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CN’s April 21 pre-filing with the STB—its notice of intent to file an application seeking authority to combine with KCS—stated that the STB’s “current merger regulations contained in 49 C.F.R. part 1180 should apply in this proceeding.”
STB agreed. In 2001, the agency “revised its regulations governing proposals for major rail consolidations, in response to concerns regarding continued consolidation in the rail industry,” it wrote in the decision. The new rules, among other things, “placed a heavier burden on merger applicants to show that a major rail combination is consistent with the public interest, reflecting a shift in the Board’s policy that places a greater emphasis in the public interest assessment on enhancing competition while ensuring a stable and balanced rail transportation system.”
STB also noted that the “49 C.F.R. § 1180.0(b) waiver for major transactions involving KCS has been shown not to be warranted here.” (The STB decided April 23 that it would review the proposed merger of Canadian Pacific and KCS under the waiver provision it granted KCS in 2001. The waiver came about since “a potential transaction involving KCS and another Class I carrier would not necessarily raise the same concerns and risk as other potential mergers between Class I railroads,” given KCS’s size relative to the other Class I railroads.)
As for the voting trust, STB wrote in its decision that “[t]he voting trust agreement attached to CN’s motion for approval is incomplete, insofar as it identifies (as ‘Exhibit A to Voting Trust Agreement’) and includes multiple references to a merger agreement, which is not attached. As a result, the Board declines to establish a comment period and review the proposal pursuant to the process prescribed in 49 C.F.R. § 1180.4(b)(4)(iv). CN’s motion for approval of its voting trust agreement is denied, without prejudice, as incomplete.”
Download the full STB decision:
On May 17, CN released this statement in response to the STB’s decision:
“We welcome the STB’s decision to move forward with reviewing CN’s proposed combination with KCS under the current merger rules, which requires demonstrating that the combination would enhance competition. We requested that the STB review its superior proposal to combine with KCS under these rules because we are confident that a CN-KCS combination will create a safer, faster, cleaner and stronger railway that is ideally positioned to support the growth of an emerging consumption-based economy through better service options and customer choice. CN has received strong support for its combination with KCS as evidenced by the over 1,000 letters of support that have been filed with the STB by customers and other stakeholders. As we have stated before, we are committed to addressing any competitive concerns under the current merger rules in order to successfully complete a CN-KCS combination.
“We note that the STB’s procedural decision to defer consideration of our voting trust was based solely upon the fact that a merger agreement for the combination between CN and KCS was not yet available to be filed with the Board. We intend to promptly complete our application as the merger agreement with KCS was finalized on May 13, 2021, the same day that KCS’s Board of Directors announced that our combination was superior and that it intends to terminate its merger agreement with Canadian Pacific Railway Limited (‘CP’).
“We look forward to the STB promptly setting forth its timetable for reviewing our voting trust. We firmly believe that, once the STB has had the opportunity to undertake a full and fair review of our voting trust, we will have demonstrated that our voting trust is in the public interest. In particular, CN will demonstrate that our strong balance sheet, cash flows and ratings profile will provide certainty that we have the financial strength and integrity to satisfy the STB’s public interest analysis. CN’s proposed voting trust has identical terms and uses the same trustee as CP’s recently approved voting trust and our proposal provides superior and more certain value for KCS shareholders and represents a pro-competitive solution that offers unparalleled opportunities for customers, employees, shareholders, the environment and the North American economy.”
Shortly after on May 17, CP issued the following statement:
“We concur with the STB’s decision to apply the new merger rules to the proposed CN transaction. The STB explained: ‘The proposed transaction poses issues that the current merger rules were designed to address, namely the potential competitive impacts of a merged entity with some degree of overlapping routes and presently existing direct competition—characteristics that would appear to pertain to the CN and KCS systems.’
“The new rules place a ‘heavier burden on merger applicants to show that a major rail combination is consistent with the public interest.’
“The STB’s decision has significant implications for CN’s proposed use of a voting trust. The new merger rules require that the STB formally approve CN’s proposed use of a voting trust. Though CN had filed a motion seeking such approval, the STB rejected that motion as incomplete.
“The STB also rejected as ‘misplaced’ CN’s arguments about the legal standard governing its consideration of CN’s proposed voting trusts. Instead, the STB emphasized that the new merger rules take a ‘much more cautious approach’ to future voting trusts and noted the agency’s ‘plenary authority’ over consolidations.
“Under the new rules, a voting trust can be used only if, ‘in the context of’ a particular proposed transaction, its use would be ‘consistent with the public interest.’ The STB’s decision made clear that this is a ‘broad’ standard requiring ‘at minimum’ the consideration of five statutory factors. One of those factors relates to the potential impact of a voting trust on the financial condition of rail carriers. The STB disagreed with CN’s position that there was no cause for concern: ‘The level of debt being utilized by CN to fund the proposed merger, as well as the substantial premium CN has offered for KCS, call this assumption into question.’
“Another of the statutory public interest factors relates to the impact on competition. The STB’s decision follows comments last week from the Department of Justice with the STB contending that ‘the Board should not permit the proposed CN voting trust because CN’s proposed acquisition of KCS appears to pose greater risks to competition than the risks posed by a CP-KCS merger.’
“The STB’s decision today cited DOJ’s Comment for the statement that ‘threats to competition would be present immediately after the CN voting trust is consummated.’
“[T]he STB’s decision shows that the agency intends to review CN’s proposed trust against the backdrop of the STB’s findings in 2001 that ‘use of a voting trust is a privilege, not a right’ and that they ‘should not be used routinely, but rather should be available only for those rare occasions when their use would be beneficial.’ As such, if CN renews its motion for approval, the STB will take a ‘more cautious approach’ and evaluate all of the ‘potential benefits and costs’ relating to CN’s proposal.
“With this new ruling by the STB, CP’s confidence in the superiority of its friendly agreement with KCS is redoubled. The fairness of CP’s outstanding offer to acquire KCS is compelling because CP+KCS is the only Class I merger that is viable. The STB has approved CP’s use of a voting trust and affirmed the application of the pre-2001 merger rules because a CP-KCS combination is truly end-to-end and pro-competitive.”
The post STB to CN: No Waiver. Voting Trust Denied (For Now) appeared first on Railway Age.
This article first appeared on www.railwayage.com
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