KSU/CP: Companies File Notice With STB; Most Recent Agency Rules Likely to Lengthen Evaluation of Voting Trust Compared With Previous Major Rail Transactions

Takeaways

• Canadian Pacific Railway Ltd. and Kansas City Southern filed a notice of intent to file an application with the Surface Transportation Board yesterday, March 23.


• Consistent with the deal’s merger agreement, the filing outlines the use of an independent voting trust pending STB review. The use of a voting trust is common for rail mergers; however, the process for STB approval of the use of the trust is likely to be more complex than in past rail mergers cited as precedent by the companies.


• In their deal presentation, the merging parties state that “closing KCS into a Trust prior to STB review of the proposed change in control is standard procedure, with numerous precedents.” These precedents either involve smaller transactions or were completed prior to 2001 STB regulations which formalizes approval for voting trusts in major rail transactions.


• The rules require an explanation of how the use of a voting trust is in the public interest and includes a process including a public comment period and an agency decision whether applicants can establish and use the trust.

Canadian Pacific Railway Ltd. and Kansas City Southern filed a notice of intent to file an application with the Surface Transportation Board yesterday, March 23. Consistent with the deal’s merger agreement, the filing outlines the use of an independent voting trust pending STB review.

The use of a voting trust in the merger is common for rail mergers; however, the process for STB approval of the use of the trust is likely to be more complex than in past rail mergers cited as precedent by the companies.

According to the merger agreement, CP is to submit within two business days of the agreement a copy of the voting trust agreement to the Surface Transportation Board. The parties are to use reasonable best efforts to receive a written informal advisory opinion that the action of depositing shares into a voting trust “will preclude unlawful control of the Company by Parent.” The merger agreement also provides that “[i]f the STB or the STB staff determines that the approval or authorization of the STB is required in order to consummate the Voting Trust Transaction … Parent and the Company shall use reasonable best efforts to obtain, as promptly as practicable thereafter, the STB Voting Trust Approval.” The merging parties are to file an approval application with the STB within six months.

Precedent Transactions Using Voting Trusts Cited by the Merging Parties

In their deal presentation, the merging parties state that “closing KCS into a Trust prior to STB review of the proposed change in control is standard procedure, with numerous precedents,” citing: (1) CP and Central Maine and Quebec Railway; (2) Genesee & Wyoming and Brookfield Infrastructure Partners; (3) Providence & Worcester Railroad and Genesee & Wyoming; (4) Canadian National and Illinois Central; and (5) UP and Southern Pacific.

These mergers can be distinguished by either their smaller size or their completion before the STB in 2001 issued rules on the approval process for voting trusts in the context of large rail mergers.

Canadian Pacific and Central Maine and Quebec Railway

On Nov. 20, 2019, Canadian Pacific and Fortress Transportation and Infrastructure Investors LLC announced that they entered into a definitive agreement whereby CP would acquire the Central Maine & Quebec Railway. The transaction closed Dec. 30, 2019, prior to final approval by the STB. The agency noted in its acceptance of the application on Jan. 16 that “[o]n December 30, 2019, Applicants filed a letter confirming the consummation of the Transaction. The letter also stated that all of the outstanding common stock of CMQR US was deposited in an independent voting trust pending the Board’s decision on the application.” The STB approved the application on May 1, concluding that the transaction did not involve two or more Class I railroads and that it “would not likely cause a substantial lessening of competition or create a monopoly or restraint of trade.”

Genesee & Wyoming and Brookfield Infrastructure Partners

The $8.4 billion transaction was announced on July 1, 2019, with the merger agreement also contemplating the use of voting trust. The merging parties filed a notice of exemption with the STB on July 9, asserting:

Following a public comment period, the STB granted the exemption on Oct. 29, 2019. The transaction closed Dec. 30.

Providence & Worcester Railroad and Genesee & Wyoming

The transaction between Providence & Worcester Railroad and Genesee & Wyoming was announced on Aug. 15, 2016. At the time, G&W said that it “will seek confirmation from the staff of the STB that, if the STB has not yet approved the transaction, G&W may close the transaction into a proposed form of voting trust, which will be managed by an independent voting trustee until G&W is granted approval from the STB to control P&W.” The companies on Sept. 1 filed for exemption from the prior approval requirements, which was granted in a Dec. 15, 2016, decision. The STB noted that G&W was a noncarrier holding company that was acquiring a small, Class III railroad. The companies completed the deal on Nov. 1, 2016.

Canadian National and Illinois Central

The merger between Canadian National and Illinois Central was announced on Feb. 10, 1998. The parties filed a primary application on July 15, 1998, which was accepted by the STB on Aug. 14. In its acceptance, the STB noted that “the shares acquired by CN in the Tender Offer and in the Merger are held in a voting trust … pursuant to an agreement dated as of March 13, 1998.” The document from the agency also stated that “[o]n February 25, 1998, CN received an informal opinion from the Board’s staff to the effect that CN’s use of the Voting Trust will be consistent with the Board’s policies and will preclude unlawful control of IC by CN.” The time between the announcement of the transaction and an indication from the agency that use of the voting trust was acceptable was 15 days.

The STB granted final approval of the transaction in May 1999. In approving the deal, which the agency described as “major” transaction given the merging parties status as Class I railroads, the agency evaluated five factors to determine whether the deal was in the public interest, including “(1) the effect of the proposed transaction on the adequacy of transportation to the public; (2) the effect on the public interest of including, or failing to include, other rail carriers in the area involved in the proposed transaction; (3) the total fixed charges that result from the proposed transaction; (4) the interest of carrier employees affected by the proposed transaction; and (5) whether the proposed transaction would have an adverse effect on competition among rail carriers in the affected region or in the national rail system.” This evaluation was made well after the determination that the use of the voting trust was acceptable.

Union Pacific and Southern Pacific

Shortly after the STB was established on Jan. 1, 1996, it approved the merger between UP and SP, which also employed a voting trust. The companies filed their application on Nov. 30, 1995, and it was granted July 3, 1996. In the agency’s final report, it notes that “UPC already owns approximately 25% of the SPR common stock; these shares, which have been held in a voting trust pending the outcome of this proceeding, were acquired on September 15, 1995, for a cash price of $25.00 per share.”

2001 STB Rules Modify Evaluation of Voting Trusts

In 2001, the STB adopted final regulations governing proposals for major rail consolidations, which included updated procedures involving voting trusts. The agency stated that “with only a limited number of major railroads remaining, we must take a much more cautious approach to future voting trusts in order to preserve our ability to carry out our statutory responsibilities.”

In commentary, the agency recognized that it “has permitted the use of voting trusts during the pendency of control applications, so long as the trust would not result in unlawful control” and issued “informal, nonbinding, staff letters giving an opinion as to whether use of the voting trust would result in unauthorized control.”

The 2001 rules provide for “a more formal and open process for applicants in major rail consolidations, requiring them to demonstrate in a public filing that their contemplated use of a trust would not result in unlawful control and would be consistent with the public interest.”

The companies have said that their deal qualifies as a major transaction. For such transactions, the rules state that “applicants contemplating the use of a voting trust 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. Following a brief period of public comment and replies by applicants, the Board will issue a decision determining whether applicants may establish and use the trust.”

Given the formalized process, it is likely that the timeline to obtain agency approval for the trust will be longer and involve higher scrutiny than in the transactions cited by the merging parties. The end date in the merger agreement is Dec. 21, 2021.

In their notice of intent to file an application with the Surface Transportation Board, the companies assert, “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.” The relevant section states that “for a merger proposal involving KCS and another Class I railroad, we will waive application of the new rules and apply the rules previously in effect unless we are persuaded otherwise”(emphasis added). In response to the notice, the STB issued a press release on behalf of Chairman Martin Oberman, stating that “[u]nder the Board’s statutes and regulations, this proposed transaction would be classified as ‘Major’ and would be the first major transaction to seek Board approval in more than two decades.” The agency “intends to scrutinize the transactions carefully and diligently, in keeping with the applicable statutory and regulatory frameworks,” according to Oberman.