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File photo of a CN locomotive in Montreal.

Canadian Pacific Railway Ltd.'s establishment directors are embroiled in what is fast becoming a nasty fight with a restless New York activist shareholder over who will lead the company.

Talks between the CP board and Bill Ackman of Pershing Square Capital Management LP had initially been described as amicable, but, as of Tuesday, showed signs of becoming a heated dispute that could distract the railway at a crucial time.

CP chairman John Cleghorn issued a public letter chastising Mr. Ackman for pressuring the company to hire Hunter Harrison, the famed former chief of rival Canadian National Railway Co., as its next CEO.

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Mr. Cleghorn, the former CEO of Royal Bank of Canada, disputed reports that some CP directors supported Mr. Harrison, and he voiced frustration about Mr. Ackman's limited input for improving profit at the railway.

"You did not have a plan," Mr. Cleghorn said in the letter filed with regulators.

The letter prompted an angry retort from Mr. Ackman, whose Pershing Square is CP's largest shareholder with a 14.2-per-cent stake. Mr. Ackman called for the resignation of CEO Fred Green and disputed Mr. Cleghorn's account of discussions about Mr. Harrison.

"We believe it is the senior-most leadership of the company that must be changed, namely Fred Green, in order for this potential to be unlocked," Mr. Ackman said in a letter sent to Mr. Cleghorn on Tuesday.

His response also took aim at Mr. Cleghorn for denying the media reports that some CP directors had expressed interest in Mr. Harrison as a potential CEO candidate.

"Contrary to your statement in the letter that no one at Canadian Pacific expressed an interest in meeting with Mr. Harrison, on the Saturday after our Wednesday, Nov. 2, meeting, you called me at home and asked that I arrange a meeting with him," Mr. Ackman wrote in the letter. "Our plan is to transform Canadian Pacific from the worst-performing railroad in North America into one of the best by effectuating a cultural and operational transformation of Canadian Pacific which begins with a new leader."

The testy exchange between Mr. Cleghorn and the influential New York investor appears to signal a breakdown in discussions between CP's blue-chip board of directors and an activist who has made a huge personal fortune challenging the boards of laggard companies.

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Mr. Ackman has been urging CP since early November to hire Mr. Harrison as the railway's new CEO and Tuesday's letter from Mr. Cleghorn suggests that the board does not agree.

The 67-year-old Mr. Harrison, who lives in Florida, is credited with transforming CN into North America's most efficient railway, but his aggressive push for cost-cutting at CN sparked some complaints about service.

While the CP letter didn't refer to Mr. Green, Mr. Cleghorn emphasized that "CP has a strong management team and an independent board made up of directors with extensive experience in railroads, energy, natural resources, food and agriculture, law, government, banking and finance."

Mr. Green, who has served as CP CEO since 2006, has been seeking to improve CP's operating ratio, a key indicator of productivity that measures operating costs as a percentage of revenue. CP's operating ratio ranks as the worst among North America's Big Six railways.

Mr. Cleghorn said CP directors have invited Mr. Ackman to join the board, but denied that any CP director has indicated interest in courting Mr. Harrison either directly or through Pershing.

Mr. Ackman has declined the offer of a board seat because CP requested that he sign a standstill agreement before accepting the appointment. "The so-called customary arrangement to which you refer is a standstill agreement that no other director of Canadian Pacific has been asked to sign, and which would eliminate many of our basic shareholder rights," he wrote.

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Mr. Cleghorn and Mr. Green couldn't be reached for comment, but CP said late Tuesday that it stands by Mr. Cleghorn's letter. A Pershing spokesman declined to comment.

Mr. Harrison retired from CN at the end of 2009. He had a non-compete clause that expired at the end of 2011, but restrictions remain related to collecting his CN pension benefits from 2012 to 2014.

Raymond James Ltd. analyst Steve Hansen characterized Mr. Cleghorn's letter as the start of CP's campaign to push back against Mr. Ackman and Pershing. "The letter is a shot across the bow."

Even if Mr. Harrison doesn't join CP, "management change is forthcoming at CP. The question is to what degree is change coming and over what time period," Mr. Hansen said.

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