Bloomberg News

Ackman to Indemnify Rail CEO Pick as Rival Goes to Court

January 24, 2012

(Updates with board nominees’ backgrounds in ninth paragraph.)

Jan. 24 (Bloomberg) -- Investor William Ackman said he will shield his choice to run Canadian Pacific Railway Ltd. against a possible loss of benefits after the retired executive’s former employer suspended pension and other payments.

Canadian National Railway Co. said yesterday that ex-Chief Executive Officer Hunter Harrison, Ackman’s pick to lead rival Canadian Pacific, had breached or planned to breach his contractual obligations. Ackman said Canadian National’s litigation over Harrison’s benefits was “frivolous.”

Harrison, 67, is at the center of a three-way struggle. As Ackman’s Pershing Square Capital Management LP prods Canadian Pacific to hire him, Canadian National is moving to halt an annual pension of $1.5 million and additional payments for a total of $40 million if Harrison joins the smaller carrier.

“We’re going to indemnify him from any lawsuits he suffers as a result of this,” Ackman said in an interview. “And we have done our homework. He has not breached his agreements, and therefore we don’t expect there will be exposure to us on the indemnity.”

Canadian National has “reasonable grounds” to believe that Harrison “breached and intends to breach his contractual undertakings,” according to an e-mailed statement. The Montreal-based railroad asked a federal judge in Chicago to declare its actions “reasonable and lawful,” and determine whether the facts support its assertion that Harrison breached his agreement.

‘Throw Around’

“We don’t just throw around $40 million,” Ackman said in the interview. We don’t expect to have to make any payments under this indemnity because the lawsuit’s completely frivolous.’’

Canadian Pacific already has rebuffed Ackman’s quest to install Harrison, and its board has reiterated support for incumbent CEO Fred Green. Ackman is planning a proxy fight to elect new directors.

Ackman will nominate himself; Paul C. Hilal, 45, a Pershing partner; Gary F. Colter, Rebecca MacDonald and Anthony R. Melman at the railroad’s annual meeting on May 17, Canadian Pacific said yesterday in a statement.

Colter, 66, is the president and founder of CRS Inc., a corporate restructuring and management consulting company, according to a regulatory filing today. MacDonald, 58, is founder and executive chairman of Just Energy Group Inc., which markets deregulated gas and electricity. Melman, 64, is CEO of Nevele Inc., a strategic financial adviser.

‘Only About Money’

Ackman and Pershing, Canadian Pacific’s largest shareholder, weren’t named as defendants in the Canadian National complaint.

“This suit is only about money,” said Gregory Joseph, a New York lawyer for Harrison. Joseph said Harrison “scrupulously” honored a two-year non-compete agreement with Canadian National after retiring in December 2009. “Canadian National is not seeking to prevent Mr. Harrison from accepting a position at Canadian Pacific, should one someday be offered,” Joseph said.

Harrison ran Canadian National for seven years, a span in which the country’s largest railroad outperformed Calgary-based Canadian Pacific on industry benchmarks such as the ratio of operating expenses to sales.

Non-Competition Agreements

Canadian National agreed to pay Harrison’s promised benefits in retirement “only in return for Harrison’s loyalty to CN and his conformance to bargained-for, reasonable non- disclosure, non-competition and non-solicitation obligations,” according to the railroad’s complaint.

Harrison has said he would be willing to lead Canadian Pacific. Canadian National said its ex-CEO has been in breach of his agreements and seeks a declaration from the court that it is “entitled to cancel all pension, restricted stock unit and other benefits otherwise due to Harrison.”

According to the complaint, Harrison told Canadian National in a Jan. 5 call that he had been meeting with representatives of Pershing, which had selected Canadian Pacific as an investment. Pershing asked Harrison whether he would be willing to be CEO of Canadian Pacific and he said yes, according to the complaint.

Pershing owns a 14.2 percent stake in Canadian Pacific, based on data compiled by Bloomberg. Ackman invests in companies he deems undervalued and pushes changes he says will improve shareholder returns.

The case is Canadian National Railway Co. v. Harrison, 12-00493, U.S. District Court, Northern District of Illinois (Chicago).

--With assistance from James Langford and Jeffrey Tannenbaum in New York. Editors: Ed Dufner, Michael Hytha

To contact the reporters on this story: Natalie Doss in New York at ndoss@bloomberg.net; Don Jeffrey in New York at djeffrey1@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Michael Hytha at mhytha@bloomberg.net


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