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Hunter Harrison, former CEO of Canadian National RailwayThe Globe and Mail

Canadian National Railway Co. has suspended Hunter Harrison's pension payments, alleging that the former chief executive officer has breached provisions of his retirement deal and poses a serious threat to CN if he joins rival Canadian Pacific Railway Ltd.

Montreal-based CN launched legal proceedings on Monday in Illinois against Mr. Harrison, who retired from CN in 2009.

Reached at his home in Florida, Mr. Harrison said he had just been notified about the suspended payments, valued at almost $40-million (U.S.) in total, and it is "premature for me to comment at this point."

But Mr. Harrison's lawyer, Greg Joseph, later issued a statement to say his client had scrupulously honoured the terms of CN's non-compete deal and the lawsuit offers no legal basis for stopping payments. "This is shocking behaviour for a reputable public company. This suit is only about money," Mr. Joseph said.

CP CEO Fred Green has been under pressure from U.S. hedge fund Pershing Square Capital Management LP to stage a turnaround at the freight carrier, which is an industry laggard in productivity. Pershing Square CEO Bill Ackman is waging a proxy battle against CP in his quest to replace Mr. Green with Mr. Harrison.

"Harrison was intimately involved in every detail of CN's business. Not every detail was confidential, of course, but a great many were – and still are. Under Harrison's leadership, CN grew into a far more efficient and valuable railroad than its principal competitor, CP," CN said its complaint in U.S. District Court. "Harrison is not the only executive who could run CP, but he is the only executive who possesses the unique body of CN confidential information, access to which by CP would be devastating."

CN's legal tactic provoked an extraordinary gesture from Pershing Square.

Mr. Ackman said that after consulting his lawyers, he is convinced there is so little merit to CN's lawsuit that Pershing Square is prepared to guarantee Mr. Harrison's retirement benefits if CN prevails with its suit.

"We will assume the risk of the $40-million. We have agreed to give Hunter an indemnity that will protect him from this frivolous litigation," Mr. Ackman said.

Pershing Square, which is now CP's largest shareholder, hired Mr. Harrison as a consultant last fall to help the hedge fund assess its potential investment in CP. Mr. Ackman said Mr. Harrison did not provide the fund with any information about CN.

In an interview two weeks ago, Mr. Harrison said he's excited about the prospect of running Calgary-based CP. "I feel like I can still make a significant contribution. If the opportunity presents it itself, I am ready to go," he said.

Mr. Harrison had a non-compete clause that expired at the end of 2011, so he believes 

he is now able to accept a job that entails competing against CN.

In its 14-page court filing, CN is seeking a declaration that it is reasonable and lawful for the railway to halt Mr. Harrison's pension benefits with a present value of $20.6-million and restricted share units worth $17.9-million.

CN, Canada's largest railway, asserts that based on "the strength of rumours of the mere possibility that Harrison will join CP, CP's stock rose while numerous analysts downgraded CN."

The court filing alleges that the former CN CEO's consulting work in 2011 for Pershing Square constituted a breach of his non-compete provisions reached with CN and he intends to further violate non-compete restrictions by joining CP to harm CN.

"Upon his retirement, Harrison was entitled to very generous postemployment benefits, including an annual pension of $1.5-million and payments under a restricted share units agreement," according to CN's complaint. "CN is ready to pay those amounts, worth nearly $40-million, but it agreed to do so only in return for Harrison's loyalty to CN and his conformance to bargained-for, reasonable non-disclosure, non-competition and non-solicitation obligations."

Mr. Harrison served as CN's CEO from 2003 to 2009, guiding the railway to become the industry's most efficient train operator.

Pershing Square is proposing to elect a minority slate of alternative directors at CP: Mr. Ackman and his Pershing Square colleague Paul Hilal, corporate restructuring specialist Gary Colter, former Onex Corp. executive Anthony Melman and Just Energy Group Inc. executive chairwoman Rebecca MacDonald.