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

The Surface Transportation Board (STB) has determined that Canadian Pacific (NYSE: CP) and Kansas City Southern (NYSE: KSU) can proceed with establishing a voting trust as a way to protect Kansas City Southern (KCS) and its shareholders during the merger process.

CP and KCS had announced plans to merge in March, while CP rival CN (NYSE: CNI) said in April that it is also interested in acquiring KCS. Both CP and CN are Canadian railways, and they propose that a merger with KCS would create a railroad that has operations across Canada, the U.S. Midwest and into Mexico.

STB’s Thursday decision grants CP and KCS permission to use a voting trust as a way to prevent any premature takeover of KCS and to enable KCS to continue to operate as an independent company until the merger process has been completed.

STB granted the use of the trust, provided that some modifications be followed. The modifications pertain to guidelines that the trust’s trustee must follow during the merger process to ensure no conflict of interest. CP named former KCS CEO David Starling as the trustee.

The board also asked that any modifications to the voting trust agreement be reviewed and approved by STB.

STB acknowledged the comments about the trust by the U.S. Department of Justice, shippers groups and railroads such as Union Pacific (NYSE: UNP), noting that the trust follows federal regulations.

“Given the high level of interest in the Transaction, and because this is the first major transaction to be brought before the agency in over two decades, the Board has concluded that formal review of the Voting Trust Agreement by the Board is appropriate here,” the board said in a unanimous decision.

It continued, “The Board finds that the Voting Trust Agreement proposed for use in the Transaction, subject to the modifications specified below, comports with the regulations under part 1013 designed to prevent the exercise of unauthorized control during the pendency of regulatory review and that, in the event that the Transaction is disapproved or not consummated and there is a need for divestiture, there is no reasonable basis to conclude that the financial strength or operational capabilities of the carriers would be compromised.”

CP praised the STB’s decision: “Following this critical milestone, we are proceeding full steam ahead to complete this historic combination, creating the first truly North American single line railroad,” CP President and CEO Keith Creel said. “We are continuing to prepare our formal merger application and proxy filing for a shareholder vote in the near future.”

CP said the next steps would be for shareholders from both companies to approve the merger in order to close out the voting trust. At that point, CP would acquire KCS shares and place them into the voting trust, while KCS shareholders would receive their consideration, CP said. After that, KCS would continue to operate as an independent company while the merger undergoes regulatory review by STB.

In April, the board also determined that its review of the CP-KCS merger would occur under older merger rules because KCS was exempted from following the older rules. The older rules look at whether a merger would restrict competition, versus the newer post-2001 rules in which mergers must show how they enhance competition.

Rival CN, which is pursuing a voting trust structure similar to CP’s in its efforts to merge KCS, said it was “encouraged” by Thursday’s decision.

“The STB applied the same public interest factors that CN stated should apply to both Voting Trusts. For the reasons given in the STB’s decision, CN is confident that the STB will reach the same decision with respect to the identical Voting Trust put forward for CN’s proposed acquisition of KCS. Approving both Voting Trusts will allow KCS to choose the bid it judges to be best for its shareholders,” CN said.

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