Last week, CSN (>> Companhia Siderurgica Nacional) filed an injunction in a regional court to force Usiminas (>> Usinas Siderurgicas de Minas Grs SA Usms) to tap 900 million reais ($258 million) in cash sitting at subsidiary Mineração Usiminas SA, said the sources, who asked for anonymity since the process is under seal of secrecy. The injunction was rejected on Friday, the sources said.

The lawsuit will seek to annul terms of the Usiminas capital plan, alleging it will be dilutive and detrimental to minority shareholders, according to the sources. Under terms of the capital plan, Usiminas may fetch 1 billion reais ($279 million) from an offering of voting shares.

The move underscores CSN's efforts to have more say in Usiminas, which is succumbing to rising Chinese imports, a steep recession and a rift between controlling shareholders Nippon Steel & Sumitomo Metal Corp (>> Nippon Steel & Sumitomo Metal Corp) and Techint Group.

CSN owns 14.1 percent of voting shares and 20.7 percent of non-voting stock of Usiminas, respectively, making it one of the top four shareholders.

CSN declined to comment.

Antitrust watchdog Cade ruled a year ago that CSN could not directly participate on the board of Usiminas. The sources said that CSN is not considering such plans or a tie-up with Usiminas at this point.

CSN considers the proposal of 5 reais a share for the capital increase "too low," according to the sources.

Shares in CSN jumped 4 percent to 12.38 reais on Monday. Non-voting shares in Usiminas rose 1.4 percent to 2.13 reais.

CONTRACTS

When rejecting the injunction, state Judge Patricia Santos Firmo said Monday's capital injection could be annulled, according to documents obtained by Reuters. In addition, she opened the possibility that CSN could be eligible for future compensation stemming from losses incurred in the capital injection plan, according to the documents.

CSN Chief Executive Officer Benjamin Steinbruch began buying shares in Usiminas five years ago, when two key shareholders in the company were on their way out. Steinbruch wanted the investment, which at the time totaled 3 billion reais, to help CSN and Usiminas join forces against Chinese competition.

The company's stake in Usiminas is currently worth about 500 million reais.

The petition came after CSN asked watchdog Cade for permission to appoint members to the board of Usiminas because Steinbruch, also the company's controlling shareholder, is dissatisfied with the board's performance.

Part of the dissatisfaction stemmed from a lack of clarity over 13 billion reais in contracts that Usiminas signed in recent years with companies controlled by Nippon Steel or Techint, said one source.

Nippon Steel and Techint did not immediately comment.

The dismal performance of Usiminas over the past two years is a sign that the strategy followed by Nippon Steel-backed management at Usiminas has failed to help, the sources said.

Among Brazil's listed steelmakers, Usiminas was the only one that posted operational losses. With its debt rising faster than peers, Usiminas also has the smallest scope for raising cash at this point, according to analysts.

($1 = 3.5795 Brazilian reais)

(Editing by James Dalgleish and Jeffrey Benkoe)

By Tatiana Bautzer and Guillermo Parra-Bernal