NORFOLK, Va., Dec. 7, 2015 /PRNewswire/ -- Norfolk Southern
Corporation (NYSE: NSC) (the "Company") today announced that former
Surface Transportation Board ("STB") commissioners Francis
Mulvey and Charles Nottingham
have carefully reviewed voting trust issues and the merger
transaction proposed by Canadian Pacific (TSX: CP) (NYSE:CP) and
agree with the Norfolk Southern board of directors that both would
be highly unlikely to be approved by the STB.
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"The Norfolk Southern board is committed to creating value for
shareholders and exploring all bona fide opportunities to enhance
value," said Chairman, President and CEO James A. Squires. "In that regard, the Company
retained nationally recognized regulatory counsel and former STB
commissioners to carefully evaluate the regulatory landscape under
the 2001 merger rules. The former STB commissioners have concluded
that the STB would be highly unlikely to approve a voting trust
structure or the merger transaction, as neither would be in the
public interest. The Norfolk Southern board remains confident that
the continued execution of its strategic plan is superior to
Canadian Pacific's grossly inadequate and high-risk proposal."
The following is the text of the white paper from the former STB
commissioners.
Regulatory Review of Proposed CP+NS Merger
Having formerly served as Chairmen of the Surface Transportation
Board ("STB"), we have unique insights regarding how the STB would
review the proposed CP+NS merger and any related voting trust
mechanism. We publish this white paper to share these
insights.
Out of respect for the independent professional judgment of the
current members of the STB, we are not attempting to speak on
behalf of our former agency. Rather, having been confronted
with much misinformation about how the STB is likely to review the
proposed voting trust and merger, we feel compelled to correct the
record.
As simple background, rail carriers cannot assume control of
another carrier without prior STB approval. The STB's
approval process can last between 19 and 22 months. Current
STB regulations, adopted in 2001, set a high bar for approval of a
proposed major merger and related voting trust based on an untested
public interest standard. In our expert opinions, the STB is
not likely to approve CP's proposed voting trust or the CP+NS
merger.
Voting Trust Approval
STB voting trust regulations have become far more
stringent. In the past, the STB routinely and informally
permitted carriers to acquire controlling stakes in other carriers
using a voting trust, provided that the trustee was
independent. This is no longer the case under current STB
regulations. A voting trust to be used in conjunction with a
proposed major merger (such as CP+NS) now must receive formal STB
approval before it is implemented. The STB approval process
includes a public comment period where interested stakeholders can
object to the proposed use of a voting trust. And, the STB's
current approval standard is quite demanding. As was true
under the old regulations, the trustee must be independent and the
trust must prevent premature, unlawful control; but now under the
new regulations, use of the trust also must be in the public
interest. CP's voting trust would be the first trust reviewed
under the STB's new regulations.
If the reports we have read are correct, CP seems to think it
can use a voting trust to begin implementing its business plan for
NS ("Plan") during the STB's merger review process and
prior to formal STB approval of the merger. This would
directly violate the express statutory bar against a premature
exercise of common control. CP cannot assume control of NS,
by any means, until the STB approves the merger – even if a
voting trust is used. This conclusion applies regardless of
the specific scheme CP might use. 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.
Further, if CP begins to implement its Plan prior to formal STB
review and approval of the merger, CP essentially would usurp and
preempt the STB's exclusive jurisdiction to review and approve that
Plan and the other effects of the merger. The STB might not
take kindly to this circumvention.
Even if CP does not use a voting trust to begin implementing its
Plan and exercising control over NS prematurely, we have grave
doubts that the STB would find any voting trust to be in the public
interest. Because the public interest standard is completely
new, even as former Chairmen of the STB, we cannot predict this
outcome with certainty. However, we struggle to identify any
public interest justifications for CP's voting trust. It is
far easier to identify the public interest harms from holding NS in
voting trust limbo for nearly 2 years, which could include
compromised service for shippers, reduced investments in rail
infrastructure and network capacity, and disruptions for NS labor
interests.
The STB also could view approval of any voting trust as
triggering a domino effect. Under the current STB merger
regulations, as discussed below, the Board must consider likely
downstream effects as rival carriers react to a proposed
merger. When the BNSF+CN merger was proposed in 1999, other
Class 1 carriers notified the STB that they would find it necessary
to respond in kind. Accordingly, the STB presumes that any
major rail merger (such as CP+NS) will trigger further industry
consolidation resulting in just two transcontinental carriers, with
adverse effects for competition and rail service for
shippers. As such, the STB could try to stop the first domino
from falling – by rejecting CP's voting trust.
Merger Approval
As with the voting trust regulations, STB merger regulations
have become far more stringent. The current regulations
eliminate the historical, longstanding presumption favoring rail
industry consolidation. As then-Chairman Linda Morgan testified in a June 2001 Senate subcommittee hearing on the
STB's new merger rules:
The old rules said that mergers would be approved unless.
The new rules say mergers will be approved only if. Our new
rules clearly reflect a greater skepticism about the benefits of
future mergers and a greater concern about the potential harm of
further consolidation. . . . And it is my hope that, in
raising the bar, these rules will remind the railroads to take care
of business with the systems they now have and to stop viewing
mergers as the only way to go.
The proposed CP+NS merger would be the first merger reviewed
under the STB's new regulations.
As in the voting trust review process, there is substantial
regulatory uncertainty and risk in the merger review process.
Again, the STB approval process includes a public comment period
where interested stakeholders can object to a proposed
merger. And, the STB has broad discretion to determine if a
proposed merger is in the public interest. Under STB
regulations, mergers are in the public interest only if substantial
and demonstrable gains in key benefits – such as improved service
and safety, enhanced competition, and greater economic efficiency –
outweigh anticompetitive effects, potential service disruptions, or
other merger-related harms.
In the words of former Chairman Morgan, merger applicants have a
high bar to clear, including: demonstrating how the merger would
enhance competition; addressing the impacts of the merger in
conjunction with potential further rail industry consolidation;
providing a full-system operating plan in a cross-border merger as
well as robust safety and service plans; and proposing conditions
that would spring into effect if the merger benefits are not
realized or if the STB approves further rail industry
consolidation.
The STB can outright reject a proposed merger, or it can approve
a proposed merger with conditions designed to safeguard the public
interest and to stimulate effective competition. Typical
conditions relate to environmental mitigation, labor protection,
and safety and service.
CP+NS Merger Review
Based on our collective experience with prior STB determinations
under public interest standards, the STB likely would not approve
the proposed CP+NS merger. There is every reason to expect
substantial opposition to the merger from other railroads,
shippers, labor interests, and community and environmental
groups. Especially in this context, it is hard to see any
public interest justifications for the CP+NS merger, and the STB
could view CP's claims with a large grain of salt.
(1) Chicago Congestion. Based on publicly available
traffic data, there are limited opportunities for CP and NS to
reroute traffic away from Chicago.
(2) Terminal Access and Bottleneck Proposals. The
STB currently is considering whether open access would increase
competitive rail options for shippers. It appears that CP has
proposed a voluntary and unilateral open access condition to
attempt to show that the merger would enhance competition.
Even if this were enough to entice STB approval, the STB would have
to define many elements of this open access proposal to make sure
that it actually enhances competition in practice. And, open
access would destroy value from reduced revenues and degrade
service from increased operating complexities and
costs.
(3) Improved Metrics. CP claims that it can improve
NS's operating ratio, but this is irrelevant to the STB's
review. Improved metrics can be achieved absent a merger, as
demonstrated by CP's own record. Further, the dramatic
reductions in NS's network and asset base that CP has proposed to
improve NS's metrics might not be in the public interest.
Such reductions could disenfranchise shippers by eliminating key
service products; compromise CP+NS's ability to withstand
operational or service disruptions; impair CP+NS's ability to
sustain future traffic growth; and overall, impede the national
interest in a robust transportation network.
On the other side of the ledger, the STB likely would find
significant harms from the CP+NS merger. Most importantly,
the proposed merger would trigger a final wave of industry
consolidation. As noted above, this is an entirely new
consideration in the STB's merger review. We strongly believe
that the STB would be disinclined to allow railroads to merge down
to just two transcontinental carriers, especially in the current
climate where all of the large railroads are financially healthy,
investing substantially in infrastructure, and providing generally
good service.
Further, in our experience, rail mergers typically have resulted
in substantial and lengthy service disruptions. The CP+NS
merger would be no different. In fact, the proposed merger
could create multiple stages of service disruptions – during
the voting trust period, during merger implementation, during
follow-on competitive responses to the merger, and during further
industry consolidation.
Even if the STB were to approve the proposed merger, such
approval should be expected to come with a huge price tag in the
form of conditions. The merger review process provides the
STB with the jurisdiction and authority to regulate carriers in
ways that would otherwise exceed its authority. In addition
to conditions regarding competition and potential further rail
industry consolidation, the STB could impose other burdensome and
expensive conditions.
(1) Environmental Mitigation Conditions. Since our
tenures at the STB, community and environmental groups have become
increasingly sophisticated and politicized. For example,
several local municipalities in the suburbs of Chicago were successful in petitioning the STB
for environmental and highway traffic congestion mitigation
conditions in the CN/EJ&E transaction in 2008. In
CN/EJ&E, total mitigation costs amounted to $160 million – more than 50% of the transaction
price; and STB oversight continues to this day – nearly 7 years
after formal STB approval. CP+NS should expect similarly
burdensome and expensive environmental mitigation conditions,
especially given their crude oil traffic volumes.
(2) Labor Protection Conditions. The STB would
impose New York Dock labor protection, requiring payments to
certain employees who lose their job as a result of the
merger. If the reports we have read are correct, CP's Plan
includes extensive headcount reductions, so labor protection
benefits likely would represent a huge cost for CP+NS.
(3) Service Conditions. Given historical service
problems from mergers, the STB might impose conditions related to
service levels, such as the frequency with which cars will be
delivered to and picked up from shippers, or other conditions to
address shipper concerns. Such service conditions necessarily
would threaten CP+NS's freedom to structure its operations.
Conclusion
Current STB regulations set a high bar for approval of CP's
proposed voting trust and merger based on an untested public
interest standard. While no one can predict with absolute
certainty what the STB will decide, we believe, based on our review
of the public record, that the STB is unlikely to approve CP's
proposed voting trust and the CP+NS merger.
/s/
Francis P.
Mulvey
/s/
Charles D. Nottingham
About Francis P.
Mulvey
Dr. Mulvey has been President of ITER Associates, a
transportation consulting firm in Bethesda, Maryland, since January 2014. Prior to assuming his current
position, Dr. Mulvey served on the STB from 2004 to 2013. Dr.
Mulvey served as Acting Chairman of the STB from March 2009 until August
2009, and he served as Vice Chairman of the STB from
January 2012 to January 2013.
During his career, Dr. Mulvey has held various legislative
positions, in which he was responsible for all railroad legislative
matters for the Ranking Democratic Member of the Committee and
served as advisor to the Ranking Member on overall
transportation-policy issues.
About Charles D.
Nottingham
Mr. Nottingham served on the STB from 2006 to 2011. Mr.
Nottingham served Chairman of the STB from August 2006 until March
2009, and he was designated Vice Chairman of the STB in
January 2011.
During his career, Mr. Nottingham has worked closely with the
freight rail, energy, agriculture, motor carrier, moving and
storage, automotive and chemical industries.
About Norfolk Southern
Norfolk Southern Corporation (NYSE: NSC) is one of the
nation's premier transportation companies. Its Norfolk Southern
Railway Company subsidiary operates approximately 20,000 route
miles in 22 states and the District
of Columbia, serves every major container port in the
eastern United States, and
provides efficient connections to other rail carriers. Norfolk
Southern operates the most extensive intermodal network in the East
and is a major transporter of coal, automotive, and industrial
products.
Forward-Looking Statements
Certain statements in this press release are forward-looking
statements within the meaning of the safe harbor provision of the
Private Securities Litigation Reform Act of 1995, as amended,
including but not limited to statements regarding the indication of
interest made by Canadian Pacific Railway Limited. In some cases,
forward-looking statements may be identified by the use of words
like "believe," "expect," "anticipate," "estimate," "plan,"
"consider," "project," and similar references to the future.
Forward-looking statements are made as of the date they were first
issued and reflect the good-faith evaluation of the Company's
management of information currently available. These
forward-looking statements are subject to a number of risks and
uncertainties, many of which are beyond the Company's control,
including future actions that may be taken by Canadian Pacific
Railway Limited in furtherance of its unsolicited proposal. These
and other important factors, including those discussed under "Risk
Factors" in the Company's Form 10-K for the year ended December 31, 2014, as well as the Company's other
public filings with the SEC, may cause our actual results,
performance or achievement to differ materially from those
expressed or implied by these forward-looking statements.
Forward-looking statements are not, and should not be relied upon
as, a guarantee of future performance or results, nor will they
necessarily prove to be accurate indications of the times at or by
which any such performance or results will be achieved. As a
result, actual outcomes and results may differ materially from
those expressed in forward-looking statements. We undertake no
obligation to update or revise forward-looking statements, whether
as a result of new information, the occurrence of certain events or
otherwise, unless otherwise required by applicable securities
law.
Contacts:
Media Inquiries:
Frank
Brown, 757-629-2710 (fsbrown@nscorp.com)
Investor Inquiries:
Katie Cook, 757-629-2861
(InvestorRelations@nscorp.com)
Or
Joele Frank / Dan Katcher / Andrew Siegel
Joele Frank, Wilkinson Brimmer
Katcher
212-355-4449
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SOURCE Norfolk Southern Corporation