How boards fared in the courts: 10 top cases of 2008: a review of the rulings leads to the finding that independent directors, deliberative processes, concern for shareholders, and respect for the rules of play hold sway.

• Position: TOP LEGAL CASES

CSX Corp. v. Children's Inv. Fund Mgmt. (UK) LLP

Message to activist shareholders: accumulate with great care

BY COLIN DIAMOND

CSX CORP. SUED The Children's Investment Fund (TCI), a hedge fund seeking to elect its nominees to CSX's board, alleging that it had violated Section 13(d) of the Exchange Act by failing to disclose its beneficial ownership of more than 5% of CSX's common stock pursuant to total return swaps (TRSs). The court--the case was adjudicated in the Southern District of New York--did not find that the long party to a TRS is automatically the beneficial owner of the reference security. However, it held that in this instance TCI had engaged in a scheme to prevent the vesting of beneficial ownership. TCI was therefore "deemed" to be the beneficial owner of CSX's stock because it deliberately spread its TRS positions among several counterparties, each of which hedged its position on an almost share-for-share basis and was likely to vote and dispose of the shares in accordance with TCI's wishes, and none of which met the 5% disclosure threshold.

The CSX decision highlighted the use of derivative equity positions to accumulate significant undisclosed economic, and potential ownership, interests in a company's stock in connection with battles for corporate control. As a result of the decision, activist shareholders will need to act with great care when accumulating significant undisclosed positions through derivatives, including TRSs, and ensure they have no impermissible understandings regarding the voting or disposition of the reference securities.

While ostensibly confined to its facts, the judgment injects a degree of uncertainty regarding the determination of beneficial ownership in connection with cash-settled TRSs and may be used in other contexts that the court did not envisage in determining beneficial ownership.

Colin Diamond is a partner in White & Case's Capital Markets Practice with experience counseling public companies in securities law compliance, corporate governance, and capital raising transactions. He can be contacted at cdiamond@whitecase.com.

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IN RE LORAL SPACE AND COMMUNICATIONS INC. CONSOLIDATED LITIGATION

Fairness inform must be accompanied by fairness in substance

BY DOUG RAYMOND

THEY USED A SPECIAL COMMITTEE and got a fairness opinion. But they didn't get a fair deal. The judge rewrote the terms, and Loral directors learned that treating stockholders fairly goes beyond lip service. Loral involved a challenge to a $300 million preferred stock purchase by Loral's largest stockholder. Since five of nine directors were affiliated with the stockholder, the board appointed a special committee. This gesture turned out to be hollow, because the chairman was one of the five stockholder-affiliated directors. During negotiations he divulged the committee's fallback position to the stockholder and even asked the stockholder to invest $40 million in his own company. The second member "brought the scientific concept of inertia to the Special Committee." The committee's financial advisor never conducted a market check. As months passed, the committee hewed to its mandate of dealing only with the stockholder and did not investigate alternative transactions.

The court found the process and the terms unfair. Stated the judge: "When, over the course of nearly a year, there appears to be no instance in which the Special Committee took any of the numerous opportunities available to it to explore the marketplace and determine whether it could obtain better terms than were available from the controlling stockholder ... it is impossible for me to conclude that the Special Committee acted as an effective guarantor of fairness."

Rewriting the deal in terms it deemed fair, the court took the dramatic step of converting the controlling stockholder's preferred stock into nonvoting common. This underlined its message: Fairness in form must be accompanied by fairness in substance.

Doug Raymond is a partner in the law firm Drinker Biddle & Reath LLP and heads the firm's Corporate and Securities Group. He can be contacted at doug.raymond@dbr.com. Kathy Wynn, an associate with Drinker Biddle & Reath, assisted in the preparation of this case summary.

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IN RE BRIDGEPORT HOLDINGS, INC.

Directors knocked for 'sitting on their hands' while company faltered

BY ELIZABETH B. BURNETT

TIMING IS EVERYTHING. That is the message to directors of distressed companies in In re Bridgeport Holdings, Inc., a Delaware Bankruptcy Court ruling that upheld bad faith claims based on directors' delay in addressing their company's deteriorating financial condition and their subsequent "uninformed and hurried sale" of the company's assets...