The Surface Transportation Board on May 6 approved, by unanimous vote, a voting trust for Canadian Pacific’s proposed merger with Kansas City Southern. “The Board finds that formal Board review of the voting trust agreement proposed for use in connection with this transaction is warranted and determines that the proposed arrangement is acceptable with certain modifications,” STB wrote in Docket No. FD 36500.
“Following this critical milestone, we are proceeding full steam ahead to complete this historic combination, creating the first truly North American single line railroad,” said CP President and CEO Keith Creel. “We are continuing to prepare our formal merger application and proxy filing for a shareholder vote in the near future.”
Following are selected excerpts from STB’s decision (the full decision can be downloaded below):
“By decision served on April 23, 2021, the Board found that review of the acquisition of control of Kansas City Southern and its railroad affiliates (KCS) by Canadian Pacific Railway Limited (Canadian Pacific) (collectively, with Canadian Pacific’s U.S. rail carrier subsidiaries and KCS, Applicants) proposed in this docket (the Transaction) will be governed by the regulations contained in 49 C.F.R. part 1180, subpart A, in effect before July 11, 2001, pursuant to the waiver for a major merger transaction involving KCS under 49 C.F.R. § 1180.0(b).”
“Given the high level of interest in the Transaction, and because this is the first major transaction to be brought before the agency in [more than] two decades, the Board has concluded that formal review of the Voting Trust Agreement by the Board is appropriate here. Accordingly, the Board has reviewed the proposed Voting Trust Agreement and related information submitted by Canadian Pacific and has also considered the comments submitted about the proposed use of a voting trust provided by the U.S. Department of Justice (DOJ) and other interested persons … [T]he Board finds that the Voting Trust Agreement proposed for use in the Transaction, subject to the modifications specified below, comports with the regulations under part 1013 designed to prevent the exercise of unauthorized control during the pendency of regulatory review and that, in the event that the Transaction is disapproved or not consummated and there is a need for divestiture, there is no reasonable basis to conclude that the financial strength or operational capabilities of the carriers would be compromised.”
“The Board appreciates [U.S. Department of Justice] views regarding voting trusts and the need for careful consideration of their proposed use. However, the use of independent voting trusts in connection with the review of control transactions before the agency is a long-standing agency practice that is subject to regulatory requirements as well as an established body of agency precedent. Although the Board has expressed some concerns about whether voting trusts are always appropriate … the Board is satisfied … that the Voting Trust Agreement and related arrangements (as modified) proposed for use in the Transaction are appropriate. The Voting Trust Agreement here is conventional and would preserve Kansas City Southern intact to be managed by its existing management, with its own board of directors, and with a trustee [David Starling] who is a former chief executive officer of Kansas City Southern; compensation programs would be in place to incentivize Kansas City Southern management and employees to remain with the company and continue to achieve the independent business objectives Kansas City Southern has set for itself and its affiliated railroads; and there is no basis to believe that any issues associated with divestiture, if such process were required with respect to the Transaction, would be problematic for either Kansas City Southern or Canadian Pacific. As Canadian Pacific indicates, DOJ expressed no specific concerns about the Voting Trust Agreement, and no reasons have been given by DOJ, Union Pacific, or any other commenter that would indicate that the proposed arrangement would result in unauthorized control or that a successful divestiture could not be accomplished.”
“The Board finds that the proposed Agreement otherwise contains appropriate provisions to safeguard the independence of the trustee. There would be no corporate officers or board members in common between Canadian Pacific and its affiliates, on the one hand, and the trustee and its affiliates, on the other hand … Similarly, the boards and management of Kansas City Southern and its affiliates would have no overlap with the boards or management of Canadian Pacific and its affiliates, and there would be no movement of managers or directors from Canadian Pacific or its affiliates to Kansas City Southern or its affiliates during the pendency of the trust.”
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In order to close into voting trust, the CP-KCS merger requires approval from shareholders of both companies along with satisfaction of customary closing conditions. CP would then acquire KCS shares and place them into the voting trust, at which point KCS shareholders “will receive their consideration,” CP noted. “KCS management and Board of Directors will continue to steward the company while it is in trust, pursuing KCS’s independent business plan and growth strategies while the merger undergoes regulatory review. The STB last month affirmed it will review the CP-KCS combination under the waiver granted to KCS in 2001 to exempt it from new merger rules the STB implemented that year. In reaching this decision, the STB noted that the two companies once combined would remain the smallest of the Class I carriers.”
STB’s decision “repeatedly noted that the Board’s grant of formal approval for the CP voting trust was ‘based solely upon the specific facts’ of the CP/KCS transaction and was under the pre-2001 regulations applicable to the CP/KCS transaction rather than the post-2001 regulations, which adopt a ‘much more cautious approach to future voting trusts,’” CP said. “The decision made clear that when reviewing a voting trust under the 2001 rules, the STB has ‘plenary authority’ and an obligation to review a variety of factors in determining whether use of a trust, in the context of a specific proposed transaction, would be ‘consistent with the public interest.’”
As expected, CN, which has made a counter-offer the KCS Board is considering, responded immediately to STB’s decision:
“CN is encouraged by the STB’s decision to approve the voting trust for CP’s proposed acquisition of KCS. The STB applied the same public interest factors that CN stated should apply to both voting trusts. For the reasons given in the STB’s decision, CN is confident that the STB will reach the same decision with respect to the identical voting trust put forward for CN’s proposed acquisition of KCS. Approving both voting trusts will allow KCS to choose the bid it judges to be best for its shareholders.
“CN maintains that it has presented a better bid, is a better partner, a better railway and therefore the best solution for KCS. Our proposal presents an unparalleled opportunity for customers, employees, shareholders and the North American economy. We remain confident in our ability to close the combination with KCS, and we look forward to continuing to engage productively and respectfully with the KCS Board to deliver a superior and pro-competitive transaction to CN and KCS’s respective stakeholders.”
The Cowen Insight
Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor offers this analysis on CP’s and CN’s competing voting trust applications:
“CP was granted the voting trust that enables it to move forward with the proposed merger process. CP must make some modifications per the request of the STB, and move forward with SEC filings to ultimately enable a shareholder vote. We are not surprised by the news that CP can move forward with its voting trust, given it was granted the [pre-2001] rules, which did not have to meet the public interest test.
“Based on the filing, it appears the STB did do a somewhat more formal review process of the trust for CP, which was ultimately approved (albeit under the old rules). The difference in CN’s voting trust is that it too will have a formal review of the trust, but under the new rules, which call for higher scrutiny and a public comment period. This will likely elongate the process and must demonstrate anti-competitiveness. It took the STB 45 days to approve the voting trust for CP, and we believe it may take longer for it to approve the CN trust.
“In our view, we see the next step as the most significant regarding the deal, which will be whether or not CN is allowed to use the trust (using scrutiny of the new rules). If the STB grants the trust like it did with CP, it will level the playing field for both parties. CP will ultimately lose, as it will turn into a bidding war—something that CP President and CEO Keith Creel stated he is absolutely against when he did a fireside chat with us at the NEARS conference. CP believes that the STB will not allow the trust because under the new rules of the voting trust, it must demonstrate public interest—which CN will not meet, given the overlap CP has cited.”