KCS Terminates CP Merger Agreement and Enters Into Merger Agreement with CN

Pending before the Surface Transportation Board (Board) are two potential merger proceedings involving Kansas City Southern – Docket No. FD 36500, regarding a potential merger with Canadian Pacific, and Docket No. FD 36514, regarding a potential merger with Canadian National.  A summary of these proceedings is provided below.

Potential CP/KCS Merger

On March 23, 2021, Canadian Pacific Railway Limited (Canadian Pacific), Canadian Pacific Railway Company, and their U.S. rail carrier subsidiaries, Soo Line Railroad Company, Central Maine & Quebec Railway US Inc., Dakota, Minnesota & Eastern Railroad Corporation, and Delaware & Hudson Railway Company, Inc. (collectively, CP), and Kansas City Southern and its U.S. rail carrier subsidiaries, The Kansas City Southern Railway Company (KCSR), Gateway Eastern Railway Company, and The Texas Mexican Railway Company (collectively, KCS), notified the Board of CP and KCS’s (collectively, Applicants) intent to file an application seeking authority under 49 U.S.C. §§ 11323-25 for the acquisition of control by Canadian Pacific, through its indirect, wholly owned subsidiary, Cygnus Merger Sub 2 Corporation (Cygnus Merger Sub 2), of Kansas City Southern.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (filed Mar. 23, 2021).  Applicants stated that they were also seeking authority for the acquisition of control by Canadian Pacific, through Kansas City Southern, of KCSR and its railroad affiliates, and for the resulting common control by Canadian Pacific of both its U.S. railroad subsidiaries and KCSR and its railroad affiliates.  Id. at 1.  Applicants noted that Canadian Pacific and Kansas City Southern entered into an Agreement and Plan of Merger on March 21, 2021.  Id. at 2. 

In their notice, Applicants stated that the transaction is a “major” transaction, as defined at 49 C.F.R. § 1180.2(a), because it is a control transaction that involves two or more Class I railroads.  Id.  Applicants also stated that the application is “subject to the regulations set forth at 49 CFR Part 1180 (2000), pursuant to the waiver granted by the Board for transactions involving KCSR.”  Id. at 3-4.  Under 49 C.F.R. § 1180.0(b), the Board “will waive application of the regulations contained in [Part 1180, subpart A] for a consolidation involving [KCSR] and another Class I railroad and instead will apply the regulations in [] subpart A in effect before July 11, 2001 . . . unless [the Board is] shown why such a waiver should not be allowed.” 

By a letter dated March 22, 2021, CP requested an informal, non-binding opinion from Board staff, pursuant to 49 C.F.R. § 1013.3(a), that a proposed voting trust agreement and related arrangements would effectively insulate CP from any violation of Board policy against unauthorized acquisition of control of a regulated carrier.

The Board issued a decision on April 21, 2021, finding that this is a “major” transaction under 49 C.F.R. § 1180.2(a).  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served April 21, 2021).  On April 23, 2021, the Board issued a decision, finding the transaction to be subject to the regulations set forth at 49 C.F.R. subpart A, in effect before July 11, 2021, pursuant to the waiver for transactions involving KCSR.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served April 23, 2021).  Additionally, on May 6, 2021, the Board issued a decision, finding that formal Board review of the voting trust agreement proposed for use in connection with the transaction is warranted.  The Board determined that the proposed arrangement is acceptable with certain modifications.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served May 6, 2021). 

Potential CN/KCS Merger

On April 20, 2021, Canadian National Railway Company (CNR), Grand Trunk Corporation, and their rail operating subsidiaries (collectively, CN) submitted a prefiling notification of their intent to file an application seeking authority under 49 U.S.C. §§ 11323-25 for the acquisition of control by CNR, through its wholly owned subsidiary Brooklyn Merger Sub, Inc., of KCS.  Canadian Nat’l Ry. Co.—Control—Kansas City S., FD 36514 (filed April 20, 2021).  The applicants stated that they were submitting the prefiling notification “in the event that [KCS] accepts an acquisition proposal that CN conveyed to [KCS’s] Board of Directors on April 20, 2021.”  Id. at 1.

CN stated that its proposal contemplates a “major” transaction and, thus, the “proposed transaction presents a threshold question under 49 C.F.R. § 1180.0(b) of whether the Board would review it under its current major merger rules, or whether the current rules should be waived in favor of the rules that were in place before Major Rail Consolidation Procedures, 5 S.T.B. 539 (2001).”  Id. at 3-4.  CN noted that it believes that “the current major merger rules should be applied to a transaction involving KCS, and that mergers involving KCS should not be subject to a different set of rules.”  Id. at 4.  CN filed a motion for approval of a voting trust agreement on April 26, 2021.

On May 17, 2021, the Board issued a decision finding that this is a “major” transaction under 49 C.F.R. § 1180.2(a).  Canadian Nat’l Ry. Co.—Control—Kansas City S., FD 36514 (STB served May 17, 2021).  In a separate decision issued on the same day, the Board determined that the proposed transaction will be subject to the current merger regulations.  The Board also denied CN’s motion for approval of a voting trust agreement, without prejudice, as incomplete.  Canadian Nat’l Ry. Co.—Control—Kansas City S., FD 36514 (STB served May 17, 2021). 

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On May 21, 2021, KCS filed a letter in Docket Nos. FD 36500 and FD 36514, stating that “KCS has terminated the CP merger agreement and entered into a merger agreement with CN.”  Canadian Nat’l Ry. Co.—Control—Kansas City S., FD 36514 at 1 (filed May 21, 2021).  KCS stated that it “believes the combination with CN will provide customers access to new single-line transportation services at the best value for their transportation dollar,” and that “[t]he resulting combination will increase competition among the Class 1 railroads, while preserving access to all existing gateways to enhance route choices and ensure robust price competition.”  Id. at 2.  KCS noted that it is withdrawing as a co-applicant in the FD 36500 proceeding but, to the extent the proceeding continues, KCS intends to remain a party of record.  Id.

On May 21, 2021, CP filed a letter in Docket No. FD 36500 stating that “CP intends to proceed to prepare and file its Application.”  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 at 1 (filed May 21, 2021).  CP subsequently filed a petition requesting that the Board issue declaratory relief confirming that “(1) [KCS] has a continuing obligation to provide CP with the information CP needs to prepare, file, and defend its forthcoming Application for Board authorization to control KCS; and (2) CP has a continuing right to access the information KCS has already provided to CP under the Protective Order entered by the Board on April 2, 2021.”  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 at 1 (filed May 27, 2021).  The Board denied CP’s request for an expedited reply deadline and ordered that replies to CP’s petition were due by June 16, 2021.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served June 7, 2021).  KCS filed a reply, arguing that “[t]he Board should deny CP’s Declaratory Order Petition given that there is no precedent for CP’s request and that granting that request would create bad public policy.”  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 at 4 (filed June 16, 2021).

            On May 26, 2021, CN and KCS filed a joint motion for approval of a voting trust agreement.  In a decision served on June 8, 2021, the Board directed CN and KCS to file certain documents by June 14, 2021 and established a comment period for the applicants’ motion for approval of a voting trust agreement.  Canadian Nat’l Ry. Co.—Control—Kansas City S., FD 36514 (STB served June 8, 2021).  Comments are due on June 28, 2021.  Applicants’ reply is due on July 6, 2021.

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