CN, Shareholder Publicly Scuffle Over Railway's Leadership and Direction

Over the next six months, freight rail observers may bear witness to a public relations battle between Canadian railway CN and activist London-based investor TCI Fund Management over CN's leadership and direction.

Both are seeking to win the hearts of CN shareholders, who will have a meeting on March 22, per TCI's request. TCI wants shareholders to consider replacing four CN board members with four of its own candidates, as well as replace CN President and CEO JJ Ruest with its pick, Jim Vena, a former executive of CN and, more recently, Union Pacific (NYSE:UNP).

In a filing to the U.S. Securities and Exchange Commission last month, TCI questioned CN's leadership after CN's failed attempt to acquire Kansas City Southern (NYSE:KSU). TCI founder and managing partner Chris Hohn, which owns 5.2% of CN (NYSE:CNI), claimed CN had been "underperforming" in recent quarters, as witnessed by a climbing operating ratio compared with other Class I railroads, and that its recent attempt to acquire KCS demonstrated "misguided" priorities.

Since that filing, CN agreed to TCI's request for a shareholder meeting, announcing on Monday the date for the meeting. But the railway also defended itself against what it called "dubious" claims regarding CN's leadership and direction.

The railway on Monday called TCI a "dissident shareholder that only recently acquired a 5% stake in CN and is seeking to assert effective control over one of Canada's largest and most economically important companies. It is doing so without presenting a credible plan to create superior or sustainable value."

CN also said last Friday TCI's stake in CN rival Canadian Pacific (NYSE:CP) demonstrates a conflict of interest.

"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," CN said.

It continued: "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 has also sought to address questions about its financial performance and operating ratio by setting a target OR of 57% in 2022 and conducting a strategic review of its non-rail assets.

TCI shot back on Tuesday, saying "CN shareholders deserve the truth."

"Like many other CN shareholders, TCI is a firm believer in the long-term success and growth of the Canadian railroad industry and therefore owns [shares in] both CN and CP, with a larger stake in CN. This is in no way unusual in the sector or in other industries," TCI said. "For years, CN has been losing market share. TCI believes that, with a strong Board and world-class CEO, CN will regain its dominant market position and be the fastest growing and most profitable Class 1 railroad once again."

TCI said CN shareholders should focus on the board candidates it has put forth, as well as their qualifications. The candidates are Gilbert Lamphere, Allison Landry, Rob Knight, and Paul Miller, all of whom are industry veterans with operational experience, according to TCI.

"The Board may also attempt to turn the special meeting into a vote on TCI, rather than conduct an objective and informed debate on the merits of the four nominees. … The truth is that CN's Board and CEO lack the necessary operating and railway expertise to improve the performance of the Company. Gilbert Lamphere, Allison Landry, Rob Knight, and Paul Miller have significant operational experience and analytical capabilities in the railroad industry, and their election, together with a new CEO, will provide the essential expertise required for CN to reach its full potential," TCI said.

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