Language in Rail Freight Merger Deal takes a Darker Tone

US – CANADA – The public back and forth between rail freight carriers Norfolk Southern (NS) and Canadian Pacific (CP) continues this week with CP responding to the white paper NS published which reviewed the original merger proposal and was authored by two former Surface Transportation Board (STB) members Chip Nottingham and Frank Mulvey. In the white paper, the two explain why they think a CP+NS merger and related voting trust would have difficulty gaining regulatory approval. NS replied to CP's criticisms of its report stating that CP's response is ‘flatly wrong’. Judging by these early days press release retorts, a merger between the two companies is looking less likely to occur.

CP felt that it was important to note that neither Mulvey nor Nottingham participated in the review of a ‘major’ merger transaction while at the STB, and did not consult with CP to ascertain the details of what CP is proposing, or might propose, before publishing their white paper. According to CP, Nottingham and Mulvey assumed for the purpose of their analysis that NS would be put in trust when in fact CP intends for CP to be in trust rather than NS. Canadian Pacific continued:

“Their white paper was published before CP delivered its detailed presentation describing the key features of the proposed merger and related voting trust including our proposal to put CP in trust. As such, their white paper is based largely on inaccurate assumptions, rumour, speculation, and conclusions that are unsupported by fact or by law.

“We would not presume to predict the conclusion of the current STB. We are, however, confident that the STB will not prejudge the transaction, and that whatever voting trust structure and merger application is ultimately presented to the STB for regulatory approval will be considered fairly and impartially by the current STB, with the benefit of a full record and under the proper legal standards.

“Mulvey and Nottingham make four primary assertions: first, that a voting trust cannot be used as proposed; second, that the STB would not approve a voting trust or a CP+NS merger application due to its concerns that it will trigger other mergers; third, that the STB would not approve a CP+NS merger application under its public interest standard; and fourth, that if it approved such a transaction, it would be subject to ‘onerous’ conditions.”

Canadian Pacific goes on to specify in detail why it believes each of the assertions and misgivings were in error. Norfolk Southern replied to the response by saying that it is ‘flatly wrong on the facts and the law’. NS countered CP’s statement that the authors hadn’t considered the specific voting trust structure by quoting Mulvey and Nottingham as stating that, ‘[no] matter how CP Executives are put in charge of NS management before the merger is approved, the STB likely would not be fooled into thinking that CP and NS are operating independently’, adding that the former commissioners said that any voting trust, however structured, is highly unlikely to be approved by the STB.

If Canadian Pacific is confident that its proposed voting trust structure would satisfy the twin legal tests - avoiding premature control and furthering the public interest - Canadian Pacific can seek a declaratory order to that effect from the STB.

Norfolk Southern has rejected the revised, reduced proposal from Canadian Pacific to acquire the Company for $32.86 in cash and a fixed exchange ratio of 0.451 shares in a new company that would own Canadian Pacific and Norfolk Southern. NS's board unanimously concluded that the proposal continued to be grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome, and is not in the best interest of the Company and its shareholders.

There have now been two separate offers from CP, the first of $46.72 in cash per share and a fixed exchange ratio of 0.348 shares in a new company that would own the two North American rail giants, and then this second offer, both of which were dismissed out of hand by the NS board.