David Lopez (DL-6779)

DEBORAH DONOGHUE,   Plaintiff,   - against -   CSX CORPORATION, et al.   Defendants,

Civil Action No.       08 Civil 9252  (MGC)       STIPULATION OF    SETTLEMENT

WHEREAS, plaintiff, Deborah Donoghue (“Plaintiff”), a shareholder of CSX Corporation (“CSX”), brought this action (the “Action”) pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to recover so-called “short-swing” profits alleged to have been realized by defendants The Children’s Investment Master Fund (“TCI”), The Children’s Investment Fund Management (UK) LLP, The Children’s Investment Fund Management (Cayman) Ltd., Christopher Hohn, Timothy O’Toole, 3G Fund LP (“3G”), 3G Capital Partners Ltd., 3G Capital Partners LP, Alexandre Behring and Gilbert H. Lamphere or some of them (collectively, the “Settling Defendants”) in connection with their putative purchases and sales of CSX securities;

WHEREAS, the Settling Defendants deny any wrongdoing whatsoever and this Stipulation of Settlement (“Stipulation”) shall in no event be construed or deemed to be evidence of or an admission or concession on the part of the Settling Defendants with respect to any claim, or any fault or liability or wrongdoing or damages whatsoever, or any deficiency in the defenses that the Settling Defendants have or may assert.  The Plaintiff, CSX and the Settling Defendants (collectively, the “Parties”) recognize, however, that the Action has been filed by Plaintiff and defended by the Settling Defendants in good faith and with adequate basis in fact under Rule 11 of the Federal Rules of Civil Procedure, and that the Action is being voluntarily settled after advice of counsel and negotiation between counsel for the Parties;

 

 

WHEREAS, CSX and the Settling Defendants are parties to an action entitled CSX Corporation v. The Children’s Investment Fund Management (UK) LLP, 08 Civil 2764 (LAK) (the “13D Action”) in which the court issued a 115-page Opinion and Final Judgment (the “Opinion”) after trial; the Opinion is currently on appeal to the United States Court of Appeals for the Second Circuit;

WHEREAS, Plaintiff’s theory of liability in this Action is based on the June 11, 2008 Opinion in the 13D Action, wherein the court found that:  (i) TCI’s transactions in total return cash-settled equity swaps (the “equity swaps”) resulted in it being deemed to be the beneficial owner, within the meaning of Rule 13d-3(b) of the Exchange Act, of CSX common stock held by its swap counterparties as hedges to the swaps; and (ii) TCI and 3G purchased and sold CSX common stock and/or equity swaps and were members of a group under Section 13(d)(3) of the Exchange Act along with other Settling Defendants;

WHEREAS, Plaintiff asserts that by reason of such beneficial ownership TCI may be deemed to beneficially own over 10 percent of CSX’s common stock;

WHEREAS, Plaintiff asserts that 3G, by virtue of its membership in a group, may be deemed to beneficially own over 10 percent of CSX’s common stock;

 

 

WHEREAS, the Settling Defendants vigorously contest the findings in the 13D Action and have appealed the Opinion;

WHEREAS, Timothy O’Toole and Gilbert Lamphere had no involvement in any of the trading activity alleged to give rise to Section 16(b) liability and were incorrectly named as defendants in this Action;

WHEREAS, the United States Court of Appeals for the Second Circuit heard argument in the 13D Action on August 25, 2008; the Parties recognize that, if the Second Circuit reverses the findings in the 13D Action that the Settling Defendants beneficially owned CSX’s common stock through their transactions in equity swaps, there will be no basis for liability in this Action.  The Parties further recognize that CSX’s theory of beneficial ownership in the 13D Action is novel, that a number of amici have submitted briefs in support and opposition to CSX’s position, and that the Securities and Exchange Commission (the “SEC”), Division of Corporation Finance (the “Division”), sent a letter to the trial court stating that “[t]he Division believes that interpreting an investor’s beneficial ownership under Rule 13d-3 to include shares used in a counter-party’s hedge, absent unusual circumstances, would be novel and would create significant uncertainties for investors who have used equity swaps in accordance with accepted market practices understood to be based on reasonably well-settled law”;

WHEREAS, given the risks and uncertainties of the outcome of the appeal in the 13D Action, CSX and Plaintiff have concluded that it is in the interest of CSX to settle this Action on the terms set forth herein (the “Settlement”);

 

 

WHEREAS, CSX obtained significant discovery from the defendants in the 13D Action, including records reflecting all of the Settling Defendants’ transactions in CSX equity securities and equity swaps related to CSX stock; thereafter, CSX engaged an expert consultant to prepare an analysis of potential damages under Section 16(b) arising from the Settling Defendants’ transactions in equity swaps and common stock, which reflects that the maximum recoverable damages under the Rules which govern the calculation of recoverable profits under Section 16(b) of the Exchange Act, may be as much as $128,000,000 for TCI and $9.6 million for 3G; and in connection with the Parties’ settlement negotiations, CSX has shared its discovery and analysis with Plaintiff’s counsel in this Action;

WHEREAS, the Settling Defendants believe that, even if the Second Circuit affirms the Opinion, they have several meritorious defenses to Plaintiff’s Section 16(b) claims and that the potential liability for the Section 16(b) claims is substantially lower than the $137.6 million calculated by Plaintiff and CSX;

WHEREAS, the Parties engaged in settlement negotiations among themselves which culminated in an agreement whereby TCI will pay CSX the sum of $10,000,000 and 3G will pay CSX the sum of $1,000,000;

WHEREAS, CSX and its disinterested directors (i.e., directors who have no financial interest in this litigation and are not affiliated with or nominated by the Settling Defendants), who are represented by their own independent counsel, realize that a settlement of this litigation on the terms described herein is in the best interests of CSX and its shareholders; and

 

 

WHEREAS, in evaluating the proposed settlement provided for herein, Plaintiff and her counsel have considered:  the substantial benefit being provided by the proposed Settlement; the uncertainties of the outcome of this Action, which Plaintiff recognizes turns on the outcome of the appeal in the 13D Action and TCI’s separate defenses to Section 16(b) liability in this Action; CSX’s theory of liability in the 13D Action is hotly contested and there is no precedent directly on point; and that resolution of the claims in this Action, wherever and however determined, likely would be submitted for appellate review, there would be yet additional time until there would be a final adjudication of the claims and defenses asserted, and additional legal fees, which could reduce the amount of any ultimate recovery (whether on a litigated judgment, if Plaintiff were to prevail, or by settlement).

IT IS HEREBY STIPULATED AND AGREED, for good and valuable consideration, the sufficiency of which is hereby acknowledged, as follows:

1.           As soon as practicable after this Stipulation has been executed, the Parties jointly shall move the Court for preliminary approval of this Settlement and the form of notice to shareholders, and for entry of a Preliminary Order, substantially in the form attached hereto as Exhibit A.

2.           Following entry of the Preliminary Order, (a) CSX shall file a Form 8-K with the SEC, issue a press release, place a notice of settlement on its website, and send notice of the proposed Stipulation substantially in the form attached hereto as Exhibit B (the “Notice”) by U.S. First Class Mail, to its shareholders who filed current Schedules 13D or 13G, or Form 13F, with the SEC, and (b) CSX and the Settling Defendants (other than Timothy O’Toole and Gilbert Lamphere) shall send a joint request to the Second Circuit Court of Appeals advising it of the settlement of this Action and requesting that it defer further ruling on the appeal of the 13D Action until the Settling Defendants have sent notice that this Action has become Final or, in the event that it does not become Final, that litigation of this Action has resumed.

 

 

3.           If the Settlement contemplated by this Stipulation is approved by the Court after Notice and a hearing on the fairness of the Settlement, counsel for the Parties shall request that the Court enter an Order and Final Judgment (the “Order and Final Judgment”) substantially in the form annexed hereto as Exhibit C.  The Order and Final Judgment shall become final (“Final”) following entry, either by expiration of the time for appeal or review of such Order or, if any appeal is filed and not dismissed, after the Order is affirmed on appeal and is no longer subject to review upon appeal or by writ of certiorari or motion for reconsideration.

4.           (a)           On or before the tenth business day after the Order approving the Settlement becomes Final (i) TCI shall wire transfer to CSX the amount of ten million dollars ($10,000,000) less the amount of attorney’s fees and reimbursement of expenses, if any, awarded by the Court to Plaintiff’s counsel, which amount shall be paid directly to Plaintiff’s counsel and (ii) 3G shall wire transfer to CSX the amount of one million dollars ($1,000,000) (the “Settlement Payments”).  The total Settlement Payments, including any award of attorney’s fee and reimbursement of expenses, shall not exceed $11,000,000.

(b)           Entry and Finality of the Order and Final Judgment is a condition precedent to TCI’s and 3G’s obligation to make the Settlement Payment.

(c)           In the event the Court does not enter the Order approving the Settlement, or such Order does not become Final, this Stipulation shall be null and void except as to paragraphs 4(c), 6 and 13(a), and the Parties shall be returned to their positions nunc pro tunc as they existed on the date before the Settlement and without prejudice in any way.

 

 

5.           In consideration of the Settlement Payment, CSX and Plaintiff on behalf of herself and any and all owners of any security (as defined in Section 3(a)(10) of the Exchange Act) of CSX or any other security or instrument, the value of which is derived from the value of any CSX equity security, each release and discharge the Settling Defendants, their present, future or former officers, directors, members, employees, agents, attorneys, representatives, advisors and affiliates or associates (as the latter two terms are defined in Rule 12b-2 of the Exchange Act), trustees, parents, principals, subsidiaries, general or limited partners or partnerships, investment advisory clients and brokers, and each of their heirs, executors, administrators, successors and assigns (the “Related Parties”) from any and all liability and damages under or based upon any and all claims, rights, causes of action, suits, matters, demands, transactions and issues, known or unknown, arising out of or relating to the assertions contained in the Amended Complaint in this Action or that could have been asserted in this Action (i) by Plaintiff on behalf of herself or any other person or entity, (ii) by CSX and/or (iii) by any and all owners of any security (as defined in Section 3(a)(10) of the Exchange Act) of CSX or any other security or instrument the value of which is derived from the value of any CSX equity security, or any of them, whether individually, directly, representatively, derivatively or in any other capacity for all claims arising out of or relating to any violation of Section 16(b) of the Exchange Act and the rules and regulations promulgated under Section 16 relating to trading in CSX securities, equity swaps and/or other securities or instruments the value of which is derived from the value of any CSX equity security, from the beginning of time up through the date that this Settlement becomes Final under paragraph 3.  This release does not extend to CSX’s claims and the defendants’ defenses in the 13D Action.  Plaintiff’s counsel, David Lopez, covenants not to bring any additional claims against the Settling Defendants and their Related Parties for trading in CSX securities, including, without limitation equity swaps or any other derivative security or instrument tied to the value of any CSX equity security arising from or relating to transactions in such securities or instruments up through the date that this Settlement becomes Final under paragraph 3, regardless of the theory of liability.

 

 

6.           This Stipulation and all negotiations and papers related to it, and any proceedings in connection with the Settlement, whether or not the Settlement becomes Final or is consummated, are not and shall not be construed to be evidence of, or an admission by, any of the Parties respecting the validity or invalidity of any of the claims or defenses asserted by the Parties or of the Settling Defendants’ liability or lack thereof with respect to any such claim or defense or for any damages sought in the Action, or of any wrongdoing or lack of wrongdoing by any or all of them whatsoever, and shall not be offered for admission or received as evidence of any such liability or wrongdoing or damages, or lack thereof.  This covenant expressly applies to but is not limited to the 13D Action: CSX and the Settling Defendants agree that neither this Stipulation, nor the proceedings or orders in this Action, shall be offered into evidence in the 13D Action or any other action or proceeding, nor may they cite to this Settlement as grounds for arguing the strength or infirmity of their claims or defenses in the 13D Action.

7.           Plaintiff’s counsel will apply to the Court, on notice to counsel for the Settling Defendants and CSX and to the shareholders of CSX, for attorney’s fees and expenses in an amount of five hundred fifty thousand dollars ($550,000.00), which application CSX has agreed to support.  Such attorney’s fees and expenses as may be awarded by the Court are to be paid by TCI after the Order becomes Final in accordance with paragraph 4(a) and shall reduce the amount of the Settlement Payment to CSX as provided therein, so that, as described in paragraph 4(a), the total payment by TCI will equal $10 million and the total payment by 3G will equal $1 million.  The Settlement is in no way contingent upon any attorney’s fees or expenses being awarded in any amount.

 

 

8.           This Stipulation contains the entire agreement between the Parties concerning the subject matter hereof and neither party is relying upon any representation, promise or assertion not contained herein.

9.           This Stipulation may be executed in one or more counterparts, each of which shall be deemed an original of this Stipulation and all of which, when taken together, shall be deemed to constitute one and the same agreement provided that no party shall be bound hereby unless and until all parties shall have executed and delivered this Stipulation.

10.           The individuals signing this Stipulation represent that they have the authority to execute this Stipulation, to grant the releases in this Stipulation and to compromise and settle all their claims and their defenses relating to the Action.

11.           This Stipulation may not be modified or amended, nor may any of its provisions be waived, except by a writing signed by all Parties hereto.

12.           The Parties shall use their best efforts to execute such documents and shall take such other reasonable action as is necessary to effectuate this Stipulation as provided for herein.

 

 

13.           The Parties submit to the jurisdiction of this Court (a) for all purposes relating to this Action; and (b) for resolving any disputes over this Stipulation and its enforcement.

Dated:       New York, New York

   December 16, 2008

/s/ David Lopez		/s/ Michael Swartz
David Lopez (DL-6779) LAW OFFICE OF DAVID LOPEZ 171 Edge of Woods Road, P.O. 323 Southampton, New York 11968 631 ###-###-####		Michael Swartz (MS-7069) SCHULTE ROTH & ZABEL LLP 919 Third Avenue New York, New York 10022 212 ###-###-####
Attorney for Plaintiff		Attorneys For The Children’s Investment Master Fund, The Children’s Investment Fund Management (UK) LLP, The Children’s Investment Fund Management (Cayman) Ltd., Christopher Hohn and Timothy O’Toole
/s/ Miranda Schiller		/s/ David Marriott
Miranda Schiller (MS-9456) WEIL, GOTSHAL & MANGES, LLP 767 Fifth Avenue New York, New York 10153 212 ###-###-####		David Marriott (DM-7708) CRAVATH, SWAINE & MOORE Worldwide Plaza 825 Eighth Avenue New York, New York 10019
Attorneys for CSX Disinterested Directors		Attorneys for CSX Corporation
		/s/ Peter Doyle
		Peter Doyle (PD-1735) Kirkland & Ellis LLP Citigroup Center 153 East 53rd Street New York, New York  10022-4611   Attorneys for 3G Fund LP, 3G Capital Partners Ltd., 3G Capital Partners LP, Alexandre Behring, and Gilbert H. Lamphere

DEBORAH DONOGHUE,   Plaintiff,   - against -   CSX CORPORATION, et al.   Defendants,

Civil Action No.     08 Civil 9252  (MGC)

 

If you are the owner of a CSX security or any other security or instrument, the value of which is derived from the value of any CSX equity security, you may appear personally or by counsel and be heard at the Settlement Hearing;  and you may support, object to or express your views regarding the Settlement and/or plaintiff’s application for an award of an attorney’s fee and reimbursement of costs and expenses.  However, you will not be heard or entitled to contest the approval of the Settlement or plaintiff’s application for an award of attorney’s fees and reimbursement of costs and expenses unless, on or before ________________, 2009, you file a notice of intention to appear: (i) setting forth the dates you purchased and the number of shares of CSX common stock or security instrument, the value of which is derived from the value of CSX common stock, that you own as of the date hereof; and (ii) stating your objections, support or comments, in writing, with the Clerk of the United States District Court for the Southern District of New York, 500 Pearl Street, New York, New York 10007, together with a list of any witnesses you intend to call, a list of any exhibits you intend to present and all briefs or other papers that support your objections or comments that you will submit to this Court at the Settlement Hearing.  On or before ________________, 2009, you must also serve, in person or by mail, the notice of intention to appear and attendant papers described in (i) and (ii) of this paragraph on the following:

 

 

At the Settlement Fairness Hearing, or at such other time as the Court may direct, Plaintiff’s counsel intends to apply to the Court for an award of attorney’s fee and expenses in the amount of $550,000.  CSX, prior to the negotiation of the Settlement with the Settling Defendants, agreed with Plaintiff’s counsel to a formula for computing a fair and reasonable attorney’s fee based on 5 percent of the recovery and will support such application.  This agreement is not binding on the Court.  Any amounts awarded would be paid from the Settlement Payment, after the Order approving the Settlement becomes final.

This Notice is not all-inclusive.  For the full details of the matters disclosed in the Notice, including the Stipulation of Settlement described above, and for further information concerning this Action, you may wish to refer to the pleadings or other papers filed with the Court in this Action, all of which may be inspected at the office of the Clerk of the United States District Court for the Southern District of New York, 500 Pearl Street, New York, New York during normal business hours.

For further information regarding this Notice, the Action or the proposed Settlement, CSX shareholders can contact, in writing, Plaintiff’s counsel:

David Lopez, Esq.

171 Edge of Woods Road,  P.O. Box 323

Southampton, New York 11968

 

Dated:       New York, New York

   December ____, 2008