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(Reuters) - In another twist to a battle brewing in Canada's usually staid rail sector, Canadian National Railway (CNR.TO) said on Monday it has halted pension and other payments worth nearly $40 million to its former chief executive, Hunter Harrison.
CN said it has stopped the payments because it believes Harrison, who retired as president and chief executive on December 31, 2009, had breached or intended to breach his non-compete and confidentiality obligations to the company, which is Canada's biggest railway.
CN has asked an Illinois district court to rule on whether it can reasonably and lawfully stop paying Harrison. It has also asked the court to decide whether Harrison has breached his contract with CN.
Harrison, who is lauded for turning CN into North America's most efficient railroad during his tenure as CEO, is suddenly back in the spotlight because of a looming proxy battle at CN's smaller rival, Canadian Pacific Railway (CP.TO).
Activist shareholder William Ackman, whose Pershing Square Capital Management owns a 14.2 percent stake in CP and is its biggest shareholder, wants to install Harrison as CEO of CP as part of a plan to turn around the railroad.
Harrison has expressed enthusiasm for the job in several press interviews.
"CN has a reasonable basis to believe ... that Harrison was in breach of his non-disclosure and noncompete undertakings sometime in 2011," CN said in a court filing.
CN said that, on his retirement, Harrison agreed that his retirement and pension benefits would be paid on the condition that he not compete with CN for five years - until December 31, 2014.
The court filing reveals that there was a conversation between Harrison and an unnamed CN official regarding Harrison's involvement with hedge fund Pershing Square as far back as October 31, 2011.
CN said it is ready to resume paying Harrison's retirement benefits but only in return for "Harrison's loyalty to CN and his conformance to bargained-for, reasonable non-disclosure, non-competition and nonsolicitation obligations".
Harrison could not be reached for comment.
Harrison's benefits include restricted stock unit payments of about $17.9 million and pension benefits with a present value of about $20.6 million.
Even if Harrison were to commit not to use confidential information if he became CEO of CP, "it would be humanly impossible for him to do so," CN said in the filing.
CN said Harrison denies violating any of his contractual obligations. The company received a letter 10 days ago from Harrison's lawyers requesting confirmation that CN will "honor its obligations" to pay Harrison's benefits.
Reporting By Nicole Mordant; editing by Rob Wilson and Peter Galloway