Tue 04/13/2021 10:12 AM
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Relevant Documents:
KCS and CP Reply
KCS Press Release
DOJ Comment

Takeaways

  • Canadian Pacific Railway Ltd. and Kansas City Southern responded to objections to the companies’ claim of a waiver from rules that would compel heavy scrutiny by the Surface Transportation Board, or STB, claiming that revoking the waiver “would unnecessarily complicate and prolong the Board’s review of the proposed combination of CP and KCS, and thereby delay realization of the significant benefits the transaction.”

  • CP and KCS assert that the STB should “reaffirm the waiver it granted in 2001 as applied to the specific transaction proposed” and establish a procedural schedule “that allows a thorough but fair examination of the public interest implications.”

  • Separately, the DOJ Antitrust Division submitted a comment Monday evening encouraging the STB to consider the competitive impact of the transaction prior to approving the applicants combining their ownership by entering into a voting trust. The agency said that it “believes that all voting trusts inherently threaten the Board’s meaningful ability to review mergers.”


Canadian Pacific Railway Ltd. and Kansas City Southern responded to objections to the companies’ claim of a waiver from rules that would compel heavy scrutiny by the Surface Transportation Board, or STB, claiming that revoking the waiver “would unnecessarily complicate and prolong the Board’s review of the proposed combination of CP and KCS, and thereby delay realization of the significant benefits the transaction.” For access to the linked documents throughout this story as well as our M&A team's analysis and reporting on hundreds of other mergers and acquisitions request a trial here.

The merging parties claim in their reply, filed late Monday, April 12, that the objections raised do not raise concerns regarding the merits of the transaction but instead “seek to make the already-robust regulatory review process more time consuming and burdensome.” CP and KCS assert that the STB should “reaffirm the waiver it granted in 2001 as applied to the specific transaction proposed” and establish a procedural schedule “that allows a thorough but fair examination of the public interest implications.”

CP and KCS accuse the entities seeking to apply the 2001 merger rules to the current transaction of suffering “collective amnesia concerning the purposes for which those new rules were adopted and the reasons why the Board chose to waive their application to transactions involving KCS.” The parties give five reasons for their position: (1) they have not raised any objections to the STB engaging in a “thorough public interest assessment” under the statute; (2) the deal presents none of the concerns that prompted the 2001 revisions because KCS is still the smallest Class I railroad and the combined company would be the smallest Class I; (3) STB evaluating the deal under the pre-2001 rules via a waiver would result in the board having all the materials it requires to evaluate the relevant issues; (4) applying the 2001 rules, “while surely not fatal to the transaction’s ultimate success,” would impose significant costs on involved parties and the public interest; and (5) that even though the 2001 rules include a process to review a voting trust, they should not apply that process to the transaction because “[a]bsolutely nothing about the ‘plain vanilla’ voting trust Applicants propose is remotely controversial.”

On Monday, KCS and CP also submitted to the STB another batch of support letters from 75 shippers and market participants, bringing the total number of such letters to 379.

Separately, the DOJ Antitrust Division submitted a comment Monday evening that encouraged the STB to consider the competitive impact of the transaction prior to approving the applicants combining their ownership by entering into a voting trust. The agency said that it “believes that all voting trusts inherently threaten the Board’s meaningful ability to review mergers.” The DOJ also said that “the Board should carefully consider applying its 2001 merger standards and procedures to this case, to ensure it can thoroughly examine the competition concerns raised by commenters.”

The STB’s 2001 rules “rightly set a high bar for both proposed transactions and applicants’ use of voting trusts,” according to the DOJ. The comment states that even if a voting trust “successfully insulates the acquired railroad from the direct control of the acquiring railroad, each company will have less incentive to compete with the other.” Further, allowing the parties to combine before the STB reaches a decision on the merits of whether the transaction harms competition “makes a mockery of the Board’s authority.” The DOJ also raises concerns about the prospects of securing a successful divestiture, if needed, because the railroad industry is “specialized and concentrated” and “the only companies willing and able to acquire the divested assets without creating antitrust concerns are entities without railroad experience.”

The DOJ says that it is not aware of any other regulatory agency that permits mechanisms like voting trusts. Other agencies such as FERC and the FCC also pursue long investigations of mergers but do not permit the voting trust mechanism. The DOJ argues that companies can address regulatory risk “up-front and allocate this risk in the merger agreement, by negotiating break-up fees, divestiture and litigation commitments, regulatory efforts clauses, material adverse change clauses, and other terms.”
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