SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
SCHEDULE 14D-1
(Amendment No. 3)
Tender Offer Statement Pursuant to Section 14(d)(1)
of the Securities Exchange Act of 1934
----------------
Conrail Inc.
(Name of Subject Company)
Norfolk Southern Corporation
Atlantic Acquisition Corporation
(Bidders)
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(INCLUDING THE ASSOCIATED COMMON STOCK PURCHASE RIGHTS)
(Title of Class of Securities)
208368 10 0
(CUSIP Number of Class of Securities)
SERIES A ESOP CONVERTIBLE JUNIOR
PREFERRED STOCK, WITHOUT PAR VALUE
(INCLUDING THE ASSOCIATED COMMON STOCK PURCHASE RIGHTS)
(Title of Class of Securities)
NOT AVAILABLE
(CUSIP Number of Class of Securities)
----------------
JAMES C. BISHOP, JR.
EXECUTIVE VICE PRESIDENT-LAW
NORFOLK SOUTHERN CORPORATION
THREE COMMERCIAL PLACE
NORFOLK, VIRGINIA 23510-2191
TELEPHONE: (757) 629-2750
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications on Behalf of Bidder)
----------------
with a copy to:
RANDALL H. DOUD, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE: (212) 735-3000
This Amendment No. 3 amends the Tender Offer Statement on
Schedule 14D-1 filed on October 24, 1996, as amended (the "Schedule
14D-1"), by Norfolk Southern Corporation, a Virginia corporation
("Parent"), and its wholly owned subsidiary, Atlantic Acquisition
Corporation, a Pennsylvania corporation ("Purchaser"), relating to
Purchaser's offer to purchase all outstanding 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
(the "ESOP Preferred Shares" and, together with the Common Shares, the
"Shares"), of Conrail Inc. (the "Company"), including, in each case,
the associated Common Stock Purchase Rights, upon the terms and
subject to the conditions set forth in the Offer to Purchase dated
October 24, 1996 (the "Offer to Purchase") and in the related Letter
of Transmittal (which, together with any amendments or supplements
thereto, constitute the "Offer"), copies of which were filed as
Exhibits (a)(1) and (a)(2) to the Schedule 14D- 1, respectively.
Unless otherwise defined herein, all capitalized terms used herein
shall have the respective meanings given such terms in the Offer to
Purchase or the Schedule 14D-1.
ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER.
Item 5 is hereby amended to add the following:
(b) On October 31, 1996, Parent issued a press release
commenting on CSX's response to the Customer Letter. Parent reiterated
its view that the competitive effects of the Offer and the Proposed
Merger are superior to the Proposed CSX Transaction.
In addition, on October 31, 1996, Parent sent to its
customers certain charts (the "Customer Charts") which illustrate
Parent's view that the competitive effects of the Offer and the
Proposed Merger are superior to the Proposed CSX Transaction.
ITEM 10. ADDITIONAL INFORMATION.
Item 10 is hereby amended to add the following:
(e) On October 30, 1996, Parent and Purchaser filed with the
District Court a Complaint for Injunctive Relief against the
Commissioners of the Pennsylvania Securities Commission, the Attorney
General of Pennsylvania and the Company, together with a Consent Order
agreed to by all parties, seeking to enjoin enforcement of the
Pennsylvania Takeover Disclosure Law as it would relate to the Offer.
On October 31, 1996, Parent, Purchaser and the other
plaintiff in the Pennsylvania Litigation filed a memorandum of law
with the District Court in opposition to defendants' motions to
dismiss the Pennsylvania Litigation. The memorandum of law sets forth,
among other things, Plaintiffs' arguments that (i) they have standing
to sue the Company Board for breach of fiduciary duty, (ii) they are
adequate representatives of the Company's shareholders for purposes of
Federal Rule of Civil Procedure 23.1, (iii) pre-suit demand upon the
Company Board should be excused since it would have been futile, (iv)
the Company's proposed amendment to the Company Articles to "opt-out"
of the Pennsylvania Control Transaction Law is invalid under
Pennsylvania law, (v) plaintiffs' federal claims state a cause of
action, and (vi) defendants' unclean hands claim lacks merit.
On November 1, 1996, Parent, Purchaser and the other
plaintiff in the Pennsylvania Litigation filed a motion, supporting
brief and proposed form of order with the District Court seeking a
temporary restraining order in the Pennsylvania Litigation (the "TRO
Motion"). In the TRO Motion the Plaintiffs have requested that the
District Court temporarily enjoin defendants and all persons acting on
their behalf or in concert with them from taking any action to enforce
Sections 3.1(n) and 5.13 of the CSX Merger Agreement and any other
provisions of the CSX Merger Agreement which purport to limit the
ability of the Company Board to take action or make any determination
with regard to the Rights Agreement and temporarily enjoin defendants
and all persons acting on their behalf or in concert with them from
distributing any Rights pursuant to the Rights Agreement. The
plaintiffs have also requested that the District Court require the
defendants to take such action as is necessary to prevent a
"Distribution Date" from occurring pursuant to the Rights Agreement.
The District Court has tentatively scheduled a hearing for Noon,
Philadelphia time, on November 4, 1996 to hear arguments concerning
the TRO Motion.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
Item 11 is hereby amended to add the following:
(a)(18) Press Release issued by Parent on October 31, 1996.
(a)(19) Customer Charts sent on October 31, 1996.
(a)(20) Press Release issued by Parent on November 1, 1996
(g)(3) Memorandum of Law filed by Parent, Purchaser and
Kathryn B. McQuade in opposition to Defendants'
motion to dismiss (dated October 31, 1996, United
States District Court for the Eastern District of
Pennsylvania).
(g)(4) Temporary Restraining Order Motion and related brief
and proposed form of Order filed by Parent,
Purchaser and Kathryn B. McQuade (dated November 1,
1996, United District Court for the Eastern District
of Pennsylvania).
SIGNATURE
After due inquiry and to the best of its knowledge and
belief, the undersigned certifies that the information set forth in
this statement is true, complete and correct.
Dated: November 1, 1996
NORFOLK SOUTHERN CORPORATION
By: /s/ JAMES C. BISHOP, JR.
--------------------------------
Name: James C. Bishop, Jr.
Title: Executive Vice President-Law
ATLANTIC ACQUISITION CORPORATION
By: /s/ JAMES C. BISHOP, JR.
--------------------------------
Name: James C. Bishop, Jr.
Title: Vice President and General Counsel
EXHIBIT INDEX
Exhibit
Number Page
(a)(18) Press Release issued by Parent on October 31, 1996.
(a)(19) Customer Charts sent on October 31, 1996.
(a)(20) Press Release issued by Parent on November 1, 1996
(g)(3) Memorandum of Law filed by Parent, Purchaser and Kathryn
B. McQuade in opposition to Defendants' motion to dismiss
(dated October 31, 1996, United States District Court for
the Eastern District of Pennsylvania).
(g)(4) Temporary Restraining Order Motion and related brief and
proposed form of Order filed by Parent, Purchaser and
Kathryn B. McQuade (dated November 1, 1996, United
District Court for the Eastern District of Pennsylvania).
EXHIBIT (A)(18)
FOR IMMEDIATE RELEASE
October 31, 1996
Contact: Robert C. Fort
757 629-2714
NORFOLK, VA -- Norfolk Southern today made the following state-
ment with respect to its recent letter to shippers outlining the
competitive advantages of a Norfolk Southern combination with
Conrail:
"In its release yesterday, CSX attempted to minimize Norfolk
Southern's letter to shippers outlining its commitment to bal-
anced competition. In fact, CSX's release was long on words and
short on substance.
"Specifically, CSX did not address the central issue we want
to make sure shippers understand--THAT NORFOLK SOUTHERN'S PRO-
POSED COMBINATION WITH CONRAIL PROMOTES COMPETITION, WHILE CSX'S
SUPPRESSES COMPETITION.
"Norfolk Southern believes that clearly communicating this
position directly to shippers is far superior to CSX's "fill-in-
the-blanks" form letter which, again, is long on words but does
not address the central issue of balanced competition. We think
that CSX's offer to help them write letters on a subject with
which they are quite familiar is an insult to the intelligence of
shippers."
###
EXHIBIT (A)(19)
<TABLE>
<CAPTION>
COMPARISONS
NAME PLATE MW NET GENERATION MWh CAPACITY FACTOR PROVEN CAPACITY CAPACITY FACTOR
MW (%) MW BASED ON PROVEN
CAPACITY
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
|---------------------------------------------------------------------------------------------
|---------------------------------------------------------------------------------------------
NS| 38,317 180,641,432 53.82% 36,217 56.94%
|---------------------------------------------------------------------------------------------
|---------------------------------------------------------------------------------------------
CR| 36,114 160,895,408 50.86% 33,088 55.51%
|---------------------------------------------------------------------------------------------
|---------------------------------------------------------------------------------------------
CSXT| 69,622 344,123,926 56.42% 64,818 60.61%
|---------------------------------------------------------------------------------------------
|---------------------------------------------------------------------------------------------
===============================================================================================================
TOTAL 144,053 685,660,766 54.34% 134,122 58.36%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
NS/CR 71,091 322,731,308.00 51.82% 66,143 55.70%
NS/CR % 50.52% 48.40% 50.51%
GENERATION
CSXT % GENERATION 49.48% 51.60% 49.49%
- ---------------------------------------------------------------------------------------------------------------
CSXT/CR 105,423.85 503,040,808.00 54.47% 97,596 58.84%
CSXT/CR % 73.34% 73.58% 72.93%
GENERATION
NS % GENERATION 26.66% 26.42% 27.07%
</TABLE>
NOTES
- - 1995 RDI Data from POWERdat.
- - Coal fired utility plants served by the three carriers of interest that
are capable of unloading coal. Other plants in the East are not
involved in this analysis.
- - Coal fired plants may or may not receive coal by these carriers.
- - NS/CSX, NS/CR, CSX/CR joint plants are included on each of the
"nsutils.xls", "crutils.xls", and "csxutils.xls" files.
- - Joint plants are color coded in the above mentioned files:
8 - NS/CSX; 1 - NS/CR AND 1- CSX/CR.
- - The NS/CR joint plant is counted only once in the NS/CR merged data
within spreadsheet "compare.xls". The same is true with the CSX/CR
joint plant.
NS/CR MERGER
NAMEPLATE CAPACITY (MW)
1995
CSXT CS/CR
(49.48%) (50.52%)
CSXT/CR MERGER
NAMEPLATE CAPACITY (MW)
1995
NS CSXT/CR
(26.66%) (73.34%)
NS/CR MERGER
NET GENERATION (MWh)
1995
CSXT NS
(51.60%) (48.40%)
CSXT/CR MERGER
NET GENERATION (MWh)
1995
NS CSXT/CR
(26.42) (73.58%
EXHIBIT (A)(20)
FOR IMMEDIATE RELEASE
November 1, 1996
Contact: Robert C. Fort
(757) 629-2714
NORFOLK SOUTHERN ASKS COURT TO BLOCK CONRAIL 'POSION PILL'
NORFOLK, VA -- Norfolk Southern (NYSE:NSC) today asked a
federal judge in Philadelphia to block Conrail (NYSE:CRR)
from executing a "draconian" plan that would effectively
force its shareholders to accept CSX's (NYSE:CSX) merger
offer and prevent them from even considering Norfolk
Southern's higher offer for Conrail.
In its motion for a temporary restraining order,
Norfolk Southern said Conrail's plan represents "the most
egregious instance of a company hastily 'locking up' a
transfer of control to a favored bidder without regard for
the best interests of its shareholders or other constituen-
cies."
Norfolk Southern asked the Court to stop Conrail from
distributing its "Poison Pill" rights on November 7. The
distribution of the rights would essentially trigger
Conrail's "poison pill" defense against any potential buyer
except CSX. Judge Donald W. Van Artsdalen has tentatively
scheduled a hearing on Norfolk Southern's motion for a
temporary restraining order for Noon Monday (November 4).
"Conrail's directors have essentially ceded their
fiduciary duties" to CSX, Norfolk Southern said in its
filing. Execution of the "Rights Plan" would cause an
"enormous dilution" of Conrail stock, Norfolk Southern
said.
In its filing, Norfolk Southern said that Conrail, its
directors and CSX are attempting "to coerce, mislead and
fraudulently manipulate Conrail's shareholders to swiftly
deliver control of Conrail to CSX pursuant to a tender
offer" in stock and cash with a value of slightly more than
$85 per Conrail share (as of October 29, 1996).
Norfolk Southern on October 24 made a $100-a-share
all-cash offer for all shares of Conrail common stock.
"We believe that Conrail shareholders should have the
right to consider our offer, which is clearly better for
them and ultimately for shippers, communities, employees
and the public interest," said David R. Goode, Chairman,
President and Chief Executive Officer of Norfolk Southern.
In an amended complaint filed Wednesday, Norfolk
Southern noted that under the terms of Conrail's deal with
CSX, Conrail directors are prohibited from terminating the
agreement for 180 days even if their fiduciary duties
required them to do so. "Conrail directors have agreed to
take a six-month leave of absence during what may be the
most critical six months in Conrail's history," Norfolk
Southern's complaint said.
Norfolk Southern is a transportation holding company
that operates a 14,500-mile rail system in 20 states and a
trucking line.
###
World Wide Web Site - http://www.nscorp.com
EXHIBIT (G)(3)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- - - - - - - - - - - - - - - - - -x
NORFOLK SOUTHERN CORPORATION, a :
Virginia corporation, :
ATLANTIC ACQUISITION CORPORATION, :
a Pennsylvania corporation AND :
KATHRYN B. McQUADE, :
:
Plaintiffs, :
: C.A. No. 96-CV-7167
-against- :
:
CONRAIL INC., :
a Pennsylvania corporation, :
DAVID M. LEVAN, H. FURLONG BALDWIN,:
DANIEL B. BURKE, ROGER S. HILLAS, :
CLAUDE S. BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN C. :
MAROUS, DAVID H. SWANSON, E. :
BRADLEY JONES, AND RAYMOND T. :
SCHULER AND CSX CORPORATION, :
:
Defendants. :
- - - - - - - - - - - - - - - - - -x
PLAINTIFFS' MEMORANDUM OF LAW
IN OPPOSITION TO DEFENDANTS' MOTIONS TO DISMISS
Mary A. McLaughlin
George G. Gordon
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 (DELAWARE)
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: October 31, 1996
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . 1
COUNTER-STATEMENT OF FACTS . . . . . . . . . . . . . 6
The Plaintiffs . . . . . . . . . . . . . . . . . . . 6
Plaintiff Norfolk Southern Had Made
Known to Conrail on Numerous Occasions
Its Interest in Acquiring Conrail . . . . . . . . . 6
On the Day Before the Purportedly
Scheduled Meeting of Conrail's Board,
Defendants Announce the CSX Transaction . . . . . . . 9
CSX Admits That the Conrail Board Approved
the CSX Transaction Rapidly . . . . . . . . . . . . 11
CSX's Snow Implies That the CSX Transaction
Is a Fait Accompli and States That Conrail's
Directors Have Almost No Fiduciary Duties . . . . 11
The Onerous Terms of the
CSX/Conrail Merger Agreement:
The Poison Pill Lock-In . . . . . . . . . . . . . . 12
The 180-Day Lock-Out . . . . . . . . . . . . . . . . 13
The $300 Million Breakup Fee . . . . . . . . . . . . 13
The Lock-Up Stock Option . . . . . . . . . . . . . . 14
Selective Discriminatory
Treatment of Competing Bids . . . . . . . . . . . . . 14
Norfolk Southern Responds With
a Superior Offer for Conrail . . . . . . . . . . . 15
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . 16
I. BOTH NORFOLK SOUTHERN AND KATHRYN B. McQUADE
HAVE STANDING TO SUE CONRAIL'S BOARD FOR BREACH
OF FIDUCIARY DUTY . . . . . . . . . . . . . . . 16
A. Section 1782 Of The Business Corporation
Law -- Which The Defendants Ignore -- Ex-
plicitly Allows Beneficial Owners Of Stock
To Bring A Derivative Action . . . . . . . 16
B. The Plaintiffs Brought Their Breach Of
Fiduciary Duty Claims As Derivative Claims 19
II. PLAINTIFFS NORFOLK SOUTHERN AND MCQUADE ARE
ADEQUATE REPRESENTATIVES OF CONRAIL'S SHARE-
HOLDERS FOR PURPOSES OF RULE 23.1 . . . . . . . 20
III. PRE-SUIT DEMAND SHOULD BE EXCUSED ON THE FACTS
PLED BY THE PLAINTIFFS . . . . . . . . . . . . . 25
IV. THE CHARTER AMENDMENT IS INVALID UNDER PENNSYL-
VANIA LAW . . . . . . . . . . . . . . . . . . . 30
V. PLAINTIFFS' FEDERAL CLAIMS BASED ON INADEQUATE
DISCLOSURES STATE A VALID CAUSE OF ACTION . . . 34
VI. THE DEFENDANTS' UNCLEAN HANDS CLAIM IS WITHOUT
BASIS . . . . . . . . . . . . . . . . . . . . . 37
CONCLUSION . . . . . . . . . . . . . . . . . . . . . 39
INTRODUCTION
This action arises from the attempt by defen-
dants 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 pursuant to a tender offer for
up to 20% of Conrail's stock for $92.50 in cash, a possi-
ble second tender offer and a back-end stock-for-stock
merger (the "CSX Transaction"). As of the close of
business on October 29, 1996, the blended value of the
CSX Transaction was slightly more than $85 per Conrail
share.
As the plaintiffs' Complaint (and First Amended
Complaint filed on October 30, 19961) describe in detail,
Conrail's directors acted precipitously to accede to
CSX's proposal without even attempting to determine if
Norfolk Southern Corporation ("Norfolk Southern") --
which had expressed interest in both the distant and very
recent past in acquiring Conrail -- would offer a better
proposal. Indeed, Conrail's hasty action was specifical-
ly designed to forestall any competing, higher bid for
Conrail by Norfolk Southern.
-----------------------
1 The First Amended Complaint adds additional facts
developed since the original Complaint was filed and
adds additional claims related to, among other
things, (a) a provision in the CSX Merger Agreement
that prevents Conrail's directors from withdrawing
their recommendation that Conrail's shareholders
accept the CSX tender offer, terminating the CSX
Merger Agreement and recommending or entering into a
competing takeover proposal for at least 180 days
even if their fiduciary duty would require them to
do so; and (b) provisions in the CSX Merger Agree-
ment and Conrail's poison pill plan that prevent
Conrail from redeeming, amending or otherwise taking
further action with respect to the poison pill for
any transaction other than the current CSX Transac-
tion. The Amended Complaint alleges that, under the
terms of Conrail's poison pill plan, Conrail's
directors will lose, on November 7, their power to
make the poison pill inapplicable to any acquisition
transaction other than the CSX Transaction, unless
CSX agrees to let them postpone that date. Unless
the November 7 date is postponed, Conrail will be
unable to be acquired other than through the CSX
Transaction, under its current terms, for a period
of almost nine years.
On October 23, 1996, Norfolk Southern announced
its intention to commence a public tender offer for all
shares of Conrail common stock at a price of $100 in cash
per share (the "Norfolk Southern Offer"). Norfolk South-
ern further announced that it intends, as soon as practi-
cable following the closing of its offer, to acquire the
entire equity interest in Conrail for cash at the same
price per share. The Norfolk Southern Offer and proposed
merger represent a 40% premium over the closing market
price of Conrail stock on October 14, 1996 (the day prior
to the announcement of the merger with CSX) and a sub-
stantial premium over CSX's offer.
The plaintiffs' underlying case presents the
most egregious instance of a company hastily "locking up"
a transfer of control. While the Pennsylvania Business
Corporation Law allows directors substantial leeway in
considering change of control issues, it does not permit,
contrary to the defendants' protestations otherwise,
directors to completely abdicate their fiduciary duties
as they have done here.
The egregious nature of the defendants' conduct
relies for support on a view of Pennsylvania corporate
law that would purport to totally eliminate the concept
of fiduciary duty owed by directors as it relates to the
issue of who owns and controls the corporation. At the
self-interested urging of defendant LeVan, Conrail's
directors have agreed to a transaction that they must
have known could and would be bettered by Norfolk South-
ern. From the inferior CSX Transaction, defendant LeVan
stands to gain substantially increased compensation and a
pledge that he will succeed CSX's Chairman and Chief
Executive Officer John W. Snow.
As alleged in the plaintiffs' Complaint (and
First Amended Complaint) and as will be discussed in
detail in the plaintiffs' opening brief in support of
their motion for preliminary injunction to be filed next
week, the defendants' self-serving and distorted view of
Pennsylvania corporate law is incorrect. While
Pennsylvania's legislature has acted to give directors of
Pennsylvania corporations the power to "just say no" to a
bidder, it has not given directors the ability to enter
into a merger agreement and cede all of their fiduciary
duties to the potential acquiror through the merger
contract.
In the same way that the Conrail defendants
have tried to ignore Norfolk Southern, their motion to
dismiss ignores any statute, case or fact that they do
not like. Defendants, for example, suggest that plain-
tiffs rushed to file this lawsuit "in such haste ... that
elementary principles of standing were ignored," but have
themselves failed to cite the Pennsylvania statute that
expressly gives plaintiffs standing to sue. Similarly,
defendants argue that a bidder such as Norfolk Southern
cannot be an adequate shareholder representative, but
neglect to mention the substantial case authority to the
contrary. The list goes on:
* Defendants argue that plaintiffs have not made
sufficient allegations of fraud to avoid the
demand requirement, but ignore the plain alle-
gations of fraud in plaintiffs' Complaint.
* They argue that Pennsylvania law expressly
empowers directors to terminate amendments, but
miss the point that the proposed articles
amendment distorts and subverts the opt-out
provisions of the Pennsylvania Business Corpo-
ration Law.
* They argue that plaintiffs breached a confiden-
tiality agreement with CSX, but fail to mention
that the agreement was terminated by a signed
letter agreement over two years ago.
In addition to being substantively incorrect,
the plaintiffs' motions are procedurally deficient in
that they rely on numerous alleged facts not taken from
the Complaint or the documents incorporated by reference
in it. As Rule 12(b)(6) itself makes clear, reliance on
matters outside of the Complaint mandates that the mo-
tions to dismiss be treated as motions for summary judg-
ment. Given the factual disputes that are apparent from
comparison of the allegations of the Complaint with the
defendants' briefs, dismissal of the Complaint by motion
is inappropriate in this case. Plaintiffs believe the
ongoing expedited discovery begun several days ago will
result in a record by next week that will provide more
than adequate basis for the Court to issue the prelimi-
nary injunction sought by the plaintiffs.
COUNTER-STATEMENT OF FACTS
The Plaintiffs
--------------
Plaintiff Norfolk Southern is a Virginia corpo-
ration "considered by many analysts to be the nation's
best-run railroad," according to the New York Times.
(Comp. 3) Norfolk Southern is the beneficial owner of
100 shares of common stock of Conrail. (Id.)
Plaintiff Kathryn B. McQuade is, and has been
at all times relevant to this action, the owner of Con-
rail common stock. (Comp. 5)
Plaintiff Norfolk Southern Had Made
Known to Conrail on Numerous Occasions
Its Interest in Acquiring Conrail
--------------------------------------
On numerous occasions prior to 1994, senior
management of Norfolk Southern spoke to their counter-
parts at Conrail concerning a possible business combina-
tion between Norfolk Southern and Conrail. By early
September 1994, negotiations toward such a transaction
were in an advanced stage. Norfolk Southern had proposed
an exchange ratio of 1-to-1, but Conrail management was
still pressing for a higher premium. On September 23,
1994, Norfolk Southern increased the proposed exchange
ratio to 1.1-to-1, and left the door open to an even
higher ratio. Conrail discontinued such discussions in
September 1994, after the Conrail Board elected defendant
LeVan as Conrail's President and Chief Operating Officer
as a step toward ultimately installing him as Chief
Executive Officer and Chairman.
The 1.1-to-1 exchange ratio reflected a sub-
stantial premium over the market price of Conrail stock
at that time. If one applies that ratio to Norfolk
Southern'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 Norfolk Southern
likely would 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.
During the period following September 1994,
Norfolk Southern's Chairman, David R. Goode, from time to
time had conversations with Mr. LeVan. During virtually
all of these conversations, Mr. Goode expressed Norfolk
Southern'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 Norfolk Southern would have an opportu-
nity to bid.
At its September 24, 1996 meeting, the Norfolk
Southern Board reviewed its strategic alternatives and
determined that Norfolk Southern should press for an
acquisition of Conrail. Accordingly, Mr. Goode again
contacted Mr. LeVan to (i) reiterate Norfolk Southern'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 would be back in contact with Norfolk Southern after
that meeting. Mr. Goode emphasized that he wished to
communicate Norfolk Southern's position so that Conrail's
Board would be aware of it during the strategic planning
meeting. Mr. LeVan stated that it was unnecessary to do
so.
Following September 24, Mr. LeVan did not
contact Mr. Goode. Finally, on Friday, October 4, 1996,
Mr. Goode telephone Mr. LeVan. Mr. Goode again reiterat-
ed Norfolk Southern's strong interest in making a propos-
al to acquire Conrail. Mr. LeVan responded that the
Conrail Board would be meeting on October 16, 1996, and
assumed that he would contact Mr. Goode following that
meeting. Mr. Goode again stated that Norfolk Southern
wanted to make a proposal so that the Conrail Board would
be aware of it. Mr. LeVan again 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
---------------------------------------
To Norfolk Southern'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 sold swiftly to CSX and then a merger would be
consummated following required regulatory approvals.
The CSX Transaction, the blended value of which
was slightly more than $85 per Conrail share as of Octo-
ber 29, 1996, 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 of 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 that, 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, consum-
mation of a follow-up stock-for-stock merger.
Thus, once the Charter Amendment is approved,
CSX will be in a position to acquire either effective or
absolute control over Conrail. In its preliminary proxy
materials filed with the Securities and Exchange Commis-
sion ("SEC"), Conrail states that if CSX acquires 40% of
Conrail's stock, approval of the merger will be "virtual-
ly 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 a stock option granted to it as
part of the CSX Transaction (the "Stock Option"). CSX
could obtain "approximately 50 percent" of Conrail's
shares by purchasing 40% pursuant to tender offer and by
exercising its stock options, in which event shareholder
approval of the CSX merger will be, according to
Conrail's preliminary proxy statement, "certain."
The CSX Transaction includes a breakup fee of
$300 million and a lock-up stock option agreement threat-
ening substantial dilution to any rival bidder for con-
trol of Conrail. Integral to the CSX Transaction are
covenants substantially increasing Mr. LeVan's compensa-
tion and guaranteeing that he will succeed John W. Snow,
CSX's Chairman and Chief Executive Officer, as the com-
bined company's CEO and Chairman.
CSX Admits That the Conrail Board Approved
the CSX Transaction Rapidly
------------------------------------------
On October 16, 1996, the New York Times report-
ed that CSX's Mr. Snow, on October 15, 1996, had stated
that the CSX Transaction "came together rapidly in the
last two weeks." The Wall Street Journal reported on
October 16 that Mr. Snow stated that negotiations con-
cerning the CSX Transaction had gone "very quickly," and
"much faster than he and Mr. LeVan had anticipated." On
October 24, 1996, the Wall Street Journal observed that
"[i]n reaching its agreement with CSX, Conrail didn't
solicit other bids ... and appeared to complete the
accord at breakneck speed."
CSX's Snow Implies That the CSX Transaction
Is a Fait Accompli and States That Conrail's
Directors Have Almost No Fiduciary Duties
--------------------------------------------
On October 16, 1996, Mr. Goode met in Washing-
ton, D.C. with Mr. Snow, CSX's Chairman, 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.
The Onerous Terms of the
CSX/Conrail Merger Agreement:
The Poison Pill Lock-In
-----------------------------
Consistent with Mr. Snow's remarks that
Conrail's advisers had ensured that the CSX Transaction
is "bullet-proof" and that Conrail's directors have
almost no fiduciary duties, the CSX Merger Agreement
contains draconian "lock-up" provisions which are unprec-
edented.
Perhaps the most onerous of these provisions,
in terms of the drastic consequences it threatens to
Conrail, its shareholders and its other legitimate con-
stituencies, is the poison pill "lock-in" provision. The
CSX Merger Agreement purports to bind the Conrail Board
not to take any action with respect to the Conrail poison
pill to facilitate any offer to acquire Conrail other
than the CSX Transaction. At the same time, the Conrail
Board has amended the Conrail poison pill to facilitate
the CSX Transaction. Moreover, Conrail has not disclosed
the effect of these provisions to its shareholders.
The 180-Day Lock-Out
--------------------
The CSX Merger Agreement also contains an
unprecedented provision purporting to bind Conrail's
directors not to terminate the CSX Merger Agreement for
180 days regardless of whether their fiduciary duties
require them to do so.
The $300 Million Breakup Fee
----------------------------
The CSX Merger Agreement also provides for a
$300 million breakup fee. This fee would be triggered if
the CSX Merger Agreement were terminated following a
competing takeover proposal.
This breakup fee is disproportionately large,
constituting over 3.5% of the aggregate value of the CSX
Transaction (and approximately 5% if added to the value
of the Stock Option Agreement discussed below in the
context of Norfolk Southern's offer). 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 Norfolk Southern.
The Lock-Up Stock Option
------------------------
Concurrently with the CSX 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 adjust-
ment. 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 outstand-
ing common shares are to be purchased for or converted
into, in whole or in part, cash, in exchange for cancel-
lation 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 immedi-
ately prior to the consummation of such transaction and
the purchase price. In relation to Norfolk Southern's
offer of $100 per share, the dilution attributable to the
Stock Option Agreement would be $119,666,077.50.
Selective Discriminatory
Treatment of Competing Bids
---------------------------
Finally, the Conrail Board has breached its
fiduciary duties by selectively rendering Conrail's
poison pill rights plan inapplicable to the CSX Transac-
tion, and approving the CSX Transaction and, thus, ex-
empting it from the 5-year merger moratorium under
Pennsylvania's Business Combination Statute.
Norfolk Southern Responds With
a Superior Offer for Conrail
------------------------------
On October 23, 1996, Norfolk Southern publicly
announced 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 approv-
als, by a cash merger at the same price. Norfolk South-
ern commenced its offer on October 24, 1996.
ARGUMENT
I. BOTH NORFOLK SOUTHERN AND KATHRYN B. McQUADE HAVE
STANDING TO SUE CONRAIL'S BOARD FOR BREACH OF FIDU-
CIARY DUTY.
--------------------------------------------------
A. Section 1782 Of The Business Corporation Law --
Which The Defendants Ignore -- Explicitly Al-
lows Beneficial Owners Of Stock To Bring A
Derivative Action.
----------------------------------------------
The defendants argue that the plaintiffs do not
have standing to sue under SECTION 1717 because they are not,
and never were, record shareholders of Conrail. (Op. Br.
at 11). The defendants neglected to bring to the atten-
tion of the Court, however, the specific provisions of SECTION
1782 ("Actions Against Directors and Officers") of the
Pennsylvania Business Corporation Law (the "BCL") that
address this issue in detail. Pursuant to the clear
language of SECTION 1782, beneficial ownership of stock is
sufficient to give a plaintiff standing to bring a deriv-
ative action for breach of fiduciary duty. Section
1782(a) of Subchapter F ("Derivative Actions") specifi-
cally relates to actions against directors and officers.
It states, in plain English, that:
in any action or proceeding brought to enforce a
secondary right on the part of one or more share-
holders of a business corporation against any pres-
ent or former officer or director of the corporation
because the corporation refuses to enforce rights
that may properly be asserted by it, each plaintiff
must aver and it must be made to appear that each
plaintiff was a shareholder of the corporation or
owner of a beneficial interest in the shares at the
time of the transaction of which he complains....
(Emphasis added.)
An additional indication that the legislature
intended to provide standing for a broad range of share-
holders seeking to bring a breach of fiduciary duty claim
is contained in subsection (b) of SECTION 1782, which states,
in relevant part:
[a]ny shareholder or person beneficially interested
in shares of the corporation ... who does not meet
[the] requirements [of subsection (a)] may, never-
theless in the discretion of the court, be allowed
to maintain the action or proceeding... (Emphasis
added.)(2)
------------------
2 The defendants rely on BCL SECTIONSECTION 1103 (a definitional
section) and 1717 for the proposition that only
record owners have standing to bring a derivative
action for breach of fiduciary duty. Section 1103
does define "shareholder" as a "record" shareholder.
Section 1782, however, expands the class of individ-
uals who may bring a derivative claim to "sharehold-
er or owner of a beneficial interest in the shares."
Section 1717 says only that a shareholder may not
bring a direct action against a director for breach
of fiduciary duty. It does not say who may bring a
derivative claim. Section 1782, quoted in the text
above, governs who may bring a derivative claim and
expressly gives beneficial owners the right to do
so. It is a basic precept of statutory construction
that where there is a specific statutory provision
relating to an issue, that specific provision con-
trols over a more general provision where the two
may be viewed as inconsistent. See, e.g., New
Bethlehem Volunteer Fire Co. v. Workmen's Compensa-
tion Appeal Bd., 654 A.2d 267, 269-70 (Pa. Commw.),
appeal denied, 668 A.2d 1140 (Pa. 1995) (specific
statutory provisions control over general provision
when they conflict).
While the clear language of the statute is
enough to establish that beneficial owners may initiate a
derivative action on behalf of the corporation, the case
law also supports plaintiffs' position.
In Kusner v. First Pennsylvania Corp., 395 F.
Supp. 276 (E.D. Pa. 1975) rev'd in part on other grounds,
531 F.2d 1234 (3d Cir. 1976), this Court found that the
holder of subordinated debentures could not maintain a
derivative action because he was not the holder of a
"proprietary interest" in the business entity. Id. at
280. The Kusner Court recognized that the "right to sue
derivatively is an attribute of ownership...." Id. at
281. The Court did not distinguish between record and
beneficial ownership because such distinctions are of no
accord. It is the claim of ownership of the stock,
regardless of the capacity in which that ownership oc-
curs, that gives rise to the right to maintain an action
on the corporation's behalf. See also, In re Penn Cen-
tral Transp. Co., 341 F. Supp. 845 (E.D. Pa. 1972);
Murdock v. Follansbee Steel Corp., 213 F.2d 570 (3d Cir.
1954)(cases where a beneficial owner brought a derivative
action).
The defendants' argument that only record
owners of stock may bring derivative suits is not sup-
ported by any provision of the BCL or case law interpret-
ing Pennsylvania law. The clear language of Section 1782
is fatal to the defendants' argument. The defendants'
position must be rejected by this Court.
B. The Plaintiffs Brought Their Breach Of Fiducia-
ry Duty Claims As Derivative Claims.
-----------------------------------------------
The defendants spend an entire section of their
brief arguing that shareholders cannot bring a direct
action against the directors of a corporation for breach
of fiduciary duty, but must, instead, bring a derivative
claim. (Op. Br. at 9-11) But the plaintiffs do not
dispute that point. They have brought their breach of
fiduciary duty claims as derivative claims. (See Am.
Comp. 97-99; Count I (Breach of Fiduciary Duty With
Respect to the Charter Amendment), Count II (Breach of
Fiduciary Duty With Respect to the Poison Pill), Count
III (Breach of Fiduciary Duty With Respect to Pennsylva-
nia Business Combinations Statute), Count V (Breach of
Fiduciary Duty With Respect to the Poison Pill Lock-In),
Count VII (Breach of Fiduciary Duty With Respect to the
180-Day Lock-Out), and Count VIII (Breach of Fiduciary
Duty With Respect to the Lock-Up Provisions)
II. PLAINTIFFS NORFOLK SOUTHERN AND MCQUADE ARE ADEQUATE
REPRESENTATIVES OF CONRAIL'S SHAREHOLDERS FOR PUR-
POSES OF RULE 23.1.
----------------------------------------------------
The defendants next argue that even if the
plaintiffs have standing to sue pursuant to SECTION 1717, they
are not adequate class representatives as required by
Rule 23.1, because their interests conflict with those of
Conrail's other shareholders. Like the defendants'
previous arguments relating to standing, their argument
relating to adequacy of representation is not supported
by the law or the facts.
The defendants' argument centers around the
contention that the economic interests of a sharehold-
er/takeover bidder are "necessarily" divergent from the
interests of the target's other shareholders. (Op. Br. at
12) The logic that the defendants use in arriving at
this conclusion is faulty, and the case law they cite is
inapposite.
First and foremost, the case law is clear on
the fact that "every case in which the standing of a
shareholder to maintain a derivative suit is disputed
must be decided on the basis of what is fair in the
particular circumstances and not according to rigid
rules." Mobil Corp. v. Marathon Oil Co., No. C-2-81-
1402, 1981 WL 1713 at *27 (S.D. Ohio Dec. 7, 1981),
citing Davis v. Comed, Inc., 619 F.2d 588 (6th Cir.
1980). The defendants' attempt to put this case into a
box and have it decided upon an unyielding set of factors
-- rather than the actual circumstances presented --
should be rejected.
This Court's analysis should start with the
fact that the burden of proving inadequacy of representa-
tion falls squarely on the shoulders of the defendants
challenging the plaintiffs' representation. Air Line
Pilots Assoc. Int'l. v. UAL Corp., 717 F. Supp. 575, 579
(N.D. Ill. 1989), aff'd, 897 F.2d 1394 (7th Cir. 1990);
Shamrock Assocs. v. Horizon Corp., 632 F. Supp. 566
(S.D.N.Y. 1986); Granada Investments, Inc. v. DWG Corp.,
717 F. Supp. 533, 538 (N.D. Ohio 1989), aff'd, 962 F.2d
1203 (6th Cir. 1992). In assessing the defendants'
contentions in this context, the Court should also be
mindful that the defendants have motives in seeking to
disqualify representative plaintiffs that are adverse to
those of the corporation; the defendants clearly do not
want to be sued, even if it is for the corporation's
benefit.
Contrary to the misleading impression left by
Conrail's brief, numerous courts have held that tender
offerors may have standing to bring a derivative action.
"A [plaintiff] need not necessarily be disqualified from
bringing a derivative action against the corporation
merely because that shareholder is also a potential
acquiror." Newell Co. v Vermont American Corp., 725 F.
Supp. 351, 368 (N.D. Ill. 1989); Air Line Pilots Assoc.,
717 F. Supp. at 579; MacAndrews & Forbes Holdings, Inc.
v. Revlon, Inc., C.A. No. 8126, 1985 WL 21129 (Del. Ch.
Oct. 9, 1985).
Additionally, and more generally, a plaintiff
should not be disqualified under Rule 23.1 "merely be-
cause of the existence of interests beyond those of the
class he seeks to represent, so long as he shares a
common interest in the subject matter of the suit." G.A.
Enters. v. Leisure Living Communities, Inc., 517 F.2d 24
(1st Cir. 1975); Tyco Laboratories, Inc. v. Kimball, 444
F. Supp. 292, 299 (E.D. Pa. 1977). The Court's primary
focus should be to "consider any indications that suggest
the existence of extrinsic factors which `render it
likely that the representative may disregard the inter-
ests of the class members.'" Granada Investments, 717 F.
Supp. at 538 (citations omitted).
There are numerous cases where courts have
found that the interests of a takeover bidder are not
economically inconsistent with the interests of other
shareholders. For example, in Granada, the court found
that Granada, a takeover bidder, was an adequate repre-
sentative of the class. In clear language directly on
point here, the Granada Court found that:
Although derivative plaintiff brings this suit
primarily to force the consideration by DWG of a
merger proposal, Granada's interests do not appear
to be economically antagonistic to the interests of
the other shareholders. While Granada is a poten-
tial buyer and the other shareholders are potential
sellers, their interests are not inevitably in
conflict. Both Granada and the other shareholders
share an interest in preventing DWG's directors from
locking up control of DWG. Moreover, in its propos-
al, Granada has offered to purchase DWG stock at a
price of $22.00 per share, a price significantly
higher than the stock's current listing on the
exchange. Conceivably, this offering price does not
reflect the true value of the DWG stock; yet by
bringing this suit, Granada hopes to create an
opportunity for the shareholders to make that deter-
mination. By either rejecting or accepting
Granada's price (or a price offered by another
bidder), the shareholders, rather than the Court,
ultimately decide whether plaintiff's interests are
antagonistic to their own. (Emphasis added; foot-
note omitted.)
717 F. Supp. at 538. The Granada court's rationale
provides compelling support for a finding that Norfolk
Southern has standing to pursue its claims here.
The Granada Court's view is accepted by other
courts that have considered this issue. In Air Line
Pilots Assoc., 717 F. Supp. at 579, and Mobil Corp. v.
Marathon Oil Co., 1981 WL 1713 (S.D. Ohio 1981), for
example, the courts came to the same conclusion that the
Granada Court reached. In Air Line Pilots and Mobil, the
courts rejected the argument that the defendants have
advanced here -- namely that the economic interests of
the plaintiffs are in conflict because the bid-
der/shareholder seeks the lowest possible price and the
other shareholders desire the highest price they can get
for their shares. In both of those cases, the courts
reasoned that the bidder/shareholder had the "best oppor-
tunity and incentive to see that the target corporation
`plays fair'" and accordingly serves as an adequate
representative for the class. Mobil Corp. v. Marathon
Oil Co., 1981 WL 1713 (S.D. Ohio 1981)
Even the case that defendants rely most heavily
upon to support their argument, Baron v. Strawbridge &
Clothier, 646 F. Supp. 690 (E.D. Pa. 1986), in fact
supports the view that the plaintiffs urge this Court to
adopt. The Baron Court noted that:
In finding that economic antagonisms exist between
the plaintiffs and the other shareholders, the court
is not suggesting that interests automatically
diverge in all cases where a derivative plaintiff is
a potential purchaser and other shareholders are
potential sellers. (Emphasis added.)
646 F. Supp. at 695.
Norfolk Southern has the same interests as the
other shareholders of Conrail -- prohibiting the Conrail
Board from locking up the sale of the company without
giving due consideration to the alternatives. For the
reasons set forth in the Air Line Pilots, Mobil and
Granada cases, this Court should find that the plaintiffs
are adequate representatives of the class in this
case.(3)
III. PRE-SUIT DEMAND SHOULD BE EXCUSED ON THE FACTS PLED
BY THE PLAINTIFFS.
---------------------------------------------------
Defendants contend that the plaintiffs' Com-
plaint contains insufficient allegations of "fraud" on
the part of individual defendant directors to excuse the
formality of a demand on the board of directors under
Pennsylvania law. This contention is meritless. The
defendants have misread the case law and the plaintiffs'
Complaint.
Under Pennsylvania law, a shareholder need not
make a demand on the board of directors before filing a
derivative action if that demand would be "a vain or
useless thing." See Glenn v. Kittanning Brewing Co., 103
A. 340, 343 (Pa. 1918). In Garber v. Lego, 11 F.3d 1197
(3d Cir. 1993), the Third Circuit recognized that a
demand is unnecessary under Pennsylvania law where the
defendant directors are alleged to have acted to further
their own self-interest at the expense of Conrail's
shareholders and other constituencies. Garber, 11 F.3d
at 1204-05. See also Glenn, 103 A. at 343 (demand would
be "vain or useless" where plaintiff alleged that board
members issued stock to one of the defendants to gain
control of the corporation); Treat v. Pennsylvania Mut.
Life Ins. Co., 52 A. 60 (Pa. 1902) (demand excused where
plaintiff challenged managers' conduct in voting them-
selves unreasonably large salaries and granting the
president and treasurer back pay). Similarly, the Penn-
sylvania Supreme Court has held that a demand would be
futile where it was alleged that the board acted to
ratify the self-dealing of the corporation's president.
See Bailey v. Jacobs, 189 A. 320, 330 (Pa. 1937) (demand
would be "futile" where the board "not only took no
action to protect the interests of the stockholders but
passed resolutions seeking to ratify defendant's acts").
--------------------
3 The defendants also argue that plaintiff McQuade is
not an adequate representative of the class because
she suffers from the same problems the defendants
allege Norfolk Southern to have. As described
above, Norfolk Southern is an adequate representa-
tive. Ms. McQuade, therefore, is also an adequate
representative of Conrail's shareholders.
Here, plaintiffs' allegations make it plain
that any demand upon the defendant directors would have
been a waste of time. Plaintiffs' complaints are packed
with specific allegations that the individual defendant
directors engaged in fraudulent activity, acted to fur-
ther their own interests at the expense of Conrail's
shareholders and other constituencies, and stand to
benefit personally from the challenged conduct. (See
generally Am. Comp. 98 (a)-(h)) By way of example,
plaintiffs allege:
* that the individual directors "acted
fraudulently by pursuing defendants' cam-
paign of misinformation, described [in the
complaint], in order to coerce, mislead
and manipulate Conrail shareholders to
swiftly deliver control of Conrail to the
low bidder." (Am. Comp. 98(a))
* that the individual defendant directors
were "motivated by their personal interest
in entrenchment" to engage in the chal-
lenged conduct at the expense of share-
holders. (Am. Comp. 98(c)-(d), (f))
* that, in dealing with CSX, the defendant
directors were motivated by the fact that
the CSX deal contains "executive succes-
sion and compensation guarantees for Con-
rail management and board composition
covenants effectively ensuring Conrail
directors of continued board seats." (Am.
Comp. 3)
* that the defendant directors fraudulently
adopted extraordinary entrenchment mecha-
nisms, such as the "continuing directors"
requirement, designed to further their own
personal interests and disenfranchise
shareholders. (Am. Comp. 80-88)
Moreover, not only do plaintiffs allege that
the individual board members acted to further their own
personal interests, but they also allege that the defen-
dant directors acted to ratify defendant LeVan's individ-
ual self-dealing as well. The Complaint sets forth in
detail the lucrative deal that defendant LeVan worked out
with CSX, which was approved by the defendant directors
as part of the CSX Merger Agreement. (Am. Comp. 71-
73, 98) Given the plain allegations of the defendant
directors' self-dealing, and the allegations of defendant
LeVan's own self-dealing that was ratified by the defen-
dant directors, there can be no question that a demand on
the Conrail Board would have been futile. In such a
situation, the Board could not be expected "to sue for a
redress of wrongs which they had sought to validate."
Bailey, 189 A. at 330.
Nothing in the cases relied on by defendants
changes this conclusion or supports their contention that
the allegations in plaintiffs' Complaint are insufficient
to excuse a demand. In Garber, for example, the plain-
tiff challenged the grant of incentive compensation plans
to key executives by the corporation's Compensation
Committee. Unlike this case, the shareholder plaintiff
did not allege fraud or self-dealing by the individual
defendant directors.
The Pennsylvania Supreme Court's decision in
Wolf v. Pennsylvania R.R., 45 A. 936 (Pa. 1900), is
similarly inapposite. In Wolf, the plaintiff' sharehold-
ers did not even attempt to allege fraud or self-dealing,
but claimed that the defendant directors "allowed them-
selves to be `kept in absolute ignorance of [the
corporation's] business.'" Wolf, 45 A. at 937 (citations
omitted). The Pennsylvania Supreme Court simply held
that such allegations of "erroneous judgment" were not
sufficient to excuse demand. Id.; see also Kelly v.
Thomas, 83 A. 307 (Pa. 1912) (complaint that named only
three of seven directors and failed to allege any specif-
ic fraudulent conduct was insufficient to excuse demand).
Finally, demand would have been futile here
because the defendant directors have set a schedule
designed to rush the CSX deal through shareholder approv-
al. The CSX Merger Agreement was announced on October
15, 1996. Defendants scheduled a shareholders meeting
for November 14, 1996, only one month after the announce-
ment. At that meeting, defendants intend to ask share-
holders to vote on the Charter Amendment that would allow
CSX to acquire up to 50% of Conrail's stock without
triggering certain provisions of Pennsylvania's anti-
takeover law. If that amendment passes, Conrail's own
proposed proxy materials state that approval of the
merger is virtually certain. Given the expedited sched-
ule set by defendants, requiring shareholders to make a
demand on the Conrail Board would effectively deny them a
remedy.
IV. THE CHARTER AMENDMENT IS INVALID UNDER PENNSYLVANIA
LAW.
---------------------------------------------------
Defendants argue that Pennsylvania law "ex-
pressly empower[s]" the directors to withhold at their
discretion the filing of the proposed Charter Amendment
opting out of Subchapter 25E of the Pennsylvania BCL even
if the shareholders approve it. (Op. Br. at 18) Defen-
dants are simply wrong on the law - the Pennsylvania BCL
does not authorize a discriminatory, deal-specific opt-
out; nor does it contemplate a process in which the
directors can initiate a shareholder vote, but only abide
by its results if they feel like it. Moreover, while
defendants accuse plaintiffs of relying on a "snippet" of
the BCL to support their claim, it is defendants that
cherry pick a phrase from plaintiffs' allegations and
distort plaintiffs' points to fit their arguments.
The CSX Merger Agreement, between CSX and
Conrail, provides that CSX will purchase 40% of Conrail
stock via a tender offer or offers for $92.50 a share.
CSX also has an option to purchase an additional
15,955,477 shares of common stock that would, in combina-
tion with the 40% purchased through the tender offer,
bring its holdings to 50% of Conrail stock. Once that
happens, according to Conrail's own proposed proxy state-
ment, approval of the merger by the Conrail shareholders
would be certain.
One stumbling block stands between CSX and
expedited approval of the merger. The Pennsylvania BCL,
Subchapter 25E, requires that any person who acquires
control over more than 20% of the voting shares of a
Pennsylvania corporation must purchase the remaining
shares, if tendered, for a "fair price." Fair price is
defined as not less than the highest price per share paid
by the acquiring person during the 90 days prior to
obtaining control over more than 20% of the voting shares
plus an increment representing the proportionate value of
any control premium. Thus, if CSX purchases more than
20% of Conrail's shares for $92.50 in its initial tender
offer, it would have to purchase 100% of the shares for
at least $92.50.
To remedy this problem, and lock-up CSX's
control over Conrail, a November 14, 1996 shareholders
meeting has been scheduled. At that meeting, sharehold-
ers will be asked to approve an amendment to Conrail's
articles of incorporation "opting out" of this provision
of the BCL and paving the way for CSX to purchase a
controlling interest in Conrail. The directors, however,
are not planning to file the amendment, even if passed by
the shareholders, unless the CSX deal is moving forward.
Thus, the amendment would pave the way for the CSX deal,
but the anti-takeover impediments would remain for com-
peting takeover proposals (that might be less favorable
to Mr. LeVan and/or the other defendant directors).
In their motion to dismiss briefing, defendants
suggest that plaintiffs' sole support for their argument
that the proposed deal-specific opt-out is unlawful is a
"snippet" from Section 1914(a) of the BCL that requires
an articles amendment to be adopted if it is passed by
the shareholders. (Op. Br. at 18) Defendants have
missed the point. Plaintiffs' claim is not simply that
the proposed Charter Amendment process violates the
procedural rules for filing amendments passed upon by the
shareholders. Rather, plaintiffs claim that the Charter
Amendment is an attempt to subvert the opt-out provisions
of the Pennsylvania BCL. (Am. Comp. at 218-221)
The Pennsylvania BCL makes no provision for a
discriminatory opt-out as contemplated by defendants.
Section 2541(a) of the Pennsylvania BCL allows corpora-
tions to opt out of Subchapter 25E. Nothing in the
statute, however, authorizes the type of deal-specific
opt-out proposed by the Conrail Board. Indeed, the
defendants' proposed procedure undermines the very pur-
pose of the opt-out provision. That provision was de-
signed to allow shareholders to free the corporation from
the impediments of the anti-takeover provisions in Sub-
chapter 25E and to loosen the directors' grip of control
on the corporation. Here, to the contrary, the discrimi-
natory opt-out provision is being used as part of
defendants' plan to tighten that grip.
Defendants' argument that the Pennsylvania BCL
gives them the authority to "terminate" amendments if
provisions for termination are included in the resolution
passed by the shareholders similarly misses the point.
The section of the statute upon which they rely --
SECTION 1914(d) - says nothing about the procedure for opting
out of Subchapter 25E. Moreover, the so-called "termina-
tion" provision here purports to allow the directors to
ignore the shareholder vote if they do not like the way
things are going (i.e., if too few shareholders tender
their shares to CSX). Common sense and logic dictate
that such an outcome cannot be a proper reading of the
statute.
In short, defendants are attempting to stand
the Pennsylvania BCL on its head. Defendants are using
the opt-out rights in the anti-takeover provisions of the
BCL, designed to increase shareholder freedom, to further
their own personal interests in locking up control over
Conrail. It is this misuse of the opt-out procedure --
wholly ignored in defendants' motion to dismiss briefing
-- that provides the basis for plaintiffs' claim that the
Charter Amendment is unlawful.
V. PLAINTIFFS' FEDERAL CLAIMS BASED ON INADEQUATE
DISCLOSURES STATE A VALID CAUSE OF ACTION.
----------------------------------------------
In a classic example of "too little, too late,"
defendants attempt to argue that the plaintiffs' federal
disclosure claims are moot because of subsequent disclo-
sures. Defendants' argument flies directly in the face
of case law decided by this Court.
In Klein v. Boyd, No. Civ. A. 95-5410, 1996 WL
230012 (E.D. Pa. May 3, 1996), Judge Yohn denied a motion
to dismiss certain federal securities claims and RICO
claims based on subsequent curative disclosures. In
Klein, the defendant argued that all of the alleged
misrepresentations and omissions were corrected with
later written disclosures. 1996 WL 230012, at *7. In
rejecting that argument, the Court held that a motion to
dismiss is generally based on the information contained
in the complaint. Id. The Court found that it was only
proper to consider extraneous information if such infor-
mation was integral to the complaint. Id. Since the
documents that formed the basis of the plaintiffs' claims
were included in the complaint, the Court saw no reason
to consider the defendants' additional documents on the
motion to dismiss.
The same logic applies here. The plaintiffs'
federal claims are based upon inadequate disclosures in
the defendants' Schedule 14D-9 and proxy statement.
Those documents are false and materially misleading, and
those documents form the basis of the Complaint. Accord-
ingly, this Court should not consider the additional
disclosures on a motion to dismiss.
If this Court decides that examining the subse-
quent disclosure documents is appropriate at this stage
of the proceedings, a motion to dismiss must still be
denied. An analysis of the content of the defendants'
disclosures and whether those additional disclosures
adequately inform the Conrail shareholders of the impact
of the CSX and Norfolk Southern offers are substantial
questions of fact. See In re Sunrise Sec. Litig., MDL
No. 655, 1987 WL 19343 (E.D. Pa. July 7, 1987). Since
the motion presently before this Court is a motion to
dismiss, and not a motion for summary judgment,
defendants' argument is not properly before the Court.
In any event, the Amended Complaint filed on
October 30, 1996 adds new disclosure claims relating to,
among other things, events since the original Complaint
was filed on October 23. The revised claims demonstrate
that even the supplemented disclosures made by the defen-
dants are misleading and inadequate.
The defendants' motion to dismiss should be
denied.(4)
VI. THE DEFENDANTS' UNCLEAN HANDS CLAIM IS WITHOUT
BASIS.
----------------------------------------------
The defendants' last argument is that the
plaintiffs are not entitled to equitable relief because
they breached a 1994 Confidentiality Agreement they
entered into with Conrail.(5) The defendants' claim is
not supported by the facts.
-----------------------
4 In its joinder in Conrail's motion to dismiss, CSX
argues that the plaintiffs' civil conspiracy claim
must be dismissed based on the United States Supreme
Court's decision in Central Bank of Denver, N.A. v.
First Interstate Bank of Denver, N.A, 114 S. Ct.
1439 (1994). The defendants, in yet another blatant
oversight, fail to cite In re Towers Financial
Corporation Noteholders Litig., 936 F. Supp. 126
(S.D.N.Y 1996). In Towers, the Court noted that
Central Bank clearly stands for the proposition that
there is no private right of action for an aiding
and abetting claim under the federal securities
laws. Id. at 128. However, the Towers Court also
found that conspiracy liability, which contemplates
the intentional wrongdoing of a party, is a separate
and distinct concept that is not covered under the
precedent set forth in Central Bank. Id. at 130.
As the defendants correctly state, Norfolk
Southern and Conrail entered into an agreement on August
17, 1994 to exchange certain proprietary information in
order to facilitate the evaluation of a potential strate-
gic transaction between the companies. The information
exchange was subject to a confidentiality agreement
whereby the parties agreed not to reveal any of the
information to any third party.
However, the story as to the August 17, 1994
agreement does not end with that one document. On Octo-
ber 3, 1994, the parties entered into a brief letter
agreement that terminated all of the provisions of the
August 17 agreement (Attached as Exhibit A). Despite the
fact that the October 3 agreement was executed by Con-
rail, and in fact initiated by Conrail, the defendants
have failed to bring it to the Court's attention. A
simple reading of the subsequent October 3 agreement
establishes that the defendants' claim of unclean hands
is completely meritless.
------------------------
5 Of course, the easy answer to the defendants' un-
clean hands argument is that unclean hands is an
affirmative defense which is not relevant on a
motion to dismiss, which looks only to the allega-
tions of the Complaint. However, the plaintiffs
respond to the merits of the argument in order to
bring to the attention of the Court certain disposi-
tive facts that rebut the defendants' argument in
full.
CONCLUSION
For the reasons stated in this brief, the
defendants' motions to dismiss should be denied.
Respectfully submitted,
/s/ MARY A. McLAUGHLIN
---------------------------
Mary A. McLaughlin
(I.D. No. 24923)
George G. Gordon
(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 (DELAWARE)
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: October 31, 1996
EXHIBIT (G)(4)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- - - - - - - - - - - - - - - - - -x
NORFOLK SOUTHERN CORPORATION, a :
Virginia corporation, :
ATLANTIC ACQUISITION CORPORATION, :
a Pennsylvania corporation, AND :
KATHRYN B. McQUADE, :
:
Plaintiffs, :
: C.A. No. 96-CV-7167
-against- :
:
CONRAIL INC., a Pennsylvania :
corporation, DAVID M. LEVAN, :
H. FURLONG BALDWIN, DANIEL B. :
BURKE, ROGER S. HILLAS, CLAUDE S. :
BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN C. :
MAROUS, DAVID H. SWANSON, E. :
BRADLEY JONES, AND RAYMOND T. :
SCHULER AND CSX CORPORATION, :
:
Defendants. :
- - - - - - - - - - - - - - - - - -x
MOTION FOR TEMPORARY RESTRAINING ORDER
Pursuant to Federal Rule of Civil Procedure 65(b),
plaintiffs Norfolk Southern Corporation, Atlantic Acquisition
Corporation, and Kathryn B. McQuade hereby move this Court for
temporary injunctive relief as follows:
1. To temporarily enjoin defendants and all persons
acting on their behalf or in concert with them from taking any
action to enforce Sections 3.1(n) and 5.13 of the Agreement and
Plan of Merger by and among Conrail Inc., Green Acquisition Corp.
and CSX Corporation and any other provisions of such Merger
Agreement which purport to limit the ability of the Board of
Directors of Conrail to take action or make any determination
with regard to Conrail's Rights Agreement, as amended.
2. To temporarily enjoin defendants and all persons
acting on their behalf or in concert with them from distributing
any rights pursuant to Conrail's Rights Agreement and to require
the defendants to take such action as is necessary to prevent a
"Distribution Date" from occurring pursuant to such Rights Plan.
The grounds for the relief requested are set forth in
the plaintiffs' memorandum of law.
________________________
Mary A. McLaughlin
(I.D. No. 24923)
George G. Gordon
(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 (DELAWARE)
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: November 1, 1996
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- - - - - - - - - - - - - - - - - -x
NORFOLK SOUTHERN CORPORATION, a :
Virginia corporation, :
ATLANTIC ACQUISITION CORPORATION, :
a Pennsylvania corporation AND :
KATHRYN B. McQUADE, :
:
Plaintiffs, :
: C.A. No. 96-CV-7167
-against- :
:
CONRAIL INC., :
a Pennsylvania corporation, :
DAVID M. LEVAN, H. FURLONG BALDWIN,:
DANIEL B. BURKE, ROGER S. HILLAS, :
CLAUDE S. BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN C. :
MAROUS, DAVID H. SWANSON, E. :
BRADLEY JONES, AND RAYMOND T. :
SCHULER AND CSX CORPORATION, :
:
Defendants. :
- - - - - - - - - - - - - - - - - -x
PLAINTIFFS' OPENING BRIEF IN SUPPORT OF
THEIR MOTION FOR A TEMPORARY RESTRAINING ORDER
Mary A. McLaughlin
George G. Gordon
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 (DELAWARE)
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: November 1, 1996
TABLE OF CONTENTS
PAGE
INTRODUCTION . . . . . . . . . . . . . . . . . . . . 1
STATEMENT OF FACTS . . . . . . . . . . . . . . . . . 4
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . 11
I. PLAINTIFFS AND CONRAIL'S OTHER STOCKHOLDERS
WILL SUFFER IRREPARABLE, IMMINENT INJURY
UNLESS THE COURT RESTRAINS THE DISTRIBUTION
OF THE RIGHTS . . . . . . . . . . . . . . . . . 11
A. Standards For The Issuance Of
A Temporary Restraining Order . . . . . . . 11
B. The Harm Is Irreparable . . . . . . . . . . 12
C. The Harm is Imminent . . . . . . . . . . . 14
II. PLAINTIFFS ARE REASONABLY LIKELY TO
SUCCEED ON THE MERITS OF THEIR CLAIMS . . . . . 15
A. The Conrail Board of Directors has
Contracted Away Its Fiduciary Duties
In Violation of Pennsylvania Law . . . . . 15
III. THE BALANCE OF EQUITIES AND THE PUBLIC
INTEREST FAVORS THE ISSUANCE OF A
TEMPORARY RESTRAINING ORDER . . . . . . . . . . 18
CONCLUSION . . . . . . . . . . . . . . . . . . . . . 20
INTRODUCTION
This case presents the most egregious instance
of a company hastily "locking up" a transfer of control
to a favored bidder without regard for the best interests
of its shareholders and other constituencies. While the
matters raised in the plaintiffs' Amended Complaint will
be the subject of a preliminary injunction hearing on
November 12, plaintiffs now seek immediate injunctive
relief with respect to one particularly draconian feature
of Conrail's arsenal of defensive weapons which threatens
immediate irreparable harm before November 12.
Plaintiffs seek to prevent the occurrence of a
"Distribution Date" under defendant Conrail's Rights Plan
(the "Rights Plan") and prevent the distribution on
November 7 of rights issued pursuant to the Rights Plan.
Under the terms of the Rights Plan, the rights certifi-
cates are required to be issued on the tenth business day
following the commencement of an offer by someone other
than CSX (which Conrail has exempted from its Rights
Plan). Since Norfolk Southern commenced its tender offer
for all of Conrail's shares on October 24, 1996, a Dis-
tribution Date will occur on November 7, 1996, unless the
Board determines otherwise.
What makes Conrail's attempt to "lock-up"
control so particularly egregious in this case is the
fact that Conrail's Board can no longer "determine other-
wise." Conrail's directors and CSX have agreed in Sec-
tion 5.13 of the Conrail/CSX Merger Agreement not to
amend the Rights Plan or take any other action with
respect to the Rights Plan, such as delaying the date on
which the rights would be distributed. Conrail's direc-
tors are thus prohibited, as a result of their own mis-
conduct, from taking any action to prevent distribution
of the rights to Conrail's shareholders on November 7,
1996. Conrail's directors have essentially ceded their
fiduciary duties in this regard to CSX.
If the rights are distributed, any person who
thereafter becomes the beneficial owner of 10 percent or
more of Conrail's common stock, will trigger the "flip-
in" or "flip-over" features of the Rights Plan, thereby
causing enormous dilution of the stock interest held by
the acquiring person. The practical effect of the occur-
rence of a Distribution Date and the distribution of the
rights is that Conrail's directors will no longer be able
to remove the rights as an obstacle to any transaction
other than the pending transaction with CSX.
While this Court has scheduled a preliminary
injunction hearing for November 12, 1996 to consider
Norfolk Southern's request for preliminary injunctive
relief, there may be nothing for this Court to decide by
November 12 if the status quo cannot be maintained as to
the rights until then. Unless a temporary restraining
order is granted, a Distribution Date will occur under
Conrail's draconian Rights Plan on November 7, 1996 and
the rights will become exercisable. The Conrail Board
would then be unable to consider any transaction (other
than the favored CSX Transaction) until the Rights Plan
expires in 2005. Thus, if a Distribution Date occurs,
Conrail will have ensured that no higher offer could be
consummated until the year 2005.
Temporary injunctive relief is warranted so
that a fuller record may be developed and so that this
Court will have a meaningful opportunity on November 12,
1996 to render effective relief on the plaintiffs'
claims. Plaintiffs seek, among other relief, an order
requiring the defendants to take such action as is neces-
sary to prevent a Distribution Date from occurring and
enjoining the defendants from distributing the rights to
shareholders pursuant to a Distribution Date related to
Norfolk Southern's pending tender offer.
STATEMENT OF FACTS
The Competing Proposals
This action arises from the attempt by defen-
dants Conrail, its directors, and CSX to coerce, mislead,
and fraudulently manipulate Conrail's shareholders to
swiftly deliver control of Conrail to CSX pursuant to a
tender offer for up to 20% of Conrail's stock for $92.50
in cash, a possible second tender offer and a back-end
stock-for-stock merger (the "CSX Transaction"). As of
the close of business on October 29, 1996, the blended
value of the CSX Transaction was slightly more than $85
per Conrail share. The CSX Transaction contains a vari-
ety of lock-up devices designed to forestall any compet-
ing higher bid for Conrail. Such devices are described
in detail in paragraphs 36-70 of the Amended Complaint
(filed on October 30, 1996) and at pages 12-15 of the
Plaintiffs' Memorandum of Law in Opposition to
Defendants' Motions to Dismiss (filed on October 31,
1996).
On October 24, 1996, Norfolk Southern commenced
a public tender offer for all shares of Conrail common
stock at a price of $100 in cash per share (the "Norfolk
Southern Offer").
Conrail's Rights Plan
Poison pill rights plans of the type adopted by
Conrail are normally designed to make an unsolicited
acquisition prohibitively expensive to an acquiror by
diluting the value and proportional voting power of the
shares acquired. (V. Am. Comp. 40)(1)
Under such a plan, stockholders receive a
dividend of originally uncertificated, unexercisable
rights. The rights become exercisable and certificated
on the so-called "Distribution Date," which under the
Conrail Rights Plan 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 stock at a set price. Once rights certificates were
issued, the rights could trade separately from the asso-
ciated shares of stock. (V. Am. Comp. 41)
The provisions of a rights plan that cause the
dilution to an acquiror's position in the corporation are
called the "flip-in" and "flip-over" provisions. Rights
typically "flip in" when, among other things, a person or
group obtains some specified percentage of the
corporation's stock; in the Conrail Rights Plan, 10% is
the "flip-in" level. 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 (specifically, $410 worth of Conrail stock for
$205). The person or group acquiring the 10% or greater
ownership, however, would be ineligible to exercise such
rights. In this way, a rights plan dilutes the
acquiror's equity and voting position. Poison pill
rights "flip over" if the corporation engages in a merger
in which it is 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. The Conrail
Rights Plan contains both a "flip-in" provision and a
"flip-over" provision. (V. Am. Comp. 42)
----------------------
1 "V. Am. Comp." refers to Plaintiffs' Verified First
Amended Complaint filed on October 30, 1996.
So long as corporate directors retain the power
ultimately to eliminate the anti-takeover effects of a
rights plan in the event that they conclude that a par-
ticular acquisition would be in the best interests of the
corporation, a poison pill plan can be used to promote
legitimate corporate interests. Thus, typical rights
plans reserve power in a corporation's board of directors
to redeem the rights in toto for a nominal payment, or to
amend the plan, for instance, to exempt a particular
transaction or acquiror from the dilutive effects of the
plan. (V. Am. Comp. 43)
The Effect Of The Merger Agreement On
The Conrail's Directors Ability to Make
Decisions Relating To The Rights Plan
---------------------------------------
The Conrail Rights Plan contains provisions for
redemption and amendment. However, an unusual aspect of
the Conrail Rights Plan is that the power of Conrail's
directors to redeem the rights or amend the plan to
exempt a particular transaction or bidder terminates on
the Distribution Date. While the Conrail Rights Plan
gives Conrail's directors the power to effectively post-
pone the Distribution Date, the CSX Merger Agreement
purports to bind them contractually not to do so. Thus,
the Distribution Date under Conrail's Rights Plan will
occur on November 7, 1996 -- ten business days after the
date when Norfolk Southern commenced its Offer -- and
Conrail's directors have entered into an agreement which
purports to tie their hands so that they cannot do any-
thing to prevent it. (V. Am. Comp. 44)
Ironically, the specific provisions of the CSX
Merger Agreement which purport to prevent the Conrail
directors from postponing the Distribution Date are the
very same sections which require Conrail to exempt the
CSX Transaction from the Conrail Rights Plan -- Sections
3.1(n) and 5.13. Section 3.1(n) provides, in pertinent
part:
Green Rights Agreement and By-laws. (A) The
Green Rights Agreement has been amended (the
"Green Rights Plan Amendment") to (i) render
the Green Rights Agreement inapplicable to the
Offer, the Merger and the other transactions
contemplated by this Agreement and the Option
Agreements and (ii) ensure that (y) neither
White nor any of its wholly owned subsidiaries
is an Acquiring Person (as defined in the Green
Rights Agreement) pursuant to the Green Rights
Agreement and (z) a Shares Acquisition Date,
Distribution Date or Trigger Event (in each
case as defined in the Green Rights Agreement)
does not occur by reason of the approval, exe-
cution or delivery of this Agreement, and the
Green Stock Option Agreement, the consummation
of the Offer, the Merger or the consummation of
the other transactions contemplated by this
Agreement and the Green Stock Option Agreement,
and the Green Rights Agreement may not be fur-
ther amended by Green without the prior consent
of White in its sole discretion. (emphasis
added)
Section 5.13 provides, in pertinent part:
The Board of Directors of Green shall take all
further action (in addition to that referred to
in Section 3.1(n)) reasonably requested in
writing by White (including redeeming the Green
Rights immediately prior to the Effective Time
or amending the Green Rights Agreement) in
order to render the Green Rights inapplicable
to the Offer, the Merger and the other transac-
tions contemplated by this Agreement and the
Green Stock Option Agreement. Except as pro-
vided above with respect to the Offer, the
Merger and the other transactions contemplated
by this Agreement and the Green Stock Option
Agreement, the Board of Directors of Green
shall not (a) amend the Green Rights Agreement
or (b) take any action with respect to, or make
any determination under, the Green Rights
Agreement, including a redemption of the Green
Rights or any action to facilitate a Takeover
Proposal in respect of Green.
(V. Am. Comp. 45)
Thus, although under the Conrail Rights Plan
the Conrail Board is empowered to "determine[] by action
... prior to such time as any person becomes an Acquiring
Person" that the Distribution Date will occur on a date
later than November 7, the Conrail board has contractual-
ly purported to bind itself not to do so. (V. Am. Comp.
46)
If the Distribution Date is permitted to occur,
Conrail, its shareholders, and its other constituencies
face catastrophic irreparable injury.(2) If the Distri-
bution Date occurs and then the CSX Transaction does not
occur for any number of reasons -- for instance, because
(i) the Conrail shareholders do not tender sufficient
shares in the CSX offer, (ii) the Conrail shareholders do
not approve the CSX merger, (iii) the merger does not
receive required regulatory approvals, or (iv) CSX exer-
cises one of the conditions to its obligation to complete
its offer -- Conrail will be essentially incapable of
being acquired or engaging in a business combination
until 2005. This would be so regardless of the benefits
and strategic advantages of any business combination
which might otherwise be available to Conrail. In the
present environment of consolidation in the railroad
industry, such a disability would plainly be a serious
irremediable disadvantage to Conrail, its shareholders
and all of its constituencies. (V. Am. Comp. 47, 48,
see also 18, 38, 121, 126)
------------------------
2 Indeed, counsel for plaintiffs are aware of no
situation in the ten year history of rights plans in
which a distribution of rights actually occurred
pursuant to a rights plan of the type adopted by
Conrail.
ARGUMENT
I. PLAINTIFFS AND CONRAIL'S OTHER STOCKHOLDERS
WILL SUFFER IRREPARABLE, IMMINENT INJURY
UNLESS THE COURT RESTRAINS THE DISTRIBUTION
OF THE RIGHTS.
-------------------------------------------
A. Standards For The Issuance Of
A Temporary Restraining Order.
------------------------------
"To obtain a temporary restraining order in
this Circuit, the moving party has the burden of showing
(a) a reasonable likelihood of success on the merits; (b)
that it will suffer irreparable harm absent such relief
and (c) that on balance the equities and the public
interest favor such relief." Graphic Management Assoc.
v. Roger Honegger & Ferag, Inc., 1994 U.S. Dist. LEXIS
1981, at *2 (E.D. Pa. Feb. 25, 1994) (citing American
Greetings Corp. v. Dan-Dee Imports, Inc., 807 F.2d 1136,
1140 (3d Cir. 1986)). "[P]roper judgment entails a
'delicate balancing' of all elements.... [W]here factors
of irreparable harm, interests of third parties and
public considerations strongly favor the moving party, an
injunction might be appropriate `even though plaintiffs
did not demonstrate as strong a likelihood of ultimate
success as would generally be required.'" Constructors
Ass'ns of W. Pa. v. Kreps, 573 F.2d 811, 815 (3d Cir.
1978) (quotations omitted)
B. The Harm Is Irreparable.
------------------------
If the Distribution Date is permitted to
occur, Conrail, its shareholders, and its other constitu-
encies face catastrophic irreparable injury. If the
Distribution Date occurs and then the CSX Transaction
does not occur for any reason, Conrail will be essential-
ly incapable of being acquired or engaging in a business
combination until 2005, regardless of the benefits and
strategic advantages of any business combination which
might otherwise be available to Conrail. Such a disabil-
ity would plainly be a serious irremediable disadvantage
to Conrail, its shareholders and all of its constituen-
cies.
The commentators and cases have uniformly
recognized that no bidder would proceed with a tender
offer if a rights plan would thereby be triggered. As
one commentator has noted, "[n]o bidder has proceeded, or
indeed can proceed, with a tender offer in the face of a
poison pill, because if the pill is triggered, the re-
sulting dilution is too great a cost for any bidder to
bear." Mark J. Lowenstein, The SEC and the Future of
Corporate Governance, 45 Ala. L. Rev. 783, 790 (1994).
See also Facet Enters, Inc. v. Prospect Group, Inc., C.A.
No. 9746, 1988 WL 36140, at *3 (Del. Ch. Apr. 15,
1988)(noting that poison pill would deter any tender
offer for all of target corporation's shares because of
potential loss of $50 million from dilution of shares);
Dynamics Corp. of Am. v. CTS Corp, 794 F.2d 250, 258 (7th
Cir. 1986)(describing destructive effect of triggering of
poison pill on acquiror and target corporations), rev'd
on other grounds, 481 U.S. 69 (1987).(3)
------------------------
3 Indeed, for these reasons, as noted above, coun-
sel for plaintiffs knows of no situation in which
a distribution of rights has been permitted to
occur pursuant to a rights plan of the type
adopted by Conrail.
Thus, if the rights are distributed on
November 7, Norfolk Southern will have lost its opportu-
nity to acquire Conrail, Conrail's shareholders will have
lost the opportunity to choose an immediate $100 cash
value for their shares, Conrail's other constituencies
will have lost the substantial benefits of a merger with
a corporation "considered by many analysts to be the
nation's best-run railroad" (according to The New York
Times) and Conrail will have ensured that it could not
take advantage of a merger opportunity until the year
2005. The injuries suffered by Norfolk Southern and
Conrail's shareholders constitute irreparable harm. See
A. Copeland Enters., Inc. v. Guste, 706 F. Supp. 1283,
1294 (W.D. Tex. 1989)(finding irreparable harm because
poison pill prevents plaintiff from making a tender
offer). See also Amalgamated Sugar Co. v. NL Indus., 644
F. Supp. 1229, 1239 (S.D.N.Y. 1986)(finding irreparable
harm because tender offerer "cannot present to the share-
holders of [target], in any meaningful way, its offer so
long as this rights plan is in place."), aff'd, 825 F.2d
634 (2d Cir. 1987); Buckhorn, Inc. v. Ropak Corp., 656 F.
Supp. 209, 235 (S.D. Ohio), aff'd mem., 815 F.2d 76 (6th
Cir. 1987); Mills Acquisition Co. v. Macmillan, Inc.,
C.A. No. 10168, 1988 WL 108332, at *18 (Del. Ch. Oct. 18,
1988)(finding poison pill irreparably harms shareholders
by depriving them of right to consider higher bid), aff'd
in pertinent part, 559 A.2d 1261 (Del. 1989).
C. The Harm is Imminent.
---------------------
As things currently stand, the distribution
of the rights is set to occur on November 7, 1996. If
the rights are distributed, the rights will no longer be
redeemable by the Conrail Board, and the Rights Plan will
no longer be capable of amendment to facilitate any
takeover or merger proposal that Conrail's board might
wish to pursue until the Rights Plan expires in 2005.
Put simply, once the Distribution Date occurs, Conrail's
directors will have no control over the Conrail poison
pill's dilutive effect on an acquiror.
Moreover, if the distribution of the rights
is not enjoined before November 7, the Court will be
unable to unscramble the eggs at the preliminary injunc-
tion hearing set for November 12 as the rights will have
been distributed to third parties who are free to trade
them in the marketplace.
II. PLAINTIFFS ARE REASONABLY LIKELY TO
SUCCEED ON THE MERITS OF THEIR CLAIMS.
--------------------------------------
A. The Conrail Board of Directors has
Contracted Away Its Fiduciary Duties
In Violation of Pennsylvania Law.
------------------------------------
The "business and affairs of every [Pennsyl-
vania] business corporation shall be managed under the
direction of a board of directors." Pa. B.C.L. SECTION 1721
Additionally, a director of a Pennsylvania corporation
"shall stand in a fiduciary relation to the corporation
and shall perform his duties as a director...in good
faith, in a manner he reasonably believes to be in the
best interest of the corporation and with such care,
including reasonable inquiry, skill and diligence, as a
person of ordinary prudence would use under similar
circumstances." Pa. B.C.L. SECTION 1721 The Pennsylvania
B.C.L. makes perfectly clear that the directors of Penn-
sylvania corporations must, without exception, manage the
business of the corporation and they must do so with due
care and in good faith.
The Merger Agreement between Conrail and CSX,
which purports to allow Conrail's directors to make a
decision with regard to the distribution of rights under
the Conrail Rights Plan only with the approval of CSX's
directors, is a blatant violation of the mandate of the
Pennsylvania B.C.L. This Court should reject any agree-
ment which allows the directors of a Pennsylvania corpo-
ration to contract away their fiduciary obligations, as
the Conrail directors have done here.
Case law from across the country makes clear
that directors may not contract away their fiduciary
duties. See Jewel Cos. v. Pay Less Drug Stores North-
west, Inc., 741 F.2d 1555, 1560 n.5 (9th Cir.
1984)(noting that a number of "[c]ourts have held invalid
attempts to curtail the board's traditional management
function by contract"); ConAgra, Inc. v. Cargill Inc.,
382 N.W.2d 576, 587 (Neb. 1986)(noting that "directors
could not enter into an agreement to violate their fidu-
ciary obligations"); Great W. Producers Coop. v. Great W.
United Corp., 613 P.2d 873, 878 (Colo. 1980)(holding that
where a decision "lies `at the heart' of the directors'
corporate management duties, and the directors may not
lawfully agree to abrogate the continuing duty to exer-
cise their independent judgment with respect to that
determination").
Perhaps the most recent decision directly on
point is Paramount Communications Inc., v. QVC Network,
Inc., 637 A.2d 34 (Del. 1994). In Paramount, the direc-
tors of Paramount signed a merger agreement with Viacom,
Inc. which contained, as defensive provisions, a no-shop
provision, a termination fee and a stock option agree-
ment, as well as an amendment to Paramount's rights plan.
Pursuant to the no-shop provision, the Paramount Board
was prohibited from soliciting, discussing, or negotiat-
ing or endorsing any competing transaction. Soon after
the announcement of the Viacom/Paramount merger, QVC
sought to enter into a merger with Paramount. QVC was
told by the Paramount directors that the Viacom/Paramount
merger agreement prohibited them from talking to QVC. In
affirming a preliminary injunction granted by the trial
court, the Delaware Supreme Court held that
The No-Shop Provision could not validly de-
fine or limit the fiduciary duties of the
Paramount directors. To the extent that a
contract, or a provision thereof, purports to
require a board to act or not act in such a
fashion as to limit the exercise of fiduciary
duties, it is invalid and unenforceable.
Despite the arguments of Paramount and Viacom
to the contrary, the Paramount directors
could not contract away their fiduciary obli-
gations. (emphasis added)(citations omitted).
637 A.2d at 51. See also Abercrombie v. Davies, 123 A.2d
893, 899 (Del. Ch. 1956)("this Court cannot give legal
sanction to agreements which have the effect of removing
from directors in a very substantial way their duty to
use their own best judgment on management matters");
Grimes v. Donald, C.A. No. 13358, 1995 WL 54441, at *9
(Del. Ch. Jan. 11, 1995), aff'd, 673 A.2d 1207 (Del.
1996)("[t]he board may not either formally or effectively
abdicate its statutory power and its fiduciary duty to
manage or direct the management of the business and
affairs of this corporation"); Chapin v. Benwood Founda-
tion, Inc., 402 A.2d 1205, 1210 (Del. Ch. 1979), aff'd
sub nom, Harrison v. Chapin, 415 A.2d 1068 (Del.
1980)("the directors of a Delaware corporation may not
delegate to others those duties which lay at the heart of
the management of the corporation").
The case law and the statute mandate that
this Court enjoin Conrail's directors from taking a
sabbatical from their fiduciary duties.
III. THE BALANCE OF EQUITIES AND THE PUBLIC
INTEREST FAVORS THE ISSUANCE OF A
TEMPORARY RESTRAINING ORDER.
--------------------------------------
A balancing of the equities and the public
interest demonstrably favors the issuance of a temporary
restraining order. If interim relief is denied, the
plaintiffs and Conrail's other stockholders and constitu-
encies will suffer immediate, irreparable harm. On the
other hand, a temporary restraining order would impose no
substantial hardship on Conrail. As noted, Conrail has
numerous other defensive weapons in its arsenal. As the
court recognized in Hanson Trust PLC v. ML SCM Acquisi-
tion, Inc., 781 F.2d 264, 283 (2d Cir. 1986), in granting
a preliminary injunction, "[t]his remedy, of course, does
not preclude [the target company] from renewing its
defensive efforts on other legitimate terms, or on a
basis that is beyond challenge...." Here, Conrail will
not be prejudiced in any way by maintenance of the status
quo until plaintiffs' application for a preliminary
injunction can be heard as scheduled on November 12, 1996
after the development of an adequate record.
A temporary restraining order in the form
requested is warranted and should be issued.
CONCLUSION
For the foregoing reasons, the plaintiffs
respectfully request that their Motion for a Temporary
Restraining Order be granted.
________________________
Mary A. McLaughlin
(I.D. No. 24923)
George G. Gordon
(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 (DELAWARE)
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: November 1, 1996
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- - - - - - - - - - - - - - - - - -x
NORFOLK SOUTHERN CORPORATION, a :
Virginia corporation, :
ATLANTIC ACQUISITION CORPORATION, :
a Pennsylvania corporation, AND :
KATHRYN B. McQUADE, :
:
Plaintiffs, :
: C.A. No. 96-CV-7167
-against- :
:
CONRAIL INC., a Pennsylvania :
corporation, DAVID M. LEVAN, :
H. FURLONG BALDWIN, DANIEL B. :
BURKE, ROGER S. HILLAS, CLAUDE S. :
BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN C. :
MAROUS, DAVID H. SWANSON, E. :
BRADLEY JONES, AND RAYMOND T. :
SCHULER AND CSX CORPORATION, :
:
Defendants. :
- - - - - - - - - - - - - - - - - -x
TEMPORARY RESTRAINING ORDER
AND NOW, on this ___ day of November ___, 1996,
having heard argument from counsel for the parties on
Plaintiffs' Motion for a Temporary Restraining Order and
upon review of Plaintiffs' Motion and supporting brief,
and it appearing to the Court that Plaintiffs have satis-
fied the standards necessary for the granting of a tempo-
rary restraining order, and that unless the temporary
restraining order sought by Plaintiffs is granted, irrep-
arable harm will result to the Plaintiffs and sharehold-
ers of Conrail before the matter can be heard at the
preliminary injunction hearing set for November 12, 1996,
it is hereby ORDERED that plaintiffs' motion is GRANTED
and that:
1. Defendants and all persons acting on their
behalf or in concert with them are enjoined from taking
any action to enforce Sections 3.1(n) and 5.13 of the
Agreement and Plan of Merger by and among Conrail Inc.,
Green Acquisition Corp. and CSX Corporation and any other
provisions of such Merger Agreement which purport to
limit the ability of the Board of Directors of Conrail to
take action or make any determination with regard to
Conrail's Rights Agreement, as amended.
2. Defendants and all persons acting on their
behalf or in concert with them are enjoined from distrib-
uting any rights pursuant to Conrail's Rights Agreement
and required to take such action as is necessary to
prevent a "Distribution Date" from occurring pursuant to
such Rights Plan.
3. This temporary restraining order shall
expire on ___________, unless extended.
BY THE COURT:
___________________________
J.
