STB has already decided that CP's proposed use
of a voting trust is subject to the pre-2001 merger rules, which
entails different standards and processes than those governing CN
proposal for review under current regulations
CALGARY, AB, April 27, 2021 /PRNewswire/ - Today,
Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) filed the
following letter with the Surface Transportation Board:
The Honorable Cynthia T. Brown
Chief, Section of Administration, Office of Proceedings
Surface Transportation Board
395 E Street S.W.
Washington, DC 20423
Re:
|
Finance Docket No.
36500, Canadian Pacific Ry. – Control – Kansas City
Southern
|
|
Finance Docket No.
36514, Canadian National Ry. – Control – Kansas City
Southern
|
Dear Ms. Brown:
I am writing on behalf of the Canadian Pacific Applicants in
Finance Docket No. 36500,1 in response to the letter
submitted by Canadian National ("CN") on April 26 in the above-referenced dockets.
In that submission, CN asks the Board to subject the voting trust
arrangement proposed by Canadian Pacific ("CP") for its acquisition
of Kansas City Southern ("KCS") to the same review process and
standards that govern CN's proposed voting trust. As
explained below, CN's position is both contrary to law and
fundamentally at odds with the very different factual contexts of
the two voting trust proposals. Accordingly, we respectfully submit
that the Board should proceed to review each of the pending voting
trust proposals under the different regulatory review processes and
standards applicable to each of them.
In short, it follows inexorably from the Board's decision to
apply the KCS waiver to the CP/KCS transaction that CP's
proposed use of a voting trust is subject to the pre-2001 merger
rules, which are different from the Board's current
regulations. See Finance Docket No 36500, Decision
Nos. 3 (at 2 n.2) and 4 (at 3). It is already manifest that
CP's proposal meets the pre-2001 standard, as it will effectively
insulate KCS from premature control by CP. CN wholeheartedly
agrees. See CN-6 at 4-7 (CN's supposedly "identical"
voting trust agreement and trustee selection satisfies
"longstanding and specific guidelines in part 1013"). Under
well-established Board precedent (relied upon by CN), CP's proposed
voting trust need only "ensure that it is not used to obtain
unauthorized control of a regulated carrier," and CP's "submission
of [the] voting trust for an informal opinion [is] purely
voluntary." Union Pacific Corp., et al. – Request for
Informal Opinion – Voting Trust Agreement, Finance Docket
32619, 1994 WL 680238, at *1 n.1, * 3 (ICC served Dec. 20, 1994) (UP/Santa Fe).
CN's proposal, by its own admission, is subject to the 2001
rules and their requirement that the Board conduct the "public
interest" review mandated by new Section 1180.4(b)(4), which goes
beyond consideration of whether the trust will insulate KCS from
premature control.2 The Board should proceed to
establish a process for consideration of CN's proposal, in which CP
intends to participate.
Though CP will in due course demonstrate why approval of CN's
proposal to acquire the shares of KCS prior to obtaining control
authorization is not in the public interest, CP wishes to expand
briefly on why there is no merit to CN's suggestion that its trust
proposal should be subject to the same review process as CP's
proposal.
Different Factual Contexts Demand Different
Treatment.
CP begins by observing that CN's assertion that its voting trust
proposal is "identical" to that proposed by CP is
fundamentally incorrect. Although the terms of the
proposed trust agreement itself, and the proposed trustee, appear
to be substantially the same, that is where any similarity
ends. The Board's 2001 rules require that any voting
trust proposal be considered in the context of the specific
transaction for which a trust would be used. 49 CFR §
1180.4(b)(4)(iv). Here, CN is proposing to use a trust to
allow it to consummate its own acquisition of KCS prior to
obtaining Board approval of CN's control of KCS, which raises
fundamentally greater public interest concerns than CP's
proposal.3 Specifically:
1. Perhaps most fundamentally, CN and KCS are head-to-head
horizontal competitors today, and that competition –
notwithstanding the lack of CN premature control over KCS –
would be adversely affected, perhaps permanently, by the change in
incentives associated with CN's ownership of all of KCS's
stock during the pendency of a lengthy control proceeding.
The Department of Justice was correct to see these incentive
effects as a concern where railroads compete, and in the case of a
CN/KCS transaction those concerns actually apply.
Finance Docket No. 36500, DOJ Comment (filed Apr. 12, 2021) at 3-4.
CN tries to sidestep this basic fact by asserting that DOJ's
concerns do not apply to it because its transaction is
"end-to-end." Finance Docket No. 36514, CN-6, at 12.
That characterization is a blatant misrepresentation of the
facts. Whereas CP's proposed transaction is in fact
"end-to-end in nature" (see CP/KCS, Decision No. 4 at 2), a
CN combination with KCS is not, as even a cursory glance at a rail
map demonstrates. Both the substantially parallel nature of
the CN and KCS systems and readily-available data on carrier access
(direct and via reciprocal switch) confirm the substantially
head-to-head overlap between the systems, as shown in Figure 1
below. In sum, more than 340 shipper facilities have service
from both CN and KCS at locations across KCS's U.S. system (not
including shippers benefitting from build-in/build-out competition,
geographic competition, and access to both railroads via connecting
shortlines).
Not surprisingly, then, when IC (CN's predecessor) sought to
acquire KCS in 1994, major shippers in the Baton Rouge-New
Orleans corridor objected to the proposed use of a voting
trust in that case because the proposed merger would have
substantial adverse competitive impact. As they
explained:
"Petitioners operate major
petroleum and petrochemical production facilities in the
Baton Rouge-New Orleans corridor and are served by one or
both of the rail carriers involved in this merger
proceeding. The ICR and KCSR run parallel routes between
New Orleans and Baton Rouge, and are the only two carriers
serving the chemical corridor along the east bank of the
Mississippi River. While the routes thereafter diverge, they
run essentially in parallel into the Midwest. Analysis of
1992 waybill data reveals approximately $700
million of traffic originated or terminated in the
Baton Rouge-New Orleans corridor, and the chemicals group
constituted approximately 44% of that traffic. Petitioners
alone account for approximately 5 Billion pounds of freight
annually moving by rail in the corridor. A merger of the
ICR and KCSR would have substantial adverse impact upon Petitioners
by virtue of elimination of competition, heretofore imminent
competition and potential competition in the Baton Rouge-New
Orleans corridor."
Illinois Central Corp. – Common Control – Illinois Central
R.R. & The Kansas City Southern Ry., Finance Docket
No. 32556, Petition of Bordon, Fina and Shell (filed Sept. 27, 1994), at 2 (emphasis added).
That transaction was abandoned after the ICC sought comment on the
proposed trust arrangement.
Confirming the very significant competitive issues raised by
CN/KCS's horizontal merger, preliminary analysis of the Board's
Waybill Sample data4 shows that very substantial flows
of traffic would suffer 2-to-1 or 3-to-2 reductions in independent
rail routes as a result of a CN/KCS transaction, as shown in Figure
2 below:5
CN's proposed use of a trust would have immediate adverse
effects on all of this competition and for well more than a year,
regardless of what steps CN might ultimately propose to remedy
competitive concerns at the end of the regulatory review
process.
2. Second, as explained in CP's April 21, 2021 Letter in Finance Docket 36500
(CP-12), unlike CP/KCS, a CN acquisition would uniquely destabilize
the balanced structure of the North American railroad
industry. By blocking CP's proposed acquisition of KCS, a
closing of CN's acquisition into trust would leave CP
asymmetrically disadvantaged and stranded north of Kansas City, creating strong strategic
pressure for further consolidation. This would happen as soon
as CN acquired KCS's stock and placed it in
trust.6
3. Third, the ultimate outcome of the Board's regulatory
review of a CN/KCS transaction (the first ever under the 2001
merger rules) is highly uncertain – certainly far more so than the
CP/KCS transaction. The harms to competition from a
CN/KCS transaction and its impact on downstream consolidation –
both of which are vital public interest factors under the 2001
rules – will have an important bearing on whether the Board could
ever find that the CN/KCS transaction is consistent with the public
interest as well as on the extensive conditions that would be
required to make it so. Given this uncertainty, CN's proposal
to place KCS into trust bears vastly more risk of a bad outcome for
KCS, the industry, and perhaps even CN – no matter how well CN
thinks its crystal ball is able to predict the Continent's
late-2022 economic future and the implications of a forced
divestiture process.
Different Regulatory Standards and Processes Must
Govern.
CN well understands that it would have no chance of
prevailing were it to seek to have the KCS waiver applied to its
proposed transaction, for all of the reasons summarized
above. Instead, it effectively urges the Board to
reconsider its Decision No. 4 (in Finance Docket No. 36500), which
found that the KCS waiver does apply "neatly" to CP's proposed
acquisition of KCS.
1. The inherent consequence of that decision is that the
pre-2001 Board regulations and precedent apply to CP's voting trust
proposal. The Board has already noted that its waiver
decision determines which "regulations pertaining to voting trusts"
shall apply. Finance Docket No 36500, Decision Nos. 3 at 2
n.2. The new "public interest" review of voting trusts was
added by the 2001 rules, and did not exist previously. This
precise point was made by the Board when it revised its merger
rules in 2001: "The Board, like the ICC before 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. 49 CFR 1013."
The Board's pre-2001 precedent governing the use of voting
trusts is thus well-established and unambiguous: voting
trusts are permitted when they effectively insulate the target from
premature control, pure and simple. The Board's regulations
(49 CFR § 1013) and countless pre-2001 major merger (and post-2001
other merger) precedents speak to this. E.g.,
UP/Santa Fe, at * 3
(scrutinizing "proposed voting trust and, as revised here,
find[ing] nothing inherent in its provisions that would result in
the kind of premature, unauthorized control prohibited by the
ICA"); Canadian National Ry., Grand Trunk Corp., & Grand
Trunk Western R.R. – Control – Illinois Central Corp., Illinois
Central R.R., Chicago, Central
& Pacific R.R., & Cedar River R.R., Letter from
Vernon A. Williams to Paul A. Cunningham (Feb.
25, 1998) (providing informal opinion that proposed trust
would effectively insulate acquirer from a control
violation). Accordingly, the path for further review of CP's
proposed trust is clear based on the Board's decision that the
pre-2001 rules would apply to the CP/KCS transaction. There
is no occasion for any further review process given that it is
acknowledged that under Board precedent CP's proposal will insulate
KCS from premature control.
CN's suggestion that the Board should conduct a further or
different review of CP's proposed use of a trust is contrary to
Board precedent and inappropriate in light of the very different
factual circumstances posed by the two pending proposals. CN
would at minimum be required to satisfy the stringent standards for
seeking reconsideration of the Board's ruling in Decision No. 4,
but it does not even attempt to do so.
2. The regulatory path for CN's proposed trust is equally
clear, but very different. CN has now moved for approval of
its trust under the Board's 2001 rules. It has not sought a
waiver of the 2001 rules, in whole or in part but has affirmatively
embraced them. E.g., CN April
26 Letter at 2 ("CN remains committed to the current merger
rules"). Therefore, it expressly invokes the public comment
process set forth in new Section 1180(b)(iv) for review of its
trust proposal. Finance Docket 36514, CN-6 at 17. The
Board should proceed to establish a public comment
period.
3. If CN's April 26 letter
is instead intending to suggest that CN's voting trust proposal
should be governing by the same pre-2001 standards as apply to CP's
proposal, that request is procedurally improper and substantively
misguided. At minimum, to attain the procedural posture it
seeks CN would first have to propose a waiver of the 2001 rules,
which it has both opposed and renounced for purpose of its own
transaction. If CN nonetheless intends to seek a waiver,
the Board's regulations provide for objections by interested
parties within ten days. 49 C.F.R. § 1180.0(b). CP
certainly would object for the reasons set forth above, but other
interested parties must also have the opportunity to know that a
waiver is being sought and submit their own comments on its
appropriateness.
4. Finally, CN's suggestion that the Board review the two trust
proposals simultaneously is meritless, not just because different
standards and processes apply to them. It would be manifestly
unjust to hold up CP's voting trust proposal awaiting a process for
review of CN's proposal that CN has chosen to wait to commence
for a full month after CP announced its agreement with KCS and CP
and KCS jointly filed their Notice of Intent.
*
*
*
For the foregoing reasons, CP requests that the Board proceed
with each of the pending voting trust proposals under the different
regulatory review processes and standards that apply to them.
CP appreciates the Board's attention to this matter.
Respectfully submitted,
David L.
Meyer
Attorney for Canadian Pacific
Railway Limited
cc: All Parties of Record in Finance Docket Nos. 36500 and
36514
_______________________________
|
|
1 Canadian Pacific
Applicants are Canadian Pacific Railway Limited, Canadian Pacific
Railway Company, and their U.S. rail carrier subsidiaries Soo Line
Railroad Company, Central Maine & Quebec Railway US Inc.,
Dakota, Minnesota & Eastern Railroad Corporation, and Delaware
and Hudson Railway Company, Inc. (collectively "Canadian Pacific"
or "CP").
|
|
2 See 49
CFR § 1180.4(b)(4)(iv) ("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") (emphasis
added).
|
|
3 Although a
question better addressed in the context of the public interest
review of CN's proposed trust, CN's suggestion that the impact on
CN's finances is the only relevant public interest factor is wrong.
That assertion is flatly inconsistent with both the breadth
of the Board's "public interest" discretion (e.g., Penn-Central
Merger and N & W Inclusion Cases, 389 U.S. 486, 498-99
(1968) ("determination of the factors relevant to the public
interest is entrusted by the law primarily to the Commission,
subject to the standards of the governing statute") and the Board's
conclusion in 2001 that use of voting trusts "should be available
only for those rare occasions when their use would be
beneficial." Major Rail Consolidation Procedures, Ex
Parte No. 582 (Sub-No. 1) (STB served June 11, 2001) at 29-30
n.29.
|
|
4 CP's use of
these data was for purposes of Finance Docket No. 36500, in order
to respond to CN's claim in that docket that the implications of
the two voting trust proposals are identical.
|
|
5 CN seems to
believe that it need not address – via remedy or otherwise –
competitive harm except where CN and KCS are the only serving rail
carriers. Finance Docket No. 36500, CN Apr. 23 Letter at 3
("If KCS chooses to partner with CN, CN will propose effective
solutions, working closely with these customers to ensure that no
customer will become sole served as a result of the
transaction."). This is a misguided viewpoint. Even if
one adopted an "only 2-to-1 harm matters" perspective, given the
broadly parallel nature of the CN and KCS systems south of Kansas
City and Springfield, Illinois, much of the traffic suffering
adverse competitive impacts in fact involves 2-to-1 reductions in
viable routing alternatives despite specific shipper
facilities being served by more than two carriers (such as
where the two best routes between origin and destination involve CN
and KCS, which CN proposes to reduce to a single carrier,
CN).
|
|
6 Indeed, CP is very
concerned that CN would downgrade KCS's mainline north of
Shreveport, undermining potential future CP-KCS interline
options regardless of any commitment CN might make to keep the
Kansas City gateway "open."
|
FORWARD-LOOKING STATEMENTS AND INFORMATION
This news release includes certain forward looking statements
and forward looking information (collectively, FLI) to provide CP
and KCS shareholders and potential investors with information about
CP, KCS and their respective subsidiaries and affiliates, including
each company's management's respective assessment of CP, KCS and
their respective subsidiaries' future plans and operations, which
FLI may not be appropriate for other purposes. FLI is typically
identified by words such as "anticipate", "expect", "project",
"estimate", "forecast", "plan", "intend", "target", "believe",
"likely" and similar words suggesting future outcomes or statements
regarding an outlook. All statements other than statements of
historical fact may be FLI.
Although we believe that the FLI is reasonable based on the
information available today and processes used to prepare it, such
statements are not guarantees of future performance and you are
cautioned against placing undue reliance on FLI. By its nature, FLI
involves a variety of assumptions, which are based upon factors
that may be difficult to predict and that may involve known and
unknown risks and uncertainties and other factors which may cause
actual results, levels of activity and achievements to differ
materially from those expressed or implied by these FLI, including,
but not limited to, the following: the timing and completion of the
transaction, including receipt of regulatory and shareholder
approvals and the satisfaction of other conditions precedent;
interloper risk; the realization of anticipated benefits and
synergies of the transaction and the timing thereof; the success of
integration plans; the focus of management time and attention on
the transaction and other disruptions arising from the transaction;
estimated future dividends; financial strength and flexibility;
debt and equity market conditions, including the ability to access
capital markets on favourable terms or at all; cost of debt and
equity capital; the pending share split of CP's issued and
outstanding common shares; potential changes in the CP share price
which may negatively impact the value of consideration offered to
KCS shareholders; the ability of management of CP, its subsidiaries
and affiliates to execute key priorities, including those in
connection with the transaction; general Canadian, U.S., Mexican
and global social, economic, political, credit and business
conditions; risks associated with agricultural production such as
weather conditions and insect populations; the availability and
price of energy commodities; the effects of competition and pricing
pressures, including competition from other rail carriers, trucking
companies and maritime shippers in Canada, the U.S. and Mexico; industry capacity; shifts in market
demand; changes in commodity prices; uncertainty surrounding timing
and volumes of commodities being shipped; inflation; geopolitical
instability; changes in laws, regulations and government policies,
including regulation of rates; changes in taxes and tax rates;
potential increases in maintenance and operating costs; changes in
fuel prices; disruption in fuel supplies; uncertainties of
investigations, proceedings or other types of claims and
litigation; compliance with environmental regulations; labour
disputes; changes in labour costs and labour difficulties; risks
and liabilities arising from derailments; transportation of
dangerous goods; timing of completion of capital and maintenance
projects; currency and interest rate fluctuations; exchange rates;
effects of changes in market conditions and discount rates on the
financial position of pension plans and investments; trade
restrictions or other changes to international trade arrangements;
the effects of current and future multinational trade agreements on
the level of trade among Canada,
the U.S. and Mexico; climate
change and the market and regulatory responses to climate change;
anticipated in-service dates; success of hedging activities;
operational performance and reliability; customer, shareholder,
regulatory and other stakeholder approvals and support; regulatory
and legislative decisions and actions; the adverse impact of any
termination or revocation by the Mexican government of Kansas City
Southern de Mexico, S.A. de C.V.'s
Concession; public opinion; various events that could disrupt
operations, including severe weather, such as droughts, floods,
avalanches and earthquakes, and cybersecurity attacks, as well as
security threats and governmental response to them, and
technological changes; acts of terrorism, war or other acts of
violence or crime or risk of such activities; insurance coverage
limitations; material adverse changes in economic and industry
conditions, including the availability of short and long-term
financing; and the pandemic created by the outbreak of COVID-19 and
resulting effects on economic conditions, the demand environment
for logistics requirements and energy prices, restrictions imposed
by public health authorities or governments, fiscal and monetary
policy responses by governments and financial institutions, and
disruptions to global supply chains.
We caution that the foregoing list of factors is not exhaustive
and is made as of the date hereof. Additional information about
these and other assumptions, risks and uncertainties can be found
in reports and filings by CP and KCS with Canadian and U.S.
securities regulators, including any proxy statement, prospectus,
material change report, management information circular or
registration statement to be filed in connection with the
transaction. Due to the interdependencies and correlation of these
factors, as well as other factors, the impact of any one
assumption, risk or uncertainty on FLI cannot be determined with
certainty.
Except to the extent required by law, we assume no obligation to
publicly update or revise any FLI, whether as a result of new
information, future events or otherwise. All FLI in this news
release is expressly qualified in its entirety by these cautionary
statements.
ABOUT CANADIAN PACIFIC
Canadian Pacific is a transcontinental railway in Canada and the
United States with direct links to major ports on the west
and east coasts. CP provides North American customers a competitive
rail service with access to key markets in every corner of the
globe. CP is growing with its customers, offering a suite of
freight transportation services, logistics solutions and supply
chain expertise. Visit www.cpr.ca to see the rail advantages
of CP. CP-IR
ADDITIONAL INFORMATION ABOUT THE TRANSACTION AND WHERE TO FIND
IT
CP will file with the U.S. Securities and Exchange Commission
(SEC) a registration statement on Form F-4, which will include a
proxy statement of KCS that also constitutes a prospectus of CP,
and any other documents in connection with the transaction. The
definitive proxy statement/prospectus will be sent to the
shareholders of KCS. CP will also file a management proxy circular
in connection with the transaction with applicable securities
regulators in Canada and the
management proxy circular will be sent to CP shareholders.
INVESTORS AND SHAREHOLDERS OF KCS AND CP ARE URGED TO READ THE
PROXY STATEMENT/PROSPECTUS AND MANAGEMENT PROXY CIRCULAR, AS
APPLICABLE, AND ANY OTHER DOCUMENTS FILED OR TO BE FILED WITH THE
SEC OR APPLICABLE SECURITIES REGULATORS IN CANADA IN CONNECTION WITH THE TRANSACTION WHEN
THEY BECOME AVAILABLE, AS THEY WILL CONTAIN IMPORTANT INFORMATION
ABOUT KCS, CP, THE TRANSACTION AND RELATED MATTERS. The
registration statement and proxy statement/prospectus and other
documents filed by CP and KCS with the SEC, when filed, will be
available free of charge at the SEC's website at www.sec.gov. In
addition, investors and shareholders will be able to obtain free
copies of the registration statement, proxy statement/prospectus,
management proxy circular and other documents which will be filed
with the SEC and applicable securities regulators in Canada by CP online at investor.cpr.ca and
www.sedar.com, upon written request delivered to CP at 7550 Ogden
Dale Road S.E., Calgary, Alberta,
T2C 4X9, Attention: Office of the Corporate Secretary, or by
calling CP at 1-403-319-7000, and will be able to obtain free
copies of the proxy statement/prospectus and other documents filed
with the SEC by KCS online at www.investors.kcsouthern.com, upon
written request delivered to KCS at 427 West 12th Street,
Kansas City, Missouri 64105,
Attention: Corporate Secretary, or by calling KCS's Corporate
Secretary's Office by telephone at 1-888-800-3690 or by email at
corpsec@kcsouthern.com.
You may also read and copy any reports, statements and other
information filed by KCS and CP with the SEC at the SEC public
reference room at 100 F Street N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at
1-800-732-0330 or visit the SEC's website for further information
on its public reference room. This communication shall not
constitute an offer to sell or the solicitation of an offer to buy
any securities, nor shall there be any sale of securities in any
jurisdiction in which such offer, solicitation or sale would be
unlawful prior to appropriate registration or qualification under
the securities laws of such jurisdiction. No offering of securities
shall be made except by means of a prospectus meeting the
requirements of Section 10 of the U.S. Securities Act of 1933, as
amended.
PARTICIPANTS IN THE SOLICITATION OF PROXIES
This communication is not a solicitation of proxies in
connection with the transaction. However, under SEC rules, CP, KCS,
and certain of their respective directors and executive officers
may be deemed to be participants in the solicitation of proxies in
connection with the transaction. Information about CP's directors
and executive officers may be found in its 2021 Management Proxy
Circular, dated March 10, 2021, as
well as its 2020 Annual Report on Form 10-K filed with the SEC and
applicable securities regulators in Canada on February 18,
2021, available on its website at investor.cpr.ca and at
www.sedar.com and www.sec.gov. Information about KCS's
directors and executive officers may be found on its website at
www.kcsouthern.com and in its 2020 Annual Report on Form 10-K filed
with the SEC on January 29, 2021,
available at www.investors.kcsouthern.com and www.sec.gov. These
documents can be obtained free of charge from the sources indicated
above. Additional information regarding the interests of such
potential participants in the solicitation of proxies in connection
with the transaction will be included in the proxy
statement/prospectus and management proxy circular and other
relevant materials filed with the SEC and applicable securities
regulators in Canada when they
become available.
View original content to download
multimedia:http://www.prnewswire.com/news-releases/cp-addresses-cns-contention-that-voting-trust-proposals-should-be-reviewed-under-same-standards-and-processes-301278083.html
SOURCE Canadian Pacific