April 18, 2024
BY EMAIL, FEDEX
Jeffrey Sonnenfeld and Steven Tian
c/o Fortune Media
40 Fulton St.
New York, NY 10038
Re: Apparent Involvement in Norfolk Southern Corporation’s Attempt to Mislead Shareholders
Messrs. Sonnenfeld and Tian:
We write to address your smear piece (the “Article”) that targets Ancora Holdings Group, LLC (collectively with its affiliates, “Ancora”) and its campaign to increase value for all shareholders of Norfolk Southern Corporation (“Norfolk Southern”).1 Much like your other curiously one-sided columns that aggressively attacked engaged shareholders, the Article is essentially an encapsulation of Norfolk Southern’s talking points pertaining to Ancora’s campaign. We have serious concerns that the article was in fact written at the behest of Norfolk Southern through its advisors, which would constitute a gross violation of journalistic ethics and the securities laws.
We believe that Norfolk Southern’s shareholders, regulators, and other stakeholders will look very poorly upon the presentation of what amounts to solicitation materials on behalf of the company in this manner in the weeks leading up to a shareholder election. For reasons summarized in this letter, we contend the Article is misleading to investors and malicious, and we call upon you to immediately and publicly retract the Article to mitigate the damage done by its publication.
Ancora is concerned that the Article is a Norfolk Southern solicitation to shareholders in all but name, giving investors a false impression that it is an impartial third-party assessment of the company’s potential under its existing leadership and strategy in advance of its annual meeting of shareholders on May 9, 2024. We understand that Yale’s Chief Executive Leadership Institute is supported by various financial communications advisors. When you publish an article at the behest of any advisor on one side in a proxy fight that has supported your organization financially, that article is proxy solicitation material and those financial ties must be disclosed. What’s more, the communication cannot contain misstatements or omissions.
Tel (212) 504-5757 Fax (212) 504-6666
In light of these concerns, Ancora directed a representative of one of its strategic advisors, Longacre Square Partners LLC (“Longacre Square”), to ask you if you had any economic ties or undisclosed relationships with Norfolk Southern and/or its advisors (without specifying any advisory firm by name). Two emails sent to you went unaddressed by you. However, one of Norfolk Southern’s advisors, Joele Frank Wilkinson Brimmer Katcher (“Joele Frank”), promptly contacted Longacre Square. Longacre informed us that Joele Frank affirmatively stated that you reached out to them regarding Ancora’s directed inquiries. Joele Frank’s response on your behalf validates the concerns we are raising in this letter.
It appears that you and your affiliated entities have therefore chosen to participate in the solicitation of proxies on behalf of Norfolk Southern. Like all other participants, you should be subject to the Securities Exchange Act of 1934, as amended, and the rules thereunder (“Exchange Act”). We have copied Norfolk Southern, which should promptly amend its public disclosures accordingly.
Make no mistake, we recognize that Norfolk Southern has every right to scrutinize Ancora, its nominee directors and proposed management team, and their plans. However, Norfolk Southern does not have the right to indirectly peddle distortions through third parties over which it has power and influence.
Material Misstatements and Omissions.
To the extent the Article is a proxy solicitation, it may not include material misstatements or omissions. The Article is polluted with so many inaccuracies that we can only address here some of the most egregious misstatements and characterizations. First, as to the East Palestine derailment, Norfolk Southern being compelled to pay for the consequences of an avoidable derailment is not remotely equivalent to “investing . . . into the local community.” If you carried out rigorous independent research, you would have quickly identified that Norfolk Southern is responsible for the derailment and its consequences. Put simply, remediation is not investment.2 Management’s commitment to make things right—as if they could actually fix the damage—is simply an acknowledgement of responsibility and the fact that Norfolk Southern, and indirectly its shareholders, are now required to compensate for this terrible wrong. Whether the amounts you refer to in your Article come from a judicially implemented future payment of $600 million dollars to the tragedy’s victims,3 or the $1.1 billion in recognized expenses in 2023 for costs directly attributable to the derailment,4 it is clear in all events that Norfolk Southern and its owners are paying dearly for its mistake.
Your Article relays one local official’s view of the East Palestine derailment, ignoring the intense criticism from leaders at every level across the political spectrum – among them U.S. senators,5 members of Congress,6 and the President of the United States.7 Even East Palestine’s Mayor Conaway, who certainly cannot afford to completely alienate Norfolk Southern given his constituents’ need for the company to rebuild their community, was critical of Norfolk Southern’s prioritizing building new track on top of contaminated soil as part of the cleanup.8 Even the blizzard of criticism from these leaders is drowned out altogether by the ongoing complaints of residents themselves.9 Amid this backlash, it is nonsensical to highlight Company leadership engagement with the community when CEO Shaw’s absence from East Palestine at critical junctures has been prominently documented in the media.10 This mischaracterization of the public reaction to the East Palestine disaster calls into doubt the entire substance of the Article.
Safety is an Institutional Shortcoming at Norfolk Southern.
We have significant questions about the analysis that leads to your conclusions regarding Norfolk Southern’s safety record. Ancora, its nominees, and its proposed senior management team pride themselves on their plans to prioritize safety improvements at Norfolk Southern after the 2024 annual meeting of its shareholders. Regardless, you somehow seem to conclude that the railroad directly responsible for East Palestine and several more derailments in 2024 is on the mend.
Reality stands in stark contrast to your assessment. The Federal Railroad Administration (“FRA”) concluded in August 2023 that Norfolk Southern “has not promptly or comprehensively responded to FRA’s recommendations and significant findings” from an audit just the previous year.11 The FRA identified troubling findings, including that “employees and the organization do not always work to foster mutual trust,” “training and resources are not always effective at supporting safety efforts,” and Norfolk Southern “frequently focused solely on enforcing compliance with minimum safety standards.” These are institutional problems and weaknesses, not one-off or random mistakes. Norfolk Southern’s own safety auditor, Atkins Nuclear Secured, echoed the FRA’s safety concerns and made eighteen separate safety recommendations in its report on September 14, 2023.12
The Article cites FRA statistics for a chart that purports to show safety improvements. But the selective data presented in the Article does not show the whole picture.13 Expand the parameters for the FRA data to accidents along all track types (not just main lines), and Norfolk Southern makes up more than a fifth of the total accidents of the railroads you identify. Among all these accidents, Norfolk Southern had 293 total along all track types in 2023 – a number that is higher than its 2021 total of 263. Norfolk Southern’s overall FRA reported accident number is still higher today than it was three years ago. Looking at more serious accidents, such as collisions, where on all tracks Norfolk Southern increased from 10 in 2021, to 21 in 2022, to 24 in 2023. Your selective use of FRA figures and snapshot reporting gloss over trends that show Norfolk Southern’s problematic safety record continues under CEO Shaw’s leadership.
Numerous Mischaracterizations of Ancora and its Substance-Driven Campaign.
The Article also pervasively mischaracterizes Ancora and its efforts to improve Norfolk Southern. Ancora is a Cleveland, Ohio-based firm with more than $8 billion in assets under management. Downtown Cleveland is a ninety-minute drive from the East Palestine derailment site. Ancora has stated from the very first day of its public campaign that its work is “beyond just dollars and cents.”14 Ancora has a long history of success, growing its assets under management by nearly 150% in the last decade. As an experienced activist investor with a track record of creating shareholder value, Ancora ranked at the top of activism reviews in 2023 by Bloomberg, Lazard, and Barclays – and has a pragmatic mindset.
With that context, the Article’s characterization of Ancora and its campaign, is completely divorced from reality. Focusing on just one point, your mischaracterization of settlement discussions, Ancora spent months attempting earnest discussions with the Norfolk Southern board before moving forward with the proxy contest. This engagement was spelled out in detail in Ancora’s proxy statement. These negotiations reflect Ancora’s practical viewpoint; in fact, it has successfully settled with ten companies in activist campaigns since 2020. But Ancora has been very clear that its analysis shows that Mr. Shaw’s management is inherently incompatible with maximizing shareholder value. Ancora offered to settle the campaign on February 9, 2024 for a minority change in board composition plus a board commitment replace Mr. Shaw as CEO.15 The Article’s depiction of Ancora’s engagement with Norfolk Southern and its general approach to this investment is almost entirely distinct from the facts disclosed in Ancora’s definitive proxy statement.
Furthermore, while Ancora has a track record of success in its own right, it has relied on the decades of cumulative railroading experience among its slate and the proposed management team and the support of other major Norfolk Southern investors and market analysts in this campaign. The biographies of Ancora’s director slate and proposed management team speak for themselves in terms of extensive experience, at the levels of operator, manager, and investor. Ancora received early support from EdgePoint Investment Group, which then issued a statement echoing Ancora’s concerns and firmly supporting the changes that Ancora was publicly calling for even before Ancora made its initial proxy filing with the U.S. Securities and Exchange Commission (“SEC”).16 All of this was disclosed to the SEC directly in correspondence that, as is customary, the SEC will publish on its website. In addition, other investors and analysts have jumped to support Ancora’s campaign and its nominees’ plans for Norfolk Southern, including prominent institutional investor Neuberger Berman.17 To cite just a couple of supporters:
1.Barclays publicly stated on March 25, 2024: “We see value in potential management change with Jim Barber as CEO and Jamie Boychuk as COO as proposed by the activist investor Ancora.”18
2.Of Ancora nominees’ proposed management team, UBS said on March 13, 2024: “We note the difference in approach where the proposed executives indicated they would look to improving network velocity to enable growth in contrast to the resilience approach of the current NSC team which relies on holding excess resources (people, equipment) in order to be able to support potential volume growth. The proposed executives focused on improving service (velocity, trip plan compliance) as a necessary step to enable the marketing and sales organisation to capture more price.”19
Ancora’s campaign has been predominantly driven by substance and metrics, not mudslinging. From the outset, Ancora has emphasized shareholder value as well as the health of the organization and the welfare of its employees. As early as its public launch on February 20, 2024, Ancora’s campaign has directly linked Norfolk Southern’s subpar performance to management decision-making and strategy. On the morning of April 15, 2024, just a few hours before your pre-prepared Article coincidentally published, Ancora and its nominees released a nearly 200-page presentation outlining phased milestones and a detailed, operations-driven plan to create shareholder value. The proposed reductions in operating ratio to 62-63% after 12 months, 60% after 24 months, and 57% after 36 months is reasonable and possible, based on the views of the experienced railroaders on the Ancora slate and proposed management team. Ancora’s slate has outlined a realistic approach to aggressively turning Norfolk Southern around – which contrasts sharply with the existing company management’s rushed pivot to some of the same points Ancora’s team has already outlined.20
Contrary to your Article’s allegations regarding Ancora’s operational plans with respect to employees, with a sizable nine-figure investment in Norfolk Southern, Ancora has no incentive to harm the company in which it has invested so much time and resources. By contrast, Ancora believes in preserving and enhancing Norfolk Southern workers. The Ancora nominees proposal prominently states that “[h]eadcount reduction will be achieved through attrition” not through “firings” as the Article falsely alleges.21 The Ancora nominees and proposed management, on safety grounds, publicly endorsed a two-person crew standard on mainline trains in early March 2024.22 In April, federal regulators agreed, as Secretary of Transportation Pete Buttigieg announced the two-person crew as the legal standard to be implemented by rulemaking.23 Of the 13,500 written comments received, only 60 opposed the rule – one of them was from Norfolk Southern.24 If you were truly We cannot imagine why you would not include facts like some of the ones we have included here if you didn’t have an interest in an outcome.
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We hope Norfolk Southern’s other shareholders that have already read your Article see it for what it is: a cynical and self-serving hit piece to protect Norfolk Southern’s management and board.
We reiterate Ancora’s firm request that you retract the Article from publication and take appropriate measures consistent with academic and journalistic best practices to alert the public and the Norfolk Southern shareholders of the published errors. Publishing a correction of the various factual errors and misleading omissions we identified above, at minimum, along with the retraction should begin to set the public record straight. Should you fail to promptly retract the Article and publish such correction and reply to this letter confirming the same we will be forced to escalate the matter. We also ask that Norfolk Southern, which is copied, correct its disclosures in accordance with the proxy rules. Ancora reserves all rights with respect to the matters described in this letter.
Ancora and its nominees and advisors have stood behind their statements throughout this campaign. We fail to understand why Norfolk Southern cannot make its own case.
Sincerely, /s/ Richard Brand Richard Brand Cadwalader, Wickersham & Taft LLP
cc:Michael J. Aiello, Partner, Weil, Gotshal & Manges LLP Denise W. Hutson, Legal Secretary, Norfolk Southern Corporation
Alan Murray, Chief Executive Officer, Fortune Media Steven Weissman, General Counsel, Fortune Media James Chadwick, President, Alternatives, Ancora Alternatives LLC
Gregory Marose, Managing Partner, Longacre Square Partners
Dan Zacchei, Managing Partner, Longacre Square Partners
Source:
https://www.sec.gov/Archives/edgar/data/702165/000110465924049620/tm247441d18_dfan14a.htm