[Federal Register Volume 86, Number 191 (Wednesday, October 6, 2021)]
[Notices]
[Pages 55678-55681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21795]


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SURFACE TRANSPORTATION BOARD

[Docket No. FD 36500]


Canadian Pacific Railway Limited; Canadian Pacific Railway 
Company; Soo Line Railroad Company; Central Maine & Quebec Railway US 
Inc.; Dakota, Minnesota & Eastern Railroad Corporation; and Delaware & 
Hudson Railway Company, Inc.--Control--Kansas City Southern; The Kansas 
City Southern Railway Company; Gateway Eastern Railway Company; and The 
Texas Mexican Railway Company

AGENCY: Surface Transportation Board.

ACTION: Decision No. 8 in Docket No. FD 36500; Notice of Receipt of 
Amended Prefiling Notification.

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SUMMARY: Canadian Pacific Railway Limited (Canadian Pacific), Canadian 
Pacific Railway Company (CPRC), and their U.S. rail carrier 
subsidiaries, Soo Line Railroad Company, Central Maine & Quebec Railway 
US Inc., Dakota, Minnesota & Eastern Railroad Corporation, and Delaware 
& Hudson Railway Company, Inc. (collectively, CP) and Kansas City 
Southern and its U.S. rail carrier subsidiaries, The Kansas City 
Southern Railway Company (KCSR), Gateway Eastern Railway Company, and 
The Texas Mexican Railway Company (collectively, KCS) (CP and KCS 
collectively, Applicants) have filed an amendment to the prefiling 
notice of intent that was filed with the Board on March 23, 2021 (March 
2021 Notice).

ADDRESSES: Any filing submitted in this proceeding should be filed with 
the Board via e-filing on the Board's website. In addition, one copy of 
each filing must be sent (and may be sent by email only, if service by 
email is acceptable to the recipient) to each of the following: (1) 
Secretary of Transportation, 1200 New Jersey Avenue SE, Washington, DC 
20590; (2) Attorney General of the United States, c/o Assistant 
Attorney General, Antitrust Division, Room 3109, Department of Justice, 
Washington, DC 20530; (3) CP's representative, David L. Meyer, Law 
Office of David L. Meyer, 1105 S Street NW, Washington, DC 20009; (4) 
KCS's representative, William A. Mullins, Baker & Miller PLLC, Suite 
300, 2401 Pennsylvania Avenue NW, Washington, DC 20037; (5) any other 
person designated as a Party of Record on the service list; and (6) the 
administrative law judge assigned in this proceeding, the Hon. Thomas 
McCarthy, 1331 Pennsylvania Avenue, NW, Washington, DC 20004-1710, and 
at ctolbert@fmshrc and zbyers@fmshrc.

FOR FURTHER INFORMATION CONTACT: Valerie Quinn at (202) 245-0283. 
Assistance for the hearing impaired is available through the Federal 
Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION: By decision served April 21, 2021, the Board 
provided notice of Applicants' intent to file an application seeking 
authority for the acquisition of control by Canadian Pacific of Kansas 
City Southern, and through it, of KCSR and its railroad affiliates, and 
for the resulting common control by Canadian Pacific of its U.S. 
railroad subsidiaries, and KCSR and its railroad affiliates. See 
Canadian Pac. Ry.--Control--Kan. City S. (Decision No. 3), FD 36500 
(STB served Apr. 21, 2021). Specifically, in the March 2021 Notice, 
Applicants stated that Canadian Pacific (along with two of its wholly 
owned subsidiaries,

[[Page 55679]]

Cygnus Merger Sub 1 Corporation and Cygnus Merger Sub 2 Corporation) 
and Kansas City Southern had entered into an Agreement and Plan of 
Merger (March 2021 Merger Agreement), under which Canadian Pacific, 
through its indirect, wholly owned subsidiary, Cygnus Merger Sub 2 
Corporation, would acquire all of the capital stock of Kansas City 
Southern.\1\
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    \1\ For additional background, see Decision No. 3, FD 36500, 
slip op. at 2-3.
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    By decision served April 23, 2021, following a public comment 
period, the Board found the proposed transaction to be subject to the 
regulations set forth at 49 CFR part 1180, subpart A, in effect before 
July 11, 2001, pursuant to the waiver for a merger transaction 
involving KCS and another Class I railroad under 49 CFR 1180.0(b). See 
Canadian Pac. Ry.--Control--Kan. City S. (Decision No. 4), FD 36500, 
slip op. at 2-3 (STB served Apr. 23, 2021) (with Vice Chairman Primus 
dissenting). By decision served May 6, 2021, the Board found that, 
subject to certain required modifications described in that decision, 
Applicants' proposed placement of KCS into a voting trust during the 
pendency of the control proceeding would comply with the guidelines at 
49 CFR part 1013, comport with past agency policy and practice, and 
ensure that the day-to-day management and operation of KCS would not be 
controlled by Canadian Pacific or anyone affiliated with Canadian 
Pacific while KCS remains in trust. See Canadian Pac. Ry.--Control--
Kan. City S. (Decision No. 5), FD 36500, slip op. at 6 (STB served May 
6, 2021).
    On May 21, 2021, KCS notified the Board that it had terminated the 
March 2021 Merger Agreement with Canadian Pacific and had entered into 
a merger agreement with Canadian National Railway Company (CNR). (KCS 
Letter 1, May 21, 2021.) KCS stated that, accordingly, it was 
withdrawing as a co-applicant in this proceeding. (Id. at 2.)
    In the amended notice, filed on September 15, 2021, Applicants 
state that KCS rejoins CP as a co-applicant in this proceeding, as KCS 
has since terminated its agreement to be acquired by CNR. (Amended 
Notice 2.) Applicants state that they have executed a definitive 
Agreement and Plan of Merger (September 2021 Merger Agreement), which 
``contemplates the same transaction on terms identical in nearly every 
respect to those set forth'' in the March 2021 Merger Agreement, 
including Applicants' planned use of an independent voting trust.\2\ 
(Id. at 2-3.) Specifically, Applicants state the structure of the 
proposed transaction is identical to that described in the March 2021 
Notice. (See id. at 4-5; March 2021 Notice 2-3.)
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    \2\ With the amended notice, Applicants have submitted a version 
of the September 2021 Merger Agreement that shows ``redline'' 
comparisons to the March 2021 Merger Agreement. (Amended Notice, Ex. 
1.) Applicants also submitted versions of the proposed voting trust 
agreement (Voting Trust Agreement) that show redline comparisons to 
the voting trust agreement submitted to the Board in March 2021 and 
comparisons to the voting trust agreement that had been modified in 
accordance with Decision No. 5. (Amended Notice, Exs. 2 & 3.)
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    Applicants indicate that they anticipate filing their application 
on or shortly after October 20, 2021, and that the other specifics in 
the March 2021 Notice remain the same, including the use of 2019 as the 
base year for impact analyses. (Amended Notice 3.)
    Use of a Voting Trust. As noted above, the structure of the 
proposed transaction as described in the amended notice--the process 
and series of internal transactions by which Canadian Pacific would 
acquire and place the stock of Kansas City Southern in trust--is 
identical to that described in the March 2021 Notice. (Compare Amended 
Notice 4-5 with March 2021 Notice 2-3.) Similarly, the transaction 
itself--the combination of Applicants' respective rail networks under 
Canadian Pacific's control upon receipt of regulatory approval--remains 
unchanged. The voting trust that Canadian Pacific proposes to use to 
hold the shares of Kansas City Southern during the pendency of the 
control proceeding is also substantively identical to the voting trust 
approved by the Board in Decision No. 5, with the modifications 
required by that decision. (Amended Notice 5; id., Ex. 3 (redline 
comparison).) Applicants state that the proposed trustee, David L. 
Starling, has again agreed to serve as trustee. (Amended Notice 5.) 
Applicants also acknowledge that, as stated in Decision No. 5, any 
modification to the Voting Trust Agreement must be submitted to the 
Board for review and approval; the Board retains authority to compel 
amendment of the Voting Trust Agreement and compliance with any 
divestiture or other directive; and all communications between CP and 
KCS during the trust period must occur under the supervision of the 
trustee pursuant to guidelines he would be responsible for implementing 
to assure that the information exchanges that occur between the 
carriers do not compromise the independent management and operation of 
KCS. (Amended Notice 6 n.8 (citing Decision No. 5, FD 36500, slip op. 
at 9).)
    The amended notice further states that the pertinent circumstances 
relating to CP's proposed use of a voting trust have not changed 
relative to those underlying the Board's conclusion in Decision No. 5. 
(Amended Notice 6.) In particular, Applicants state the provisions of 
the merger agreement relating to the conduct of KCS's business while 
KCS is in trust, including provisions relating to incentive 
compensation for KCS employees, remain the same (and in one case, allow 
for additional flexibility on KCS's part). (Amended Notice 6; see 
generally id., Ex. 1, Sec. Sec.  5.1, 5.7.) Accordingly, Applicants 
assert that the voting trust would ensure that Canadian Pacific's 
acquisition of Kansas City Southern's shares will not result in 
``unauthorized control of a regulated carrier,'' and that the Board's 
related findings in Decision No. 5 remain applicable. (Amended Notice 6 
(quoting Decision No. 5, FD 36500, slip op. at 10).) Additionally, 
Applicants contend that the use of a voting trust would not compromise 
the ``financial strength or operational capabilities of Kansas City 
Southern or Canadian Pacific'' if a divestiture of KCS were required. 
(Amended Notice 6 (quoting Decision No. 5, FD 36500, slip op. at 10).) 
Applicants state that CP and KCS both remain financially healthy and 
expect to grow independently during the trust period. (Amended Notice 
6.) Although the financial terms of the offer have changed,\3\ 
Applicants explain that the ``improved'' terms are in the form of 
additional Canadian Pacific voting securities, with no increase in the 
cash consideration to be paid to Kansas City Southern's shareholders or 
increase in CP's debt levels. (Amended Notice 4; see also id. at 6-7 
(also noting that the interest of private equity investors in acquiring 
KCS remains strong).) Applicants further state that all other terms of 
the merger agreement remain substantially the same. (Amended Notice 4 
(citing id., Ex. 1 (redline comparison of March 2021 and September 2021 
Merger Agreements)).)
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    \3\ (See Amended Notice, Ex. 1, Sec. Sec.  2.1, 8.16 (definition 
of ``Exchange Ratio'') (modifying Exchange Ratio on which the 
``Share Consideration'' is based, but not increasing the ``Cash 
Consideration'').) Applicants state that CP has also agreed to pay, 
on KCS's behalf, the ``break fee'' that KCS became obligated to pay 
to CNR when it terminated the CNR merger agreement. (Amended Notice 
4 n.4.)
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    The information provided in the amended notice indicates that 
Applicants intend to seek approval of the same transaction--the 
combination of Applicants' respective rail networks under Canadian 
Pacific's control--that

[[Page 55680]]

was proposed in the March 2021 Notice and described in Decision No. 3. 
The voting trust proposed for use during the pendency of the control 
proceeding is substantively identical to the one approved in Decision 
No. 5 and is properly structured to prevent unauthorized control and 
provide for the irrevocability of the trust as required by 49 CFR part 
1013. The modified financial terms of CP's offer, which are not 
referred to in the Voting Trust Agreement, would not impact the 
operation of the voting trust; nor is there a basis to conclude that 
those terms would materially impact the carriers' financial stability 
or operational capabilities if a divestiture were required. Based on 
the information contained in the amended notice, there is no reason for 
the Board not to apply its previous approval granted in Decision No. 5 
for Applicants to use the voting trust described in the amended notice.
    The Board notes, however, that where parties seek review of a 
proposed voting trust and receive approval from the Board, it is not a 
foregone conclusion that the approval remains effective where a merger 
agreement is terminated but later revived. Additionally, the Board's 
authority ``to rule on, or prevent the use of, a voting trust . . . is 
inherent in [its] statutory authority over rail mergers,'' Major Rail 
Consolidation Procs., 5 S.T.B. 539, 567 (2001), and the agency retains 
continuing jurisdiction to order modifications and correct future 
problems that may come to its attention. See generally Decision No. 5, 
FD 36500, slip op. at 9-10; Union Pac. Corp.--Request for Informal 
Op.--Voting Tr. Agreement, FD 32619, slip op. at 6 & n.10 (ICC served 
Dec. 20, 1994); Santa Fe S. Pac. Corp.--Control--S. Pac. Transp. Co., 2 
I.C.C.2d 709, 715, 834-35 (1986). Applicants are reminded that while 
the Board has approved the use of a voting trust for this transaction, 
Applicants must continue to ensure that the management and operation of 
KCS remain independent during the pendency of the control proceeding in 
order to effectively insulate Canadian Pacific from any violation of 49 
U.S.C. 11323(a)'s prohibition against unauthorized acquisition of 
control of a regulated carrier, as described further in the guidelines 
at 49 CFR part 1013 and Decision No. 5.
    With respect to communications, Applicants are reminded that only 
three types of communications between CP and KCS are permitted during 
the trust period: (1) Communications relating to the Board's review of 
the transaction and related planning for post-approval integration that 
would be the focus of the public interest benefits of the transaction; 
(2) communications between rail carriers in the ordinary course of 
their independent business relationships, such as in connection with 
their ongoing interactions as connecting carriers and participation in 
industry-wide U.S. regulatory matters; and (3) data exchange required 
for the preparation of reporting to governmental and other entities by 
companies within a consolidated group, such as financial reporting. 
Decision No. 5, FD 36500, slip op. at 3. Applicants are further 
reminded that all such communications must occur under the supervision 
of the trustee pursuant to guidelines the trustee will adopt, and that 
those guidelines must include a requirement that communications in the 
first category involving confidential information must be subject to 
the protective order that has been entered in this proceeding and used 
solely for the stated purpose and not for any other business or 
commercial purpose. Id. at 9. Additionally, the guidelines must also 
include an explicit acknowledgement that the trustee is responsible for 
implementing measures to monitor and assure that the information 
exchanges that occur between the carriers do not compromise the 
independent management and operation of Kansas City Southern during the 
duration of the trust. Id.
    Should the voting trust be consummated, the Board will likewise 
continue to monitor the relationships and interactions of the parties 
to ensure the independence of the trustee and KCS. Should the voting 
trust not function as expected, the trustee not fulfill his obligations 
under the terms of the voting trust arrangement the Board has approved, 
or Applicants otherwise engage in impermissible management or 
operational conduct, the Board will take appropriate remedial action.
    Proposed Procedural Schedule. On March 22, 2021, Applicants filed a 
petition to establish a procedural schedule and submitted a proposed 
procedural schedule that provides for a 10-month period between the 
date an application is filed and the date on which the Board would 
issue its final decision on the merits. The Board will solicit comments 
on a proposed procedural schedule in a separate decision.
    It is ordered:
    1. The approval granted in Decision No. 5 for Applicants to use a 
voting trust applies to the voting trust described in the amended 
notice, as discussed above.
    2. This decision is effective on its service date.
    Decided: September 30, 2021.
    By the Board, Board Members Begeman, Fuchs, Oberman, Primus, and 
Schultz. Board Member Primus dissented with a separate expression.
BOARD MEMBER PRIMUS, dissenting:
    I strongly disagree with the majority's treatment of Applicants' 
new merger agreement and voting trust. To be clear, KCS terminated its 
original merger agreement with CP in order to pursue a merger with CNR. 
Now, having terminated its agreement with CNR, KCS has entered into a 
new merger agreement with CP that contains financial terms different 
from its previous agreement. However, in doing so, Applicants not only 
want to pick up from the point the original agreement was terminated, 
but also to keep the same voting trust.
    With this new agreement, the Board again has been presented with 
the opportunity to thoroughly review a potential CP-KCS merger under 
the robust standards of the current merger rules. During consideration 
of the voting trust associated with the original merger agreement 
between CP and KCS, I stated my strong opposition to the KCS waiver 
based on this thought, as well as my belief that the waiver's very 
existence was baseless. Any merger involving KCS, a Class I no 
different from any other, should be brought before the Board under the 
current merger rules, especially in the context of an historic 
transcontinental merger, such as between CP and KCS.
    The Board was correct to consider the proposed CNR-KCS merger under 
the current merger rules, which rightfully position public interest as 
the central tenet in the Board's deliberations. Ultimately, the Board 
concluded that the question of the public interest in the CNR-KCS 
voting trust had not been satisfied and the trust was denied. In the 
wake of this decision, the Board should give strong consideration to 
reviewing any subsequent merger agreement and accompanying voting trust 
under the new rules in order to be consistent and provide greater 
clarity as to how a proposed voting trust addresses the public 
interest.
    All this raises the question: Should the Board pause to review the 
voting trust for the new CP-KCS merger agreement? The majority's 
decision acknowledges that ``it is not a forgone conclusion that the 
approval remains effective where a merger agreement is terminated but 
later revived.'' However, in this case it seems that approval was a 
forgone conclusion. Regardless of the similarities between the 
terminated and new agreements, I strongly feel that it is in the best 
public interest for the Board to evaluate this transaction under the

[[Page 55681]]

current merger rules. The Board has just shown how effective and 
forward leaning applying the new rules can be in protecting the 
network's public interest. Why then the insistence to continue to rely 
on the waiver that removes consideration of the public interest in this 
voting trust agreement?
    The topic of railroad consolidation has long been a public concern. 
Past efforts to consolidate have been viewed as both necessary and 
disruptive to our national rail network. In the 1990s, as the number of 
Class Is quickly shrank, concern over consolidation grew. The Board's 
resulting adoption of the current merger rules in 2001 was the 
appropriate response to this concern--in particular, its insistence 
that the public interest be a major component in the consideration of 
any voting trust and merger application. Now, twenty years later, the 
Board is once again front and center in the debate over consolidation 
and the future of the network. In the interest of the public good and 
for the well-being of the national rail network, any further 
consolidation of the Class Is should be subjected to the current merger 
rules which call for the Board to consider whether the public interest 
is best served by a merger agreement's proposed voting trust. For these 
reasons, I respectfully dissent.

Aretha Laws-Byrum,
Clearance Clerk.
[FR Doc. 2021-21795 Filed 10-5-21; 8:45 am]
BILLING CODE 4915-01-P