March 23, 2012 / 2:08 AM / 5 years ago

CP Rail nominates activist investor to board

Activist shareholder William Ackman of Pershing Square Capital Management speaks during the Canadian Pacific Railway Ltd. shareholders and analysts meeting in Toronto February 6, 2012. REUTERS/Mike Cassese

(Reuters) - Canadian Pacific Railway Ltd (CP.TO) nominated activist investor William Ackman for election to its board of directors on Thursday, the latest twist in a drawn-out proxy battle with his Pershing Square Capital Management.

Canada’s No.2 railway is locked in a proxy contest with the Ackman-controlled hedge fund, which wants to replace CP’s chief executive, Fred Green, with former Canadian National Railway (CNR.TO) CEO Hunter Harrison. Ackman believes Harrison is better suited to improve CP’s lackluster operating performance.

CP said it strongly disagreed with Ackman’s demand that it replace Green, but said it remained open to having Ackman join its board.

The company offered Ackman a board seat last year, but the activist investor turned it down and nominated himself along with a five-member slate for election to the CP board.

On Thursday, CP said it was ready to offer Ackman himself a voice on the board, but insisted that Pershing Square’s other nominees have no evident rail experience and add no other complementary industry experience.

It is rare for companies to nominate a proxy foe like Ackman to the board, said Brad Allen, a senior vice president at proxy solicitation firm, Laurel Hill Advisory Group, which is not involved in the conflict.

“They know he’s going to get support,” he said. “They’ve made it easy for shareholders to elect him to the CP board and obviously not elect anyone else, trying to capture the vote of institutional shareholders that like Ackman, but don’t know if they really like everybody else.”

CP’s annual shareholder meeting will be held on May 17, in Calgary, Alberta.

In a statement late on Thursday, Pershing Square issued a release disagreeing with CP’s proposal.

It said CP’s filing made clear that the board still did not understand the fundamental management changes that the majority of the rail company’s shareholders required.

“Fortunately, our opportunity to restructure this board and reset its culture is now only weeks away. We look forward to May 17th,” Pershing Square said.

Shares of CP closed 37 Canadian cents lower at C$78.16 on Thursday on the Toronto Stock Exchange.

“The upcoming annual meeting is one of the most important in Canadian Pacific’s history,” said CP chairman John Cleghorn in an open letter to investors on Thursday.

OPERATING RATIOS

Pershing, which owns 14.2 percent of CP, blames Green for the railroad’s sluggish performance.

CP defends its chief executive, saying he has built strong customer relationships that would help improve the railroad’s operating ratio over the next three years. Operating ratios measure a railway’s efficiency and are good indicator of its profitability.

CP aims to lower its ratio to 70 to 72 percent by 2014 from more than 80 percent, a number that makes it the weakest of North America’s Class 1 railroads.

The company on Thursday outlined further improvement targets, saying that its multi-year plan should bring operating ratios down to between 68.5 and 70.5 percent by 2016.

Pershing believes a new management at CP would allow it to bring its operating ratio into the mid-60 percent range by 2015. Some analysts have said such a target is unrealistic.

“Pershing Square has presented no credible, detailed plan to support its assertions about reducing Canadian Pacific’s operating ratio,” said Cleghorn in his letter.

Reporting By Allison Martell and Euan Rocha; Editing by Frank McGurty

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