CSX, to inquire whether “he would be interested in coming in as CEO of CSX.” By the middle of the month, Amin wrote that TCI was not “going to get what we want passively.” At more or less the same time, TCI began to unwind some of its swaps and to purchase CSX stock with a goal of keeping its exposure to CSX “roughly constant.” It is relevant to consider why TCI decided to shift some of its position into shares. Certainly there is no persuasive evidence that any economic factor that led TCI to choose swaps in the first place had changed. In other words, if financing considerations made swaps more attractive at the outset, that advantage persisted. So the explanation lies elsewhere. And it is, in the circumstances, obvious. TCI saw the payoff on its CSX investment, if there was to be one, resulting from a change in CSX policies and, if need be, management. But CSX had rebuffed all of TCI’s overtures for substantive high level meetings and shown little interest in an LBO. So TCI by this time understood that a proxy fight likely would be required to gain control of or substantial influence over CSX. Holding shares that it could vote directly had an advantage over swaps because the votes of shares held by swap counterparties were less certain. They depended upon TCI’s ability to influence those counterparties to vote the shares as TCI wished. This advantage, however, was not enough to cause TCI to dump a large part of its TRS position. 5. CSX Files Its 10-Q and Discloses that TCI Has an Economic Position On April 18, 2007, CSX filed its Form 10-Q for the period ending March 30, 2007, in which it disclosed that it had “received notice from The Children’s Investment Fund Management (U.K.) LLP that it had made a filing under the Hart-Scott-Rodino Antitrust Improvements Act to acquire more than $500 million of CSX stock. That firm has also advised CSX that it currently holds a significant economic position through common stock ownership and derivative contracts tied to the value of CSX stock.” Following this disclosure, TCI essentially paused its trading activities. But it continued and, perhaps, stepped up its efforts to lay the groundwork for a proxy contest and to induce like-minded investors to buy CSX shares. On May 8, Amin attended the Bear Stearns Transportation Conference where he gave a heavily attended speech. He set forth TCI’s (1) interest in CSX, (2) proposals to improve CSX, and (3) view that management was unresponsive to those proposals. The next day, TCI, among others, emailed CSX to ascertain the outcome of the shareholder vote, taken at the annual meeting on May 2, on a non-binding resolution concerning shareholders’ ability to call special meetings. CSX subsequently had little contact with TCI between the Bear Stearns Conference and August. TCI, however, met again with Evercore to express frustration that neither CSX management nor its board had been willing to meet to discuss TCI’s proposals to improve operations and governance at the company. TCI informed Evercore that it directly owned 4 percent of CSX shares and had entered into swaps referencing over 10 percent of the company’s shares. 6. Proxy Fight Preparations Continue TCI claims to have begun reconsidering its position in CSX as it entered August 2007 because (1) it was reevaluating its entire portfolio in light of turmoil in the credit and equity markets and (2) it perceived a heightened risk of re-regulation of the railroad industry. As we shall see, it in fact reduced its exposure by nearly 2 million shares. Nevertheless, on August 2, TCI met with D.F. King, its proxy solicitation firm, to discuss the mechanics of a proxy contest. D.F. King advised that success in a proxy contest was more likely if TCI proposed a “short slate” of two director-nominees, rather than a control slate, because Institutional Shareholder Services (“ISS”) would be more willing to endorse that approach than to endorse a control slate at a company with a record of success vis-a-vis share price performance. Hohn expressed his professed concern over re-regulation to CSX on August 23, stating that the proposed legislation was “a death threat to returns in the industry.” He recommended that the railroad industry threaten to “cut all growth capex [i.e., capital expenditure]” because it would be “impossible to justify growth capex if this bill is passed.” CSX held an analyst/investor conference in New York on September 6. TCI attended. Following the conference, Hohn met with CSX advisors Evercore and Morgan Stanley and again expressed disappointment with and criticism of CSX. TCI then contacted Heidrick & Struggles, an executive search firm, and asked it to locate one or two potential nominees to the board. On September 20, TCI informed D.F. King that it was “likely to proceed in a proxy contest,” although Amin expressed skepticism that a minority slate of directors could accomplish what TCI wished to achieve. He therefore inquired as to the feasibility of running a slate of nominees for half the board, an idea that D.F. King thought would be unsuccessful because it would not command support by ISS. TCI continued other preparations as well. It identified Tim O’Toole as a potential director nominee at the end of September, and Amin contacted him on October 6 to arrange a meeting between him and Hohn. After the meeting, Amin put O’Toole in touch with an attorney at Schulte Roth, TCI’s counsel, “to discuss what a process may look like.” TCI continued to press CSX. It sent an open letter to the board on October 16 in which it stated that it owned 4.1 percent of CSX’s shares as a “long-term investor.” Hohn and Amin reiterated demands that the board (1) “[s]eparate the [cjhairman and CEO roles,” (2) “[rjefresh the [b]oard with new independent directors,” (3) “[a]l-low shareholders to call special shareholder meetings,” (4) “[ajlign management compensation with shareholder interests,” (5) “[pjrovide a plan to improve operations,” (6) “justify the capital spending plan,” and (7) “[pjromote open and constructive relations with labor, shippers and shareholders.” They requested also that the board freeze growth investment until the fate of any regulatory legislation becomes more apparent. Hohn and Amin concluded that they “sincerely hope[d that CSX would] act now — and act voluntarily — to address the serious issues facing CSX.” TCI followed with a second open letter on October 22 in which it criticized CSX’s response to its first letter as “pandering to Washington” and its management’s statements to lawmakers as “reckless” and “irresponsible.” 7. TCI Concentrates its Swaps in Deutsche Bank and Citigroup As the likelihood of a proxy fight increased, TCI began to address the matter of its voting power. From the inception of its TRS acquisitions in October 2006 until the end of October 2007, TCI carefully distributed its swaps among eight counterparties so as to prevent any one of them from acquiring greater than 5 percent of CSX’s shares and thus having to disclose its swap agreements with TCI. On October 30, 2007, however, TCI began unwinding its TRSs with Credit Suisse, Goldman Sachs, J.P. Morgan, Merrill Lynch, Morgan Stanley, and UBS and replacing them with TRSs with Deutsche Bank and Citigroup. Ultimately, it shifted exposure equal to approximately 9 percent of CSX from other counterparties into Deutsche Bank and Citigroup. TCI contends that it did this for two reasons. It claims first that it was motivated by the credit market crisis, believing that Deutsche Bank and Citigroup, as commercial banks backed by governmental central banks, would reduce TCI’s exposure to counterparty credit risk. Perhaps so. But there was another and, from TCI’s point of view, far more important reason for this move. The likelihood of its counterparties voting the hedge shares with TCI was very much on its mind. Indeed, Hohn stated that he and Amin “discussed whether picking Deutsche Bank and Citigroup would be beneficial in terms of a potential vote of any hedge shares in a potential proxy fight. With respect to Deutsche Bank, we speculated that it might be helpful that a hedge fund within Deutsche Bank, Austin Friars Capital, also had a proprietary position in CSX.” But Hohn was modest. As the record demonstrates, TCI and Austin Friars had been working together, at least to some degree, on the CSX project for some time. TCI had consulted Deutsche Bank about its LBO proposal. And, as we shall see, there is additional reason to believe that Deutsche Bank was exceptionally receptive, to say the least, to TCI’s goals and methods. 8. TCI Enters into Agreements with Two Director-Nominees TCI had met with Tim O’Toole in October to gauge his interest in being nominated for the CSX board. On December 6, 2007, O’Toole purchased 2,500 shares of CSX stock, which qualified him for election, and on December 10 entered into a formal agreement to be a nominee for the board. The next day, and after a two week negotiation, Gary Wilson also agreed to be a nominee for TCI’s slate of directors. B. 3G 1. 3G Develops a Position in CSX 3G began to analyze the investment potential of the North American railroad industry during 2005 and 2006 but began to focus on CSX only toward the end of 2006 and beginning of 2007. It claims that it perceived CSX to be 3G’s best investment opportunity because it thought that (1) the share price of CSX was “less likely to decrease and more likely to appreciate over time as compared with other railroads,” (2) “CSX had a large proportion of legacy contracts at below-market prices that would expire and could then be repriced over time” to increase revenues, and (3) “CSX had substantial upside potential from improving operational efficiency.” During the first week of February, Daniel Schwartz of 3G contacted CSX’s investor relations department to inquire about the company. He then emailed Behring on February 7 to indicate that the deadline had passed for CSX shareholders to submit proposals to be included in the company’s proxy materials, including board nominations, for that year’s annual general meeting. As 3G was not then a shareholder of CSX — indeed, it had no investments in or exposure to it of any kind — this demonstrates its interest in a proxy fight right from the outset. 3G made its first investment in CSX on February 9, purchasing 1.7 million shares of common stock. In the week ended February 16, it amassed 8.3 million shares, or 1.9 percent of shares outstanding. 3G then sold 17,340 shares and temporarily stopped trading. Behring wrote to CSX’s Ward on February 27 to request a meeting. He explained that his interest stemmed from his ownership of approximately 2 percent of CSX shares. Baggs responded on Ward’s behalf, stating that he was available to discuss the railroad industry and CSX, but indicating that the J.P. Morgan investor/analyst conference, scheduled in the middle of March, might be a convenient time for Behring to meet with Ward. Behring attended the conference and introduced himself to Ward, who agreed to arrange a meeting with 3G representatives. 2. 3G Resumes Buying CSX Shares On March 29, 2007, 3G began to purchase shares of CSX stock at a rapid rate. Between that date and April 17, it acquired 11.1 million shares, bringing its holdings to 4.4 percent of the company’s outstanding stock. Its April 2 purchases alone represented 89.6 percent of the total daily volume of trading in CSX stock. But it stopped buying as abruptly as it began and made no further investments in CSX between April 17 and August 15. 3G nevertheless remained very much interested in CSX. It attended the Bear Stearns Conference on May 8 and heard Amin’s speech, which Schwartz characterized as “an amazing speech, ripping into csx mgmt!!!! [sic].” It monitored the price of CSX stock during the speech and noted that it rose to $46.50, up 1.3 percent. On May 9, 2007, Schwartz telephoned CSX to find out the results of votes conducted at the May 2 annual general meeting on various shareholder proposals. He called again on May 17 to seek a meeting between 3G and CSX, a meeting that CSX refused to have. The two parties ultimately agreed to arrange a June visit to CSX’s Jacksonville headquarters. 3. 3G’s Hart-Scott-Rodino Filing Baggs and Munoz met with 3G at its New York offices on June 11. Behring told CSX that 3G would be making a Hart-Scott-Rodino premerger notification filing, which it subsequently did on June 13. In a subsequent letter to CSX confirming the filing, 3G indicated that it intended to acquire shares of CSX common stock in excess of $500 million and that it might acquire more than 50 percent. Ip. 3G Sells Some Shares Notwithstanding its HarL-Scotfc-Rodino filing, 3G did not change its investment position in CSX for nearly four months after its purchase on April 17. Starting in the middle of August, however, it began once again to increase its holdings, purchasing about 493,000 shares on August 15 and then entering into its first TRSs, which referenced 1.7 million CSX shares, on August 16. Between August 24 and September 14, however, it sold 8.3 million CSX shares, over 40 percent of its position. The Court deals with those sales below. 5. 3G Rebuilds its Investment in CSX By September 15, 3G held 11.6 million shares and swaps referencing 1.7 million shares, giving it economic exposure to just over 3 percent of the shares outstanding, and had stopped reducing its exposure. On September 26, 3G reversed course again and began increasing its direct position. By October 15, it had purchased 5.2 million shares and held 3.8 percent of the shares outstanding. Together with its swaps, it had economic exposure to 4.2 percent of the shares outstanding. 6. 3G Prepares for a Proxy Fight During this period, 3G also began to pursue possible nominees for the CSX board. It identified Behring as one potential candidate and focused on Gil Lam-phere, a former director of Canadian National Railway, as another. Following an October 12 meeting, Lamphere put together an operating plan for CSX entitled “Project Improve.” On November 2, Lamphere met with 3G’s lawyers at Kirkland & Ellis. He then purchased 22,600 shares of CSX stock, thus qualifying for election to the board, and, on December 10, 2007, entered into a formal agreement to be a board nominee. 3G simultaneously acquired more shares and entered into more swaps. On November 1, it increased its physical holdings in CSX by 421,300 shares. Between November 1 and 8, it entered into TRSs referencing an additional 1.58 million CSX shares. On November 8, the final day on which 3G’s CSX position changed, it held 4.1 percent of the shares outstanding and had swaps referencing 0.8 percent of shares outstanding, for an aggregate economic exposure of 4.9 percent of the company. C. The Relationship Between TCI and 3G TCI and 3G have had a long-standing relationship. Synergy, a fund under the 3G umbrella, has been an investor in TCI since its beginning. TCI and 3G thus are well known to and communicate regularly with each other. Moreover, TCI is widely regarded as an “activist” hedge fund. This was of considerable interest to 3G, which regarded itself as inexperienced in playing such a role. Behring therefore sought out Hohn for the purpose of educating himself in this area. 1. SG Learns of TCI’s Interest in CSX In the early part of 2007, Synergy received a letter from TCI disclosing the industries in which TCI was invested. The report showed a very large holding in “U.S. transportation.” Behring contacted TCI to inquire as to what this meant, He was particularly interested in TCI’s holdings in the railroad industry. Hohn told him that TCI had “an interest in CSX,” the size of which could be deduced from TCI’s overall position in the railroad industry. While Hohn professes not to recall having told Behring of TCI’s exact holdings in the company, it would have been entirely natural for him to have disclosed at least the approximate size of TCI’s holding. The Court finds that he did so. 2. SG and TCI Discuss Activity in CSX As discussed above, 3G purchased its first shares of CSX on February 9 and made additional purchases on February 12. These were no piddling acquisitions. Its purchases over these two days constituted approximately 24 percent of the total market volume for CSX shares. Moreover, its purchasing continued through February 16, by which time 3G had accumulated 8.3 million shares of CSX. In addition, 3G entered into some CSX credit default swaps (“CDS”) on February 13 and 14. These events coincided with an email that Hohn sent to Amin on February 13 with the subject line “Re: Arcelor Brasil MTO — urgent.” The first paragraph stated that Hohn wanted to discuss communications that Amin had had with a third party regarding Arcelor Brasil. In the next paragraph, however, Hohn raised a new subject. He wrote that “[ijncreased activity in csx cds [sic ] has caused excitement in the stock. I want to also discuss our friend alex [sic ] of Brazil.” Hohn admitted that he spoke with Behring in relation to this email and that the conversation occurred at about the time the email was sent. At trial, however, he denied that his interest in discussing his “friend Alex” with Amin, or his conversation with Behring that occurred at this time, related to CDS activity in CSX. This testimony is not credible except perhaps in an extremely literal sense. 3G was interested in CSX no later than January 2007 and Hohn knew it. 3G purchased a very large volume of CSX shares in the open market immediately before the email. Its CDS transactions, on the other hand, were a handful of private contracts that were characterized by defense counsel as “a tiny minuscule hedge,” costing only $10,000 a year, “of what became an over billion dollar equity position.” The likelihood therefore is that Hohn’s email “misspoke” in referring to 3G’s CDS transactions, the intention being to refer to its stock purchases. But whether the reference was intended to be to CDSs or shares, the real “excitement” concerned the volume of trading in CSX shares, not a few private CDS transactions. The Court infers that Hohn wanted to discuss his “friend Alex” with Amin because he was concerned that 3G was acting in a manner that risked having the marketplace become aware of the accumulation of a position that might presage a control battle. S. SG and TCI Meet on March 29 This conclusion dovetails with the fact that 3G made no investments in CSX from February 22 until March 29. On the latter date, Behring met with Amin in New York. Each claimed not to recall attending that meeting, but both testified, un-persuasively, that they did not discuss their respective holdings in CSX. On that very day, however, 3G resumed purchasing CSX stock, buying 11.1 million more shares by April 18. In addition, during this period, the waiting period resulting from TCI’s HSR Act filing expired, and TCI also began purchasing CSX common stock, accumulating 17.6 million shares by April 18. A TCI and SG Inquire of CSX Regarding a Shareholder Vote TCI and 3G, along with many other investors and CSX, attended the Bear Stearns Transportation Conference on May 8, 2007, at which Amin made his speech about TCI’s position and interest in CSX. The next day, TCI contacted CSX to inquire about the results of shareholder voting at the CSX annual general meeting held one week earlier. 3G made the same inquiry, as did several other investors. According to Baggs, who had been the vice president of investor relations for over three years and with the company for over twenty, this “was the first instance in [his] experience of having investors calling about the outcome of a particular shareholder proposal.” 5. The August-September Pause We have seen already that TCI began professing concern about the risk of rere-gulation of railroads in August 2007. And for a period of about two weeks, TCI and 3G evidenced that concern. Both reduced their positions. Between August 23 and August 31, TCI reduced its exposure to CSX by nearly 2 million shares. Indeed, Amin told Hohn on September 12, 2007 that he wished that TCI had sold CSX “10 dollars ago.” And over almost the same period — August 24 to September 14 — 3G sold 8.3 million CSX shares, over 40 percent of its position. But this change of heart was temporary. 6. TCI and 3G Ramp Up Again On September 20, just six days after 3G completed the sales referred to above, TCI informed D.F. King that it likely would go ahead with a proxy contest and began looking for suitable director-nominees. During that same time period, 3G contemplated proposing Behring as a director-nominee. Amin and Behring met again on September 26. Although both parties deny that they discussed anything related to the purchase of CSX common stock, they both admitted that the topic of CSX likely arose and that each knew that the other had an investment position in the company. And just as occurred on March 29, the date of an earlier Amin-Behring meeting, 3G again began buying CSX holdings on the day of this September 26 meeting. By October 15, it had purchased over 5 million shares, bringing its physical holdings to 16.8 million shares. 7. TCI and 3G Search for Director Nominees TCI and 3G both began searching for director-nominees during the same time period. TCI identified Tim O’Toole as a potential candidate and contacted him on October 6 to arrange a meeting. Hohn and O’Toole met in London on October 8. By October 5, Behring, he says, was reviewing annual reports to identify suitable director candidates. He identified Lamphere around that time and met with him in New York on October 8. Behring met with Lamphere again on October 12 and then met with Amin on October 17. He denied having told Amin during that meeting that 3G was searching for nominees and that it had met twice with a potential candidate. V. The Proxy Contest A. TCI and 3G Disclose the Formation of a Formal Group On December 10, 2007, Lamphere and O’Toole entered into nominee agreements with 3G and TCI, respectively, and on December 11, Gary Wilson agreed with TCI to be a nominee. On December 19, 2007, TCI, 3G, Lam-phere, O’Toole, and Wilson (the “Group”) filed a Schedule 13D with the SEC. The filing disclosed that they had “entered into an agreement to coordinate certain of their efforts with regard [sic ] (i) the purchase and sale of [various shares and instruments] and (ii) the proposal of certain actions and/or transactions to [CSX].” It stated that the Group disclosed that it collectively owned 8.3 percent of CSX shares outstanding, all of which were said to have been “originally acquired ... for investment in the ordinary course of business” save for the 25,100 purchased by Lamphere and O’Toole in connection with becoming director nominees. The Group disclosed that it “intendfed] to conduct a proxy solicitation” but “ha[d] no present plan or proposal that would relate to or result in any of the matters set forth in subparagraphs (a) — Q) of Item 4.” The Group reserved the right to take future action that it deemed appropriate. The 13D disclosed also that TCI had cash-settled equity swap arrangements with eight counterparties that gave it economic exposure to approximately 11 percent of CSX’s shares outstanding. 3G similarly disclosed its swap economic exposure to 0.8 percent, all of which was held with Morgan Stanley. Both disclaimed beneficial ownership of the underlying shares referenced by their TRSs. B. The Group Files Its Notice of Intent to Nominate Directors Pursuant to CSX’s amended and restated bylaws, the Group filed a “Stockholder Notice of Intent to Nominate Persons for Election as Directors of CSX Corporation” (“Notice”) on January 8, 2008. C. CSX and TCI Attempt to Negotiate a Resolution Edward Kelly, the presiding director of the CSX board, met with Hohn in January to see whether a proxy contest could be avoided. CSX expressed a willingness to nominate three of the Group’s director nominees, including Hohn and Behring, and a fourth mutually acceptable candidate. But Kelly and Hohn were unable to agree on a fourth candidate. Hohn’s efforts in the negotiations were not limited to seating directors on the board. On January 14, he demanded that (1) he be able to interview the current directors, dictate which directors the Group’s three nominees would replace, and determine which committees they would be seated on, (2) the roles of CEO and chairman be split, (3) the board’s size not be increased without approval of the shareholders or 80 percent of the board, and (4) shareholders controlling 10 or 15 percent of the outstanding shares of voting stock be permitted to call a special meeting at any time and for any legally permissible purpose. Hohn told Kelly that he would create a dissident board and make things unpleasant for Kelly. Moreover, he told Kelly that if TCI were successful in electing its five directors, Ward’s future would be “bleak.” Kelly responded on January 16 that he was “concerned about [Hohn’s] apparent interest in gaining effective control.” The two sides met the next day, and Kelly inquired as to whether Hohn would be interested in a standstill agreement. Hohn was not receptive to the idea so, on January 18, Kelly informed Hohn that the differences between CSX and TCI would be “impossible to bridge,” particularly because of Hohn’s position that a standstill agreement, no matter its contents, would not be acceptable. Three days later, the Group supplemented its Notice to include its intent to present a proposal that would amend the CSX bylaws to allow shareholders holding at least 15 percent of all shares outstanding the ability to call a special meeting. D. CSX and The Group File Proxy Materials 1. CSX CSX filed a preliminary proxy statement on February 21 and a revised version on February 22, 2008. It urged shareholders to vote for the board’s proposed directors and not to vote for any nominees offered by the Group. It stated also that the shareholders would be presented with three proposals concerning their ability to call a special meeting: one supported by CSX, one by TCI, and a third. CSX proposed amending the bylaws to permit holders of 15 percent of the company’s outstanding shares to require the board to call a special meeting unless the proposed topic of the meeting had been voted on within the previous year or would be voted on at the annual meeting within the next ninety days. It urged that its proposal provided safeguards against the use of such meetings as a mechanism for disruption or delay that were lacking in the other proposals. 2. The Group’s Proxy Statement The Group filed its preliminary proxy statement on March 10, 2008. It proposed Hohn, Behring, Lamphere, O’Toole, and Wilson for election to the board and advocated its proposal to permit investors holding at least 15 percent of CSX stock to call a special meeting for any purpose permissible under Virginia law. The materials noted that the Group collectively held 35.1 million shares, representing approximately 8.7 percent of those outstanding, and that the value of its investment in CSX exceeded $1.65 billion. It disclosed its members’ swap arrangements and the aggregate percentage of CSX shares to which they provided economic exposure. It disclosed also that Deutsche Bank beneficially owned 36.7 million shares of CSX, or 9.1 percent of the common stock. VI. The Positions of the Parties CSX contends that (1) TCI violated Section 13(d) of the Exchange Act by failing to disclose its beneficial ownership of shares of CSX common stock referenced in their TRSs and (2) TCI and 3G violated Section 13(d) by failing timely to disclose the formation of a group. It argues further that TCI and 3G violated Section 14(a) of the Exchange Act because their proxy statements were materially false and misleading. Its state law claim contends that defendants’ notice of intent to nominate directors failed to comply with CSX’s bylaws in violation of Section 13.1-624 of the Virginia Stock Corporation Act. Defendants contend first that CSX and Ward violated Section 14(a) of the Exchange Act because the CSX proxy statement is materially false and misleading concerning (1) executive compensation and director stock awards, and (2) the defendants and their intentions. They allege also that a bylaw amendment passed by CSX on February 4 concerning shareholder special meetings violates Section 13.1-680 of the Virginia Stock Corporation Act. Discussion I. Section 13(d) The Williams Act, which enacted what now is Section 13(d) of the Exchange Act, was passed to address the increasing frequency with which hostile takeovers were being used to effect changes in corporate control. Section 13(d) in particular was adopted “to alert the marketplace to every large, rapid aggregation or accumulation of securities, regardless of technique employed, which might represent a potential shift in corporate control.” The core of the statute for present purposes is Section 13(d)(1), which provides in relevant part that “Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is registered pursuant to section 781 of this title, ... is directly or indirectly the beneficial owner of more than 5 per centum of such class shall, within ten days after such acquisition, send to the issuer of the security at its principal executive office, by registered or certified mail, send to each exchange where the security is traded, and file[ ] with the Commission, a statement containing such of the following information, and such additional information, as the Commission may by rules and regulations, prescribe as necessary or appropriate in the public interest or for the protection of investors— “(A) the background, and identity, ... and the nature of such beneficial ownership by, such person and all other persons by whom or on whose be