Canadian Pacific Railway (CP) says STB Applies "heavier Burden" and Greater Scrutiny to CN (CNI) Bid for KCS (KSU)

May 17, 2021 5:27 PM EDT

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Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) ("CP") today issued the following statement in response to the Surface Transportation Board's ("STB") decision to apply the newer, more stringent merger rules to Canadian National's ("CN") proposed acquisition as well as its effort to obtain approval to use a voting trust in connection with its proposed combination with Kansas City Southern ("KCS"):

We concur with the STB's decision to apply the new merger rules to the proposed CN transaction. The STB explained: "the proposed transaction poses issues that the current merger rules were designed to address, namely the potential competitive impacts of a merged entity with some degree of overlapping routes and presently existing direct competition—characteristics that would appear to pertain to the CN and KCS systems."

The new rules place a "heavier burden on merger applicants to show that a major rail combination is consistent with the public interest."

The STB's decision has significant implications for CN's proposed use of a voting trust. The new merger rules require that the STB formally approve CN's proposed use of a voting trust. Though CN had filed a motion seeking such approval, the STB rejected that motion as incomplete.

The STB also rejected as "misplaced" CN's arguments about the legal standard governing its consideration of CN's proposed voting trusts. Instead, the STB emphasized that the new merger rules take a "much more cautious approach" to future voting trusts and noted the agency's "plenary authority" over consolidations.

Under the new rules, a voting trust can be used only if, "in the context of" a particular proposed transaction, its use would be "consistent with the public interest." The STB's decision made clear that this is a "broad" standard requiring "at minimum" the consideration of five statutory factors. One of those factors relates to the potential impact of a voting trust on the financial condition of rail carriers. The STB disagreed with CN's position that there was no cause for concern: "the level of debt being utilized by CN to fund the proposed merger, as well as the substantial premium CN has offered for KCS, call this assumption into question."

Another of the statutory public interest factors relates to the impact on competition. The STB's decision follows comments last week from the Department of Justice with the STB contending that "the Board should not permit the proposed CN voting trust because CN's proposed acquisition of KCS appears to pose greater risks to competition than the risks posed by a CP-KCS merger." The STB's decision today cited DOJ's Comment for the statement that "threats to competition would be present immediately after the CN voting trust is consummated."

At bottom, the STB's decision shows that the agency intends to review CN's proposed trust against the backdrop of the STB's findings in 2001 that "use of a voting trust is a privilege, not a right" and that they "should not be used routinely, but rather should be available only for those rare occasions when their use would be beneficial." As such, if CN renews its motion for approval, the STB will take a "more cautious approach" and evaluate all of the "potential benefits and costs" relating to CN's proposal.

With this new ruling by the STB, CP's confidence in the superiority of its friendly agreement with KCS is redoubled. The fairness of CP's outstanding offer to acquire KCS is compelling because CP+KCS is the only Class 1 merger that is viable. The STB has approved CP's use of a voting trust and affirmed the application of the pre-2001 merger rules because a CP-KCS combination is truly end-to-end and pro-competitive.

CP+KCS is the only combination that not only serves the best interests of customers and stakeholders, but also the continent's rail network to enable a new corridor of investment and capacity for the North American economy to grow.

For more information on the transaction and the benefits it is expected to bring to the full range of stakeholders, visit

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