Tuesday, February 16, 2016

CP will seek STB declaratory order

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CP CEO Hunter Harrison. CP CEO Hunter Harrison.

Canadian Pacific on Tuesday, Feb. 16, 2016 announced it will seek a declaratory order from the U.S. Surface Transportation Board (STB) “confirming the viability of the voting trust structure that CP has suggested as part of its proposed merger with Norfolk Southern.”

NS, which thus far has rejected all of CP’s offers, has stated  numerous times that CP has not sought an STB declaratory order. For example, in a Dec. 23, 2015 letter to CP, NS said, “There is no basis to meet until you . . . address the regulatory issues, which you have the ability to do by seeking a declaratory order.”

“While we remain fully confident in our comprehensive regulatory plan, shareholders of both CP and NS have recommended that we seek this declaratory order as a means to better understand the STB’s views on the proposed voting trust model ahead of any formal application,” said CP CEO E. Hunter Harrison. “We still think this action is unnecessary; however, we believe listening to the shareholders—the owners of our respective companies—is important.”

CP said it “urges NS, consistent with its duties to its shareholders, to assist constructively in this effort, but intends to proceed regardless of NS’s cooperation.”

“Voting trusts have been used in hundreds of transactions involving regulated industries, including 144 transactions overseen by the STB since deregulation of the rail industry in 1980,” CP said. “Trusts, besides protecting against unlawful control violations, are a key means of reducing the risk that the regulatory approval process will either interfere with the marketplace’s assessment of a merger or be used as a tool by management to fend off would-be acquirers.

“While the declaratory order presents a hypothetical proposed trust—outside the established STB procedure for seeking formal trust approval—CP is hopeful that the STB will be able to offer clear guidance that will satisfy shareholders’ concerns before their voices are heard on CP’s pending resolution.”

Earlier in February, CP submitted a non-binding resolution to NS shareholders, to be voted upon at the upcoming NS annual shareholders meeting, to require NS’s board of directors to meet with CP to discuss a merger.

“NS has cited supposed regulatory uncertainty regarding the voting trust model as a reason not to talk to CP, and NS proposed that we seek a declaratory order. We are skeptical that the STB will give a definitive ruling, especially when NS will not even sit down with us, but we are willing to go the extra mile if that is what it takes to get NS to the table,” said Harrison.

NS responded to CP’s announcement with a terse statement: “Canadian Pacific has acknowledged that there is a path to determine the validity of its proposed voting trust structure by seeking a declaratory order from the STB.”

So what happens next? Railway Age Contributing Editor Frank N. Wilner, a former STB chief of staff, and author of Railroad Mergers: History, Analysis, Insight, offers this analysis:

“There is no time limit on the STB having to rule on the request for a declaratory order or provide one. While there is a requirement for public comment and replies to actual merger applications, there is no such requirement for a request seeking a declaratory order. The thinking from outside the STB is that the STB likely will respond with the general principles that have been stated in STB letters to members of Congress that are posted on the STB website. If the STB does not provide a definitive answer as to whether the voting trust is independent and can be imposed, should CP manage to convince NS stockholders to tender their shares, then CP is back where it started before seeking the declaratory order.

“What CP must overcome are allegations that the voting trust it envisions is a sham to put CP in control of NS pending a merger application and decision, which is contrary to the purpose of an independent voting trust. How the CP request is worded and how the STB views it are, of course, all that matter.

“If the STB rules against the voting trust framework as proposed by CP, there is not much CP can do, as it is most rare that a federal court overturns an expert regulatory agency decision—especially where, as in this case, the STB has discretion in the matter rather than a clear mandate in the statute. Numerous Supreme Court decisions have solidified the sanctity of expert regulatory agency decisions, which generally can be overturned only for arbitrary and capricious intent on the part of the regulators.

“With regard to the timing of an STB decision on a voting trust declaratory order, it can be expected that U.S.-based railroads will wish to have a say re: the downstream effects; and certainly shippers and other stakeholders (DOJ, DOT, DOA) will wish to have a say. So, the process of considering CP’s request for a declaratory could morph into two rounds of comment and analysis and even an oral argument. That becomes time-consuming.

“If the Board chooses to entertain the request rather than deny it outright, there is the matter of who votes and when. Republican Begeman is said to wish to return to the Senate, and she currently is in her holdover year. She could depart at any time. With two new seats created by S. 808, and a strong likelihood that nominations and confirmations will not occur until at least mid-2017, there could be three empty seats on the board and just two board members eligible to vote until then. Do they choose to slow things down as there is no time clock on their decisionmaking here? Would only two choose to vote given that there would be three empty seats? Congress, which controls the STB budget, surely has not telegraphed any interest in this merger and most likely wouldn’t complain were there to be no movement on the petition.

“And if the STB waits for the three new board members, expect all 4 major U.S.-based railroads (and maybe even Kansas City Southern) to be lobbying with all their PACs, political IOUs and abilities to influence nominations of individuals they are confident will oppose a CP-NS combination—and, by extension, approval of a voting trust. And there likely will not be any congressional opposition to such a result.”

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