CALGARY, Feb. 3, 2016 /CNW/ - Canadian Pacific (TSX:
CP) (NYSE: CP) today released a white paper detailing the
comprehensive, merit-based process any merger application would be
subject to at the Surface Transportation Board.
The full text of the white paper, CP-NS: A Comprehensive
Approach to Regulatory Approval, is below. A PDF version can be
downloaded at: http://www.cpr.ca/en/investors.
CP-NS: A Comprehensive Approach to Regulatory
Approval
The status quo is not an option for North American
rail
In 2001, the U.S. Surface Transportation Board (STB) issued
new merger rules that clarified how the "public interest"
standard would be applied in Class I rail consolidation cases. The
new rules place a greater emphasis on showing that a proposed
transaction enhances competition and proactively ensures that
the public benefits of the transaction will be realized while
minimizing the risk of any potential harm from transitional service
problems.
In advancing its proposal to combine CP and Norfolk Southern
Corp. (NS), CP is confident that the proposal can meet this
standard and its voting trust structure will be approved because a
CP-NS combination will more than satisfy the STB's public interest
standard by introducing features that will enhance competition
through a number of shipper-friendly options.
Together, CP and NS will form an integrated transcontinental
railroad with the scale and reach to deliver unsurpassed levels of
service and safety to customers and communities while increasing
competition, supporting continued economic growth and creating
significant shareholder value.
CP believes that all stakeholders will benefit if the proposed
transaction is evaluated on its merits and based on a full record
that includes the opportunity for all interested parties to comment
within the STB's prescribed framework, free from political
interference.
Benefits of the Staggers Rail Act
In 1980, the Staggers Rail Act deregulated the failing rail
industry. Economic regulation had made it virtually impossible for
the industry to reinvest in its crumbling infrastructure, which led
to several railroad bankruptcies. To stem this tide, Congress
removed much of the existing regulatory regime so the industry
could make rational, market-based decisions.
By all measures, Staggers has been a success. The industry was
able to shed excess capacity, price services based on the market,
and consolidate. This resulted in a dramatic and sustained increase
in productivity levels, service, and reinvestment in rail
infrastructure, coupled with steadily declining rail rates (see
Figure 1: US Freight Railroad Performance Since the Staggers
Act).
Today's rail industry is healthier than it has been in decades,
largely due to consolidation and a minimalist regulatory approach.
To bolster these improvements, Congress, in 1995 enacted the
Interstate Commerce Commission (ICC) Termination Act, which
replaced the ICC with the much smaller and independent STB. The Act
vested the STB with exclusive jurisdiction over rail consolidation,
while retaining the Staggers Act mandate that the STB minimize
regulatory control over the free market operation of the rail
industry.
While the number of fully functioning Class I railroads has
decreased from 18 in 1980 to the current seven1, merger
approval under the statutory "public interest" standard has assured
that the rail industry is not only as fiercely competitive as ever,
but also healthier and more efficient.
The Introduction of New Rules for Class I
Consolidation
In 2001, the STB's revised merger policy and procedures refined
the "public interest" standard for Class I (major) mergers. The
updated merger rules require applicants to show that a transaction
enhances competition and has sufficient, proactive conditions to
mitigate potential service harms.
To protect the public interest, the STB can impose conditions to
mitigate potential harm. The STB added safeguards to protect the
public against service disruptions by requiring applicants to
present detailed plans that show both how service will be achieved
and propose remedies to alleviate any identified disruptions.
Applicants are also required to discuss downstream effects, or,
in other words, potential impacts stemming from any other future
hypothetical mergers. This would "initiate a commentary" that
allows the STB "to develop a consistent set of principles for
analyzing all of the applications that could be brought to us in
such a final round of mergers."3
These new STB policies do not "reflect an anti-merger bias" or
"reverse a statutory policy favoring mergers."4 In fact,
the STB reaffirmed that it "welcomes private-sector initiatives
that enhance the capabilities and the competitiveness of the
transportation infrastructure," and recognizes that Class I mergers
can "advance our nation's economic growth and competitiveness
through the provision of more efficient and responsive
transportation."5 Importantly, the rules do not change
the Staggers Act mandate to approve transactions that advance the
public interest6 and minimize regulatory
control.7
These updated rules, although untested, establish a clear
process for reviewing proposed Class I mergers, provide for the
development of a full evidentiary record and the opportunity for
all interested stakeholders to participate and raise concerns in an
open and transparent proceeding, ensuring that the public interest
is well-served.
The Practicality of Voting Trusts
As part of the merger process, voting trusts have been used in
hundreds of transactions as effective insulation against the
unlawful exercise of control over a railroad prior to STB approval.
Without them, railroads would face a major impediment to
transactions involving more than one carrier and thus be at a
severe disadvantage vis-à-vis non-rail bidders.8 Voting
trusts also protect against potential lessening of competition
among carriers by placing the stock of one carrier in the hands of
an independent trustee while the STB considers the transaction. In
addition, voting trusts enable the target carrier's stockholders to
receive consideration prior to regulatory approval, thus removing
their exposure to regulatory risk during the STB process.
In 2001, due to concerns regarding the potential risk of
financial harm to the carrier in trust in the event regulatory
approval is denied and the carrier must be divested, the STB
required that Class I applicants seek pre-approval following the
submission of the notice of intent to file a merger application. To
gain approval, applicants must show that the proposed trust would
insulate the carrier in trust from unlawful control and would be
consistent with the public interest.9 Insulation from
unlawful control is demonstrated by showing the voting trust is
irrevocable and the trustee independent. The public interest
standard is satisfied by showing either that the risk of financial
harm from divestiture is low or that countervailing public benefits
outweigh the risk.10 The STB rules on such requests
after a "brief" notice and comment period.11
In considering voting trust structures that also involve
management swaps, the STB has focused on the risk to competition.
Consistent with its mandate and policy to minimize regulatory
control, the STB does not ordinarily intervene in personnel
decisions and has rejected calls to do so in the context of a
voting trust. If specific concerns regarding the potential for
unlawful control can be demonstrated, the STB has relied on its
authority to set conditions that address such concerns by limiting
the types of communications and operations in which the swapped
officers or directors can engage.12 If the STB is
concerned about future misconduct, the STB relies on the
well-tested independent voting trust structure to prevent this
possibility and the STB's oversight and enforcement authority to
resolve such problems if they ever arise.13
Of the 144 voting trusts that have been used since the Staggers
Act of 1980, none have been rejected despite several challenges,
including some involving management swaps. This record largely
reflects that the principles central to a voting trust –
independence and irrevocability – were established many decades ago
and are embodied in the STB's
regulations.14
Congress Established the STB as an Independent Agency to
Protect Against Political Influences
The STB operates under the Staggers Act's basic regulatory
mandate to minimize regulatory control over the rail industry. In
order to insulate the STB from political pressures causing
deviation from this long-standing statutory mandate, Congress
established the STB as a decisionally independent agency, albeit
with administrative ties to the Department of Transportation (DOT).
This independence remains central to the STB's role. For example,
during the Kansas City Southern and Texas Mexico Railway proposed
merger hearings (July 31, 2003), then
Chair Roger Nober stated that he
was, "wary of attempts by competitors to politicize mergers.
Congress made our Agency independent, and vested us with exclusive
merger review authority to avoid precisely that circumstance, where
merger review becomes subject to political
influence."15
In December 2015, Congress not
only reauthorized the STB, but also strengthened its independence
by severing its administrative ties to the DOT. Moreover, although
news of the proposed CP-NS transaction was public, no changes were
made to the STB merger policies. Clearly, Congress continues to
have confidence in the STB to carry out its mandate on mergers.
CP's Approach to Regulatory Approval is Thoughtful and
Comprehensive
CP has carefully reviewed the new STB merger rules and
standards, including those of the voting trust structure, and has a
thoughtful and comprehensive plan to address the regulatory
process.
In general, the proposed CP-NS merger would more than satisfy
the public interest standard by offering enhanced pro-shipper
options, including elimination of bottleneck pricing and modified
terminal access, and important public benefits, such as, single
line haul, access to new markets, improved asset utilization,
routing efficiencies, and increased capacity.
As to downstream mergers, while CP believes that further
consolidation is inevitable and necessary to support future
economic growth, a combined CP-NS would still be smaller than both
UP and BNSF, and therefore creates no pressure on other carriers to
merge in order to remain competitive. Instead, CP-NS would be
better able to compete intermodally and intramodally, which in turn
increases balanced competition as a whole. Like the CP-NS proposal,
approval of any future downstream merger must be determined on its
own merits to be in the "public interest".
As to a voting trust, CP would structure one to meet the
independence and irrevocability requirements. With regard to the
public interest showing, CP is confident that in the unlikely event
that divestiture is ordered because the merger is disapproved, it
and the carrier-in-trust and both their customers and shareholders
will be, at a minimum, in the same financial position they were
when the trust was approved, and, indeed, that the more likely
outcome would be that they all have benefited while the voting
trust structure is in place. Consequently, the risk of harm from
divestiture is quite low. In addition, CP is also confident that it
can show several public benefits that would accrue to customers
from approval of the trust structure, including reduced costs and
increased efficiency and competitiveness of NS' operations.
It has been suggested that the STB would entertain a declaratory
order motion seeking an advanced indication on a voting structure
that has not yet been agreed upon by CP and NS. It is difficult to
imagine why the STB would expend valuable time and resources to
address whether a voting trust could be used, when the STB's own
precedent and regulations provide well-established certainty as to
how and when a voting trust will be approved. It is also difficult
to imagine why the STB would entertain a hypothetical question
about possible voting trust structure and related
conditions,16 when its own regulations set clear
procedures for review of an actual, formulated voting trust
presented to it for approval. As such, CP will not be seeking a
declaratory order from the STB on a voting trust structure.
The Importance of a Fair and Objective STB Review of the
CP-NS Proposal
Under the new rules, a merger is in the "public interest" if
there are "substantial and demonstrable gains in important public
benefits." Applicants are encouraged to propose provisions for
"enhanced competition" in order "to assure a balance in favor of
the public interest."17 CP's proposed merger with NS
more than satisfies the public interest standard by offering a
number of innovative pro-shipper initiatives that will enhance
competition.
In light of ample STB precedent and its regulatory mandate to
reduce regulatory control, CP is confident that a proposed voting
trust structure would be approved, but only at the appropriate time
and under the clear procedure set out in the STB's merger
rules.
Congress has established an effective regulatory framework
governing railroads. The proposed CP-NS transaction should be
evaluated within that framework on its merits and based on a full
record – free from political interference, just as Congress
intended.
Forward Looking Statement
This news release contains certain forward-looking information
within the meaning of applicable securities laws relating, but not
limited, to CP's proposal to NS regarding a possible business
combination, the anticipated results and benefits of the proposed
transaction and matters relating to regulatory approvals and
changes. This forward-looking information also includes, but is not
limited to, statements concerning expectations, beliefs, plans,
goals, objectives, assumptions and statements about possible future
events, conditions, and results of operations or performance.
Forward-looking information may contain statements with words or
headings such as "financial expectations", "key assumptions",
"anticipate", "believe", "expect", "plan", "will", "outlook",
"should" or similar words suggesting future outcomes.
Undue reliance should not be placed on forward-looking
information as actual results may differ materially from the
forward-looking information. Forward-looking information is not a
guarantee of future performance. By its nature, CP's
forward-looking information involves numerous assumptions, inherent
risks and uncertainties that could cause actual results to differ
materially from the forward-looking information, including but not
limited to the following factors: the ability of the parties to
agree to the terms of a proposed transaction; the ability of the
parties to obtain the required regulatory approvals; the ability to
recognize the financial and operational benefits of the
transaction; changes in business strategies; general North American
and global economic, credit and business conditions; risks in
agricultural production such as weather conditions and insect
populations; the availability and price of energy commodities; the
effects of competition and pricing pressures; industry capacity;
shifts in market demand; changes in commodity prices; uncertainty
surrounding timing and volumes of commodities being shipped via CP;
inflation; changes in laws and regulations, including regulation of
rates; changes in taxes and tax rates; potential increases in
maintenance and operating costs; uncertainties of investigations,
proceedings or other types of claims and litigation; labour
disputes; risks and liabilities arising from derailments;
transportation of dangerous goods; timing of completion of capital
and maintenance projects; currency and interest rate fluctuations;
effects of changes in market conditions and discount rates on the
financial position of pension plans and investments; and various
events that could disrupt operations, including severe weather,
droughts, floods, avalanches and earthquakes as well as security
threats and governmental response to them, and technological
changes. The foregoing list of factors is not exhaustive.
These and other factors are detailed from time to time in
reports filed by CP with securities regulators in Canada and the United States. Reference
should be made to "Management's Discussion and Analysis" in CP's
annual and interim reports, Annual Information Form and Form 40-F.
Readers are cautioned not to place undue reliance on
forward-looking information. Forward-looking information is based
on current expectations, estimates and projections and it is
possible that predictions, forecasts, projections, and other forms
of forward-looking information will not be achieved by CP. Except
as required by law, CP undertakes no obligation to update publicly
or otherwise revise any forward-looking information, whether as a
result of new information, future events or otherwise.
Rule 425 Disclosure
This announcement is neither an offer to purchase or exchange
nor a solicitation of an offer to sell securities. Subject to
future developments, additional documents regarding the proposed
transaction may be filed with the SEC. Investors and security
holders are urged to read such disclosure documents regarding the
proposed transaction, if and when they become available, because
they will contain important information. Investors and
security holders may obtain a free copy of the disclosure documents
(when they are available) and other documents filed by CP with the
SEC at the SEC's website at www.sec.gov. The disclosure documents
and these other documents may also be obtained for free from CP at
http://www.cpr.ca/en/investors or by directing a request to
Canadian Pacific Railway Limited, 7550 Ogden Dale Road S.E.,
Calgary, Alberta, Canada, T2C 4X9,
Attention: Office of the Corporate Secretary.
CP and its directors, executive officers and other employees may
be deemed to be participants in any solicitation of CP or NS
shareholders in connection with the proposed transaction.
Information about CP's executive officers and directors is
available in CP's Annual Report on Form 40-F for the year ended
December 31, 2014, which was filed
with the SEC on February 23, 2015.
Additional information about the interests of potential
participants will be included in any proxy statement filed in
connection with the proposed transaction.
About Canadian Pacific
Canadian Pacific (TSX:CP)(NYSE:CP) is a transcontinental railway
in Canada and the United States with direct links to eight
major ports, including Vancouver
and Montreal, providing 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 cpr.ca to see
the rail advantages of Canadian Pacific.
____________________________________________________________________
1
|
Competition in the
Railroad Industry, STB Docket No. EP 705, Initial Comments of
the Association of American Railroads, at 19 (Apr. 12, 2011)"; some
reduction in the total number of Class I's since 1980 is due to
change in definition of Class I and factors other than
consolidation.
|
2
|
https://www.aar.org/Pages/US-Freight-Rail-Performance-Since-Staggers-Act.aspx
(accessed January, 26, 2016).
|
3
|
Major Rail
Consolidation Procedures, STB Ex Parte No. 582 (Sub-No. 1), at 44
(served June 11, 2001) ("Merger Rules Decision").
|
4
|
Id., at 12
n.12.
|
5
|
49 C.F.R. §
1180.1.
|
6
|
49 U.S.C. § 11324(c)
("The Board shall approve and authorize a transaction under this
section when it finds the transaction is consistent with the public
interest").
|
7
|
49 U.S.C. § 10101(2)
(U.S. policy is "to minimize the need for Federal regulatory
control over the rail transportation system").
|
8
|
See, e.g., Water
Trans. Ass'n v. ICC, 715 F.2d 581, 586 (D.C. Cir. 1983)(holding
that allowance of voting trust was consistent with policy to
minimize need for Federal regulatory control as rejection would
have foreclosed railroad from "common acquisition device of the
tender offer" and could "foreclose acquisition
entirely").
|
9
|
See 49 CFR §
1180.4 (b)(4)(iv).
|
10
|
Merger Rules Decision
at 29.
|
11
|
49 CFR § 1180.4
(b)(4)(iv).
|
12
|
See e.g., Santa Fe
Southern Pacific Corp.-Control-Southern Pacific Trans. Co.:
Merger-The Atchison, Topeka And Santa Fe Ry Co. and Southern
Pacific Trans. Co., 1983 ICC LEXIS 70, **15-16 (Dec. 22, 1983)
(refusing to prohibit management swap during voting trust which
"under normal circumstances," ICC "would be powerless to
prevent").
|
13
|
Id. at 19 (finding
concerns regarding potential exercise of unlawful control to be
without merit "[g]iven the fact of a voting trust designed
and monitored so as prevent impermissible cooperative action" and
noting that ICC retained plenary authority to address specific
problems).
|
14
|
49 CFR Part
1013.
|
15
|
Transcript of Public
Hearing on Proposed "KCS-TEX MEX" Railroad Merger (July 31, 2003)
(available at www.stb.dot.gov).
|
16
|
CP anticipates that
the trust structure including management changes would be the
subject of negotiations and agreement between the parties. In
addition, voting trust decisions focus largely on the financial
harm if divestiture is ordered. See Merger Rules Decision at
29. But NS financial data to calculate the necessary baseline and
projected income and balance sheet financial statements for that
analysis are unavailable to CP prior to a merger
agreement.
|
17
|
49 CFR
1180.1(c).
|
SOURCE Canadian Pacific