Citing competition concerns, the U.S. Department of Justice (DOJ) is asking the Surface Transportation Board (STB) not to approve a request by Canadian railway CN (NYSE: CNI) to form a voting trust. The voting trust would be used to acquire Kansas City Southern (NYSE: KSU).

CN is seeking to establish a voting trust as a way to protect Kansas City Southern (KCS) from being taken over as STB reviews CN’s request to merge with KCS. The board had approved a similar request by CN rival Canadian Pacific (NYSE: CP). CP is also seeking to acquire KCS.

While the DOJ said it hasn’t taken a position on either proposed merger, the agency takes an interest in the matter because the attorney general has a statutory right to intervene in Class I merger proceedings.

“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,” said a Friday letter from Acting Attorney General Richard A. Powers, who represents the DOJ’s antitrust division. “Thus, even though the terms of CN’s proposed voting trust are similar to the terms of CP’s proposed voting trust, the board has good reason to hold CN’s proposed voting trust to a higher bar.”

Although the DOJ was also wary of CP’s request to establish a voting trust to acquire KCS, the rules that guide STB on whether to approve CN’s request to establish a voting trust should be applied “with greater force” because of “additional potential competitive concerns,” Powers said, noting that a voting trust implies a unity in ownership, which means CN and KCS would be less inclined to compete.

CN’s and KCS’ lines also parallel for certain routes, such as between New Orleans and Baton Rouge, Louisiana. Even though those routes don’t have the same origin-destination pairs, CN’s management would not be compelled to offer competitive options for shippers because CN is competing against a railroad it is seeking to acquire, Powers said.

“CN managers would have diminished incentives to compete aggressively against KCS in areas served by both railroads because winning business away from KCS would now hurt CN’s shareholders and vice versa. These specific competitive concerns presented by CN’s proposed transaction magnify the general risks associated with voting trusts described in the department’s prior filing,” Powers said.

CP said Friday it concurs with the DOJ’s assessment of CN’s proposal. Despite KCS’ announcement late Thursday that it views CN’s merger proposal as the superior offer, CP “remains confident” that its merger bid is the viable option going forward, as it has already [been] validated by two favorable rulings: STB’s approval for CP’s use of a voting trust and the board’s affirmation that KCS be waived from complying with post-2001 merger rules.

CP said Monday that more than 130 stakeholders have filed letters before STB in support of a CP-KCS merger, putting the total at more than 680 letters.

Subscribe to FreightWaves’ e-newsletters and get the latest insights on freight right in your inbox.

Click here for more FreightWaves articles by Joanna Marsh.

Related links:

Kansas City Southern declares CN proposal as ‘superior’

Canadian Pacific, CN continue to lobby for merger support

Regulators approve CP’s and KCS’ request to form pre-merger voting trust

CN and Canadian Pacific vie for shippers’ and KCS shareholders’ favor

CN confident in market share take from trucking via KCS merger

CN to discuss merger with KCS, sends STB over 400 support letters

Regulators say older merger rules apply to Kansas City Southern