The CP battle begins

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U.S. fund manager Bill Ackman has declared war on the board of Canadian Pacific Railway Ltd. , launching a battle for control of one of the country's most historic companies.

Discussing his intentions for the first time since he acquired a 14.2 per cent stake in CP last fall, Mr. Ackman said in an interview Monday that his New York hedge fund, Pershing Square Capital Management, is soliciting candidates for a new slate of directors to oversee the national railway.

"We intend to run a proxy contest. We're going to replace CP's directors," he said.

Pershing has not decided how many directors it wants to appoint to its alternative slate and its proposal would require the support of a majority of CP shareholders. Legal experts said the vote would likely take place in May, when CP typically holds its annual meeting.

Mr. Ackman's aggressive push for new directors has escalated shareholder activism to a level seldom seen in Canada. The tactic comes only 10 weeks after Pershing unveiled in late October what is now a $1.4-billion investment in Canadian Pacific and it sets Mr. Ackman, an impatient but highly successful investor, on a collision course with some of the country's most distinguished directors. CP's directors include former Royal Bank of Canada chief executive officer John Cleghorn, Suncor Energy Inc. CEO Rick George and former Westcoast Energy Inc. chief Michael Phelps.

"It's happened fairly quickly," said National Bank Financial Inc. analyst Cameron Doerksen.

The proxy battle appears to have been provoked by CP's rejection of Mr. Ackman's proposal to parachute in railway legend Hunter Harrison, the former CEO of Canadian National Railway Ltd., as a new chief executive to replace incumbent Fred Green. In a three-page letter to shareholders yesterday, CP's chairman, Mr. Cleghorn, said the board unanimously rejected the appointment of new management as "detrimental" to the company's turnaround strategy that it expects "to deliver meaningful improvements" in the first quarter.

Mr. Harrison, 67, retired from CN two years ago after he was widely credited with transforming the sluggish former Crown company into North America's most efficient railway. CP currently ranks as the least efficient of North America's Big Six railways and news of Mr. Ackman's backing of Mr. Harrison sparked a rally in the company's stock price.

In an interview yesterday, Mr. Cleghorn dismissed the market enthusiasm for Mr. Harrison as short-term buzz.

"This is a longer-term issue, rather than a few days on the market," Mr. Cleghorn said. "Replacing our CEO and jeopardizing our successful multiyear plan is not in the best interest of CP or its shareholders."

Mr. Cleghorn said neither he nor any CP directors met with Mr. Harrison to discuss his suitability for the job.

CP's fight with Pershing Square threatens to become a distraction for the railway during an important period when it is spending billions of dollars to modernize its fleet of locomotives and upgrade tracks that have been plagued with service and weather setbacks.

It also marks a breakdown in communications between CP's board and Mr. Ackman that had been amicable until December.

Mr. Ackman was positive about the recent addition of railway veterans Ed Harris and Tony Ingram to CP's board of directors. When the fund manager proposed Mr. Harrison as a CEO candidate at a November meeting, Mr. Cleghorn expressed interest and requested a meeting with the retired executive, according to a letter sent by Pershing Square last week.

But Mr. Cleghorn has denied that the board had any enthusiasm for hiring Mr. Harrison.

Relations became frayed in December, sources said, after the nominating committee of CP declined to meet with one of Pershing's partners, Paul Hilal, whom Mr. Ackman wanted to nominate as a director, along with himself. The two men had flown to Calgary in December for the meeting. Mr. Ackman declined to take a seat on the board because he refused to accept CP's demand that he sign a standstill agreement restricting him from hostile action against the company

Talks became even more strained in late December after media began reporting Mr. Ackman's campaign to hire Mr. Harrison. CP's board publicly chastised the investor last week in a statement for working outside the boardroom to pressure the company.

Mr. Ackman replied by accusing the accompany with misrepresenting his discussions with the board.