CSX CSX Corporation

By Jacquie McNish and Joann S. Lublin 

Hunter Harrison is frustrated that "chest pounding" between his activist investment partner and directors of CSX Corp. contributed to a breakdown in negotiations for him to take the helm of the railroad.

"I wish the two sides would get together and allow for this value creation for the shareholders instead of going through these games which create nothing but further anxiety for the shareholders," Mr. Harrison said in an interview with The Wall Street Journal.

CSX privately offered the chief executive position to the 72-year-old railroad veteran last week, but negotiations broke down when Paul Hilal, Mr. Harrison's activist partner, refused to back away from some compensation and governance demands.

Mr. Harrison said although he is "disappointed" that Mr. Hilal was unable to reach an agreement with CSX, "I am not trying to abandon anyone."

Mr. Hilal has conducted most of the discussions with CSX since the Journal first broke the news last month that he had teamed up with Mr. Harrison to shake up the Jacksonville, Fla.-based railroad's management.

In a letter sent Thursday to the CSX board, Mr. Hilal urged the company to resume negotiations, rather than wait for a shareholder vote. The investor said he was willing to change five directors, instead of six, if CSX agreed to give Mr. Harrison a four-year employment contract instead of a two-year deal. CSX told Mr. Hilal in a letter last week that would accept the nomination of five new directors.

Mr. Hilal, whose hedge fund Mantle Ridge LP has invested in CSX, is seeking to add six directors to a board that will eventually shrink to 12 members. Mr. Hilal has also asked the railroad to approve a compensation plan for Mr. Harrison that CSX estimated could cost $300 million. The package includes a large stock award and $89 million that Mantle Ridge had previously promised to pay Mr. Harrison.

CSX said its board has concerns about giving so many board seats to a shareholder with less than a 5% stake and that the cost of the proposed compensation package is "extraordinary in scope and structured largely as an upfront payment" with few performance requirements.

About 50 CSX investors met with Mr. Hilal at a Manhattan restaurant Wednesday night. They heard him defend his drive for six board seats and Mr. Harrison's proposed pay package, according to two shareholders.

"There was pushback" from investors on several issues, but their greatest concern was over the number of seats sought, said one CSX investor, who supports bringing in Mr. Harrison.

At Wednesday evening's gathering, Mr. Hilal said he needed the five seats besides Mr. Harrison's so the expected new CSX chief "has control and can execute his plan," according to this CSX investor.

The standoff with Mr. Hilal prompted CSX to take the unusual step Tuesday of calling for a special shareholder vote on Mantle Ridge's demands, at a date to be determined.

CSX's decision to let shareholders vote on the activist's demands "is a pretty smart move," said Charles Elson, head of the Weinberg Center for Corporate Governance at University of Delaware's business school.

The large pay package "casts a bit of a cloud on the activists," Mr. Elson said. "If you're running on a governance platform, this kind of package would seem to be counter to a good governance platform because of its significant size."

Mr. Harrison said he was willing to meet with CSX directors to reconsider the terms of his compensation package, though CSX's calculation is based on the assumption that its stock price would improve significantly, "which would benefit all shareholders," he said. Mr. Harrison declined to discuss what concessions he would consider. "If [they] don't like this package, tell me how you would like to bundle it and I'll take it under advisement," he said.

CSX did offer a counterproposal on compensation that would have paid Mr. Harrison between $15 million and $20 million a year, well above the current pay plan for its executives, people familiar with the matter said. It didn't want to take on Mr. Hilal's commitment to pay Mr. Harrison what he left on the table at Canadian Pacific Railway, where Mr. Harrison was chief executive until last month.

CSX said in a statement Tuesday night it would be "inappropriate" to pay Mr. Hilal's commitment to compensate Mr. Harrison for the $89 million he surrendered at CP.

At the Wednesday dinner, Mr. Hilal said the pay package is worth $200 million and includes $120 million of stock options, about half of which are tied to "very real" performance measures, according to the CSX investor.

This CSX shareholder said the $200 million figure "is still a lot of money." The investor also remains concerned over Mr. Harrison's refusal to be examined by an independent physician, saying "that's a big issue."

The activist proposal to CSX is similar to the compensation plan Mr. Harrison was granted when he was named chief executive of CP in 2012. The plan was approved with little complaint after Bill Ackman's Pershing Square Capital Management LP won a proxy battle that handed the hedge fund a majority of directors on the railroad's board. During Mr. Harrison's tenure, CP's stock price more than doubled in value.

CSX's proposal exceeds the amounts paid to the company's current chief executive, Michael Ward, who in the three years ended in 2015 earned a total of $31.6 million in salary, stock awards and other benefits, according to a company filing. At CP, Mr. Harrison was paid $18.7 million in salary, bonuses and stock awards last year.

--Paul Ziobro and David Benoit contributed to this article.

Write to Jacquie McNish at Jacquie.McNish@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

(END) Dow Jones Newswires

February 16, 2017 18:56 ET (23:56 GMT)

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