Surface Transportation Board Decides Merger Rules For CN/KCS Proposal

By Max Fisher

NGFA Vice President of Economics and Government Relations

The Surface Transportation Board (STB or Board) issued a decision on May 17 that a merger involving the Canadian National Railway (CN) and Kansas City Southern Railway (KCS) will be subject to the new 2001 merger rules.

The new rules were established in 2001 to place a greater emphasis on enhancing competition while ensuring a stable and balanced rail transportation system.

The decision comes as no surprise since CN had requested to use the new merger rules. However, the Board ruled in April that a merger with KCS involving Canadian Pacific Railway (CP) would not be subject to the new merger rules and instead could proceed under the old merger rules.

The new rules were adopted in 2001 to require merger applicants to present effective plans to keep open major existing gateways and to preserve opportunities to challenge segment rates in bottleneck situations.

The new rules require that proposals enhance, not merely preserve, competition.

The pre-2001 rules had focused on preserving competition that a merger otherwise would eliminate at so-called “2-to-1” locations and did not view the closure of gateways as a competitive harm to be ameliorated.

In 2001, the Board waived the requirements for the new merger rules to apply to KCS, but Monday’s decision overrides the 2001 waiver for a KCS merger involving CN.

The language below summarizes the Board’s rationale for using the new merger rules for a CN/KCS merger:

The Board concurs with CN’s commitment to file an application under the current regulations set forth at 49 C.F.R. part 1180 and finds that application of the current merger rules is appropriate for the proposed transaction.

Indeed, 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.

7 See Major Rail Consolidation Procs., 5 S.T.B. at 556 (noting the potential loss of indirect competition with the merger of two Class I rail carriers whose systems overlap);

see also, e.g., 49 C.F.R. § 1180.1(c)(2)(i) (requiring applicants to propose remedies to mitigate and offset competitive harms, including elimination of shippers’ build-out, transloading, plant siting, and production shifting choices when two railroads serving overlapping areas merge);

cf. Canadian Pac. Ry.—Control—Kan. City S., FD 36500, slip op. at 2 (STB served Apr. 23, 2021) (finding application of the waiver provision appropriate for an end-to-end transaction involving KCS and CP and noting the systems had “the fewest overlapping routes when compared to a merger between KCS and any other Class I carrier”) (with Board Member Primus dissenting).

The Board also ruled against CN’s proposed voting trust because a merger agreement between CN and KCS had not been provided.

However, the Board said if CN/KCS produces a merger agreement, the voting trust agreement can be revisited with STB.

In a prior decision, the Board approved the use of a voting trust agreement for CP and KCS, but in Monday’s decision, the Board stated it will take a more cautious approach to evaluating a voting trust involving CN and KCS.

On May 19, CN filed with STB a merger agreement and a request for approval of a voting trust, thus providing the Board with the needed information to issue a new decision.

As background, a voting trust essentially allows the purchaser to consummate the transaction before regulatory approval. The voting trust is controlled by an independent trustee during the regulatory review period.

While a trust would allow KCS shareholders to be paid, it comes with risk for the purchaser. If the STB does not approve the transaction, then the purchaser is financially responsible for finding a new ownership structure (presumably a new buyer) for the KCS.

- From the May 21 NGFA Newsletter


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