CN to TCI: We’ve Had Enough of Your ‘Chest Beating,’ ‘Empty Posturing’ and ‘Obvious Conflict of Interest’

Written by William C. Vantuono, Editor-in-Chief
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TCI Fund Management Ltd., led by Sir Chris Hohn (pictured) says CN shareholders “have a clear and certain path to exercise their rights as shareholders and hold the company’s underperforming Board accountable.”

The battle for control of CN’s boardroom and C Suite has heated up, morphing from light artillery to nuclear-tipped ballistic missiles. On Oct. 1—the day after Canada’s first National Day for Truth and Reconciliation—CN issued a searing statement accusing TCI Fund Management of, in simple language, lying through its teeth in its quest to chew up and spit out the current management and board. The rhetoric flying back and forth mimics the histrionics between CSX and Norfolk Southern when both railroads were headquartered in Virginia—observers quipping how the two were figuratively in hand grenade throwing range of each other, especially during their battle for control of Conrail.

CN, now on the offensive as a shareholder vote looms on whether to replace four current board members with TCI candidates and oust, at the very least, President and CEO JJ Ruest, lobbed a lengthy press release that “highlights inconsistencies in TCI’s arguments and the obvious conflict of interest driving its desire to seek effective control of CN,” adding that it “has the right leadership and management team to execute its ambitious strategic plan and drive immediate and long-term value for CN’s shareholders and other stakeholders.” 

CN said it has “responded to the numerous misleading claims and inconsistencies in recent disclosures by CIFF Capital and TCI, which, in addition to being a CN shareholder, is the largest shareholder of Canadian Pacific, CN’s direct competitor and Canada’s second-largest Class I railroad,” as well as the merger partner of Kansas City Southern, a deal that CN tried, and failed, to usurp. 

CN said TCI’s “erroneous claims” include: 

  • “False or misleading characterizations of CN’s performance.”
  • “Inaccurate description of financial risks associated with CN’s bid for Kansas City Southern and refusal to acknowledge that CN walked away with an incremental $700 million, among other strategic benefits.” 
  • “Failure to provide a credible or differentiated plan” from the one CN put forth on Sept. 17.
  • “Failure to acknowledge concerns over the fact that TCI is the largest shareholder of CN’s principal competitor,” Canadian Pacific. 

“TCI, which has a glaring conflict of interest as CP’s largest shareholder, is trying to assert effective control over CN without presenting a credible plan to create superior or sustainable value,” CN said. “As we will demonstrate more fully in due course, TCI’s critiques of the company and its performance are largely false or misleading. This includes portraying CN’s adjusted operating income, adjusted earnings per share and free cash flow as lower in the second quarter of 2021 than they were in second-quarter 2018. In fact, each of these metrics increased measurably when calculated on a trailing 12-month basis ending in such periods, which is much more meaningful to demonstrate trends in underlying performance. TCI also mischaracterizes both executive compensation and OR (operating ratio) at CN. TCI also omits the fact that much of CN’s capital spending during this period was needed to invest in technology to enhance safety and reliability, renew CN’s locomotive fleet and build network capacity and resiliency to lay the foundations for growth in total revenues and operating margins.” 

Former CN and UP operating executive Jim Vena will return to CN as CEO, if TCI is successful in its bid to restructure the railroad’s board and senior management.

“TCI is a recent 5% shareholder seeking to install its hand-picked CEO [Jim Vena] and elect five directors (including the CEO) [Gilbert Lamphere, Allison Landry, Rob Knight and Paul Miller] to a board of 11, but it has yet to put forward a differentiated or credible plan for creating sustainable value for CN’s customers, shareholders and communities,” CN said. “Material published this week by TCI contains only one paragraph about its plans for CN, and what they say sounds remarkably similar to what CN is already doing.” 

CN was referring to TCI’s Sept. 29 threatening letter to Board Chair Robert Pace complaining about the company’s failure to “immediately issue a press release to announce the resignation [on Sept. 16] of Julie Godin from the Board as required.” The paragraph to which CN is referring says, “[T]his conduct is another example in a long list of corporate governance failures at CN and illustrates why urgent change to the Board and leadership is necessary to put CN back on track.” TCI ended its letter by saying it would “report Canadian National to the relevant Canadian securities regulators and stock exchanges today.”

CN characterized TCI’s motives as “highly suspect. Earlier this year, TCI worked constructively with CN, encouraging it to be a leader and present its Climate Action Plan to its shareholders for approval. By all accounts, it appears TCI then voted in favor of CN’s directors, Say-on-Pay* and Climate Action Plan at the company’s Annual General Meeting on April 27, 2021. So did the overwhelming majority of CN shareholders. At the AGM, all directors received greater than 95% of votes in favor, and the company’s Say-on-Pay resolution passed with 97.7% support.

“Notably, this expression of overwhelming support was one week after CN announced its first proposal to buy KCS. Nothing of substance has changed since then, except for our increased bid for KCS, which secured an agreed transaction with KCS, and the pro-competition commitments we made in our submissions to the Surface Transportation Board, which while demonstrably positive for CN, have been costly and may yet be problematic for CP. It was only after this that TCI increased its stake in CN and began attacking the company publicly.” 

CN called its pursuit of KCS “a strategic move that resulted in significant benefits for CN’s shareholders and stakeholders. Contrary to the false narrative TCI is propagating, CN’s bid for KCS was the right strategic move for CN, and it resulted in multiple benefits for CN. CN’s Board and management team ran a thoughtful engagement and scenario planning process leading up to the executed merger agreement to buy a strategic asset and to protect long-term shareholder interests. All claims by TCI of CN facing US$2 billion losses have been proven to be blatantly false; in fact, CN gained US$700 million in break-up fees. CN shareholders should question TCI’s motives of endorsing CN’s closest competitor to pursue the transaction, while ignoring the equally compelling rationale of CN’s interest of pursuing the same transaction. CN believes the critical difference is that CP has limited long-term growth opportunities without KCS, while CN’s future as a standalone business is bright. On this point, CN agrees with TCI: CN has indeed built [what TCI has called] ‘a unique asset—the best rail network in North America.’” 

CN went on to say that its current board and management team “share a singular focus to execute on opportunities that are in the best interest of CN stakeholders. CN has a strong and diverse Board of Directors that includes three new independent directors elected for the first time in April 2021. CN’s Board is confident that CN’s management team has the capabilities to deliver on the goals set out in its strategic plan and lead the company into the exciting next phase of CN’s growth and industry leadership. With significant railroad industry experience, including four new senior leaders appointed over the past few years, and a focus on customer value, operational excellence, safety, environmental sustainability and social inclusion, CN’s management team is ready to win for the future and to continue building the premier railway of the 21st century.” 

CN pointed to “significant enhancements” to its corporate governance profile, including an annual advisory vote on the its Climate Action Plan, appointing three new independent directors to the Board, reducing Board size to ten independent directors plus the CEO, lowering the mandatory retirement age [for directors from 75 to 72] to confirming term limits, and achieving gender parity among independent directors ahead of plan. 

Download CN’s April 27, 2021 Essential Management Information Circular and Notice of Annual Meeting of Shareholders:

Current Chairman Robert Pace will be retiring from the Board and a new Chair will be appointed by the Board “in due course,” CN noted. “All appointments by the Board will be done with the best interests of all shareholders and members of CN’s stakeholder community in mind. Mr. Pace’s retirement was disclosed in March 2021 as [he] has reached the tenure limit under the governance practices clearly set out in CN’s 2021 Proxy Circular. The fact that TCI continues to beat its chest about seeking the removal of Mr. Pace is empty posturing.”

CN President and CEO JJ Ruest

“CN has announced an ambitious strategic plan to deliver immediate and long-term shareholder value, while retaining our commitment to safety, customer service and the communities we serve,” remarked President and CEO JJ Ruest, Railway Age’s 2019 Railroader of the Year. “This plan builds on the investments we have made in technology and capacity over the past three years to drive long-term sustainable growth in total revenues and operating margins. CN maintains an open and constructive dialogue with its shareholders, including discussions about areas where we can improve our business performance, but we will not indulge unfounded and bad-faith arguments that serve the interests of one shareholder over others—or of one of our competitors over CN. CN’s Board and senior management team are intently focused on putting forward ideas, initiatives and people that drive us forward to where CN and the railroad industry are going, not where it has been.” 

CN concluded its assault on TCI by reiterating that it “remains fully committed to a long-term, sustainable growth strategy, with a focus on operational excellence, a customer-first culture, innovation and ESG leadership.” That strategy encompasses its “comprehensive strategic plan with specific and measurable targets, including a target of approximately $700 million of additional operating income and a 57% OR for 2022, alongside plans to complete the remaining C$1.1 billion of its C$1.5 billion share repurchase plan, previously authorized by CN’s Board of Directors in January 2021, and embark on a new share repurchase plan of approximately $5 billion in 2022.” The plan also includes scaling back capital investment to approximately 17% of revenues and reducing headcount by roughly 1,000, including some 400 operating craft agreement positions. 

* As included in the Dodd-Frank Act, Say on Pay is a mandatory, nonbinding shareholder resolution offered by company management that asks investors to approve the compensation package for a company’s named executive officers (the CEO, CFO and top three most other highly compensated executive officers).

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