The Board Grants in Part & Denies in Part CP’s Request for Declaratory Relief in CP/KCS Merger Proceeding; The Board Rejects Use of Voting Trust in CN/KCS Merger Proceeding

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.  On August 2, 2021, the Board issued a decision in Docket No. FD 36500, granting in part and denying in part Canadian Pacific’s petition for declaratory relief, addressing whether Kansas City Southern has a continuing obligation to provide Canadian Pacific with information Canadian Pacific needs to prepare its application, and whether Canadian Pacific has a continuing right to access the information that Kansas City Southern has already provided.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Aug. 2, 2021).  On August 31, 2021, the Board issued a decision in Docket No. FD 36514, rejecting Canadian National and Kansas City Southern’s joint motion for approval of a voting trust agreement.   Canadian Nat’l Ry. Co.—Control—Kansas City S., FD 36514 (STB served Aug. 31, 2021).

On March 23, 2021, Canadian Pacific Railway Limited (Canadian Pacific), Canadian Pacific Railway Company, and their U.S. rail carrier subsidiaries (collectively, CP), and Kansas City Southern and its U.S. rail carrier subsidiaries (collectively, KCS), notified the Board of CP and KCS’s 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, of Kansas City Southern.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (filed Mar. 23, 2021).  The applicants stated that they were also seeking authority for the acquisition of control by Canadian Pacific, through Kansas City Southern, of The Kansas City Southern Railway Company (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.  The applicants noted that Canadian Pacific and Kansas City Southern entered into an Agreement and Plan of Merger on March 21, 2021.  Id. at 2.  The Board later found that a voting trust arrangement is acceptable, with certain modifications, in this proceeding.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served May 6, 2021).

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.

KCS filed a letter on May 21, 2021 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 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 26, 2021, CN and KCS filed a joint motion for approval of a voting trust agreement.

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 filed a petition on May 27, 2021, 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). 

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).  CP replied to KCS’s reply, asserting that it would not be in the public interest if CP were forced to discontinue and destroy its work on its pending application and were required to wait to file an inconsistent application in Docket No. FD 36514.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 at 3-4 (filed June 21, 2021).  KCS filed a motion to strike CP’s reply, stating that “[a] reply to a reply is not permitted” under the Board’s rules.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 at 1 (filed June 23, 2021).

In a decision served on August 2, 2021, the Board granted in part and denied in part CP’s petition for declaratory relief.  Canadian Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Aug. 2, 2021).  The Board stated that CP’s arguments that it is in the public interest to allow CP to prepare an application do not support CP’s request for a declaration that KCS must provide continuing access to KCS’s confidential materials.  Id., slip op. at 3-4.  According to the Board, CP has available mechanisms that would permit it to submit an application to acquire control of KCS, even without the cooperation of KCS, such as seeking discovery from KCS (with an opportunity to seek to compel production), and seeking waivers from the Board regarding application requirements.  Id., slip op. at 4.  Materials that CP could seek from KCS through the discovery process could include “information related to KCS’s safety integration plan, environmental analysis, operating plan, and operational analysis or capacity analysis.”  Id.  Thus, the Board granted in part CP’s petition, to the extent that CP seeks confirmation that it may obtain information through the discovery process, and denied the remainder of the petition.”  Id.  The Board also denied KCS’s motion to strike.  Id.

In a decision served on August 31, 2021, the Board rejected CN and KCS’s joint motion for approval to use a voting trust.  Canadian Nat’l Ry. Co.—Control—Kansas City S., FD 36514 (STB served Aug. 31, 2021).  Under the Board’s current merger regulations, which apply to the CN/KCS proceeding but do not apply to the CP/KCS proceeding, “applicants contemplating the use of a voting trust in a major transaction ‘must explain how the trust would insulate them from an unlawful control violation and why their proposed use of the trust, in the context of their impending control application, would be consistent with the public interest.’”  Id., slip op. at 17, citing 49 C.F.R. § 1180.4(b)(4)(iv).

In its August 31 decision, the Board noted that the CN/KCS proceeding is the first occasion on which the Board has applied “the public interest test in 49 C.F.R. § 1180.4(b)(4)(iv) to a proposed voting trust within the context of an impending merger application.”  Id., slip op. at 20.  The Board found that the applicants had adequately explained how the voting trust agreement would insulate them from an unlawful control violation, but the applicants “have not demonstrated that their use of a voting trust would have public benefits.”  Id., slip op. at 2, 17.  The Board also found that “there are public interest risks to competition and divestiture associated with the use of a voting trust in the context of the impending control application”  Id., slip op. at 17.  Thus, the Board rejected CN and KCS’s joint motion. 

The Board noted that it received numerous comments in support of and in opposition to the proposed voting trust.  Parties that expressed opposition or concern to the voting trust included shippers, labor organizations, the U.S. Department of Justice, the National Railroad Passenger Corporation (Amtrak), and CP.  Id., slip op. at 8.

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