SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
SCHEDULE 14D-1
Tender Offer Statement
Pursuant to
Section 14(d)(1) of the Securities Exchange Act of 1934
and
Schedule 13D
(Amendment No. 2)
_______________
Conrail Inc.
(Name of Subject Company)
CSX Corporation
Green Acquisition Corp.
(Bidders)
Common Stock, Par Value $1.00 Per Share
(Title of Class of Securities)
208368 10 0
(CUSIP Number of Class of Securities)
Series A ESOP Convertible Junior
Preferred Stock, Without Par Value
(Title of Class of Securities)
Not Available
(CUSIP Number of Class of Securities)
Mark G. Aron
CSX Corporation
One James Center
901 East Cary Street
Richmond, Virginia 23219-4031
Telephone: (804) 782-1400
(Names, Addresses and Telephone Numbers of Persons Authorized
to Receive Notices and Communications on Behalf of Bidder)
With a copy to:
Pamela S. Seymon
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telephone: (212) 403-1000
<PAGE>
This Statement amends and supplements the Tender Of-
fer Statement on Schedule 14D-1 filed with the Securities and
Exchange Commission (the "Commission") on October 16, 1996, as
previously amended and supplemented (the "Schedule 14D-1"), by
Green Acquisition Corp. ("Purchaser"), a Pennsylvania corpo-
ration and a wholly owned subsidiary of CSX Corporation, a Vir-
ginia corporation ("Parent"), to purchase an aggregate of
17,860,124 shares of (i) Common Stock, par value $1.00 per
share (the "Common Shares"), and (ii) Series A ESOP Convertible
Junior Preferred Stock, without par value (together with the
Common Shares, the "Shares"), of Conrail Inc., a Pennsylvania
corporation (the "Company"), including, in each case, the as-
sociated Common Stock Purchase Rights, upon the terms and sub-
ject to the conditions set forth in the Offer to Purchase,
dated October 16, 1996 (the "Offer to Purchase"), and in the
related Letter of Transmittal (which, together with any amend-
ments or supplements thereto, constitute the "Offer") at a pur-
chase price of $92.50 per Share, net to the tendering share-
holder in cash. Capitalized terms used and not defined herein
shall have the meanings assigned such terms in the Offer to
Purchase and the Schedule 14D-1.
Item 10. Additional Information.
(e) Section 16 of the Offer to Purchase is hereby
amended and supplemented by adding the following text at the
end thereof:
Norfolk Southern Litigation. On October 23,
1996, Norfolk Southern Corporation ("NSC") filed a
Complaint for Declaratory and Injunctive Relief in
the United States District Court for the Eastern Dis-
trict of Pennsylvania, naming the Company, Parent and
certain others as defendants, alleging, among other
things, violations of fiduciary duty, of the Com-
pany's Articles of Incorporation and By-Laws, of the
Pennsylvania Law and of disclosure provisions of the
federal securities laws, relating to tender offers
and proxy solicitations, and requesting preliminary
and permanent injunctive and declaratory relief in-
cluding, without limitation, an injunction from com-
mencing or continuing a tender offer (such as the
Offer) for Company securities, seeking approval of
the Articles Amendment or taking steps to make the
Articles Amendment effective, taking any action to
redeem the Rights or render the Rights inapplicable
to any offer with respect to the Company by Parent
without, at the same time, rendering the Rights inap-
plicable with respect to NSC's proposed tender offer
with respect to the Company, taking any action to
enforce certain provisions of the Merger Agreement,
failing to take action to exempt NSC's proposal to
acquire the Company from certain<PAGE>
provisions of the Pennsylvania Law and holding the
Pennsylvania Special Meeting. On October 24, 1996, a
hearing was scheduled for November 12, 1996 on the
preliminary injunction being sought by NSC to enjoin,
among other things, the Pennsylvania Special Meeting
and consummation of the Offer.
Among other things, the NSC complaint al-
leges, in pertinent part, that (capitalized terms
used and not defined in the following quoted para-
graphs shall have the meanings assigned such terms in
the above-described complaint):
"48. Conrail's Preliminary Proxy Statement contains
the following misrepresentations of fact:
(a) Conrail states that "certain provi-
sions of Pennsylvania law effectively preclude...CSX
from purchasing 20% or more" of Conrail's shares in
the CSX Offer "or in any other manner (except the
[CSX] Merger." This statement is false. The provi-
sions of Pennsylvania law to which Conrail is refer-
ring are those of Subchapter 25E of the Pennsylvania
Business Corporation law. This law does not "ef-
fectively preclude" CSX from purchasing 20% or more
of Conrail's stock other than through the CSX Merger.
Rather, it simply requires a purchaser of 20% or more
of Conrail's voting stock to pay a fair price in
cash, on demand, to the holders of the remaining 80%
of the shares. The real reason that CSX will not
purchase 20% or more of Conrail's voting stock absent
the Charter Amendment is that, unlike NS, CSX is un-
able or unwilling to pay a fair price in cash for
100% of Conrail's stock.
(b) Conrail states that its "Board of Di-
rectors believes that Conrail shareholders should
have the opportunity to receive cash in the nearterm
for 40% of [Conrail's] shares," and that "[t]he Board
of Directors believes it is in the best interests of
shareholders that they have the opportunity to re-
ceive cash for 40% of their shares in the near term."
These statements are false. First of all, the Con-
rail Board believes that Conrail shareholders should
have the opportunity to receive cash in the near-term
for 40% of Conrail's shares only if such transaction
will swiftly deliver effective control of Conrail to
CSX. Second, the Conrail Board of Directors does not
believe that such swift transfer of control to CSX is
in the best interests of Conrail shareholders;
-2-<PAGE>
rather, the Conrail Board of Directors believes that
swift transfer of effective control over Conrail to
CSX through the CSX Offer will lock-up the CSX Trans-
action and preclude Conrail shareholders from any
opportunity to receive the highest reasonably avail-
able price in a sale of control of Conrail.
49. CSX's Schedule 14D-1 contains the following mis-
representations of fact:
(a) CSX states that the "purpose of the
[CSX] Offer is for [CSX] . . . to acquire a signifi-
cant equity interest in [Conrail] as the first step
in a business combination of [CSX] and [Conrail]."
This statement is false. The purpose of the CSX Of-
fer is to swiftly transfer effective control over
Conrail to CSX in order to lock up the CSX Transac-
tion and foreclose the acquisition of Conrail by any
competing higher bidder.
(b) CSX states that "the Pennsylvania Con-
trol Transaction Law effectively precludes [CSX,
through its acquisition subsidiary] from purchasing
20% or more of Conrail's shares pursuant to the [CSX]
Offer." This statement is false. The provisions of
Pennsylvania law to which Conrail is referring are
those of Subchapter 25E of the Pennsylvania Business
Corporation law. This law does not "effectively pre-
clude" CSX from purchasing 20% or more of Conrail's
stock other than through the CSX Merger. Rather, it
simply requires a purchaser of 20% or more of
Conrail's voting stock to pay a fair price in cash,
on demand, to the holders of the remaining 80% of the
shares. The real reason that CSX will not purchase
20% or more of Conrail's voting stock absent the
Charter Amendment is that, unlike NS, CSX is unable
or unwilling to pay a fair price in cash for 100% of
Conrail's stock.
50. Conrail's Schedule 14D-9 states that "the [CSX
Transaction]...is being structured as a true merger-
of-equals transaction." This statement is false.
The CSX Transaction is being structured as a rapid,
locked-up sale of control of Conrail to CSX involving
a significant, albeit inadequate, control premium.
51. Each of the Conrail Preliminary Proxy Statement,
the CSX Schedule 14D-1, and the Conrail Schedule 14D-
9 omit to disclose the following material facts, the
-3-<PAGE>
disclosure of which are necessary to make the state-
ments made in such documents not misleading:
(a) That both Conrail (and its senior man-
agement) and CSX (and its senior management) knew (i)
that NS was keenly interested in acquiring Conrail,
(ii) that NS has the financial capacity and resources
to pay a higher price for Conrail than CSX could, and
(iii) that a financially superior competing bid for
Conrail by NS was inevitable.
(b) That Conrail management led NS to be-
lieve that if and when the Conrail Board determined
to sell Conrail, it would do so through a process in
which NS would be given the opportunity to bid, and
that in the several weeks prior to the announcement
of the CSX Transaction, defendant LeVan on two occa-
sions prevented Mr. Goode from presenting an acquisi-
tion proposal to Conrail by stating to him that mak-
ing such a proposal would be unnecessary and that Mr.
LeVan would contact Mr. Goode concerning NS's inter-
est in acquiring Conrail following (i) the Conrail
Board's strategic planning meeting scheduled for Sep-
tember 1996 and (ii) a meeting of the Conrail Board
purportedly scheduled for October 16, 1996.
(c) That in September of 1994, NS had pro-
posed a stock-for-stock acquisition of Conrail at an
exchange ratio of 1.1 shares of NS stock for each
share of Conrail stock, which ratio, if applied to
the price of NS stock on the day before announcement
of the CSX Transaction, October 14, 1996, implied a
bid by NS worth over $101 per Conrail share.
(d) That the CSX Transaction was structured
to swiftly transfer effective, if not absolute voting
control over Conrail to CSX, and to prevent any other
bidders from acquiring Conrail for a higher price.
(e) That although Conrail obtained opinions
from Morgan Stanley and Lazard Freres that the con-
sideration to be received by Conrail stockholders in
the CSX Transaction was "fair" to such shareholders
from a financial point of view, Conrail's Board did
not ask its investment bankers whether the CSX Trans-
action consideration was adequate, from a financial
point of view, in the context of a sale of control of
Conrail such as the CSX Transaction.
-4-<PAGE>
(f) That although in arriving at their
"fairness" opinions, both Morgan Stanley and Lazard
Freres purport to have considered the level of con-
sideration paid in comparable transactions, both in-
vestment bankers failed to consider the most closely
comparable transaction -- NS's September 1994 merger
proposal, which as noted above, would imply a price
per Conrail share in excess of $101.
(g) That, if asked to do so, Conrail's in-
vestment bankers would be unable to opine in good
faith that the consideration offered in the CSX
Transaction is adequate to Conrail's shareholders
from a financial point of view.
(h) That Conrail's Board failed to seek a
fairness opinion from its investment bankers concern-
ing the $300 million break-up fee included in the CSX
Transaction.
(i) That Conrail's Board failed to seek a
fairness opinion from its investment bankers concern-
ing the Stock Option Agreement granted by Conrail to
CSX in connection with the CSX Transaction.
(j) That the Stock Option Agreement is
structured so as to impose increasingly severe dilu-
tion costs on a competing bidder for control of Con-
rail for progressively higher acquisition bids.
(k) That the Conrail Board intends to with-
hold the filing of the Charter Amendment following
its approval by Conrail's stockholders if the ef-
fectiveness of such amendment would facilitate any
bid for Conrail other than the CSX Transaction.
(l) That the Charter Amendment and/or its
submission to a vote of the Conrail shareholders is
illegal and ultra vires under Pennsylvania law.
(m) That the Conrail Board's discriminatory
(i) use of the Charter Amendment, (ii) amendment of
the Conrail Poison Pill and (iii) action exempting
the CSX Transaction from Pennsylvania's Business Com-
bination Statute, all to facilitate the CSX Transac-
tion and to preclude competing financially superior
offers for control of Conrail, constitute a breach of
the defendant directors' fiduciary duty of loyalty.
-5-<PAGE>
(n) That Conrail's Board failed to conduct
a reasonable, good faith investigation of all reason-
ably available material information prior to approv-
ing the CSX transaction and related agreements, in-
cluding the lock-up Stock Option Agreement.
(o) That in recommending that Conrail's
shareholders tender their shares to CSX in the CSX
Offer, Conrail's Board did not conclude that doing so
would be in the best interests of Conrail's share-
holders.
(p) That in recommending that Conrail's
shareholders approve the Charter Amendment, the Con-
rail Board did not conclude that doing so would be in
the best interests of Conrail's shareholders.
(q) That in recommending that Conrail
shareholders tender their shares to CSX in the CSX
Offer, primary weight was given by the Conrail Board
to interests of persons and/or groups other than
Conrail's shareholders.
(r) That in recommending that Conrail
shareholders tender their shares to CSX in the CSX
Offer, primary weight was given to the personal in-
terests of defendant LeVan in increasing his compen-
sation and succeeding Mr. Snow as Chairman and Chief
Executive Officer of the combined CSX/Conrail com-
pany.
(s) That the Continuing Director Require-
ment in Conrail's Poison Pill (described below in
paragraphs 54 through 60, adopted by Conrail's board
in September 1995 and publicly disclosed at that
time, is illegal and ultra vires under Pennsylvania
law and therefore is void and unenforceable."
A copy of the above-described complaint is attached
hereto as Exhibit (c)(5), and the foregoing summary description
is qualified in its entirety by reference to such exhibit.
(f) On October 23, 1996, NSC announced its intention
to commence a tender offer for the Shares, and Parent issued a
press release with respect thereto.
A copy of the press release is attached hereto as
Exhibit (a)(10), and the foregoing summary description is qual-
ified in its entirety by reference to such exhibit.
-6-<PAGE>
Item 11. Material to be Filed as Exhibits.
(a)(1) -- Offer to Purchase, dated October 16, 1996.*
(a)(2) -- Letter of Transmittal.*
(a)(3) -- Notice of Guaranteed Delivery.*
(a)(4) -- Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.*
(a)(5) -- Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nom-
inees.*
(a)(6) -- Guidelines for Certification of Taxpayer Identi-
fication Number on Substitute Form W-9.*
(a)(7) -- Text of Press Release issued by Parent on Octo-
ber 15, 1996.*
(a)(8) -- Form of Summary Advertisement, dated October 16,
1996.*
(a)(9) -- Text of Press Release issued by Parent on Octo-
ber 22, 1996.*
(a)(10) -- Text of Press Release issued by Parent on Octo-
ber 23, 1996.
(b)(1) -- Commitment Letter, dated October 21, 1996.*
(c)(1) -- Agreement and Plan of Merger, dated as of Octo-
ber 14, 1996, by and among Parent, Purchaser and
the Company.*
(c)(2) -- Company Stock Option Agreement, dated as of Oc-
tober 14, 1996, between Parent and the Company.*
(c)(3) -- Parent Stock Option Agreement, dated as of Octo-
ber 14, 1996, between Parent and the Company.*
(c)(4) -- Form of Voting Trust Agreement.*
_____________________
* Previously filed.
-7-<PAGE>
(c)(5) -- Complaint in Norfolk Southern Corporation, et
al. v. Conrail Inc., et al., No. 96-CV-7167,
filed on October 23, 1996.
-8-<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and
belief, the undersigned certifies that the information set
forth in this statement is true, complete and correct.
CSX CORPORATION
By:/s/ MARK G. ARON
Name: Mark G. Aron
Title: Executive Vice President-
Law and Public Affairs
Dated: October 25, 1996<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and
belief, the undersigned certifies that the information set
forth in this statement is true, complete and correct.
GREEN ACQUISITION CORP.
By:/s/ MARK G. ARON
Name: Mark G. Aron
Title: General Counsel
and Secretary
Dated: October 25, 1996<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
(a)(1) -- Offer to Purchase, dated October 16, 1996.*
(a)(2) -- Letter of Transmittal.*
(a)(3) -- Notice of Guaranteed Delivery.*
(a)(4) -- Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.*
(a)(5) -- Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nom-
inees.*
(a)(6) -- Guidelines for Certification of Taxpayer Identi-
fication Number on Substitute Form W-9.*
(a)(7) -- Text of Press Release issued by Parent on Octo-
ber 15, 1996.*
(a)(8) -- Form of Summary Advertisement dated October 16,
1996.*
(a)(9) -- Text of Press Release issued by Parent on Octo-
ber 22, 1996.*
(a)(10) -- Text of Press Release issued by Parent on Octo-
ber 23, 1996.
(b)(1) -- Commitment Letter, dated October 21, 1996.*
(c)(1) -- Agreement and Plan of Merger, dated as of Octo-
ber 14, 1996, by and among Parent, Purchaser and
the Company.*
(c)(2) -- Company Stock Option Agreement, dated as of Oc-
tober 14, 1996, between Parent and the Company.*
(c)(3) -- Parent Stock Option Agreement, dated as of Octo-
ber 14, 1996, between Parent and the Company.*
(c)(4) -- Form of Voting Trust Agreement.*
_____________________
* Previously filed.<PAGE>
(c)(5) -- Complaint in Norfolk Southern Corporation, et
al. v. Conrail Inc., et al., No. 96-CV-7167,
filed on October 23, 1996.
-2-
EXHIBIT (a)(10)
Corporate Communications
P.O. Box C-32222
NEWS Richmond, Virginia 23261
CSX Dismisses Norfolk Southern's Announcement as a
'Confusing Non-Bid'
RICHMOND, Va., Oct. 23 /PRNEwswire/ -- In response to the
Norfolk Southern (NYSE: NSC) (NSC) announcement of its hostile
tender offer for Conrail, CSX (NYSE: CSX) issued the following
statement:
"Norfolk Southern's hostile offer comes as no surprise.
It simply does not provide the same long-term value as the
strategic CSX-Conrail partnership, which offers Conrail
shareholders tax-free equity and the substantial upside
potential that only comes from the benefits derived from the
merger of CSX and Conrail.
"Furthermore, Norfolk Southern's highly conditional non-
bid would inevitably face serious delay and could not in any
event be consummated without the approval of the Conrail board.
Specifically, the provisions of the CSX-Conrail merger
agreement effectively preclude the Conrail board of directors'
approval of any competing offers prior to mid-April 1997. In
contrast, the CSX cash tender offer would close in November
1996. The certain delays involved in the Norfolk Southern non-
bid severely and negatively impact the present value of its
proposal. Using a customary discount rate of 2 percent per
month, the Norfolk Southern non-bid is worth less than $90 per
Conrail share, far less than Norfolk Southern would have
Conrail shareholders believe.
"The fact is that the merger of CSX and Conrail will
result in service, efficiency and competitive benefits that
cannot be achieved by any combination of the Norfolk Southern
and Conrail systems.
"By every measure, the CSX-Conrail merger is superior in
economic, operational and public policy terms to the Norfolk
Southern non-bid."
CSX Corporation, headquartered in Richmond, Va., is an
international transportation company offering a variety of
rail, container-shipping, intermodel, trucking, barge and
contract logistics services.
CSX's Internet address is http://www.csx.com.
CSX press releases available through Company News On-Call
by fax, 800-758-5804, ext. 219563, or at http://
www.prnewswire.com.
SOURCE CSX Corporation
-0- 10/23/96
/CONTACT: Thomas E. Hoppin of CSX, 804-782-1450/
(CSX NSC)
EXHIBIT (c)(5)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- ---------------------------------x
NORFOLK SOUTHERN CORPORATION, a
Virginia corporation,
Three Commercial Place
Norfolk, VA 23510-2191,
New Acquisition Corporation
Three Commercial Place
Norfolk, VA 23510-2191,
and
Kathryn B. McQuade
5114 Hunting Hills Drive
Roanoke, VA 24014,
Plaintiffs,
-against-
C.A. No. ______
Conrail Inc., a Pennsylvania
corporation, 96-CV-7167
Two Commerce Square
2001 Market Street
Philadelphia, PA 19101,
David M. LeVan
245 Pine Street
Philadelphia, PA 19103-7044,
H. Furlong Baldwin
4000 N. Charles Street
Baltimore, MD 21218-1756,
Daniel B. Burke
Capital Cities/ABC Inc.
77 W. 66th Street
New York, NY 10023-6201,
(Caption continued on next page)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
Roger S. Hillas
Two Commerce Square
2001 Market Street
Philadelphia, PA 19101,
Claude S. Brinegar
1574 Michael Lane
Pacific Palisades, CA 90272-2026,
Kathleen Foley Feldstein
147 Clifton Street
Belmont, MA 02178-2603,
David B. Lewis
1755 Burns Street
Detroit, MI 48214-2848,
John C. Marous
109 White Gate Road
Pittsburgh, PA 15238,
David H. Swanson
Countrymark Inc.
950 N. Meridian Street
Indianapolis, IN 46204-3909,
E. Bradley Jones
2775 Lander Road
Pepper Pike, OH 44124-4808,
Raymond T. Schuler
Two Commerce Square
2001 Market Street
Philadelphia, PA 19101,
and
CSX Corporation
One James Center
901 East Carey Street
Richmond, VA 23219,
Defendants.
- ---------------------------------x
COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
Plaintiffs, by their undersigned attorneys, as and
for their complaint, allege upon knowledge with respect to
themselves and their own acts, and upon information and
belief as to all other matters, as follows:
Nature of the Action
1. This action arises from the attempt by
defendants Conrail, Inc. ("Conrail"), its directors, and CSX
Corporation ("CSX") to coerce, mislead, and fraudulently
manipulate Conrail's shareholders to swiftly deliver control
of Conrail to CSX and to forestall any competing higher bid
for Conrail by plaintiff Norfolk Southern Corporation
("NS"). Defendants' actions are in violation of the federal
securities laws governing proxy solicitations and tender
offers. Further, several of defendants' actions are illegal
and ultra vires under Pennsylvania statutory law. Finally,
defendants' actions are in plain breach of the defendant
Conrail directors' fiduciary duties of care and loyalty.
2. In a surprise move on October 15, 1996,
defendants Conrail and CSX announced a deal to rapidly
transfer control of Conrail to CSX and foreclose any
3
other bids for Conrail (the "CSX Transaction"). The CSX
Transaction is to be accomplished through a complicated
multi-tier structure involving a coercive front-end loaded
cash tender offer, a lock-up stock option and, following
required regulatory approvals or exemptions, a back-end
merger in which Conrail shareholders will receive stock and,
under certain circumstances, cash. According to the October
16, 1996 Wall Street Journal, the blended value of the CSX
Transaction was $89 per Conrail share. Integral to this
deal are executive succession and compensation guarantees
for Conrail management and board composition covenants
effectively ensuring Conrail directors of continued board
seats.
3. Because plaintiff NS believes that a business
combination between Conrail and NS would yield benefits to
both companies and their constituencies far superior to any
benefits offered by the proposed Conrail/CSX combination, NS
is today announcing its intention to commence, through its
wholly-owned subsidiary, plaintiff NEW ACQUISITION
CORPORATION ("NAC") a cash tender offer (the "NS Offer") for
any and all shares of Conrail stock at $100 per share, to be
followed by a cash merger at the same price (the "Proposed
Merger," and together with the NS Offer, the "NS Proposal").
4
4. By this action, plaintiffs NS, NAC, and
Kathryn B. McQuade, a Conrail shareholder, seek emergency
relief against defendants' illegal attempt to lock-up the
rapid sale of control of Conrail to CSX through their scheme
of coercion, deception and fraudulent manipulation.
Specifically, plaintiffs seek:
- Injunctive relief with respect to defendants'
violations of the federal securities laws, including
preliminary injunctive relief enjoining the special meeting
of Conrail's shareholders scheduled for November 14, 1996
and enjoining the consummation of CSX's tender offer until
corrective disclosures are made and adequately disseminated.
- - Declaratory and injunctive relief with respect to
illegal and ultra vires acts by Conrail and its directors,
including a proposed amendment to Conrail's charter and the
September 1995 amendment of Conrail's Poison Pill Plan to
include a "Continuing Director" limitation on amendment and
redemption.
- Declaratory and injunctive relief concerning breach of
the Conrail directors' fiduciary duties of loyalty and care
in attempting to lock up the sale of control of Conrail to
CSX.
In addition, to facilitate the NS Proposal, plaintiffs seek
certain declaratory relief with respect to replacement of
Conrail's Board of Directors at Conrail's next annual
meeting of shareholders.
5
Jurisdiction and Venue
5. This Court has jurisdiction over this
complaint pursuant to 28 U.S.C. Sections 1331 and 1367.
6. Venue is proper in this District pursuant to
28 U.S.C. Section 1391.
The Parties
7. Plaintiff NS is a Virginia corporation with
its principal place of business in Norfolk, Virginia. NS is
a holding company operating rail and motor transportation
services through its subsidiaries. As of December 31, 1995,
NS' railroads operated more than 14,500 miles of road in the
states of Alabama, Florida, Georgia, Illinois, Indiana,
Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi,
Missouri, New York, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Virginia and West Virginia, and
the Province of Ontario, Canada. The lines of NS' railroads
reach most of the larger industrial and trading centers in
the Southeast and Midwest, with the exception of those in
Central and Southern Florida. In the fiscal year ended
December 31, 1995, NS had net income of $712.7 million on
total transportation operating revenues of $4.668 billion.
According to the New York Times, NS "is considered by many
analysts to be the nation's best-run
6
railroad." NS is the beneficial owner of 100 shares of
common stock of Conrail.
8. Plaintiff NAC is a Pennsylvania corporation.
The entire equity interest in NAC is owned by NS. NAC was
organized by NS for the purpose of acquiring the entire
equity interest in Conrail.
9. Plaintiff Kathryn B. McQuade is and has been,
at all times relevant to this action, the owner of Conrail
common stock.
10. Defendant Conrail is a Pennsylvania
corporation with its principal place of business in
Philadelphia, Pennsylvania. Conrail is the major freight
railroad serving America's Northeast-Midwest region,
operating over a rail network of approximately 11,000 route
miles. Conrail's common stock is widely held and trades on
the New York Stock Exchange. During the year ended December
31, 1995, Conrail had net income of $264 million on revenues
of $3.68 billion. On the day prior to announcement of the
CSX Transaction, the closing per share price of Conrail
common stock was $71.
11. Defendant David M. LeVan is President, Chief
Executive Officer, and Chairman of Conrail's Board of
Directors. Defendants H. Furlong Baldwin, Daniel B. Burke,
Roger S. Hillas, Claude S. Brinegar, Kathleen
7
Foley Feldstein, David B. Lewis, John C. Marous, David H.
Swanson, E. Bradley Jones, and Raymond T. Schuler are the
remaining directors of Conrail. The foregoing individual
defendant directors of Conrail (collectively, the "Defendant
Directors") owe fiduciary duties to Conrail and its
stockholders, including plaintiffs.
12. Defendant CSX is a Virginia corporation with
its principal place of business in Richmond, Virginia. CSX
is a transportation company providing rail, intermodal,
ocean container-shipping, barging, trucking and contract
logistic services. CSX's rail transportation operations
serve the southeastern and midwestern United States.
Factual Background
The Offer
13. In response to the surprise October 15
announcement of the CSX Transaction, on October 23, 1996, NS
announced its intention to commence a public tender offer
for any and all shares of Conrail common stock at a price of
$100 in cash per share. NS further announced that it
intends, as soon as practicable following the closing of the
Offer, to acquire the entire equity interest in Conrail by
causing it to merge with NAC in the Proposed Merger. In the
Proposed Merger, Conrail
8
common stock not tendered and accepted in the Offer would be
converted into the right to receive $100 in cash per share.
The Offer and the Proposed Merger represent a 40.8% premium
over the closing market price of Conrail stock on October
14, 1996, the day prior to announcement of the CSX
Transaction.
14. In a letter to be delivered on October 23,
1996 to the Defendant Directors, NS states that it is
flexible as to all aspects of the NS proposal and expresses
its eagerness to negotiate a friendly merger with Conrail.
The letter indicates, in particular, that while the NS
Proposal is a proposal to acquire the entire equity interest
in Conrail for cash, NS is willing to discuss, if the
Conrail board so desires, including a substantial equity
component to the consideration to be paid in a negotiated
transaction so that current Conrail shareholders could have
a continuing interest in the combined NS/Conrail enterprise.
The Current Crisis: In A Surprise Move
Intended To Foreclose Competing Bids,
Conrail and CSX Announce On October 15
That Conrail Has Essentially Granted
CSX A Lock-Up Over Control Of The Company, And
Conrail Schedules A Special Meeting Of Its
Shareholders On Short Notice To Approve A
Discriminatory Charter Amendment Designed To
Facilitate Completion Of The Lock-Up Deal
9
15. After many months of maintaining that Conrail
was not for sale, on October 16, 1996 the Conrail Board
announced an abrupt about face: Conrail would be sold to
CSX in a multiple-step transaction designed to swiftly
transfer effective, if not absolute, voting control over
Conrail to a voting trustee who would be contractually
required to vote to approve CSX's acquisition of the entire
equity interest in Conrail through a follow-up stock merger.
16. Indeed, if the relief requested herein is not
granted, the fate of Conrail could be effectively determined
on November 14, 1996, just 23 business days after
announcement of the CSX transaction. That is when Conrail
shareholders will be called upon to vote on a proposed
amendment to Conrail's certificate of incorporation designed
to facilitate the swift transfer of control in favor of CSX,
and only CSX. If they approve the Charter Amendment, and
then, in the misinformed belief that the NS Proposal does
not present a viable and superior alternative, tender 40% of
Conrail's stock to CSX, Conrail's shareholders will have
been coerced by defendants' fraudulent and manipulative
tactics to sell Conrail to the low bidder.
10
Defendants Were Well Aware That
A Superior Competing Acquisition
Proposal By NS was Inevitable
17. For a number of years, certain members of
senior management of NS, including David R. Goode, Chairman
and Chief Executive Officer of Norfolk Southern, have spoken
numerous times with senior management of Conrail, including
former Conrail Chairman and CEO, James A. Hagen and current
Conrail Chairman and CEO, defendant David W. LeVan
concerning a possible business combination between NS and
Conrail. Ultimately, Conrail management encouraged such
discussions prior to Mr. Hagen's retirement as Chief
Executive Officer of Conrail. Conrail discontinued such
discussions in September 1994, when the Conrail Board
elected Mr. LeVan as Conrail's President and Chief Operating
Officer as a step toward ultimately installing him as Chief
Executive Officer and Chairman upon Mr. Hagen's departure.
18. Prior to 1994, senior management of NS and
Conrail discussed, from time to time, opportunities for
business cooperation between the companies, and, in some of
those discussions, the general concept of a business
combination. While the companies determined to proceed with
certain business cooperation opportunities, including the
Triple Crown Services joint venture, no
11
decisions were reached concerning a business combination at
that time.
19. In March of 1994, Mr. Hagen approached Mr.
Goode to suggest that under the current regulatory
environment, Conrail management now believed that a business
combination between Conrail and NS could be accomplished,
and that the companies should commence discussion of such a
transaction. Mr. Goode agreed to schedule a meeting between
legal counsel for NS and Conrail for the purpose of
discussing regulatory issues. Following that meeting, Mr.
Goode met with Mr. Hagen to discuss in general terms an
acquisition of Conrail by NS. Thereafter, during the period
from April through August 1994, management and senior
financial advisors of the respective companies met on
numerous occasions to negotiate the terms of a combination
of Conrail and NS. The parties entered into a
confidentiality agreement on August 17, 1994. During these
discussions, Mr. Hagen and other representatives of Conrail
pressed for a premium price to reflect the acquisition of
control over Conrail by NS. Initially, NS pressed instead
for a stock-for-stock merger of equals in which no control
premium would be paid to Conrail shareholders. Conrail
management insisted on a control premium, however, and
ultimately
12
the negotiations turned toward a premium stock-for-stock
acquisition of Conrail.
20. By early September 1994, the negotiations
were in an advanced stage. NS had proposed an exchange
ratio of 1-to-1, but Conrail management was still pressing
for a higher premium. In a meeting in Philadelphia on
September 23, 1994, Mr. Goode increased the proposed
exchange ratio to 1.1-to-1, and left the door open to an
even higher ratio. Mr. Hagen then told Mr. Goode that they
could not reach agreement because the Conrail board had
determined to remain independent and to pursue a stand alone
policy. The meeting then concluded.
21. The 1.1 to 1 exchange ratio proposed by Mr.
Goode in September of 1994 reflected a substantial premium
over the market price of Conrail stock at that time. If one
applies that ratio to NS's stock price on October 14, 1996
- -- the day the Conrail Board approved the CSX Transaction --
it implies a per share acquisition price for Conrail of over
$101. Thus, there can be no question that Mr. LeVan, if not
Conrail's Board, was well aware that NS would likely be
willing and able to offer more -- to Conrail's shareholders,
rather than management, that is -- than CSX could offer for
an acquisition of Conrail.
13
Defendant LeVan Actively Misleads NS
Management In Order To Permit Him To
Lock Up The Sale of Conrail to CSX
22. During the period following September of
1994, Mr. Goode from time to time had conversations with Mr.
LeVan. During virtually all of these conversations, Mr.
Goode expressed NS's strong interest in negotiating an
acquisition of Conrail. Mr. LeVan responded that Conrail
wished to remain independent. Nonetheless, Mr. Goode was
led to believe that if and when the Conrail Board determined
to pursue a sale of the company, it would do so through a
process in which NS would have an opportunity to bid.
23. At its September 24, 1996 meeting, the NS
Board reviewed its strategic alternatives and determined
that NS should press for an acquisition of Conrail.
Accordingly, Mr. Goode again contacted Mr. LeVan to (i)
reiterate NS's strong interest in acquiring Conrail and (ii)
request a meeting at which he could present a concrete
proposal. Mr. LeVan responded that the Conrail board would
be holding a strategic planning meeting that month and that
he and Mr. Goode would be back in contact after that
meeting. Mr. Goode emphasized that he wished to communicate
NS's position so that Conrail's Board would be aware of it
during the strategic planning
14
meeting. Mr. LeVan stated that it was unnecessary for Mr.
Goode to do so. At that point, the conversation concluded.
24. Following September 24, Mr. LeVan did not
contact Mr. Goode. Finally, on Friday, October 4, 1996, Mr.
Goode telephoned Mr. LeVan. Mr. Goode again reiterated NS's
strong interest in making a proposal to acquire Conrail.
Mr. LeVan responded that the Conrail Board would be meeting
on October 16, 1996, and assumed that he and Mr. Hagen would
contact Mr. Goode following that meeting. Mr. Goode again
stated that NS wanted to make a proposal so that the Conrail
Board would be aware of it. Mr. LeVan stated that it was
unnecessary to do so.
On the Day Before the Purportedly
Scheduled Meeting of Conrail's Board,
Defendants Announce the CSX Transaction
25. To NS's surprise and dismay, on October 15,
1996, Conrail and CSX announced that they had entered into a
definitive merger agreement (the "CSX Merger Agreement")
pursuant to which control of Conrail would be swiftly sold
to CSX and then a merger would be consummated following
required regulatory approvals (the "CSX Transaction"). The
Wall Street Journal reported on October 16, 1996 that the
CSX Transaction, in which
15
Conrail shareholders would receive cash and stock
consideration, was valued at $89 per Conrail share. The CSX
Transaction includes a break-up fee of $300 million and a
lock-up stock option agreement threatening substantial
dilution to any rival bidder for control of Conrail.
Integral to the CSX Transaction are covenants substantially
increasing Mr. LeVan's compensation and guaranteeing that he
will succeed John W. Snow, CSX's Chairman and Chief
Executive Officer, as the combined company's CEO and
Chairman.
CSX's Snow Implies That the CSX Transaction
Is a Fait Accompli and States That Conrail's
Directors Have Almost No Fiduciary Duties
26. On October 16, 1996, Mr. Goode met in
Washington, D.C. with Mr. Snow to discuss the CSX
Transaction and certain regulatory issues that its
consummation would raise. Mr. Snow advised Mr. Goode during
that meeting that Conrail's counsel and investment bankers
had ensured that the CSX Transaction would be "bulletproof,"
implying that the sale of control of Conrail to CSX is now a
fait accompli. Mr. Snow added that the "Pennsylvania
statute," referring to Pennsylvania's Business Corporation
Law, was "great," and that Conrail's directors have almost
no fiduciary duties. Mr. Snow's comments were intended to
discourage NS from
16
making a competing offer for control of Conrail and to
suggest that NS had no choice but to negotiate with CSX for
access to such portions of Conrail's rail system as would be
necessary to address the regulatory concerns that would be
raised by consummation of the CSX Transaction. After Mr.
Snow told Mr. Goode what CSX was willing to offer to NS in
this regard, the meeting concluded.
NS Responds With a
Superior Offer for Conrail
27. On October 22, the NS Board met to review its
strategic options in light of announcement of the CSX
Transaction. Because the NS Board believes that a
combination of NS and Conrail would offer compelling
benefits to both companies, their shareholders, and their
other constituencies, it determined that NS should make a
competing bid for Conrail. On October 23, 1996, the date of
this Complaint, NS is publicly announcing its intention to
commence a cash tender offer for any and all shares of
Conrail stock for $100 per share, to be followed, after
required regulatory approvals, by a cash merger at the same
price.
17
The CSX Transaction
Rapid Transfer of Control
28. The CSX transaction is structured to include
(i) a first step cash tender offer for up to 19.9% of
Conrail's stock, (ii) an amendment to Conrail's charter to
opt out of coverage under Subchapter 25E of Pennsylvania's
Business Corporation Law (the "Charter Amendment"), which
requires any person acquiring control over 20% or more of
the corporation's voting power to acquire all other shares
of the corporation for a "fair price," as defined in the
statute, in cash, (iii) following such amendment, an
acquisition of additional shares which, in combination with
other shares already acquired, would constitute at least 40%
and up to approximately 50% of Conrail's stock, and (iv)
following required regulatory approvals, consummation of a
follow-up stock-for-stock merger.
29. Thus, once the Charter Amendment is approved,
CSX will be in a position to acquire either effective or
absolute control over Conrail. Conrail admits that the CSX
Transaction contemplates a sale of control of Conrail. In
its preliminary proxy materials filed with the SEC, Conrail
stated that if CSX acquires 40% of Conrail's stock, approval
of the merger will be
18
"virtually certain." CSX could do so either by increasing
the number of shares it will purchase by tender offer, or,
if tenders are insufficient, by accepting all tendered
shares and exercising the Stock Option. CSX could obtain
"approximately 50 percent" of Conrail's shares by purchasing
40% pursuant to tender offer and by exercising the Stock
Option, in which event shareholder approval of the CSX
Merger will be, according to Conrail's preliminary proxy
statement, "certain."
30. The swiftness with which the CSX Transaction
is designed to transfer control over Conrail to CSX can only
be viewed as an attempt to lock up the CSX Transaction and
benefits it provides to Conrail management, despite the fact
that a better deal, financially and otherwise, is available
for Conrail, its shareholders, and its other legitimate
constituencies.
The Charter Amendment
31. Conrail's Preliminary Proxy Materials for the
November 14, 1996 Special Meeting set forth the resolution
to be voted upon by Conrail's shareholders as follows:
An amendment (the "Amendment") of the Articles of
Incorporation of Conrail is hereby approved and
adopted, by which, upon the effectiveness of such
amendment Article Ten thereof will be amended and
restated in its entirety as
19
follows: Subchapter E, Subchapter G and
Subchapter H of Chapter 25 of the Pennsylvania
Business Corporation Law of 1988, as amended,
shall not be applicable to the Corporation; and
further, that the Board of Directors of Conrail,
in its discretion, shall be authorized to direct
certain executive officers of Conrail to file or
not to file the Articles of Amendment to Conrail's
Articles of Incorporation reflecting such
Amendment or to terminate the Articles of
Amendment prior to their effective date, if the
Board determines such action to be in the best
interests of Conrail.
32. Further, the preliminary proxy materials
state that
Pursuant to the Merger Agreement and in order to
facilitate the transactions contemplated thereby,
if the [Charter Amendment] is approved, Conrail
would be required to file the Amendment with the
Pennsylvania Department of State so as to permit
the acquisition by CSX of in excess of 20% of the
shares, such filing to be made and effective
immediately prior to such acquisition. If CSX is
not in a position to make such acquisition
(because, for example, shares have not been
tendered to CSX, Conrail is not required to make
such filing, (although approval of the [Charter
Amendment] will authorize Conrail to do so) and
Conrail does not currently intend to make such
filing unless it is required under the Merger
Agreement to permit CSX to acquire in excess of
20% of the Shares.
33. Thus, if Conrail shareholders fail to tender
sufficient shares to CSX to permit CSX to acquire in excess
of 20% of the shares, for example, because they wish to
instead accept the superior NS Proposal, the Defendant
Directors are actually asking Conrail
20
shareholders to grant them the authority to discriminatorily
withhold the filing of the Charter Amendment, and thereby
attempt to prevent consummation of the NS Proposal.
LeVan's Deal
34. As an integral part of the CSX Transaction,
CSX, Conrail, and defendant LeVan have entered into an
employment agreement dated as of October 14, 1996 (the
"LeVan Employment Agreement"), covering a period of five-
years from the effective date of any merger between CSX and
Conrail. The LeVan Employment Agreement provides that Mr.
LeVan will serve as Chief Operating Officer and President of
the combined CSX/Conrail company, and as Chief Executive
Office and President of the railroad businesses of Conrail
and CSX, for two years from the effective date of a merger
between CSX and Conrail (the "First Employment Segment").
Additionally, Mr. LeVan will serve as Chief Executive
Officer of the combined CSX/Conrail company for a period of
two years beginning immediately after the First Employment
Segment (the "Second Employment Segment"). During the
period commencing immediately after the Second Employment
Segment, or, if earlier, upon the termination of Mr. Snow's
status as Chairman of the Board (the "Third
21
Employment Segment"), Mr. LeVan will additionally serve as
Chairman of the Board of the combined CSX/Conrail company.
35. Defendant LeVan received a base salary from
Conrail of $514,519 and a bonus of $24,759 during 1995. The
LeVan Employment Agreement ensures substantially enhanced
compensation for defendant LeVan. It provides that during
the First Employment Segment, Mr. LeVan shall receive annual
base compensation at least equal to 90% of the amount
received by the Chief Executive Officer of CSX, but not less
than $810,000, together with bonus and other incentive
compensation at least equal to 90% of the amount received by
the Chief Executive Officer of CSX. During 1995, Mr. Snow
received a base salary of $895,698 and a bonus having a cash
value of $1,687,500. Thus, if Mr. Snow's salary and bonus
were to equal Mr. Snow's 1995 salary and bonus, the LeVan
Employment Agreement would provide LeVan with a salary of
$810,000 and a bonus of $1,518,750 in the First Employment
Period. During the Second and Third Employment Segments,
Mr. LeVan will receive compensation in an amount no less
than that received by the Chief Executive Officer during the
First Employment Segment, but not less than $900,000.
22
36. If CSX terminates Mr. LeVan's employment for
a reason other than cause or disability or Mr. LeVan
terminates employment for good reason (as those terms are
defined in the LeVan Employment Agreement), Mr. LeVan will
be entitled to significant lump sum cash payments based on
his compensation during the five year term of the employment
agreement, continued employee welfare benefits for the
longer of three years or the number of years remaining in
the employment agreement; and the immediate vesting of
outstanding stock-based awards.
The $300 Million Break-Up Fee
37. The CSX Merger Agreement provides for a $300
million break-up fee. This fee would be triggered if the
CSX Merger Agreement were terminated following a competing
takeover proposal.
38. This breakup fee is disproportionally large,
constituting over 3.5% of the aggregate value of the CSX
Transaction. The breakup fee unreasonably tilts the playing
field in favor of the CSX Transaction -- a transaction that
the defendant directors knew, or reasonably should have
known, at the time they approved the CSX Transaction,
provided less value and other benefits to Conrail and its
constituencies than would a transaction with NS.
23
The Lock-Up Stock Option
39. Concurrently with the Merger Agreement,
Conrail and CSX entered into an option agreement (the "Stock
Option Agreement") pursuant to which Conrail granted to CSX
an option, exercisable in certain events, to purchase
15,955,477 Shares of Conrail common stock at an exercise
price of $92.50 per share, subject to adjustment.
40. If, during the time that the option under the
Stock Option Agreement is exercisable, Conrail enters into
an agreement pursuant to which all of its outstanding common
shares are to be purchased for or converted into, in whole
or in part, cash, in exchange for cancellation of the
Option, CSX shall receive an amount in cash equal to the
difference (if positive) between the closing market price
per Conrail Common Share on the day immediately prior to the
consummation of such transaction and the purchase price. In
the event (i) Conrail enters into an agreement to
consolidate with, merge into, or sell substantially all of
its assets to any person, other than CSX or a direct or
indirect subsidiary thereof, and Conrail is not the
surviving corporation, or (ii) Conrail allows any person,
other than CSX or a direct or indirect subsidiary thereof,
to
24
merge into or consolidate with Conrail in a series of
transactions in which the Conrail Common Shares or other
securities of Conrail represent less than 50% of the
outstanding voting securities of the merged corporation,
then the option will be adjusted, exchanged, or converted
into options with identical terms as those described in the
Stock Option Agreement, appropriately adjusted for such
transaction.
41. CSX and Conrail also entered into a similar
option agreement, pursuant to which CSX granted to Conrail
an option, exercisable only in certain events, to purchase
43,090,773 shares of CSX Common Stock at an exercise price
of $64.82 per share.
42. The exercise price of the option under the
Stock Option Agreement is $92.50 per share. The Stock
Option Agreement contemplates that 15,955,477 authorized but
unissued Conrail shares would be issued upon its exercise.
Thus, for each dollar above $92.50 that is offered by a
competing bidder for Conrail, such as NS, the competing
acquiror would suffer $15,955,477 in dilution. Moreover,
there is no cap to the potential dilution. At NS's offer of
$100 per share, the dilution attributable to the Stock
Option would be $119,666,077.50. At a hypothetical offering
price of
25
$101 per share, the dilution would total $135,621,554.50.
This lock-up structure serves no legitimate corporate
purpose, as it imposes increasingly severe dilution
penalties the higher the competing bid!
43. At the current $100 per share level of NS's
bid, the sum of the $300 million break-up fee and Stock
Option dilution of $119,666,077.50 constitutes nearly 5.2%
of the CSX Transaction's $8.1 billion value. This is an
unreasonable impediment to NS's offer. Moreover, because
these provisions were not necessary to induce an offer that
is in Conrail's best interests, but rather were adopted to
lock up a deal providing Conrail's management with personal
benefits while selling Conrail to the low bidder, their
adoption constituted a plain breach of the defendant
directors' fiduciary duty of loyalty.
Selective Discriminatory
Treatment of Competing Bids
44. Finally, the Conrail board has breached its
fiduciary duties by selectively (i) rendering Conrail's
poison pill rights plan inapplicable to the CSX Transaction,
(ii) approving the CSX Transaction and thus exempting it
from the 5-year merger moratorium under Pennsylvania's
Business Combination Statute, and (iii),
26
as noted above, purporting to approve the Charter Amendment
in favor of CSX only.
45. While Pennsylvania law does not require
directors to amend or redeem poison pill rights or to take
action rendering anti-takeover provisions inapplicable, the
law is silent with respect to the duties of directors once
they have determined to do so. Once directors have
determined to render poison pill rights and anti-takeover
statutes inapplicable to a change of control transaction,
their fundamental fiduciary duties of care and loyalty
require them to take such actions fairly and equitably, in
good faith, after due investigation and deliberation, and
only for the purpose of fostering the best interests of the
corporation, and not to protect selfish personal interests
of management.
46. Thus, Conrail's directors are required to act
evenhandedly, redeeming the poison pill rights and rendering
anti-takeover statutes inapplicable only to permit the best
competing control transaction to prevail. Directors cannot
take such selective and discriminatory defensive action to
favor corporate executives' personal interests over those of
the corporation, its shareholders, and other legitimate
constituencies.
27
Defendants' Campaign Of Misinformation
47. On October 15, 1996, Conrail and CSX issued
press releases announcing the CSX transaction, and Conrail
published and filed preliminary proxy materials with the
SEC. On October 16, 1996, CSX filed and published its
Schedule 14D-1 Tender Offer Statement and Conrail filed its
Schedule 14D-9 Solicitation/Recommendation Statement. These
communications to Conrail's shareholders reflect a scheme by
defendants to coerce, mislead and fraudulently manipulate
such shareholders to swiftly deliver control of Conrail to
CSX and effectively frustrate any competing higher bid.
48. Conrail's Preliminary Proxy Statement
contains the following misrepresentations of fact:
(a) Conrail states that "certain provisions
of Pennsylvania law effectively preclude . . . CSX from
purchasing 20% or more" of Conrail's shares in the CSX
Offer "or in any other manner (except the [CSX]
Merger." This statement is false. The provisions of
Pennsylvania law to which Conrail is referring are
those of Subchapter 25E of the Pennsylvania Business
Corporation law. This law does not "effectively
preclude" CSX from purchasing 20% or more of Conrail's
stock other than through
28
the CSX Merger. Rather, it simply requires a purchaser
of 20% or more of Conrail's voting stock to pay a fair
price in cash, on demand, to the holders of the
remaining 80% of the shares. The real reason that CSX
will not purchase 20% or more of Conrail's voting stock
absent the Charter Amendment is that, unlike NS, CSX is
unable or unwilling to pay a fair price in cash for
100% of Conrail's stock.
(b) Conrail states that its "Board of
Directors believes that Conrail shareholders should
have the opportunity to receive cash in the nearterm
for 40% of [Conrail's] shares," and that "[t]he Board
of Directors believes it is in the best interests of
shareholders that they have the opportunity to receive
cash for 40% of their shares in the near term." These
statements are false. First of all, the Conrail Board
believes that Conrail shareholders should have the
opportunity to receive cash in the near-term for 40% of
Conrail's shares only if such transaction will swiftly
deliver effective control of Conrail to CSX. Second,
the Conrail Board of Directors does not believe that
such swift transfer of control to CSX is in the best
29
interests of Conrail shareholders; rather, the Conrail
Board of Directors believes that swift transfer of
effective control over Conrail to CSX through the CSX
Offer will lock-up the CSX Transaction and preclude
Conrail shareholders from any opportunity to receive
the highest reasonably available price in a sale of
control of Conrail.
49. CSX's Schedule 14D-1 contains the following
misrepresentations of fact:
(a) CSX states that the "purpose of the
[CSX] Offer is for [CSX] . . . to acquire a significant
equity interest in [Conrail] as the first step in a
business combination of [CSX] and [Conrail]." This
statement is false. The purpose of the CSX Offer is to
swiftly transfer effective control over Conrail to CSX
in order to lock up the CSX Transaction and foreclose
the acquisition of Conrail by any competing higher
bidder.
(b) CSX states that "the Pennsylvania
Control Transaction Law effectively precludes [CSX,
through its acquisition subsidiary] from purchasing 20%
or more of Conrail's shares pursuant to the [CSX]
Offer." This statement is false. The provisions of
Pennsylvania law to which Conrail is
30
referring are those of Subchapter 25E of the
Pennsylvania Business Corporation law. This law does
not "effectively preclude" CSX from purchasing 20% or
more of Conrail's stock other than through the CSX
Merger. Rather, it simply requires a purchaser of 20%
or more of Conrail's voting stock to pay a fair price
in cash, on demand, to the holders of the remaining 80%
of the shares. The real reason that CSX will not
purchase 20% or more of Conrail's voting stock absent
the Charter Amendment is that, unlike NS, CSX is unable
or unwilling to pay a fair price in cash for 100% of
Conrail's stock.
50. Conrail's Schedule 14D-9 states that "the
[CSX Transaction] . . . is being structured as a true merger-
of-equals transaction." This statement is false. The CSX
Transaction is being structured as a rapid, locked-up sale
of control of Conrail to CSX involving a significant, albeit
inadequate, control premium.
51. Each of the Conrail Preliminary Proxy
Statement, the CSX Schedule 14D-1, and the Conrail Schedule
14D-9 omit to disclose the following material facts, the
disclosure of which are necessary to make the statements
made in such documents not misleading:
31
(a) That both Conrail (and its senior
management) and CSX (and its senior management) knew
(i) that NS was keenly interested in acquiring Conrail,
(ii) that NS has the financial capacity and resources
to pay a higher price for Conrail than CSX could, and
(iii) that a financially superior competing bid for
Conrail by NS was inevitable.
(b) That Conrail management led NS to
believe that if and when the Conrail Board determined
to sell Conrail, it would do so through a process in
which NS would be given the opportunity to bid, and
that in the several weeks prior to the announcement of
the CSX Transaction, defendant LeVan on two occasions
prevented Mr. Goode from presenting an acquisition
proposal to Conrail by stating to him that making such
a proposal would be unnecessary and that Mr. LeVan
would contact Mr. Goode concerning NS's interest in
acquiring Conrail following (i) the Conrail Board's
strategic planning meeting scheduled for September 1996
and (ii) a meeting of the Conrail Board purportedly
scheduled for October 16, 1996.
(c) That in September of 1994, NS had proposed a stock-for-
stock acquisition of Conrail at an exchange ratio of 1.1
shares of NS stock for each
32
share of Conrail stock, which ratio, if applied to the price of NS
stock on the day before announcement of the CSX
Transaction, October 14, 1996, implied a bid by NS
worth over $101 per Conrail share.
(d) That the CSX Transaction was structured
to swiftly transfer effective, if not absolute voting
control over Conrail to CSX, and to prevent any other
bidders from acquiring Conrail for a higher price.
(e) That although Conrail obtained opinions
from Morgan Stanley and Lazard Freres that the
consideration to be received by Conrail stockholders in
the CSX Transaction was "fair" to such shareholders
from a financial point of view, Conrail's Board did not
ask its investment bankers whether the CSX Transaction
consideration was adequate, from a financial point of
view, in the context of a sale of control of Conrail
such as the CSX Transaction.
(f) That although in arriving at their
"fairness" opinions, both Morgan Stanley and Lazard
Freres purport to have considered the level of
consideration paid in comparable transactions, both
investment bankers failed to consider the most
33
closely comparable transaction -- NS's September 1994
merger proposal, which as noted above, would imply a
price per Conrail share in excess of $101.
(g) That, if asked to do so, Conrail's
investment bankers would be unable to opine in good
faith that the consideration offered in the CSX
Transaction is adequate to Conrail's shareholders from
a financial point of view.
(h) That Conrail's Board failed to seek a
fairness opinion from its investment bankers concerning
the $300 million break-up fee included in the CSX
Transaction.
(i) That Conrail's Board failed to seek a
fairness opinion from its investment bankers concerning
the Stock Option Agreement granted by Conrail to CSX in
connection with the CSX Transaction.
(j) That the Stock Option Agreement is
structured so as to impose increasingly severe dilution
costs on a competing bidder for control of Conrail for
progressively higher acquisition bids.
(k) That the Conrail Board intends to
withhold the filing of the Charter Amendment following
its approval by Conrail's stockholders if
34
the effectiveness of such amendment would facilitate
any bid for Conrail other than the CSX Transaction.
(l) That the Charter Amendment and/or its
submission to a vote of the Conrail shareholders is
illegal and ultra vires under Pennsylvania law.
(m) That the Conrail Board's discriminatory
(i) use of the Charter Amendment, (ii) amendment of the
Conrail Poison Pill and (iii) action exempting the CSX
Transaction from Pennsylvania's Business Combination
Statute, all to facilitate the CSX Transaction and to
preclude competing financially superior offers for
control of Conrail, constitute a breach of the
defendant directors' fiduciary duty of loyalty.
(n) That Conrail's Board failed to conduct a
reasonable, good faith investigation of all reasonably
available material information prior to approving the
CSX transaction and related agreements, including the
lock-up Stock Option Agreement.
(o) That in recommending that Conrail's
shareholders tender their shares to CSX in the CSX
Offer, Conrail's Board did not conclude that doing
35
so would be in the best interests of Conrail's
shareholders.
(p) That in recommending that Conrail's
shareholders approve the Charter Amendment, the Conrail
Board did not conclude that doing so would be in the
best interests of Conrail's shareholders.
(q) That in recommending that Conrail
shareholders tender their shares to CSX in the CSX
Offer, primary weight was given by the Conrail Board to
interests of persons and/or groups other than Conrail's
shareholders.
(r) That in recommending that Conrail
shareholders tender their shares to CSX in the CSX
Offer, primary weight was given to the personal
interests of defendant LeVan in increasing his
compensation and succeeding Mr. Snow as Chairman and
Chief Executive Officer of the combined CSX/Conrail
company.
(s) That the Continuing Director Requirement
in Conrail's Poison Pill (described below in paragraphs
54 through 60, adopted by Conrail's board in September
1995 and publicly disclosed at that time, is illegal
and ultra vires
36
under Pennsylvania law and therefore is void and
unenforceable.
52. Each of the misrepresentations and omitted
facts detailed above are material to the decisions of
Conrail's shareholders concerning whether to vote in favor
of the Charter Amendment and whether, in response to the CSX
Offer, to hold, sell to the market, or tender their shares,
because such misrepresentations and omitted facts bear upon
(i) the good faith of the Conrail directors in recommending
that Conrail shareholders approve the Charter Amendment and
tender their shares in the CSX Offer, (ii) whether taking
such actions are in the best interests of Conrail
shareholders, (iii) whether the CSX Offer represents
financially adequate consideration for the sale of control
of Conrail and/or (iv) whether the economically superior NS
Proposal is a viable, available alternative to the CSX
Transaction. Absent adequate corrective disclosure by the
defendants, these material misrepresentations and omissions
threaten to coerce, mislead, and fraudulently manipulate
Conrail shareholders to approve the Charter Amendment and
deliver the control of Conrail to CSX in the CSX Offer, in
the belief that the NS Proposal is not an available
alternative.
37
Conrail's Directors Attempt To Override
Fundamental Principles of Corporate
Democracy By Imposing A Continuing
Directors Requirement in Conrail's Pill
53. As noted above, Conrail's directors have long
known that it was an attractive business combination
candidate to other railroad companies, including NS.
54. Neither Conrail management nor its Board,
however, had any intention to give up their control over
Conrail, unless the acquiror was willing to enter into board
compensation, executive succession, and compensation and
benefit arrangements satisfying the personal interests of
Conrail management and the defendant directors, such as the
assignments provided for in the CSX Transaction. They were
aware, however, that through a proxy contest, they could be
replaced by directors who would be receptive to a change in
control of Conrail regardless of defendants' personal
interests. Accordingly, on September 20, 1995, the Conrail
directors attempted to eliminate the threat to their
continued incumbency posed by the free exercise of Conrail's
stockholders' franchise. They drastically altered Conrail's
existing Poison Pill Plan, by adopting a "Continuing
Director" limitation to the Board's power to
38
redeem the rights issued pursuant to the Rights Plan (the
"Continuing Director Requirement").
55. Prior to adoption of the Continuing Director
Requirement, Conrail's Rights Plan was a typical "flip-in,
flip-over" plan, designed to make an unsolicited acquisition
of Conrail prohibitively expensive to an acquiror.
56. Under the plan, stockholders received a
dividend of originally uncertificated, unexercisable rights.
The rights would become exercisable and certificated on the
so-called "Distribution Date," which under the Rights
Agreement is defined as the earlier of 10 days following
public announcement that a person or group has acquired
beneficial ownership of 10% or more of Conrail's stock or 10
days following the commencement of a tender offer that would
result in 10% or greater ownership of Conrail stock by the
bidder. On the Distribution Date, Conrail would issue
certificates evidencing the rights, each of which would
allow the holder to purchase a share of Conrail stock at a
price set above market. Once certificates were issued, the
rights could trade separately from the associated shares of
Conrail stock.
39
57. The rights would "flip in" when, among other
things, a person or group obtained 10% ownership of Conrail
stock. Upon "flipping in," each right would entitle the
holder to receive common stock of Conrail having a value of
twice the exercise price of the right. That is, each right
would permit the holder to purchase newly issued common
stock of Conrail at half price. The person or group
acquiring the 10% or greater ownership, however, would be
ineligible to exercise such rights. Thus, the Rights Plan
would dilute the acquiror's equity and voting position. The
rights would "flip over" if Conrail were to engage in a
merger in which it was not the surviving entity. Holders of
rights, other than the acquiror, would then have the right
to buy stock of the surviving entity at half price, again
diluting the acquiror's position.
58. At any time prior to the Distribution Date,
the Board of Directors of Conrail could either redeem the
rights for a nominal payment or amend the Rights Agreement
to render the rights inapplicable to an acquiror approved by
the Board. By virtue of its redemption and amendment
provisions, the original Rights Plan placed the power to
approve or prevent an acquisition in Conrail's duly elected
Board of Directors.
40
59. The September 20, 1995 adoption of the
Continuing Director Requirement changed this reservation of
power. It added an additional requirement for amendment of
the Rights Agreement or redemption of the rights. For such
action to be effective, at least two members of the Board
must be "Continuing Directors," and the action must be
approved by a majority of such "Continuing Directors."
"Continuing Directors" are defined as members of the Conrail
Board as of September 20, 1995, i.e., the incumbents, or
their handpicked successors.
60. By adopting the Continuing Director
Requirement, the Defendant Directors intentionally and
deliberately have attempted to destroy the right of
stockholders of Conrail to replace them with new directors
who would have the power to redeem the rights or amend the
Rights Agreement in the event that such new directors deemed
such action to be in the best interests of the company.
That is, instead of vesting the power to accept or reject an
acquisition in the duly elected Board of Directors of
Conrail, the Rights Plan as amended destroys the power of a
duly elected Board to act in connection with acquisition
offers, unless such Board happens to consist of the current
incumbents or their
41
hand-picked successors. Thus, the Continuing Director
Requirement is the ultimate entrenchment device.
61. The Continuing Director Requirement is
invalid per se under Pennsylvania statutory law, in that it
purports to limit the discretion of future Boards of
Conrail. Pennsylvania law requires that any such limitation
on Board discretion be set forth in a By-Law adopted by the
stockholders. See Pa. BCL Section 1721. Thus, the
Defendant Directors were without power to adopt such a
provision unilaterally by amending the Rights Agreement.
62. Additionally, the Continuing Director
Requirement is invalid under Conrail's By-Laws and Articles
of Incorporation. Under Section 3.5 of Conrail's By-Laws,
the power to direct the management of the business and
affairs of Conrail is broadly vested in its duly elected
board of directors. Insofar as the Continuing Director
Requirement purports to restrict the power of Conrail's duly
elected board of directors to redeem the rights or amend the
Rights Agreement, it conflicts with Section 3.5 of Conrail's
By-Laws and is therefore of no cause or effect. Article
Eleven of Conrail's Articles of Incorporation permits
Conrail's entire board to be removed without cause by
stockholder
42
vote. Read together with Section 3.5 of Conrail's By-Laws,
Article Eleven enables Conrail's stockholders to replace the
entire incumbent board with a new board fully empowered to
direct the management of Conrail's business and affairs,
and, specifically, to redeem the rights or amend the Rights
Agreement. Insofar as the Continuing Director Requirement
purports to render such action impossible, it conflicts with
Conrail's Articles of Incorporation and is therefore of no
cause or effect.
63. Furthermore, the adoption of the Continuing
Director Requirement constituted a breach of the Defendant
Directors' fiduciary duty of loyalty. There existed no
justification for the directors to attempt to negate the
right of stockholders to elect a new Board in the event the
stockholders disagree with the incumbent Board's policies,
including their response to an acquisition proposal.
64. Moreover, while the Defendant Directors
disclosed the adoption of the Continuing Director
Requirement, they have failed to disclose its illegality and
the illegality of their conduct in adopting it. If they are
not required to make corrective disclosures, defendants will
permit the disclosure of the Continuing Director
Requirement's adoption to distort stockholder
43
choice in connection with the special meeting, the CSX
Offer, and (if they have not successfully locked up voting
control of Conrail by then) in the next annual election of
directors. The Defendant Directors' conduct is thus
fraudulent, in that they have failed to act fairly and
honestly toward the Conrail stockholders, and intended to
preserve their incumbency and that of current management, to
the detriment of Conrail's stockholders and other
constituencies. Accordingly, such action should be declared
void and of no force or effect. Furthermore, adequate
corrective disclosure should be required.
Conrail's Charter Permits The Removal
and Replacement of Its Entire Board of
Directors At Its Next Annual Meeting
65. As noted above, plaintiff NS intends to
facilitate the NS Proposal by replacing the Conrail board at
Conrail's next annual meeting. Conrail's next annual
meeting is scheduled to be held on May 21, 1997 (according
to Conrail's April 3, 1996 Proxy Statement, as filed with
the Securities and Exchange Commission).
66. The Defendant Directors adopted the
Continuing Director Requirement in part because they
recognized that under Conrail's Articles, its entire
44
Board, even though staggered, may be removed without cause
at Conrail's next annual meeting.
67. Section 3.1 of Conrail's By-Laws provides
that the Conrail Board shall consist of 13 directors, but
presently there are only 11. The Conrail Board is
classified into three classes. Each class of directors
serves for a term of three years, which terms are staggered.
68. Article 11 of Conrail's Articles provides
that:
The entire Board of Directors, or a class of the Board
where the Board is classified with respect to the power
to elect directors, or any individual director may be
removed from office without assigning any cause by vote
of stockholders entitled to cast at least a majority of
the votes which all stockholders would be entitled to
cast at any annual election of directors or of such
class of directors.
69. Under the plain language of Article 11, the
entire Conrail Board, or any one or more of Conrail's
directors, may be removed without cause by a majority vote
of the Conrail stockholders entitled to vote at the Annual
Meeting. Plaintiffs anticipate, however, that defendants
will argue that under Article 11, only one class may be
removed at each annual meeting. Accordingly, plaintiffs
seek a declaratory judgment that
45
pursuant to Article 11, the entire Conrail Board, or any one
or more of Conrail's directors, may be removed without cause
at Conrail's next annual meeting.
Declaratory Relief
70. The Court may grant the declaratory relief
sought herein pursuant to 28 U.S.C. Section 2201. The
Defendant Directors' adoption of the CSX Transaction (with
its discriminatory Charter Amendment poison pill, and state
anti-takeover statute treatment and draconian lock-up
provisions) as well as their earlier adoption of the
Continuing Director Requirement, clearly demonstrate their
bad faith entrenchment motivation and, in light of the NS
Proposal, that there is a substantial controversy between
the parties. Indeed, given the NS Proposal, the adverse
legal interests of the parties are real and immediate.
Defendants can be expected to vigorously oppose each
judicial declaration sought by plaintiffs, in order to
maintain their incumbency and defeat the NS Proposal --
despite the benefits it would provide to Conrail's
stockholders and other constituencies.
71. The granting of the requested declaratory
relief will serve the public interest by affording relief
from uncertainty and by avoiding delay and will conserve
judicial resources by avoiding piecemeal litigation.
46
Irreparable Injury
72. The Defendant Directors' adoption of the CSX
Transaction (with its discriminatory Charter Amendment,
poison pill and state antitakeover statute treatment and
draconian lock-up provisions) as well as their earlier
adoption of the Continuing Director Requirement threatens to
deny Conrail's stockholders their right to exercise their
corporate franchise without manipulation, coercion or false
and misleading disclosures and to deprive them of a unique
opportunity to receive maximum value for their stock. The
resulting injury to plaintiffs and all of Conrail's
stockholders would not be adequately compensable in money
damages and would constitute irreparable harm.
Derivative Allegations
73. Plaintiffs bring each of the causes of action
reflected in Counts One through Seven and Fourteen and
Fifteen below individually and directly. Alternatively, to
the extent required by law, plaintiffs bring such causes of
action derivatively on behalf of Conrail.
74. No demand has been made on Conrail's Board of
Directors to prosecute the claims set forth herein
47
since, for the reasons set forth below, any such demand
would have been a vain and useless act:
a. The Defendant Directors have acted
fraudulently by pursuing defendants' campaign of
misinformation, described above, in order to coerce,
mislead, and manipulate Conrail shareholders to swiftly
deliver control of Conrail to the low bidder.
b. The form of resolution by which the
shareholders are being asked to approve the Charter
Amendment is illegal and ultra vires in that it
purports to authorize the Conrail Board to
discriminatorily withhold filing the certificate of
amendment even after shareholder approval. Thus, its
submission to the shareholder is illegal and ultra
vires and therefore not subject to the protections of
the business judgment rule.
c. The Conrail directors' selective
amendment of the Conrail poison pill and discriminatory
preferential treatment of the CSX Transaction under the
Pennsylvania Business Combination Statute were
motivated by their personal interest in entrenchment,
constituting a breach of
48
their fiduciary duty of loyalty and rendering the
business judgment rule inapplicable.
d. The defendant directors' adoption of the
break-up fee and stock option lock-ups in favor of CSX
was motivated by their personal interest in
entrenchment, constituting a breach of their duty of
loyalty and rendering the business judgment rule
inapplicable.
e. The Continuing Director Requirement is
illegal and ultra vires under Pennsylvania statutory
law and under Conrail's charter and bylaws, rendering
the business judgment rule inapplicable to its adoption
by the Director Defendants.
f. In adopting the Continuing Director
Requirement, each of the Defendant Directors has failed
to act fairly and honestly toward Conrail and its
stockholders, insofar as by doing so the Defendant
Directors, to preserve their own incumbency, have
purported to eliminate the stockholders' fundamental
franchise right to elect directors who would be
receptive to a sale of control of Conrail to the
highest bidder. There is no reason to think that,
having adopted this
49
ultimate in entrenchment devices, the Defendant
Directors would take action that would eliminate it.
g. Additionally, the Defendant Directors
have acted fraudulently, in that they intentionally
have failed to disclose the plain illegality of their
conduct.
h. There exists no reasonable prospect that
the Defendant Directors would take action to invalidate
the Continuing Director Requirement. First, pursuant
to Pennsylvania statute, their fiduciary duties
purportedly do not require them to amend the Rights
Plan in any way. Second, given their dishonest and
fraudulent entrenchment motivation, the Defendant
Directors would certainly not commence legal
proceedings to invalidate the Continuing Director
Requirement.
75. Plaintiffs are currently beneficial owners of
Conrail common stock. Plaintiffs' challenge to the CSX
Transaction (including the illegal Charter Amendment,
discriminatory treatment, and lock-ups) and to the
Continuing Director Requirement presents a strong prima
facie case, insofar as the Defendant Directors have
deliberately and intentionally, without justification, acted
to foreclose free choice by Conrail's shareholders.
50
If this action were not maintained, serious injustice would
result, in that defendants would be permitted illegally and
in pursuit of personal, rather than proper corporate
interests to deprive Conrail stockholders of free choice and
a unique opportunity to maximize the value of their
investments through the NS Proposal, and depriving plaintiff
NS of a unique acquisition opportunity.
76. This action is not a collusive one to confer
jurisdiction on a court of the United States which it would
not otherwise have.
COUNT ONE
(Breach of Fiduciary Duty with
Respect to the Charter Amendment)
77. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
78. The Conrail directors were and are obligated
by their fiduciary duties of due care and loyalty, to act in
the best interests of the corporation.
79. In conjunction with the proposed merger, the
Conrail board of directors has approved, and recommended
that the shareholders approve, an amendment to Conrail's
charter. The amendment is required to allow a third party
to acquire more than 20% of Conrail's stock.
51
80. The Conrail directors have publicly stated
their intention to file the amendment only if the requisite
number of shares are tendered to CSX.
81. By adopting the illegal Charter Amendment and
then discriminately applying it to benefit themselves, the
Conrail directors have breached their fiduciary duties of
care and loyalty.
82. Plaintiffs have no adequate remedy at law.
COUNT TWO
(Breach of Fiduciary Duty
With Respect to the Poison Pill)
83. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
84. The Conrail board of directors adopted its
Poison Pill Plan with the ostensible purpose of protecting
its shareholders against the consummation of unfair
acquisition proposals that may fail to maximize shareholder
value.
85. The Conrail Board has announced its intention
to merge with CSX and the Conrail Board has also sought to
exempt CSX from the provisions in the poison pill.
52
86. Additionally, the Conrail Board has committed
itself to not pursue any competing offer for the Company.
87. By selectively and discriminately determining
to exempt CSX, and only CSX, from the poison pill
provisions, to the detriment to Conrail's shareholders, the
Conrail directors have breached their fiduciary duties of
care and loyalty.
88. Plaintiffs have no adequate remedy at law.
COUNT THREE
(Breach of Fiduciary Duty
with Respect to the Pennsylvania
Business Combinations Statute)
89. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
90. By approving the CSX Offer prior to its
consummation, the Defendant Directors have rendered the
Pennsylvania Business Combinations Statute, subchapter 25F
of the Pennsylvania Business Corporation Law, and,
particularly, its five-year ban on mergers with substantial
stockholders, inapplicable to the CSX Transaction, while it
remains as an impediment to competing higher acquisition
offers such as the NS Proposal.
53
91. By selectively and discriminately exempting
the CSX Transaction from the five-year merger ban, for the
purpose of facilitating a transaction that will provide
substantial personal benefits to Conrail management while
delivering Conrail to the low bidder, the Defendant
Directors have breached their fiduciary duties of care and
loyalty.
92. Plaintiffs have no adequate remedy at law.
COUNT FOUR
(Breach of Fiduciary Duty with
Respect to the Lockup Provisions)
93. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
94. In conjunction with the merger agreement, the
Conrail Board has agreed to termination fees of $300 million
and to the lock-up Stock Option Agreement.
95. These provisions confer no benefit upon
Conrail's shareholders and in fact operate and are intended
to operate to impede or foreclose further bidding for
Conrail.
96. The Conrail directors have adopted these
provisions without regard to what is in the best interest of
the Company and its shareholders, in violation of their
fiduciary duties.
54
97. Plaintiffs have no adequate remedy at law.
COUNT FIVE
Declaratory Relief Against
Conrail and Defendant Directors
(The Continuing Director Requirement
Is Void Under Pennsylvania Law)
98. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
99. Under Pennsylvania law, the business and
affairs of a Pennsylvania corporation are to be managed
under the direction of the Board of Directors unless
otherwise provided by statute or in a By-Law adopted by the
stockholders. Pa. BCL Section 1721.
100. Under Pennsylvania law, agreements
restricting the managerial discretion of directors are
permissible only in statutory close corporations.
101. No statute countenances Conrail's and the
current Board's adoption of the Continuing Director
Requirement. No Conrail By-Law adopted by the Conrail
stockholders provides that the current Board may limit a
future Board's management and direction of Conrail. Conrail
is not a statutory close corporation.
102. Adoption of the Continuing Director
Requirement constitutes an unlawful attempt by the Defendant
Directors to limit the discretion of a future
55
Board of Directors with respect to the management of
Conrail. In particular, under the Continuing Director
Requirement, a duly elected Board of Directors which
includes less than two continuing directors would be unable
to redeem or modify Conrail's poison pill even upon
determining that to do so would be in Conrail's best
interests.
103. Plaintiffs seek a declaration that the
Continuing Director Requirement is contrary to Pennsylvania
statute and therefore null and void.
104. Plaintiffs have no adequate remedy at law.
COUNT SIX
Declaratory Relief Against
Conrail and Defendant Directors
(The Continuing Director Requirement
Is Void Under Conrail's Articles
of Incorporation and By-Laws)
105. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
106. Under Section 3.5 of Conrail's By-Laws,
The business and affairs of the
Corporation shall be managed under the
direction of the Board which may exercise
all such powers of the Corporation and do
all such lawful acts and things as are not
by statute or by the Articles or by these
By-Laws directed or required to be
exercised and done by the shareholders.
56
107. Pursuant to Section 1505 of the Pennsylvania
Business Corporation Law, the By-Laws of a Pennsylvania
corporation operate as regulations among the shareholders
and affect contracts and other dealings between the
corporation and the stockholders and among the stockholders
as they relate to the corporation. Accordingly, the Rights
Plan and the rights issued thereunder are subject to and
affected by Conrail's By-Laws.
108. Insofar as it purports to remove from the
duly elected board of Conrail the power to redeem the rights
or amend the Rights Plan, the Continuing Director
Requirement directly conflicts with Section 3.5 of Conrail's
By-Laws, and is therefore void and unenforceable.
109. Article Eleven of Conrail's Articles of
Incorporation provides that Conrail's entire board may be
removed without cause by vote of a majority of the
stockholders who would be entitled to vote in the election
of directors. Read together with Section 3.5 of Conrail's
By-Laws, Article Eleven enables the stockholders to replace
the entire incumbent board with a new board with all powers
of the incumbent board, including the power to redeem the
rights or to amend the
57
Rights Agreement. The Continuing Director Requirement
purports to prevent the stockholders from doing so, and is
therefore void and unenforceable.
110. Plaintiffs have no adequate remedy at law.
COUNT SEVEN
Declaratory Relief Against
Conrail and Defendant Directors
(Adoption of the Continuing Director Requirement
Constituted a Breach of the Duty of Loyalty)
111. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
112. Adoption of the Continuing Director
Requirement constituted a breach of the duty of loyalty on
the part of the Defendant Directors. Such adoption was the
result of bad faith entrenchment motivation rather than a
belief that the action was in the best interests of Conrail.
In adopting the Continuing Director Requirement, the
Defendant Directors have purported to circumvent the Conrail
stockholders' fundamental franchise rights, and thus have
failed to act honestly and fairly toward Conrail and its
stockholders. Moreover, the Defendant Directors adopted the
Continuing Director Requirement without first conducting a
reasonable investigation.
58
113. The Continuing Director Requirement not only
impedes acquisition of Conrail stock in the NS Offer, it
also impedes any proxy solicitation in support of the NS
Proposal because Conrail stockholders will, unless the
provision is invalidated, believe that the nominees of
plaintiffs will be powerless to redeem the poison pill
rights in the event they conclude that redemption is in the
best interests of the corporation. Thus, stockholders may
believe that voting in favor of plaintiffs' nominees would
be futile. The Defendant Directors intended their actions
to cause Conrail's stockholders to hold such belief.
114. Plaintiffs seek a declaration that the
Defendant Directors' adoption of the Continuing Director
Requirement was in violation of their fiduciary duty and,
thus, null, void and unenforceable.
115. Plaintiffs have no adequate remedy at law.
COUNT EIGHT
(Declaratory and Injunctive Relief
Against Conrail and the Defendant
Directors for Violation of Section 14(a)
of the Exchange Act and Rule 14a-9
Promulgated Thereunder)
116. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
59
117. Section 14(a) of the Exchange Act provides
that it is unlawful to use the mails or any means or
instrumentality of interstate commerce to solicit proxies in
contravention of any rule promulgated by the SEC. 15 U.S.C.
Section 78n(a).
118. Rule 14a-9 provides in pertinent part: "No
solicitation subject to this regulation shall be made by
means of any . . . communication, written or oral,
containing any statement which, at the time, and in light of
the circumstances under which it is made, is false and
misleading with respect to any material fact, or which omits
to state any material fact necessary in order to make the
statements therein not false or misleading . . . ." 17
C.F.R. Section 240.14a-9.
119. Conrail's Preliminary Proxy Statement
contains the misrepresentations detailed in paragraph 48
above. It also omits to disclose the material facts
detailed in paragraph 51 above.
120. Unless defendants are required by this Court
to make corrective disclosures, Conrail's stockholders will
be deprived of their federal right to exercise meaningfully
their voting franchise.
121. The defendants' false and misleading
statements and omissions described above are essential
60
links in defendants' effort to deprive Conrail's
shareholders of their ability to exercise choice concerning
their investment in Conrail and their voting franchise.
122. Plaintiffs have no adequate remedy at law.
COUNT NINE
(Against Defendant CSX For Violation
of Section 14(d) of the Exchange Act and
Rules Promulgated Thereunder)
123. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
124. Section 14(d) provides in pertinent part:
"It shall be unlawful for any person, directly or indirectly
by use of the mails or by any means or instrumentality of
interstate commerce . . . to make a tender offer for . . .
any class of any equity security which is registered
pursuant to section 781 of this title, . . . if, after
consummation thereof, such person would, directly or
indirectly, be the beneficial owner of more than 5 per
centum of such class, unless at the time copies of the
offer, request or invitation are first published, sent or
given to security holders such person has filed with the
Commission a statement containing such of the information
specified in section 78m(d) of this
61
title, and such additional information as the Commission may
by rules and regulations prosecute . . . ." 15 U.S.C.
Section 78n(d).
125. On October 16, 1996, defendant CSX filed
with the SEC its Schedule 14D-1 pursuant to Section 14(d).
126. CSX's Schedule 14D-1 contains each of the
false and misleading material misrepresentations of fact
detailed in paragraph 49 above. Furthermore, CSX's Schedule
14D-1 omits disclosure of the material facts detailed in
paragraph 51 above. As a consequence of the foregoing, CSX
has violated, and unless enjoined will continue to violate,
Section 14(d) of the Exchange Act and the rules and
regulations promulgated thereunder.
127. CSX made the material misrepresentations and
omissions described above intentionally and knowingly, for
the purpose of fraudulently coercing, misleading, and
manipulating Conrail's shareholders to tender their shares
into the CSX tender offer.
128. Plaintiffs have no adequate remedy at law.
62
COUNT TEN
(Against Defendant Conrail For Violation
of Section 14(d) of the Exchange Act And
Rules Promulgated Thereunder)
129. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
130. Section 14(d)(4) provides in pertinent part:
"Any solicitation or recommendation to the holders of
[securities for which a tender offer has been made] to
accept or reject a tender offer or request or invitation for
tender shall be made in accordance with such rules and
regulations as the [S.E.C.] may prescribed as necessary or
appropriate in the public interest of investors." Rule 14d-
9 provides in pertinent part: "No solicitation or
recommendation to security holders shall be made by [the
subject company] with respect to a tender offer for such
securities unless as soon as practicable on the date such
solicitation or recommendation is first published or sent or
given to security holders such person . . . file[s] with the
[S.E.C.] eight copies of a Tender Offer Solicitation/
Recommendation Statement on Schedule 14D-9."
131. On October 16, 1996, Conrail (i) published
its board of directors' recommendation that Conrail
63
shareholders tender their shares in the CSX Offer and (ii)
filed with the SEC its Schedule 14D-9.
132. Conrail's Schedule 14D-9 contains each of
the false and misleading material misrepresentations
detailed in paragraph 50 above. Further, Conrail's Schedule
14D-9 omits disclosure of the material facts detailed in
paragraph 51 above. As a consequence of the foregoing,
Conrail has violated, and unless enjoined will continue to
violate, Section 14(d) of the Exchange Act and the rules and
regulations promulgated thereunder.
133. Conrail made the material misrepresentations
and omissions described above intentionally and knowingly,
for the purpose of fraudulently coercing, misleading and
manipulating Conrail's shareholders to tender their shares
into the CSX Offer.
134. Plaintiffs have no adequate remedy at law.
COUNT ELEVEN
(Against Conrail and CSX for Violation
of Section 14(e) of the Exchange Act
and Rules Promulgated Thereunder)
135. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
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136. Section 14(e) provides in pertinent part:
"It shall be unlawful for any person to make any untrue
statement of a material fact or omit to state any material
fact necessary in order to make the statements made, in the
light of the circumstances under which they are made, not
misleading, or to engage in any fraudulent, deceptive, or
manipulative acts or practices in connection with any tender
offer . . . or any solicitation of security holders in
opposition to or in favor of any such offer . . . ."
Defendants have violated and threaten to violate Section
14(e).
137. The CSX Schedule 14D-1 constitutes a
communication made under circumstances reasonably calculated
to result in the procurement of tenders from Conrail
shareholders in favor of the CSX Offer.
138. The Conrail Schedule 14D-9 and Proxy
Statement constitute communications made under circumstances
reasonably calculated to result in the procurement of
tenders from Conrail shareholders in favor of the CSX Offer.
139. The CSX Schedule 14D-1 contains the false
and misleading material representations detailed in
paragraph 49 above. The CSX Schedule 14D-1 omits
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disclosure of the material facts detailed in paragraph 51
above.
140. The Conrail Schedule 14D-9 contains the
false and misleading material misrepresentations detailed in
paragraph 50 above. The Conrail Schedule 14D-9 omits
disclosure of the material facts detailed in paragraph 51
above.
141. The Conrail Proxy Statement contains the
false and misleading material misrepresentations detailed in
paragraph 48 above. The Conrail Proxy Statement omits
disclosure of the material facts detailed in paragraph 51
above.
142. These omitted facts are material to the
decisions of Conrail shareholders to hold, sell to market,
or tender their shares in the CSX tender offer.
143. The defendants intentionally and knowingly
made the material misrepresentations and omissions described
above, for the purpose of coercing, misleading, and
manipulating Conrail shareholders to swiftly transfer
control over Conrail to CSX by tendering their shares in the
CSX Tender Offer.
144. Absent declaratory and injunctive relief
requiring adequate corrective disclosure, plaintiffs, as
well as all of Conrail's shareholders, will be
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irreparably harmed. Conrail shareholders will be coerced by
defendants' fraudulent and manipulative conduct to sell
Conrail to the low bidder. Plaintiffs NS and NAC will be
deprived of the unique opportunity to acquire and combine
businesses with Conrail.
145. Plaintiffs have no adequate remedy at law.
COUNT TWELVE
(Against Defendants Conrail and CSX For
Civil Conspiracy To Violate Section 14
of the Exchange Act and Rules
Promulgated Thereunder)
146. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
147. Defendants Conrail and CSX conspired and
agreed to conduct the campaign of misinformation described
in paragraphs 48 through 51 above for the purpose of
coercing, misleading and manipulating Conrail shareholders
to swiftly transfer control over Conrail to CSX. As set
forth in Counts Eight through Eleven above, which are
incorporated by reference herein, the defendants' campaign
of misinformation is violative of Section 14 of the Exchange
Act and the rules and regulations promulgated thereunder.
148. Plaintiffs have no adequate remedy at law.
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COUNT THIRTEEN
(Against Conrail for
Estoppel/Detrimental Reliance)
149. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
150. By his actions, silence and statements
during the period from September 1994 to October 15, 1996,
and particularly by his statements to Mr. Goode in September
and October of 1996 (as detailed above in paragraphs 17
through 24, defendant LeVan, purporting to act on behalf of
Conrail and its Board of Directors and with apparent
authority to so act, led Mr. Goode to believe that Conrail's
Board was not interested in a sale of the company and that
if and when the Conrail Board decided to pursue such a sale,
it would let NS know and give NS an opportunity to bid.
151. Prior to October 15, 1996, NS had
justifiably relied on Mr. LeVan's false statements and
representations in refraining from making a proposal to
Conrail's Board or initiating a tender offer of its own for
Conrail shares.
152. Mr. LeVan and Conrail knew or should have
known that their actions, silence, statements and
representations to NS would induce NS to believe that
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Conrail's board was not interested in selling the company
and that NS would be given an opportunity to bid if
Conrail's Board decided that Conrail would be sold.
153. Mr. LeVan and Conrail knew or should have
known that NS would rely upon their actions, silence,
statements and representations to its detriment in
refraining from making a proposal to Conrail's Board or
initiating a tender offer of its own for Conrail shares.
154. NS did in fact rely upon LeVan's and
Conrail's actions, silence, statements and representations
to its detriment in refraining from making a proposal to
Conrail's Board or initiating a tender offer of its own for
Conrail shares.
155. Conrail and its Board are estopped from
effectuating a sale of the company without giving NS an
adequate opportunity to present its competing tender offer
to the board of directors and Conrail shareholders.
Similarly, any provision in the Merger Agreement between CSX
and Conrail that would impede directors' or shareholders'
ability to approve a competing tender offer or takeover
proposal, such as that made by NS, is null and void.
156. By virtue of NS's justifiable reliance on
Conrail's and Mr. LeVan's actions, silence and
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statements, it has suffered and will continue to suffer
irreparable harm.
157. Plaintiffs have no adequate remedy at law.
COUNT FOURTEEN
(Unlawful and Ultra Vires Amendment
of Conrail's Articles of Incorporation)
158. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
159. The Conrail Board of Directors are
attempting to freeze out any competing tender offers and
lock-up the CSX deal, to the detriment of shareholders, by
improperly maneuvering to "opt-out" of the "antitakeover"
provisions of The Pennsylvania Business Corporation Law in a
discriminatory fashion. This procedure distorts and
subverts the provisions of the Pennsylvania statute.
160. At the Special Meeting of Conrail
shareholders, such shareholders will be asked to approve the
following amendment to Conrail's articles of incorporation,
which has already been approved by the Conrail Board of
Directors: "Subchapter E, Subchapter G and Subchapter H of
Chapter 25 of the Pennsylvania Business Corporation Law of
1988, as amended, shall not be applicable to the
Corporation."
70
161. The defendant directors are also asking for
authorization to exercise discretion in deciding whether or
not to file the amendment. According to the proposed proxy
materials, the defendant directors only intend to file the
amendment if CSX is in a position to purchase more than 20%
of Conrail's shares. Consequently, in effect, this
amendment becomes a "deal specific" opt-out.
162. The PBCL does not allow for such a
discriminatory application of an opt-out provision. Section
2541(a) of the PBCL provides that Subchapter 25E will not
apply to corporations that have amended their articles of
incorporation to state that the Subchapter does not apply.
Section 1914 of the PBCL provides that an articles amendment
"shall be adopted" if it received the affirmative vote of a
majority of shareholders entitled to vote on the amendment.
While section 1914 also provides that the amendment need not
be deemed to be adopted unless it has been approved by the
directors, that approval has already been given.
163. Conrail's Board is trying to distort and
subvert the provisions of the Pennsylvania statute by
keeping a shareholder approved opt-out from taking effect
unless the CSX deal is moving forward. The PBCL is quite
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clear -- it allows corporations to exercise general, not
selective, opt-outs. Therefore, any action taken at the
November 14, 1996 shareholder meeting would be a nullity.
164. If the November 14, 1996 shareholder meeting
is allowed to take place and the amendment is passed, NS
will suffer irreparable harm.
165. Plaintiffs have no adequate remedy at law.
COUNT FIFTEEN
Declaratory Relief Against
Conrail and Defendant Directors
(Removal of the Entire Conrail Board, Or Any One
or More of Conrail's Directors, Without Cause)
166. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this
paragraph.
167. Plaintiffs intend, if necessary to
facilitate the NS Proposal, to solicit proxies to be used at
Conrail's next Annual Meeting to remove Conrail's current
Board of Directors.
168. There is presently a controversy among
Conrail, the Defendant Directors and the plaintiffs as to
whether the entire Conrail Board, or any one or more of
Conrail's directors, may be removed without cause at the
Annual Meeting by a vote of the majority of Conrail
stockholders entitled to cast a vote at the Annual Meeting.
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169. Plaintiffs seek a declaration that Article
11 of Conrail's Articles permits the removal of the entire
Conrail Board, or any one or more of Conrail's directors,
without cause by a majority vote of the Conrail stockholders
entitled to cast a vote at an annual election.
170. Plaintiffs have no adequate remedy at law.
WHEREFORE, Plaintiffs respectfully request that
this Court enter judgment against all defendants, and all
persons in active concert or participation with them, as
follows:
A. Declaring that:
(a) defendants have violated Sections 14(a),
14(d) and 14(e) of the Exchange Act and the rules and
regulations promulgated thereunder;
(b) defendants' use of the Charter Amendment is
violative of Pennsylvania statutory law and their fiduciary
duties;
(c) defendants' discriminatory use of Conrail's
poison pill rights plan violates the director defendants'
fiduciary duties;
(d) the termination fees and stock option
agreements granted by Conrail to CSX are violative of the
defendants' fiduciary duties;
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(e) the "Continuing Director" Requirement of
Conrail's poison pill rights plan is ultra vires and illegal
under Pennsylvania Law and Conrail's Articles of
Incorporation and Bylaws; and is illegal because its
adoption constitutes a breach of the defendants' fiduciary
duties;
(f) Conrail's entire staggered or any one or more
of its directors, can be removed without cause at Conrail's
next annual meeting of stockholders; and
(g) the defendants have engaged in a civil
conspiracy to violate Section 14 of the Exchange Act and the
rules and regulations promulgated thereunder.
B. Preliminarily and permanently enjoining the
defendants, their directors, officers, partners, employees,
agents, subsidiaries and affiliates, and all other persons
acting in concert with or on behalf of the defendants
directly or indirectly, from:
(a) commencing or continuing a tender offer for
shares of Conrail stock or other Conrail securities;
(b) seeking the approval by Conrail's
stockholders of the Charter Amendment, or, in the event it
has been approved by Conrail's stockholders, from taking any
steps to make the Charter Amendment effective;
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(c) taking any action to redeem rights issued
pursuant to Conrail's poison pill rights plan or render the
rights plan inapplicable as to any offer by CSX without, at
the same time, taking such action as to NS's outstanding
offer;
(d) taking any action to enforce the Continuing
Director Requirement of Conrail's poison pill rights plan;
(e) taking any action to enforce the termination
fee or stock option agreement granted to CSX by Conrail;
(f) failing to take such action as is necessary
to exempt the NS Proposal from the provisions of the
Pennsylvania Business Combination Statute; and
(g) holding the Conrail Special Meeting until all
necessary corrective disclosures have been made and
adequately disseminated to Conrail's stockholders.
C. Granting compensatory damages for all
incidental injuries suffered as a result of defendants'
unlawful conduct.
D. Awarding plaintiffs the costs and
disbursements of this action, including attorneys' fees.
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E. Granting plaintiffs such other and further
relief as the court deems just and proper.
Respectfully submitted,
By: /s/ Mary A. McLaughlin
Mary A. McLaughlin, Esquire
Attorney I.D. No. 24923
George G. Gordon, Esquire
Attorney I.D. No. 63072
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
Attorneys for Plaintiffs
Of Counsel:
Steven J. Rothschild
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: October 23, 1996
VERIFICATION
Pursuant to Federal Rule of Civil Procedure 23.1
and 28 U.S.C. Section 1746, I, Henry C. Wolf, hereby verify
under penalty of perjury that the allegations and averments
in the foregoing Complaint for Declaratory and Injunctive
Relief are true and correct.
/s/ Henry C. Wolfe
Henry C. Wolf
Executive Vice President
Norfolk Southern Corporation
Executed on October 22, 1996.
