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TCI recently increased its stake in Montreal-based CN to more than 5 per cent from 3 per cent, and owns shares worth more than $4-billion.DARRYL DYCK/The Globe and Mail

Canadian National Railway Co.’s second-largest investor is marshalling support among other shareholders to oust CN’s top executive and chairman after the railway failed to win initial U.S. regulatory approval for the takeover of Kansas City Southern .

Activist investor TCI Fund Management, an investment fund run by British billionaire Chris Hohn, said CN’s lagging financial performance and its unsuccessful pursuit of KCS so far signal Canada’s largest railway needs new management.

Ben Walker, a partner in TCI, said the investment fund has been in talks with other large investors in CN and found many share TCI’s unhappiness with the way CN is run.

“I think there’s a lot of like-minded shareholders out there. We’ve spoken to them,” Mr. Walker said by phone, declining to name those other shareholders.

TCI recently increased its stake in Montreal-based CN to more than 5 per cent from 3 per cent, and owns shares worth more than $4-billion. That amount gives TCI the power to call a CN shareholder meeting at which it could demand a vote on board membership executive roles.

Mr. Walker said the next steps to remove chairman Robert Pace and CEO Jean-Jacques Ruest were not clear, and depended on the actions of other CN shareholders.

“I don’t think the board could ignore those opinions of the largest shareholders who would probably make up a majority of the shareholders. I think will be hard for the board to ignore that,” Mr. Walker said.

U.S. rail regulator deals blow to CN’s US$29.8-billion bid to take over Kansas City Southern

CP Rail reaffirms Kansas City Southern offer, gives U.S. rail carrier until Sept. 12 to accept

In a letter to CN’s board on Tuesday, TCI called for the replacement of Mr. Pace and Mr. Ruest. TCI said CN should hire former CN executive Jim Vena as CEO, and add board member Gil Lamphere, a veteran railway director.

The U.S. regulator, the Surface Transportation Board, on Tuesday blocked CN’s proposal to create a voting trust in which it planned to hold KCS while awaiting approval of the US$29.8-billion takeover. The STB said CN failed to show the voting trust was in the public interest, casting doubt the takeover would receive approval.

In the wake of the STB’s rejection of the voting trust, KCS cancelled a vote of its shareholders on the CN offer, and acknowledged receipt of a bid from Calgary-based Canadian Pacific Railway Ltd. worth US$27.2-billion.

TCI urged CN to abandon the deal rather than engaging in a costly appeal or continuing without a voting trust in place.

CN did not respond to e-mailed questions on Thursday.

“The most pressing need is not a misguided pursuit of an unattainable prize but the establishment of a culture of operational excellence that so clearly exists at other railroads such as Canadian Pacific and CSX,” TCI said. “Since 2016, CN’s financial results have lagged significantly behind those of the other railroads.”

“The company has underperformed on nearly every measure of productivity and efficiency. Revenues per RTM [revenue ton-mile], expenses per RTM, return on capital, operating ratio and profits have all gone backwards compared to the rest of the industry,” TCI added. “CN has lost its way and the business needs to be fixed as a matter of urgency.”

CN’s largest shareholder, at 14 per cent, is Cascade Investment LLC, the asset manager for Bill Gates’s personal holdings and an occasional activist investor. Cascade and several other large CN investors did not respond to interview requests or declined to comment.

In 2008, TCI won a fight for director seats at Florida-based railway CSX Corp.

In May, TCI urged CN to end its attempt to buy KCS, calling the deal overpriced and risky, and said Mr. Ruest and Mr. Pace should go if its trust application failed.

Mr. Walker said his most recent phone call with Mr. Ruest was two weeks ago. “We told him the STB was going to rule against the voting trust. He was very confident then that the STB would approve the voting trust,” Mr. Walker said.

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