TLA Feature Articles and Case Notes
Voting Trusts: Like Cicadas, They’re Back Again Greg E. Summy*
The history is familiar even to the most casual observer of the railroad industry. Beginning after the end of World War II and continuing for the next 35 years, railroads were in a state of decline. As Ernest Hemingway’s character Mike Campbell famously stated in The Sun Also Rises, when asked about how he went bankrupt, he stated “Two ways . . . gradually and then suddenly.” The same was true for the railroads during these dark years. After experiencing a couple of decades of parallel mergers,1 matters in the industry became desperate.2 Railroad bankruptcies, large and small, became commonplace. Track and roadbed conditions deteriorated. Purchases of new rolling stock were few and far between. The disastrous merger between two of the largest eastern railroads, the Pennsylvania and the New York Central into the Penn Central, fell into bankruptcy less than 30 months after its creation. As a result, the federal government created Conrail out of seven bankrupt eastern railroads, beginning operations on April 1, 1976. Realizing that the railroad industry was vital to commerce in the United States, Congress threw the industry and the country a lifeline when it passed the Staggers Act of 1980. One of the stated purposes of the law was to “ensure the development and continuation of a sound railroad transportation system with effective competition among rail carriers and * Vandeventer Black LLP (Norfolk, VA)
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with other modes . . . .”3 As it turned out, however, the continuation of consolidation in the rail industry wasn’t finished, and in the two decades following the passage of Staggers, there were several railroad consolidations, including: • CSX, created from the combination of the Chessie System, Seaboard Coast Lines and the “Family Lines”4; • Norfolk Southern, created from the merger of Norfolk & Western and the Southern; • BNSF, created from the merger of Burlington Northern and Santa Fe; • Union Pacific, created by UP’s acquisition of several fallen flags, including the Western Pacific, the Katy, Missouri Pacific, Chicago & Northwestern and the Southern Pacific (which previously had absorbed the Cotton Belt and the Rio Grande); and • The Conrail Transaction, which was the division of Conrail between Norfolk Southern and CSX, effective June 1, 1999. By 2000, only seven Class I railroads were left, with KCS being the smallest.5 As a reaction to the perceived consolidation of many significant railroads into a few larger ones, the Surface Transportation Board6 (“STB”) initiated a Notice of Proposed Rulemaking in the late 1990s, culminating in the promulgation of new regulations governing the STB’s approach to review of proposed mergers or acquisitions of control between the Class I railroads. STB Ex Parte No. 582 (Sub-No. 1), Major Rail Consolidation Procedures, 5 S.T.B. 539 (2001) (“Rulemaking”). The New Rules are found at 49 C.F.R. Part 1180. Differences between the New Rules and the rules previously in effect (“Old Rules”) are significant in certain
respects, including the STB’s statement in the Rulemaking that any further merger proposals must “enhance, not merely preserve, competition, in order to secure our approval.”7 Interestingly, reacting to a Comment filed by KCS in the Rulemaking, the STB included the potential exception for a transaction involving KCS, stating that an applicant could request a waiver from the application of the New Rules for such a transaction, and if granted, the STB would review the consolidation application under the Old Rules. For purposes of this article, the key aspect of the Old Rules is that the application would be considered under an “adverse effect upon competition” standard, rather than the requirement under the New Rules that “merger applications should include provisions for enhanced competition.”8 The subject of voting trusts was also addressed in the STB’s Rulemaking, providing a specific procedural section governing the administrative review of requests for approval of a voting trust and requiring applicants to “demonstrate in a public filing that their contemplated use of a trust would not result in unlawful control and would be consistent with the public interest.”9 Considering all this history, we return to the present. Transportation Lawyers Association Rail Chair Jameson Rice presented an excellent lecture at the June 2021 Annual Conference entitled, The $33.7 Billion Question: Who will acquire Kansas City Southern and will it pass regulatory muster? Jameson thoroughly yet concisely outlined the battle for KCS, culminating with the richer bid of Canadian National (“CN”) winning the approval of the KCS Board of Directors over the competing offer of Canadian Pacific (“CP”).10 In anticipation that KCS would accept
Transportation Lawyers Association • Canadian Transport Lawyers Association • October 2021, Vol. 23, No. 2
