SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-1
(Amendment No. 28)
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. 28 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"), as amended and supplemented by the
Supplement, dated November 8, 1996 (the "First Supplement"), and the
Second Supplement, dated December 20, 1996 (the "Second Supplement"),
and in the revised Letter of Transmittal (which, together with any
amendments or supplements thereto, constitute the "Offer"). Unless
otherwise defined herein, all capitalized terms used herein shall have
the respective meanings given such terms in the Offer to Purchase, the
First Supplement, the Second Supplement or the Schedule 14D-1.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
Item 11 is hereby amended and supplemented by the following:
(g)(9) Motion for Leave to Amend the Complaint, including as an
exhibit thereto, Plaintiffs' Fourth Amended Complaint,
filed by Parent, Purchaser and Kathryn B. McQuade against
the Company, CSX et. al. (dated December 20, 1996, United
States District Court for the Eastern District of
Pennsylvania).
(g)(10) Motion to Dismiss Defendants' Counterclaim, filed by
Parent, Purchaser and Kathryn B. McQuade (dated December
20, 1996, United States 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: December 23, 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 Description
(g)(9) Motion for Leave to Amend the Complaint, including as an
exhibit thereto, Plaintiffs' Fourth Amended Complaint,
filed by Parent, Purchaser and Kathryn B. McQuade against
the Company, CSX et. al. (dated December 20, 1996, United
States District Court for the Eastern District of
Pennsylvania).
(g)(10) Motion to Dismiss Defendants' Counterclaim, filed by
Parent, Purchaser and Kathryn B. McQuade (dated December
20, 1996, United States District Court for the Eastern
District of Pennsylvania).
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, :
v. : C.A. No. 96-CV-7167
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 MOTION FOR LEAVE
TO FILE THEIR FOURTH AMENDED COMPLAINT
Pursuant to Rules 15(a) and 15(d) of the Federal Rules
of Civil Procedure, plaintiffs, by and through their attorneys,
respectfully move for leave of Court to file a Fourth Amended
Complaint.
In support of their motion, plaintiffs rely upon the
accompanying memorandum of law.
Respectfully Submitted:
________________________
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
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: December 20, 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, RAYMOND T. :
SCHULER and CSX CORPORATION, :
:
Defendants. :
- - - - - - - - - - - - - - - - - -x
FOURTH AMENDED COMPLAINT FOR
DECLARATORY AND INJUNCTIVE RELIEF
Plaintiffs, by their undersigned attorneys, as and for
their Fourth Amended Complaint, allege upon knowledge with
respect to themselves and their own acts, and upon information
and belief as to all other matters, as follows:
Nature of the Action
1. This action arises from the attempt by defendants
Conrail Inc. ("Conrail"), its directors (the "Director
Defendants"), and CSX Corporation ("CSX") to coerce, mislead and
fraudulently manipulate Conrail's shareholders to swiftly deliver
control of Conrail to CSX and to forestall any competing higher
bid for Conrail by plaintiff Norfolk Southern Corporation ("NS").
Although defendants have attempted to create the impression that
NS's superior $115 per share all-cash offer for all of Conrail's
stock is a "non-bid" or a "phantom offer," in reality the only
obstacles to the availability of the $115 per share offered by NS
are illegal actions and ultra vires agreements by defendants.
The ultimate purpose of this action is to establish the
illegality of such actions and agreements so that NS may proceed
to provide superior value to Conrail's shareholders and a
superior transaction to Conrail and all of its constituencies.
2. Additionally, plaintiffs have sought and will seek
interim injunctive relief to maintain the status quo and ensure
that Conrail shareholders will not be coerced, misled and
fraudulently manipulated by defendants' illegal conduct to
deliver control over Conrail to CSX before the Court can finally
determine the issues raised in this action.
3. The event that set this controversy in motion was
the unexpected announcement that CSX would take over Conrail. In
a surprise move on October 15, 1996, defendants Conrail and CSX
announced a deal to rapidly transfer control of Conrail to CSX
and foreclose any other bids for Conrail (the "CSX Transaction").
The CSX Transaction is to be accomplished through a complicated
multi-tier structure involving two coercive front-end loaded cash
tender offers, a lock-up stock option and, following required
regulatory approvals or exemptions, a back-end merger in which
Conrail shareholders will receive stock and, under certain
circumstances, cash. The original CSX Transaction had a blended
value of slightly more than $85 per Conrail share as of
October 29, 1996. The currently proposed CSX Transaction has a
blended value of approximately $100 per Conrail share, over $14
per share less than the NS Proposal. The NS Proposal has a value
of at least 1 billion more than the CSX Transaction. Integral to
the inferior CSX Transaction are executive succession and
compensation guarantees for Conrail management and board
composition covenants effectively ensuring Conrail directors of
continued board seats.
4. Because plaintiff NS believes that a business
combination between Conrail and NS would yield benefits to both
companies and their constituencies far superior to any benefits
offered by the proposed Conrail/CSX combination, NS on October
23, 1996 announced its intention to commence, through its wholly-
owned subsidiary, plaintiff Atlantic Acquisition Corporation
("AAC") a cash tender offer (the "NS Offer") for all shares of
Conrail stock at $100 per share, to be followed by a cash merger
at the same price (the "Proposed Merger," and together with the
NS Offer, the "NS Proposal"). The following day, on October 24,
1996, the NS Offer commenced. On November 8, 1996, NS increased
its offer to $110 in cash per Conrail share. On December 19,
1996, NS announced that it increased its offer to $115 in cash
per Conrail share.
5. At the heart of this controversy is the assertion
by defendants, both expressly and through their conduct, that the
Director Defendants, as directors of a Pennsylvania corporation,
have virtually no fiduciary duties. While it is true that
Pennsylvania statutory law provides directors of Pennsylvania
corporations with wide discretion in responding to acquisition
proposals, defendants here have gone far beyond what even
Pennsylvania law permits. As a result, this battle for control
of Conrail presents the most audacious array of lock-up devices
ever attempted:
* The Poison Pill Lock-In. The CSX Merger Agreement
exempts the CSX Transaction from Conrail's Poison
Pill Plan, and purports to prohibit the Conrail
Board from redeeming, amending or otherwise taking
any further action with respect to the Plan.
Under the terms of the Poison Pill Plan, the
Conrail directors would have lost their power to
make the poison pill inapplicable to any
acquisition transaction other than the CSX
Transaction on November 7, unless CSX agreed to
let them postpone that date. Thus, the Poison
Pill Lock-In threatened to lock-up Conrail, even
from friendly transactions, until the year 2005,
when the poison pill rights expire. Put simply,
the CSX Merger Agreement purported to require
Conrail to swallow its own poison pill. Only
after plaintiffs applied for a temporary
restraining order did the Conrail board request
CSX's permission to postpone the Distribution
Date. Although it had no obligation to do so, CSX
permitted the postponement. Adoption of this
provision placed Conrail in serious jeopardy and
at the mercy of CSX, which had no obligation to
act in Conrail's best interests. Conrail remains
at CSX's mercy due to the Poison Pill Lock-In.
The Poison Pill Lock-in is ultra vires under
Pennsylvania law and constitutes a complete
abdication and breach of the Conrail directors'
duties of loyalty and care.
* The Two-Year Lock-Out. The CSX Merger Agreement
audaciously and unashamedly purported to prohibit
Conrail's directors from withdrawing their
recommendation that Conrail's shareholders accept
and approve the CSX Transaction and from
terminating the CSX Merger Agreement, even if
their fiduciary duties require them to do so, for
a period of 180 days from execution of the
agreement. On November 6, Conrail and CSX
announced that they had agreed to extend the lock-
out period from 180 days to 270 days. On December
19, 1996, Conrail and CSX announced that they had
agreed to extend the lock-out period another 18
months, to December 31, 1998. Put simply,
Conrail's directors have agreed to take a two-year
leave of absence during what may be the most
critical period in Conrail's history. Moreover,
while the Lock-Out originally permitted Conrail to
provide information to and negotiate with an
unsolicited competing bidder, the completion of
the CSX Offer on November 20 changed that: now
Conrail purportedly cannot even provide
information or negotiate prior to December 31,
1998. The Two-year Lock-Out is ultra vires under
Pennsylvania law and constitutes a complete
abdication and breach of the Conrail directors'
duties of loyalty and care.
* The Stock Option Lock-Up And The $300 Million
Break-Up Fee. The CSX Merger Agreement provides,
in essence, that Conrail must pay CSX a $300
million windfall if the CSX Merger Agreement is
terminated and Conrail is acquired by another
company. Further, a Stock Option Agreement
granted by Conrail to CSX threatens over
$358 million in dilution costs to any competing
bidder for Conrail. This lock-up option is
particularly onerous because the higher the
competing bid, the greater the dilution it
threatens.
* The Continuing Director Amendments To Conrail's
Poison Pill Plan. Recognizing that Pennsylvania
law permits shareholders of Pennsylvania
corporations to elect a new board of directors if
they disagree with an incumbent board's decisions
concerning acquisition offers, the Conrail Board
altered the Conrail Poison Pill Plan in September
1995 to deprive Conrail's shareholders of the
ability to elect new directors fully empowered to
act to render the poison pill ineffective or
inapplicable to a transaction they deem to be in
the corporation's best interests. This amendment
to the Conrail Poison Pill Plan is ultra vires
under Pennsylvania law and Conrail's Charter and
By-Laws, and constitutes an impermissible
interference in the stockholder franchise and a
breach of the Conrail directors' duty of loyalty.
* The Rolling Special Meeting. On November 25,
defendants announced that the special meeting of
Conrail's shareholders to vote on a proposal to amend
Conrail's Articles of Incorporation to opt-out of the
protections of subchapter 25E of the PBCL, (the
"Charter Amendment"), scheduled for December 23, would
not be convened at all unless defendants had sufficient
proxies in hand to assure approval of the Charter
Amendment, and that such meeting may be successively
postponed until Conrail's shareholders submit to the
defendants' will. Further, the Conrail directors have
in section 5.1(b) of the amended CSX Merger Agreement
improperly delegated their responsibilities with
respect to the processes of corporate democracy by
purporting to contractually limit their actions
pertaining to the special meeting to those to which CSX
consents. Defendants' conduct strikes at the heart of
corporate democracy and is fundamentally unfair. Such
conduct constitutes a breach of the Director
Defendants' fiduciary duties, aided and abetted by CSX.
On December 17, 1996, this Court entered a preliminary
injunction order requiring defendants to hold the
scheduled vote on December 23, absent an intervening
material development. The Court found the "rolling
meeting" tactic to be fundamentally unfair and to
constitute a "sham election".
At bottom, what defendants have attempted here is to litter the
playing field with illegal, ultra vires apparent impediments to
competing acquisition proposals, and then coerce Conrail
shareholders to swiftly deliver control of Conrail to CSX before
the illegality of such impediments can be determined and
revealed.
6. Accordingly, by this action, plaintiffs NS, AAC,
and Kathryn B. McQuade, a Conrail shareholder, seek emergency
relief against defendants' illegal attempt to lock-up the rapid
sale of control of Conrail to CSX through their scheme of
coercion, deception and fraudulent manipulation, in violation of
the federal securities laws, Pennsylvania statutory law, and the
fiduciary duties of the Director Defendants. In addition, to
facilitate the NS Proposal, plaintiffs seek certain declaratory
relief with respect to replacement of Conrail's Board of
Directors at Conrail's next annual meeting of shareholders.
Jurisdiction and Venue
7. This Court has jurisdiction over this complaint
pursuant to 28 U.S.C. SECTIONS 1331 and 1367.
8. Venue is proper in this District pursuant to 28
U.S.C. SECTION 1391.
The Parties
9. Plaintiff NS is a Virginia corporation with its
principal place of business in Norfolk, Virginia. NS is a
holding company operating rail and motor transportation services
through its subsidiaries. As of December 31, 1995, NS's
railroads operated more than 14,500 miles of road in the states
of Alabama, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky,
Louisiana, Maryland, Michigan, Mississippi, Missouri, New York,
North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee,
Virginia and West Virginia, and the Province of Ontario, Canada.
The lines of NS's railroads reach most of the larger industrial
and trading centers in the Southeast and Midwest, with the
exception of those in Central and Southern Florida. In the
fiscal year ended December 31, 1995, NS had net income of $712.7
million on total transportation operating revenues of $4.668
billion. According to the New York Times, NS "is considered by
many analysts to be the nation's best-run railroad." NS is the
beneficial owner of 100 shares of common stock of Conrail.
10. Plaintiff AAC is a Pennsylvania corporation. The
entire equity interest in AAC is owned by NS. AAC was organized
by NS for the purpose of acquiring the entire equity interest in
Conrail.
11. Plaintiff Kathryn B. McQuade is and has been, at
all times relevant to this action, the owner of Conrail common
stock.
12. Defendant Conrail is a Pennsylvania corporation
with its principal place of business in Philadelphia,
Pennsylvania. Conrail is the major freight railroad serving
America's Northeast-Midwest region, operating over a rail network
of approximately 11,000 route miles. Conrail's common stock is
widely held and trades on the New York Stock Exchange. During
the year ended December 31, 1995, Conrail had net income of $264
million on revenues of $3.68 billion. On the day prior to
announcement of the CSX Transaction, the closing per share price
of Conrail common stock was $71.
13. Defendant David M. LeVan is President, Chief
Executive Officer, and Chairman of Conrail's Board of Directors.
Defendants H. Furlong Baldwin, Daniel B. Burke, Roger S. Hillas,
Claude S. Brinegar, Kathleen Foley Feldstein, David B. Lewis,
John C. Marous, David H. Swanson, E. Bradley Jones, and Raymond
T. Schuler are the remaining directors of Conrail. The foregoing
individual directors of Conrail owe fiduciary duties to Conrail
and its stockholders, including plaintiffs.
14. Defendant CSX is a Virginia corporation with its
principal place of business in Richmond, Virginia. CSX is a
transportation company providing rail, intermodal, ocean
container-shipping, barging, trucking and contract logistic
services. CSX's rail transportation operations serve the
southeastern and midwestern United States.
Factual Background
The Offer
---------
15. In response to the surprise October 15
announcement of the CSX Transaction, on October 23, 1996, NS
announced its intention to commence a public tender offer for all
shares of Conrail common stock at a price of $100 cash per share.
NS further announced that it intends, as soon as practicable
following the closing of the NS Offer, to acquire the entire
equity interest in Conrail by causing it to merge with AAC in the
Proposed Merger. In the Proposed Merger as originally proposed,
Conrail common stock not tendered and accepted in the NS Offer
would have been converted into the right to receive $100 in cash
per share. On October 24, 1996, NS, through AAC, commenced the
NS Offer. The NS Offer and the Proposed Merger represented a
40.8% premium over the closing market price of Conrail stock on
October 14, 1996, the day prior to announcement of the CSX
Transaction.
16. In a letter delivered on October 23, 1996 to the
Defendant Directors, NS stated that it was flexible as to all
aspects of the NS Proposal and expressed its eagerness to
negotiate a friendly merger with Conrail. The letter indicated,
in particular, that while the NS Proposal is a proposal to
acquire the entire equity interest in Conrail for cash, NS is
willing to discuss, if the Conrail board so desires, including a
substantial equity component to the consideration to be paid in a
negotiated transaction so that current Conrail shareholders could
have a continuing interest in the combined NS/Conrail enterprise.
The Current Crisis: In a Surprise Move Intended To Foreclose Competing
Bids, Conrail and CSX Announce On October 15 That Conrail Has Essentially
Granted CSX A Lock-Up Over Control Of The Company
------------------------------------------------------------------------
17. After many months of maintaining that Conrail was
not for sale, on October 16, 1996, the Conrail Board announced an
abrupt about-face: Conrail would be sold to CSX in a multiple-
step transaction designed to swiftly transfer effective, if not
absolute, voting control over Conrail to a voting trustee who
would be contractually required to vote to approve CSX's
acquisition of the entire equity interest in Conrail through a
follow-up stock merger.
18. This Court denied plaintiffs' motion for a
preliminary injunction barring the consummation of CSX's highly
coercive front-end loaded tender offer for up to 19.9% of
Conrail's shares. As a result, CSX and Conrail succeeded through
this classic hostile takeover tactic in coercing Conrail's
shareholders to cede nearly 20% of Conrail's voting power to CSX,
gaining an overwhelming advantage in the vote of Conrail's
shareholders on the Charter Amendment, now slated for December
23, 1996. This Court's ruling on plaintiffs' motion for
preliminary injunction, and CSX's right to vote the shares it
acquired in the completed CSX offer are currently subject to
appeal.
19. The current crisis arises due to the imminent
January 17, 1997 special meeting of Conrail's shareholders,
scheduled for the purpose of conducting a shareholder vote on the
Charter Amendment. Defendants originally scheduled this meeting
for November 14, 1996. Thereafter, the meeting was rescheduled
to December 23, 1996. At that time, defendants stated that this
meeting would not be convened unless they held sufficient proxies
to assure their victory. Defendants also stated that this
special meeting could be successively postponed until Conrail's
shareholders submit to their will.
20. Within days after this Court ordered that the
December 23 vote be held, absent an intervening material event,
Conrail and CSX amended the terms of the CSX Merger Agreement to
increase the consideration to be paid in the back-end merger by
adding a purported $16 per Conrail share in convertible preferred
CSX stock and by adopting a new voting trust provision that would
permit consummation of the entire transaction in the first
quarter of 1997. The defendants accordingly rescheduled the vote
on the Charter Amendment to January 17, 1997. Moreover, Conrail
and CSX also announced that the Lock-Out provision in the CSX
Merger Agreement had been extended from 270 days to approximately
two years from now -- December 31, 1998. Defendant LeVan stated
in the press release announcing the revised transaction that
"This amendment to the merger agreement reaffirms the decision of
the Conrail board that it is not willing to agree to the sale of
Conrail to Norfolk Southern."
21. Thus, by extending the lock-out provision and by
announcing that the Conrail board simply will not consider
selling Conrail to NS, regardless of what might happen over the
next two years, defendants are continuing to attempt to coerce,
manipulate and mislead Conrail shareholders into delivering
Conrail to CSX despite the fact that NS is offering a plainly
superior transaction. In particular, the newly amended lock-out
provision, constituting a two-year abdication of the Conrail
directors' fiduciary duties, is illegal, ultra vires, and
fundamentally unfair under Pennsylvania law, and constitutes a
breach of the Conrail directors' fiduciary duties. Accordingly,
plaintiffs seek a preliminary injunction barring defendants from
taking any further steps toward consummation of the CSX
Transaction until the illegality of their conduct can be
adjudicated.
NS Promptly Responds
--------------------
22. On December 19, 1996, NS announced that it
increased its offer to $115 cash per Conrail Share. Thus, the
current NS Proposal has a value of at least $1 billion more than
the CSX Transaction.
Defendants Were Well Aware That A Superior Competing
Acquisition Proposal By NS was Inevitable
---------------------------------------------------
23. For a number of years, certain members of senior
management of NS, including David R. Goode, Chairman and Chief
Executive Officer of NS, have spoken numerous times with senior
management of Conrail, including former Conrail Chairman and
Chief Executive Officer, James A. Hagen, and current Conrail
Chairman and Chief Executive Officer, defendant David W. LeVan,
concerning a possible business combination between NS and
Conrail. Ultimately, Conrail management encouraged such
discussions prior to Mr. Hagen's retirement as Chief Executive
Officer of Conrail. Conrail discontinued such discussions in
September 1994, when the Conrail Board elected Mr. LeVan as
Conrail's President and Chief Operating Officer as a step toward
ultimately installing him as Chief Executive Officer and Chairman
upon Mr. Hagen's departure.
24. Prior to 1994, senior management of NS and Conrail
discussed, from time to time, opportunities for business
cooperation between the companies, and, in some of those
discussions, the general concept of a business combination.
While the companies determined to proceed with certain business
cooperation opportunities, including the Triple Crown Services
joint venture, no decisions were reached concerning a business
combination at that time.
25. In March of 1994, Mr. Hagen approached Mr. Goode
to suggest that under the current regulatory environment, Conrail
management now believed that a business combination between
Conrail and NS could be accomplished, and that the companies
should commence discussion of such a transaction. Mr. Goode
agreed to schedule a meeting between legal counsel for NS and
Conrail for the purpose of discussing regulatory issues.
Following that meeting, Mr. Goode met with Mr. Hagen to discuss
in general terms an acquisition of Conrail by NS. Thereafter,
during the period from April through August 1994, management and
senior financial advisors of the respective companies met on
numerous occasions to negotiate the terms of a combination of
Conrail and NS. The parties entered into a confidentiality
agreement on August 17, 1994. During these discussions, Mr.
Hagen and other representatives of Conrail pressed for a premium
price to reflect the acquisition of control over Conrail by NS.
Initially, NS pressed instead for a stock-for-stock merger of
equals in which no control premium would be paid to Conrail
shareholders. Conrail management insisted on a control premium,
however, and ultimately the negotiations turned toward a premium
stock-for-stock acquisition of Conrail.
26. By early September 1994, the negotiations were in
an advanced stage. NS had proposed an exchange ratio of 1-to-1,
but Conrail management was still pressing for a higher premium.
In a meeting in Philadelphia on September 23, 1994, Mr. Goode
increased the proposed exchange ratio to 1.1-to-1, and left the
door open to an even higher ratio. Mr. Hagen then told Mr. Goode
that they could not reach agreement because the Conrail board had
determined to remain independent and to pursue a stand-alone
policy. The meeting then concluded.
27. The 1.1-to-1 exchange ratio proposed by Mr. Goode
in September of 1994 reflected a substantial premium over the
market price of Conrail stock at that time. If one applies that
ratio to NS's stock price on October 14, 1996 -- the day the
Conrail Board approved the CSX Transaction -- it implies a per
share acquisition price for Conrail of over $101. Thus, there
can be no question that Mr. LeVan, if not Conrail's Board, was
well aware that NS would likely be willing and able to offer more
-- to Conrail's shareholders, rather than management, that is --
than CSX could offer for an acquisition of Conrail.
Defendant LeVan Actively Misleads NS Management In Order
To Permit Him To Lock Up The Sale of Conrail to CSX
--------------------------------------------------------
28. During the period following September of 1994, Mr.
Goode from time to time had conversations with Mr. LeVan. During
virtually all of these conversations, Mr. Goode expressed NS's
strong interest in negotiating an acquisition of Conrail. Mr.
LeVan responded that Conrail wished to remain independent.
Nonetheless, Mr. Goode was led to believe that if and when the
Conrail Board determined to pursue a sale of the company, it
would do so through a process in which NS would have an
opportunity to bid.
29. At its September 24, 1996 meeting, the NS Board
reviewed its strategic alternatives and determined that NS should
press for an acquisition of Conrail. Accordingly, Mr. Goode
again contacted Mr. LeVan to (i) reiterate NS's strong interest
in acquiring Conrail and (ii) request a meeting at which he could
present a concrete proposal. Mr. LeVan responded that the
Conrail board would be holding a strategic planning meeting that
month and that he and Mr. Goode would be back in contact after
that meeting. Mr. Goode emphasized that he wished to communicate
NS's position so that Conrail's Board would be aware of it during
the strategic planning meeting. Mr. LeVan stated that it was
unnecessary for Mr. Goode to do so. At that point, the
conversation concluded.
30. Following September 24, Mr. LeVan did not contact
Mr. Goode. Finally, on Friday, October 4, 1996, Mr. Goode
telephoned Mr. LeVan. Mr. Goode again reiterated NS's strong
interest in making a proposal to acquire Conrail. Mr. LeVan
responded that the Conrail Board would be meeting on October 16,
1996, and assumed that he and Mr. Hagen would contact Mr. Goode
following that meeting. Mr. Goode again stated that NS wanted to
make a proposal so that the Conrail Board would be aware of it.
Mr. LeVan stated that it was unnecessary to do so.
CSX's Chairman Snow Contributes To LeVan's Deception
----------------------------------------------------
31. Several days prior to October 15, CSX's Chairman,
John W. Snow, publicly stated that he did not expect to see any
major business combinations in the railroad industry for several
years. On October 16, 1996, the New York Times reported that
"less than a week ago, Mr. Snow told Wall Street analysts that he
did not expect another big merger in the industry (in the next
few years)."
On the Day Before the Purportedly Scheduled Meeting of
Conrail's Board, Defendants Announce the CSX Transaction
--------------------------------------------------------
32. To NS's surprise and dismay, on October 15, 1996,
Conrail and CSX announced that they had entered into a definitive
merger agreement (the "CSX Merger Agreement") pursuant to which
control of Conrail would be swiftly sold to CSX and then a merger
would be consummated following required regulatory approvals. As
of the close of business on October 29, 1996, the blended value
of the original CSX Transaction was slightly more than $85 per
Conrail share. The CSX Transaction includes a break-up fee of
$300 million and a lock-up stock option agreement threatening
substantial dilution to any rival bidder for control of Conrail.
Integral to the CSX Transaction are covenants substantially
increasing Mr. LeVan's compensation and guaranteeing that he will
succeed John W. Snow, CSX's Chairman and Chief Executive Officer,
as the combined company's CEO and Chairman.
CSX Admits That The Conrail Board Approved The CSX Transaction
Rapidly.
--------------------------------------------------------------
33. On October 16, 1996, the New York Times reported
that CSX's Snow on October 15, 1996, had stated that the multi-
billion dollar sale of Conrail in 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
concerning 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."
34. Thus, Conrail's board approved the CSX Transaction
rapidly without a good faith and reasonable investigation. Given
the nature of the CSX Transaction, with its draconian and
preclusive lock-up mechanisms, the Conrail Board's rapid approval
of the deal constitutes reckless and grossly negligent conduct.
CSX's Snow Implies That the CSX Transaction Is a Fait Accompli
and States That Conrail's Directors Have Almost No Fiduciary
Duties
-------------------------------------------------------------
35. On October 16, 1996, Mr. Goode met in Washington,
D.C. with Mr. Snow to discuss the CSX Transaction and certain
regulatory issues that its consummation would raise. Mr. Snow
advised Mr. Goode during that meeting that Conrail's counsel and
investment bankers had ensured that the CSX Transaction would be
"bulletproof," implying that the sale of control of Conrail to
CSX is now a fait accompli. Mr. Snow added that the
"Pennsylvania statute," referring to Pennsylvania's Business
Corporation Law, was "great" and that Conrail's directors have
almost no fiduciary duties. Mr. Snow's comments were intended to
discourage NS from making a competing offer for control of
Conrail and to suggest that NS had no choice but to negotiate
with CSX for access to such portions of Conrail's rail system as
would be necessary to address the regulatory concerns that would
be raised by consummation of the CSX Transaction. After Mr. Snow
told Mr. Goode what CSX was willing to offer to NS in this
regard, the meeting concluded.
NS Responds With A Superior Offer For Conrail
---------------------------------------------
36. On October 22, the NS Board met to review its
strategic options in light of the announcement of the CSX
Transaction. Because the NS Board believes that a combination of
NS and Conrail would offer compelling benefits to both companies,
their shareholders and their other constituencies, it determined
that NS should make a competing bid for Conrail. On October 23,
1996, NS publicly announced its intention to commence a cash
tender offer for all shares of Conrail stock for $100 per share,
to be followed, after required regulatory approvals, by a cash
merger at the same price. On October 24, 1996, NS, through AAC,
commenced the NS Offer.
CSX Tells The Market That NS's Superior Proposal To Acquire
Conrail Is Not Real
-----------------------------------------------------------
37. CSX responded to the NS Proposal by attempting to
lead the market to believe that the superior NS Proposal does not
represent a real, viable and actually available alternative to
the CSX Transaction. On October 24, 1996, the Wall Street
Journal reported:
CSX issued a harshly worded statement last night that
called Norfolk's move a "nonbid" that would face
inevitable delays and be subject to numerous
conditions. It said the Norfolk bid couldn't be
approved without Conrail's board, and notes that the
merger pact [with CSX] prohibited Conrail from
terminating its pact until mid-April. It said the
present value of the Norfolk bid was under $90 a share
because of the minimum six-month delay....
On the same day, the New York Times reported that "a source close
to CSX" characterized the NS Proposal as "a phantom offer."
38. These statements are an integral part of
defendants' scheme to coerce, mislead and manipulate Conrail's
shareholders to rapidly deliver control of Conrail to CSX by
creating the false impression that the NS Proposal is not a
viable and actually available alternative.
CSX Lures NS Into Settlement Discussions, Then Falsely Claims That NS
Initiated The Talks In Order to Destabilize The Market For Conrail Shares
-------------------------------------------------------------------------
39. During the weekend of November 2 and November 3,
representatives of NS and CSX met. The meetings were held at the
suggestion of CSX, ostensibly for the purpose of exploring a
settlement of the litigation between NS and CSX and a resolution
of issues raised by their respective offers to acquire Conrail.
CSX represented to NS that Conrail was aware of these meetings.
NS participated in the meetings consistent with its announced
position favoring a balanced competition structure for Eastern
railroad service.
40. On the morning of November 4, 1996, however, CSX
issued a false and misleading press release in which it claimed
(i) that NS had initiated the discussions and (2) that the
subject matter of the discussions was which pieces of Conrail NS
would purchase from CSX once CSX had purchased Conrail in its
entirety. In fact, CSX had initiated the talks, as stated above,
and the talks involved both an acquisition by NS of Conrail and
an acquisition by CSX of Conrail, and what assets the non-
acquiring party would ultimately receive.
41. CSX, with Conrail's knowing participation, issued
its false and misleading press release for the purpose of
manipulating and destabilizing the market for Conrail stock by
creating the false perception that NS was not committed to its
$100 per share bid to acquire Conrail.
42. The CSX press release had its intended effect. On
the morning of November 4, Conrail's stock price dived from $951/4
to as low as $87 per share on heavy volume.
43. Later that morning, NS issued its own press
release, explaining that it was CSX that initiated the talks with
NS, that NS remained committed to its offer to acquire Conrail
for $100 per share, and that the financing condition to its offer
had been satisfied.
44. Following NS's announcement, Conrail's stock price
returned to levels at which it had traded prior to CSX's false
and misleading press release. Conrail stock closed the day down
$1-5/8, at $93-5/8.
45. CSX's manipulative tactics are not surprising,
given CSX's previous willingness to employ disinformation against
the financial markets. As noted above, CSX's Snow had told
analysts days prior to announcement of the CSX Transaction that
he believed that a major rail merger was unlikely in the near
future. On November 6, the Wall Street Journal reported:
[S]ome...analysts think they will have trouble trusting
CSX in the future. Two weeks before the announcement
of a CSX-Conrail combination, Mr. Snow told analysts
that further rail mergers may be inevitable, but not
imminent, citing the backlash against Union Pacific
Corp's $3.9 billion takeover of Southern Rail Corp.
"I took that to mean that CSX certainly wouldn't be
leading an acquisition attempt soon, and that was a
sensible plan of action" said Anthony Hatch, an analyst
at Norwest Securities Corp. "I found their subsequent
merger announcement to be startling to say the least."
Defendants Are Forced To Amend The Conrail Poison Pill To Avert A
Near Disaster.
-----------------------------------------------------------------
46. As noted above and explained more fully below, the
Poison Pill Lock-In feature of the CSX Merger Agreement purports
to prevent the Conrail board from taking action with respect to
the Conrail Poison Pill without CSX's consent. Yet, due to
commencement of the NS Offer, such action was required in order
to prevent a "Distribution Date" from occurring on November 7,
1996. If the Distribution Date had been permitted to occur, then
Conrail would have been incapable of engaging in a business
combination other than the CSX Transaction as originally agreed
to on November 14, 1996, until the year 2005.
47. Conrail's directors had thus placed Conrail in
grave strategic jeopardy by agreeing to the Poison Pill Lock-In
provision. Essentially, the Conrail board had placed itself at
CSX's mercy, with CSX having no obligation to act other than in
its own best interests. What is worse, the Conrail directors
were completely unaware that they had done so until NS pointed
the problem out to counsel for Conrail and Conrail was forced to
call a special board meeting to address the matter. Thus, in
their haste to approve and lock up the CSX Transaction, Conrail's
directors acted with extreme recklessness.
48. Because Conrail refused to give assurances to
plaintiffs that its Board would take action to postpone the
Distribution Date (which it could do only with CSX's consent), NS
was forced to file a motion for a temporary restraining order.
The Court scheduled a hearing on the motion for noon on November
4, 1996.
49. Just hours prior to the scheduled hearing, the
Conrail directors met for the purpose of attempting to extricate
Conrail from the grave jeopardy into which their reckless conduct
had placed it. The Conrail directors adopted a resolution
postponing the "Distribution Date" of the Conrail Poison Pill
until the tenth business day following the date on which any
person acquired 10% or more of Conrail's stock. Although it had
no obligation to do so, CSX assented to this postponement. As a
result, the Court denied NS's application for a temporary
restraining order as moot.
Defendants Announce That They Have Restructured The CSX Transaction
By Substantially Front-End Loading The Cash Tender Offers In Order To
Stampede Shareholders Into Effectively Foreclosing The NS Proposal
---------------------------------------------------------------------
50. On November 5, 1996, the Conrail board met. The
results of that meeting were announced on November 6, 1996. In
that announcement, defendants disclosed that the cash tender
offers contemplated by the CSX Transaction had been substantially
front-end loaded. That is, the cash price offered to Conrail
shareholders in the initial CSX cash tender offers was increased
from $92.50 per share to $110 per share, while the stock
consideration to be paid in the follow-up merger remains the same
1.85619 shares of CSX stock for each Conrail share. Based upon
the closing sale price of CSX stock on November 7, 1996, 1.85619
shares were worth approximately $82.14.
51. Defendants also announced that the timing of the
steps toward completion of the CSX Transaction had been changed.
The special meeting of Conrail shareholders for the purpose of
voting on the Charter Amendment, originally scheduled for
November 14, was postponed until a date that defendants stated
would likely fall in December 1996, and that has now been set at
December 23, 1996. Further, the expiration date of the CSX Offer
was extended from midnight on November 15 to midnight of November
20, 1996.
52. Accordingly, defendants planned to close a first
tender offer for 19.9% of Conrail's shares on November 20, prior
to the vote on the Charter Amendment. If the Charter Amendment
is approved, defendants planned to proceed with a second front-
end loaded tender offer, after which CSX will have acquired 40%
of Conrail's stock, constituting effective control and
foreclosing the NS Proposal as an alternative for Conrail's
shareholders.
53. Both the front-end loaded structure of the CSX
Offers and the perceived risk that the NS Proposal will not be
consummated due to the draconian defensive measures adopted by
the defendants exerted and continue to exert tremendous coercive
pressure upon Conrail shareholders to tender their shares to CSX.
54. A November 10, 1996 Philadelphia Inquirer article
summed up the coercive situation created by defendants
succinctly:
[Conrail shareholders] face a daunting dilemma, which
was deliberately constructed for them by CSX's
attorneys and investment bankers. They can either
tender their stock to CSX -- that is, offer it up to
CSX for sale -- by Nov. 20, or hold back and risk
getting a lower price if [CSX] ends up the successful
bidder for Conrail.
55. In their Schedule 14D-9 disclosures, defendants
admitted the coercive design and effect of the revised CSX
Transaction:
Shareholders should also be aware that shareholders may
decide to tender their Shares to CSX in the CSX Offer
and the Second CSX Offer, if applicable (even if they
believe that the Proposed Norfolk Transactions, if they
could be effected, would have a higher value to
shareholders than the CSX Transactions), because
shareholders may conclude that sufficient Shares will
be tendered by other shareholders and that failure to
tender will result in the non-tendering shareholders
receiving only CSX shares which, based on current
market prices, have a per Share value that is
significantly less that the $110 per Share being
offered in the CSX Offer and the Second CSX Offer, if
applicable, may succeed regardless of the perceived
relative values of the CSX Transactions and the
Proposed Norfolk Transactions.
56. CSX and Conrail issued a joint press release on
November 6 to announce the revised CSX Transaction. In that
press release, defendants made several false and misleading
statements calculated to affect the decision making of investors
with respect to the CSX Offers and the NS Offer.
57. For instance, defendants stated in the press
release that Conrail's "board of directors carefully considered
the relative merits of a merger with Norfolk Southern rather than
with CSX." However, review of the fairness opinion letters from
Lazard Freres & Co. and Morgan Stanley attached to Amendment No.
4 to Conrail's Schedule 14D-9 with respect to the CSX Offer
reveals that this representation is false. Both Lazard Freres
and Morgan Stanley included a specific caveat to their letters to
Conrail's board:
[A]t your request, in rendering our opinion, we did not
address the relative merits of the [CSX Transaction],
the [NS Offer] and any alternative potential
transactions.
Even were shareholders to discover this caveat, the stark
contrast between it and the contrary statement in the joint press
release will no doubt leave shareholders wondering just what the
truth is.
58. The joint press release also quotes CSX Chairman
Snow as claiming that CSX and Conrail have conveniently
discovered an additional $180 million of synergies that "will be
realized through the" CSX Transaction, over and above the $550
million in anticipated savings originally claimed. This claim of
"newly discovered" synergies is material to investors' decisions
with respect to the CSX Offer and the NS Offer because the claim
bears directly upon the value of the follow-up stock merger
consideration offered by CSX. The sudden discovery of such
additional synergies is highly suspect, since the announcement
coincides with an increase in the cash offered in the front end
of the CSX Transaction, which increase would otherwise be
expected to negatively impact the value of the back end merger.
Making matters worse, defendants have failed to disclose any
details of or support for these claimed "newly discovered"
synergies.
NS Raises Its All Cash Offer For All of Conrail's Shares to $110
Per Share
----------------------------------------------------------------
59. On November 8, 1996, NS announced that it had
raised its offer to acquire all of Conrail's outstanding shares
to $110 cash per share. This represented, on a per share basis,
a nearly $17 per share margin over the November 8 blended value
of the CSX Transaction of approximately $93 per share. In the
aggregate, CSX's offer amounts to approximately $8.5 billion,
while NS's Proposal is $10 billion cash on the barrel. Thus, the
challenged conduct of defendants threatens a massive $1.5 billion
loss to Conrail's shareholders.
Unable To Persuade CSX To Improve The Financial Terms Of The CSX
Transaction, The Conrail Board Is Forced To Reaffirm Its Support For
The Inferior CSX Deal And To Reject NS's Improved Superior Bid
--------------------------------------------------------------------
60. On November 12, 1996, the Conrail Board met. Upon
information and belief, the topics discussed by the Conrail board
at that meeting were (i) whether a revision of the CSX
Transaction could be negotiated that would improve its financial
terms for Conrail shareholders and (ii) what response should be
made to NS's improved offer of $110 per Conrail share.
61. Apparently, Conrail was unable to negotiate an
improvement in the financial consideration offered to Conrail
shareholders in the CSX Transaction. Nevertheless, because of
the 270-day lockout provision in the CSX Merger Agreement, the
Conrail board was forced to maintain its recommendation that
shareholders tender their shares to CSX and support the CSX
Transaction and to recommend that shareholders reject the
superior NS bid of $110 per share.
Defendants Represent That The CSX Transaction Might Be Improved
---------------------------------------------------------------
62. In a joint press release dated November 13, 1996,
Conrail and CSX stated that "CSX and Conrail also stated that
they have been having, and continue to have, discussions relating
to an increase in the value of the consideration payable upon
consummation of the CSX-Conrail merger. There can be no
assurance as to when or if any such modifications will be made."
The First Preliminary Injunction Hearing
----------------------------------------
63. On November 18 and 19, this court heard the
parties' presentations on plaintiffs' motion for a preliminary
injunction.
64. During the hearing, defendants contended, contrary
to plaintiffs' position that Conrail shareholders are being
illegally coerced to tender shares to CSX, that Conrail
shareholders have a choice of whether to or not accept the CSX
Transaction since they would be asked to vote on the Charter
Amendment:
(a) Conrail Director Furlong Baldwin testified
that "No one has taken the shareholder's vote away
from he or she. No one has taken it away. To get
this thing done, it requires a shareholder's vote."
(b) Counsel for CSX represented to the Court
as follows: "Here, of course, this transaction [the
CSX Transaction] isn't going to go forward at all
unless there's the opt out in December."
(c) CSX's counsel further represented to the
Court that "Well, no one was suggesting that the
directors can take away a vote that shareholders are
entitled to under the statute, that's not happening
here."
(d) Finally, CSX's counsel told the Court that
"[T]here's going to be a proxy fight between now and
the December meeting. And at that meeting, the
shareholders will decide whether or not to opt out."
(emphasis added).
These representations by defendants were not lost upon the
Court. In its oral ruling, the Court observed "[A]ll or a
majority of the shareholders could vote against the proposed
opt-out of subchapter E."
65. Also during the hearing, defendants repeatedly
suggested that the terms of the CSX Transaction might be
improved:
(a) Conrail director E. Bradley Jones
emphasized during his cross examination on November
19 that, "I think the process is still continuing.
The situation as it sits today is one that hopefully
is going to be represented in continuing
discussions, as I believe we indicated in a press
release between our corporation and CSX, and I am
hopeful that we're going to be recognizing improved
values."
(b) Jones conceded that as of that date, CSX
still had made no commitment to improve the value of
the consideration being proposed in the CSX Merger.
Further, he testified that his only basis for
believing the terms of the CSX Merger might be
improved was that "[CSX] would recognize that if the
Conrail shareholders vote against the opt-out
they'll have 19.9 percent of our stock and the value
of their stock is liable to decline appreciably if
they lose."
(c) Although Jones testified that "[the
Conrail Board was] hopeful that that process is
going to continue and that that will not be a
speculation in the future," he conceded that the
Conrail stockholders are being forced to bear the
risk of no increase in the CSX Merger consideration:
"I think that is a risk that they're taking."
(d) Similar statements were made by CSX's
Chairman, John Snow, during his cross examination on
November 19, 1996. For example, Snow testified that
"we're in discussions about some enhancement of
value or protection of value on the back end of the
transaction."
These statements were intended to further coerce and mislead
the Conrail stockholders to believe that the terms of the CSX
Merger, then valued at only $82.37 as of November 15, 1996,
would be improved, so that the Conrail shareholders would
tender into the first step tender offer that was set to close
on November 20, 1996.
63. This Court issued its ruling denying
plaintiffs' motion for a preliminary injunction from the bench
on the evening of November 19. In its ruling, the Court held
that it had not been established that plaintiffs were likely
to succeed on the merits of their claims.
64. Plaintiffs immediately filed a notice of appeal
and motions for injunction pending appeal and for expedited
treatment of the appeal.
65. The following afternoon, on November 20, the
United States Court of Appeals for the Third Circuit denied
plaintiffs' motion for an injunction pending appeal.
Defendants Succeed In Coercing Conrail's Shareholders
Into Vastly Oversubscribing The CSX Offer
-----------------------------------------------------
66. The CSX Offer expired at midnight on November
20. CSX promptly accepted for payment the entire 19.9% of
Conrail's shares that it had offered to purchase. Because
approximately 85% of Conrail's shares were tendered, CSX was
required to accept the tendered shares on a prorata basis.
67. As a result of consummation of the first CSX
Offer, defendants gained a substantial leg up in the vote on
the Charter Amendment scheduled for December 23. Also,
consummation of the first CSX Offer purportedly bars Conrail,
under Section 4.2 of the Revised Merger Agreement, from
providing information to, and negotiating with a competing
bidder, even if the fiduciary duties of its directors require
such actions. Finally, upon information and belief,
consummation of the first CSX tender offer caused a "control
transaction" to occur with respect to Conrail under subchapter
25E of the PBCL. See Count Twenty-Five, infra.
68. Despite consummation of the first CSX Offer,
plaintiffs continue their appeal of this Court's first
preliminary injunction ruling. Until the shareholder vote on
the Charter Amendment is held, CSX's power to vote the shares
acquired will be subject to the equity power of the Court, and
even thereafter, if the vote is held and thereafter found to
have been tainted by the vote of CSX's illegally acquired
shares, the Court could declare the vote invalid.
The New Special Meeting: Defendants Attempt to Convince
Conrail's Shareholders That Resistance is Futile
--------------------------------------------------------
69. On November 25, 1996, Conrail issued a Notice
of Special Meeting of Shareholders and a definitive proxy
statement. This special meeting (the "New Special Meeting"),
to be held for the purpose of conducting a vote of Conrail's
shareholders on the Charter Amendment, was scheduled to be
convened on December 23, 1996.
70. However, while defendants contended before this
Court that Conrail's shareholders would have a choice with
respect to the CSX Transaction since they will vote on whether
the Charter Amendment will be adopted or not, in fact
defendants determined to leave them no choice.
Under the Merger Agreement, Conrail has agreed
not to convene, adjourn or postpone the Special
Meeting without the prior consent of CSX, which
consent will not be unreasonably withheld. As a
result, it is expected that the special meeting will
not be convened if Conrail has not received
sufficient proxies to assure approval of the
Proposal. Under the Merger Agreement, either CSX or
Conrail can require that additional special meetings
be held for the purpose of considering the Proposal,
and a new record date could be set for any such
special meeting (a new record date would be required
if such meeting is held after February 3, 1997).
71. The Philadelphia Inquirer on November 28, 1996
captured the essence of what defendants were attempting to do
succinctly:
As elections go, this one might have been
devised in the old Kremlin: Conrail shareholders
are scheduled to vote December 23 on a proposal that
will likely decide the Philadelphia railroad's
future. If they approve the management-endorsed
proposal, Conrail's planned $8.5 billion merger with
CSX Corp. will move forward. If the shareholders
don't approve ... they won't vote.
* * * *
In other words, count ballots first, then hold the
vote -- after we've won.
72. Thus, defendants were telling Conrail
shareholders that the only vote that they will count as
effective is a "for" vote. Defendants were essentially saying
that "against" votes are futile, since there is no scenario in
which the New Special Meeting will result in a vote rejecting
the Charter Amendment, and, by implication, rejecting the CSX
Transaction.
73. Moreover, by further announcing that successive
additional special meetings could be held for the purpose of
voting upon the Charter Amendment, defendants attempted to
discourage opposition and coerce approval. The intended
message was plain: Resistance is futile.
74. Plaintiffs contended that by entering into the
Revised Merger Agreement, which includes a covenant subjecting
the Conrail Board's actions regarding the voting process to
CSX's consent, the Conrail directors have once again improperly
delegated their managerial responsibilities. Moreover,
plaintiffs contended that, acting in concert with CSX, the
Conrail directors are manipulating the processes of corporate
democracy by scheduling the New Special Meeting, announcing
that they will permit the vote to proceed only if they are
assured of victory, and further announcing that they may pursue
successive special meetings until the shareholders submit.
Such conduct constitutes a breach of the Conrail directors'
fiduciary duties, aided and abetted by CSX, as well as
fraudulent, coercive, and fundamentally unfair conduct. The
Court scheduled a hearing for December 17, 1996 on plaintiffs'
motion for a preliminary injunction against postponement of the
December 23 vote.
The Second Front-End Loaded CSX Offer
-------------------------------------
75. On December 6, 1996, CSX commenced a second
front-end loaded tender offer to purchase up to a aggregate of
18,344,845 Conrail shares at $110 each per share (the "Second
CSX Offer"). The Second CSX Offer is conditioned on, among
other things, approval by Conrail's shareholders of the Charter
Amendment.
76. The Second CSX Offer is coercive in precisely
the same manner as was the first. In their Definitive Proxy
Statement, the Conrail defendants admit:
"Shareholders should be aware that if
the [Charter Amendment] is approved and CSX
is therefore in a position to consummate
the Second CSX Tender Offer for ap-
proximately 20.1% of the fully diluted
Shares, shareholders may decide to tender
their Shares to CSX (even if they believe
that the Norfolk Offer (as defined below),
if it could be effected, has a higher
value) because shareholders may conclude
that sufficient Shares will be tendered by
other shareholders and that failure to
tender will result in the non-tendering
shareholders receiving only CSX shares
pursuant to the Merger which, based on
current market prices, have a per Share
value that is less than the amount to be
offered in the Second CSX Tender Offer.
Therefore, if the Proposal is approved, the
Second CSX Tender Offer may succeed
regardless of the perceived relative values
of such offer and the Norfolk Offer."
The Second Preliminary Injunction Hearing
-----------------------------------------
77. On December 17, 1996, this Court conducted a
hearing on plaintiffs' motion for a preliminary injunction
against postponement of the December 23 vote. After hearing
the presentations of the parties, the Court entered an order
requiring the December 23 vote to proceed absent any
intervening material events. The Court viewed the defendants'
"rolling meeting" tactic as "fundamentally unfair" and as a
"sham election".
78. The Court's ruling contains an important
implicit message: Resistance is not futile. Conrail's
directors do indeed have fiduciary duties, and are charged with
an obligation of fairness to Conrail's shareholders in the
conduct of corporate elections. Moreover, the Conrail board's
decisions are not the final word with respect to the sale of
Conrail -- Conrail's shareholders will have an opportunity to
elect a new board of directors no later than December 1997.
Recognizing that they will not Be Permitted To
Manipulate The Charter Amendment Vote By Successive
Postponements and That They Would Lose The December 23
Vote, Defendants Adopt An Even More Desperate Tactic:
Defendants Announce A Paper Improvement To The Back-End
CSX Merger Consideration And Extend The Lock-Out Provision
to Two-Years -- One Year Past The Next Election of Directors
------------------------------------------------------------
79. On December 19, 1996, just two days after this
Court's issuance of its preliminary injunction requiring the
December 23 vote to be held, defendants announced new terms to
the CSX Transaction. The consideration to be paid in the back-
end merger would be modified to include, in addition to the
1.85619 shares of CSX stock per Conrail share, an additional
purported $16 worth of CSX convertible preferred stock per
Conrail share. Moreover, defendants announced that the 270-Day
Lock-out provision had been extended to expire not in July
1997, but instead, over two-years from now, on December 31,
1998. Significantly, this extension purportedly would extend
beyond the next required election of Conrail's directors by at
least one-year, thus purporting to bind not only the current
Conrail board, but also any newly elected board.
80. Thus, again the defendants are seeking to convey
the plain message to Conrail's shareholders that resistance is
futile. In other words, defendants are telling Conrail's
shareholders that even if they vote against the Charter
Amendment, even if they vote against the CSX Merger, and even
if they vote to remove the current Conrail Board and replace it
with new directors who would support a sale of Conrail for the
highest reasonably available price, the superior NS proposal
would still not be available to them until at least one year
after replacement of the Conrail Board.
81. This latest tactic continues defendants'
attempts to coerce, manipulate, and mislead Conrail's
shareholders into delivering Conrail to CSX.
NS Promptly Responds
--------------------
82. On December 19, 1996, NS announced that it
increased its offer to $115 cash per Conrail share. Thus, the
current NS Proposal has a value of at least $1 billion more
than the CSX Transaction.
The CSX Transaction
83. Consistent with Mr. Snow's remarks, discussed
above, 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 unprecedented. These
provisions are designed to foreclose success by any competing
bidder for Conrail and to protect the lucrative compensation
increase and executive succession deal promised to defendant
LeVan by CSX.
The Poison Pill Lock-In
-----------------------
84. 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.
85. Because of certain unusual provisions to the
Conrail Poison Pill Plan -- which provisions, as noted below,
not only were not disclosed in the Schedule 14D-1 filed with
the Securities and Exchange Commission or in the Offer to
Purchase circulated to Conrail's stockholders by CSX, or in the
Schedule 14D-9 circulated to Conrail's shareholders by Conrail,
but were in fact affirmatively misdescribed in CSX's Schedule
14D-1 and Offer to Purchase -- the provision in the CSX Merger
Agreement barring the Conrail Board from taking action with
respect to the Conrail Poison Pill threatened grave, imminent
and irreparable harm to Conrail and all of its constituencies.
86. The problem was that on November 7, 1996, a
"Distribution Date", as that term is defined in the Conrail
Poison Pill Plan, would have occurred. Once that were to
happen, the "Rights" issued under the Plan would no longer be
redeemable by the Conrail Board, and the Plan would no longer
be capable of amendment to facilitate any takeover or merger
proposal. Put simply, once the Distribution Date occurs,
Conrail's directors would have no control over the Conrail
Poison Pill's dilutive effect on an acquiror. Because of the
draconian effects of the poison pill dilution on a takeover
bidder, no bidder other than CSX would be able to acquire
Conrail until the poison pill rights expire in the year 2005,
regardless of whether such other bidder offers a transaction
that is better for Conrail and its legitimate constituencies
than the CSX Transaction. Further, not even CSX would be able
to acquire Conrail in a transaction other than the CSX
Transaction. In other words, if Conrail were not acquired by
CSX in the CSX Transaction for the level of cash and stock
originally offered by CSX, then it appears that Conrail would
not have been capable of being acquired until at least 2005.
In essence, as a result of the Poison Pill Lock-In, Conrail was
about to swallow its own poison pill.
87. Poison Pills -- typically referred to as
"shareholders rights plans" by the corporations which adopt
them -- 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.
88. 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 Poison Pill Plan
was until recently 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, the corporation would issue
certificates evidencing the rights, each of which would allow
the holder to purchase a share of stock at a set price.
Initially, the exercise price of poison pill rights is set very
substantially above market to ensure that the rights will not
be exercised. Once rights certificates were issued, the rights
could trade separately from the associated shares of stock.
89. The provisions of a poison pill plan that cause
the dilution to an acquiror's position in the corporation are
called the "flip-in" and "flip-over" provisions. Poison pill
rights typically "flip in" when, among other things, a person
or group obtains some specified percentage of the corporation's
stock; in the Conrail Poison Pill 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 poison pill 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 Poison Pill Plan contains both a "flip-in" provision
and a "flip-over" provision.
90. So long as corporate directors retain the power
ultimately to eliminate the anti-takeover effects of a poison
pill plan in the event that they conclude that a particular
acquisition would be in the best interests of the corporation,
a poison pill plan can be used to promote legitimate corporate
interests. Thus, typical poison pill plans reserve power in a
corporation's board of directors to redeem the rights in toto
for a nominal payment, or to amend the poison pill plan, for
instance, to exempt a particular transaction or acquiror from
the dilutive effects of the plan.
91. The Conrail Poison Pill Plan contains provisions
for redemption and amendment. However, an unusual aspect of
the Conrail Poison Pill 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 Poison Pill Plan gives Conrail
directors the power to effectively postpone the Distribution
Date, the CSX Merger Agreement purports to bind them
contractually not to do so. Thus, the Distribution Date under
Conrail's Poison Pill Plan would have occurred on November 7,
1996 -- ten business days after the date when NS commenced the
Offer -- and Conrail's directors had entered into an agreement
which purports to tie their hands so that they could do nothing
to prevent it.
92. 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 Poison Pill -- 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, execution 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
further 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 transactions contemplated by this
Agreement and the Green Stock Option Agreement.
Except as provided 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.
93. Thus, although under the Conrail Poison Pill
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 had contractually purported
to bind itself not to do so.
94. If the Distribution Date had been permitted to
occur, Conrail, its shareholders, and its other constituents
would have faced catastrophic irreparable injury. If the
Distribution 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 exercises one of the conditions to its
obligation to complete its offer -- Conrail would 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.
95. As a result of plaintiffs' demand that the
Distribution Date be postponed and of their motion for a
temporary restraining order, the Conrail board met on November
4, hours prior to the scheduled hearing on plaintiffs' motion,
and, with the required permission of CSX, extended the
Distribution Date until ten days after any person acquires 10%
or more of Conrail's shares. As a result, the Court denied
plaintiffs' motion as moot.
The Two-Year Lock-Out
---------------------
96. Setting aside the Poison Pill Lock-In, the CSX
Merger Agreement also contains an unprecedented provision
purporting to bind Conrail's directors not to terminate the CSX
Merger Agreement for two years regardless of whether their
fiduciary duties require them to do so. The pertinent
provisions appear in Section 4.2 of the CSX Merger Agreement.
Under that section, Conrail covenants not to solicit, initiate
or encourage other takeover proposals, or to provide
information to any party interested in making a takeover
proposal. The CSX Merger Agreement builds in an exception to
this prohibition -- it provides that prior to the earlier of
the closing of the first CSX Offer and Conrail shareholder
approval of the CSX Merger, or after December 31, 1998, if the
Conrail board determines upon advice of counsel that its
fiduciary duties require it to do so, Conrail may provide
information to and engage in negotiations with another bidder.
Consummation of the first CSX offer resulted, under this
provision, in barring Conrail from providing information to or
negotiating with a competing bidder until after expiration of
the Two-Year Lock-Out. However, inclusion of the "fiduciary
out" language in Section 4.2 plainly indicated that the
drafters of the CSX Merger Agreement -- no doubt counsel for
Conrail and CSX -- recognize that there are circumstances in
which Conrail's directors would be required by their fiduciary
duties to consider a competing acquisition bid.
97. However, despite the recognition in the CSX
Merger Agreement that the fiduciary duties of the Conrail Board
may require it to do so, Section 4.2(b) of the agreement (the
"Two-Year Lock-Out") purports to prohibit the Conrail Board
from withdrawing its recommendations that Conrail shareholders
tender their shares in the CSX Offer and approve the CSX Merger
until December 31, 1998. Likewise, it prohibits the Conrail
Board from terminating the CSX Merger Agreement, even if the
Conrail Board's fiduciary duties require it to do so, for the
same period.
98. Thus, despite the plain contemplation of
circumstances under which the Conrail Board's fiduciary duties
would require it to entertain competing offers and act to
protect Conrail and its constituencies by (i) withdrawing its
recommendation that Conrail shareholders approve the CSX
Transaction and (ii) terminating the CSX Merger Agreement,
Conrail's Board has seen fit to disable itself contractually
from doing so.
99. As with the Poison Pill Lock-In, this "Two-Year
Lock-Out" provision amounts to a complete abdication of the
duty of Conrail's directors to act in the best interests of the
corporation. With the Two-Year Lock-Out, the Conrail directors
have determined to take a two-year leave of absence despite
their apparent recognition that their fiduciary duties could
require them to act during this critical time.
100. The effect of this provision is to lock out
competing superior proposals to acquire Conrail until
December 31, 1998, thus giving the CSX Transaction an unfair
time value advantage over other offers and adding to the
coercive effects of the CSX Transaction.
101. Because it purports to restrict or limit the
exercise of the fiduciary duties of the Conrail directors, the
Two-Year Lock-Out provision of the CSX Merger Agreement is
ultra vires, void and unenforceable. Moreover, because the
Two-Year Lock-Out would purport to bind a newly-elected Conrail
board, it is ultra vires, void and unenforceable. Further, by
agreeing to the Two-Year Lock-Out as part of the CSX Merger
Agreement, the Conrail directors breached their fiduciary
duties of loyalty and care.
Rapid Transfer of Control
-------------------------
102. The CSX Transaction is structured to include
(i) the now-completed 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 which, in
combination with other shares already acquired, would
constitute at least 40% and up to approximately 50% of
Conrail's stock, and (iv) following required regulatory
approvals, consummation of a follow-up stock-for-stock merger.
103. Thus, once the Charter Amendment is approved,
CSX will be in a position to acquire either effective or
absolute control over Conrail. Conrail admits that the CSX
Transaction contemplates a sale of control of Conrail. In its
preliminary proxy materials filed with the Securities and
Exchange Commission, Conrail stated that if CSX acquires 40% of
Conrail's stock, approval of the merger will be "virtually
certain." CSX could do so either by increasing the number of
shares it will purchase by tender offer, or, if tenders are
insufficient, by accepting all tendered shares and exercising
the Stock Option. CSX could obtain "approximately 50 percent"
of Conrail's shares by purchasing 40% pursuant to tender offer
and by exercising the Stock Option, in which event shareholder
approval of the CSX Merger will be, according to Conrail's
preliminary proxy statement, "certain."
104. The swiftness with which the CSX Transaction is
designed to transfer control over Conrail to CSX can only be
viewed as an attempt to lock up the CSX Transaction and
benefits it provides to Conrail management, despite the fact
that a better deal, financially and otherwise, is available for
Conrail, its shareholders, and its other legitimate
constituencies.
The Charter Amendment
---------------------
105. Conrail's Definitive Proxy Materials for the
December 23, 1996 Special Meeting set forth the resolution to
be voted upon by Conrail's shareholders as follows:
An amendment of the Articles of Incorporation of
Conrail is hereby approved and adopted, by which,
upon the effectiveness of such amendment, Article Ten
thereof will be amended and restated in its entirety
as follows: Subchapter E, Subchapter G and
Subchapter H of Chapter 25 of the Pennsylvania
Business Corporation Law of 1988, as amended, shall
not be applicable to the Corporation.
The $300 Million Breakup Fee
----------------------------
106. The CSX Merger Agreement provides for a $300
million break-up fee. This fee would be triggered if the CSX
Merger Agreement were terminated following a competing takeover
proposal.
107. This breakup fee is disproportionally large,
constituting over 3.5% of the aggregate value of the CSX
Transaction. The breakup fee unreasonably tilts the playing
field in favor of the CSX Transaction -- a transaction that the
defendant directors knew, or reasonably should have known, at
the time they approved the CSX Transaction, provided less value
and other benefits to Conrail and its constituencies than would
a transaction with NS.
The Lock-Up Stock Option
------------------------
108. 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 adjustment.
109. If, during the time that the option under the
Stock Option Agreement is exercisable, Conrail enters into an
agreement pursuant to which all of its outstanding common
shares are to be purchased for or converted into, in whole or
in part, cash, in exchange for cancellation of the Option, CSX
shall receive an amount in cash equal to the difference (if
positive) between the closing market price per Conrail common
share on the day immediately prior to the consummation of such
transaction and the purchase price. In the event (i) Conrail
enters into an agreement to consolidate with, merge into, or
sell substantially all of its assets to any person, other than
CSX or a direct or indirect subsidiary thereof, and Conrail is
not the surviving corporation, or (ii) Conrail allows any
person, other than CSX or a direct or indirect subsidiary
thereof, to merge into or consolidate with Conrail in a series
of transactions in which the Conrail common shares or other
securities of Conrail represent less than 50% of the
outstanding voting securities of the merged corporation, then
the option will be adjusted, exchanged, or converted into
options with identical terms as those described in the Stock
Option Agreement, appropriately adjusted for such transaction.
110. CSX and Conrail also entered into a similar
option agreement, pursuant to which CSX granted to Conrail an
option, exercisable only in certain events, to purchase
43,090,773 shares of CSX Common Stock at an exercise price of
$64.82 per share.
111. The exercise price of the option under the Stock
Option Agreement is $92.50 per share. The Stock Option
Agreement contemplates that 15,955,477 authorized but unissued
Conrail shares would be issued upon its exercise. Thus, for
each dollar above $92.50 that is offered by a competing bidder
for Conrail, such as NS, the competing acquiror would suffer
$15,955,477 in dilution. Moreover, there is no cap to the
potential dilution. At NS's original offer of $100 per share,
the dilution attributable to the Stock Option would have been
$119,666,077.50. At a hypothetical offering price of $101 per
share, the dilution would total $135,621,554.50. At NS's
current bid of $115 per share, the dilution would total
$358,988,232.50. Thus, NS's 15% increase in its offer resulted
in a more than doubling of such dilution costs. This lock-up
structure serves no legitimate corporate purpose, as it imposes
increasingly severe dilution penalties the higher the competing
bid!
112. At the current $115 per share level of NS's bid,
the sum of the $300 million break-up fee and Stock Option
dilution of $358,988,232.50 constitutes over 7% of the CSX
Transaction's 9.36 billion value. This is an unreasonable
impediment to NS's offer. Moreover, because these provisions
were not necessary to induce an offer that is in Conrail's best
interests, but rather were adopted to lock up a deal providing
Conrail's management with personal benefits while selling
Conrail to the low bidder, their adoption constituted a plain
breach of the Director Defendants' fiduciary duty of loyalty.
Selective Discriminatory Treatment of Competing Bids
----------------------------------------------------
113. Finally, the Conrail board has breached its
fiduciary duties by selectively (i) rendering Conrail's Poison
Pill Plan inapplicable to the original CSX Transaction, (ii)
approving the CSX Transaction and thus exempting it from the 5-
year merger moratorium under Pennsylvania's Business
Combination Statute, and (iii), as noted above, purporting to
approve the Charter Amendment in favor of CSX only.
114. While Pennsylvania law does not require
directors to amend or redeem poison pill rights or to take
action rendering anti-takeover provisions inapplicable, the law
is silent with respect to the duties of directors once they
have determined to do so. Once directors have determined to
render poison pill rights and anti-takeover statutes
inapplicable to a change of control transaction, their
fundamental fiduciary duties of care and loyalty require them
to take such actions fairly and equitably, in good faith, after
due investigation and deliberation, and only for the purpose of
fostering the best interests of the corporation, and not to
protect selfish personal interests of management.
115. Thus, Conrail's directors are required to act
evenhandedly, redeeming the poison pill rights and rendering
anti-takeover statutes inapplicable only to permit the best
competing control transaction to prevail. Directors cannot
take such selective and discriminatory defensive action to
favor corporate executives' personal interests over those of
the corporation, its shareholders, and other legitimate
constituencies.
LeVan's Deal
------------
116. As an integral part of the CSX Transaction, CSX,
Conrail and defendant LeVan have entered into an employment
agreement dated as of October 14, 1996 (the "LeVan Employment
Agreement"), covering a period of five-years from the effective
date of any merger between CSX and Conrail. The LeVan
Employment Agreement provides that Mr. LeVan will serve as
Chief Operating Officer and President of the combined
CSX/Conrail company, and as Chief Executive Officer and
President of the railroad businesses of Conrail and CSX, for
two years from the effective date of a merger between CSX and
Conrail (the "First Employment Segment"). Additionally, Mr.
LeVan will serve as Chief Executive Officer of the combined
CSX/Conrail company for a period of two years beginning
immediately after the First Employment Segment (the "Second
Employment Segment"). During the period commencing immediately
after the Second Employment Segment, or, if earlier, upon the
termination of Mr. Snow's status as Chairman of the Board (the
"Third Employment Segment"), Mr. LeVan will additionally serve
as Chairman of the Board of the combined CSX/Conrail company.
117. Defendant LeVan received a base salary from
Conrail of $514,519 and a bonus of $24,759 during 1995. The
LeVan Employment Agreement ensures substantially enhanced
compensation for defendant LeVan. It provides that during the
First Employment Segment, Mr. LeVan shall receive annual base
compensation at least equal to 90% of the amount received by
the Chief Executive Officer of CSX, but not less than $810,000,
together with bonus and other incentive compensation at least
equal to 90% of the amount received by the Chief Executive
Officer of CSX. During 1995, Mr. Snow received a base salary
of $895,698 and a bonus having a cash value of $1,687,500.
Thus, if Mr. Snow's salary and bonus were to equal Mr. Snow's
1995 salary and bonus, the LeVan Employment Agreement would
provide LeVan with a salary of $810,000 and a bonus of
$1,518,750 in the First Employment Period. During the Second
and Third Employment Segments, Mr. LeVan will receive
compensation in an amount no less than that received by the
Chief Executive Officer during the First Employment Segment,
but not less than $900,000.
118. If CSX terminates Mr. LeVan's employment for a
reason other than cause or disability or Mr. LeVan terminates
employment for good reason (as those terms are defined in the
LeVan Employment Agreement), Mr. LeVan will be entitled to
significant lump sum cash payments based on his compensation
during the five year term of the employment agreement,
continued employee welfare benefits for the longer of three
years or the number of years remaining in the employment
agreement; and the immediate vesting of outstanding stock-based
awards.
Improper Delegation of Responsibility Regarding
The Processes of Corporate Democracy
-----------------------------------------------
119. In connection with amending the CSX Merger
Agreement, the Conrail Board has contracted away and improperly
delegated its responsibilities relating to its ability to
convene, adjourn or postpone the December 23, 1996 Shareholders
Meeting. Pursuant to the terms of the amended CSX Merger
Agreement, Conrail now must have the prior consent of CSX in
order to convene, adjourn or postpone the Shareholders Meeting
on the proposed Charter Amendment.
120. Section 5.1(b) of the amended CSX Merger
Agreement provides in this regard that:
Green [Conrail] shall not convene, adjourn or
postpone the Green Pennsylvania Shareholders Meeting
without the prior consent of White [CSX], which
consent shall not be unreasonably withheld.
121. In addition to this improper delegation of power
to CSX, the Conrail Board has purported to give to CSX a right
to call a special meeting in violation of the provisions of the
PBCL which provide that a shareholder of a registered
corporation has no right to call a special meeting, regardless
of the size of its holdings, except in certain limited
situations not applicable here.
122. Section 5.1(b) of the amended Merger Agreement
provides in this regard that:
In the event that the matters to be considered at the
Green Merger Shareholders Meeting are not approved at
a meeting called for such purpose, from time to time
Green may, and shall at the request of White, duly
call, give notice of, convene and hold one or more
meeting(s) of shareholders thereafter for the purpose
of obtaining the Green Merger Shareholder Approval,
in which case all obligations hereunder respecting
the Green Merger Shareholders Meeting shall apply in
respect of such other meeting(s), subject in any
event to either party's right to terminate this
Agreement pursuant to Section 7.1(b)(ii) or (iii).
Subject to the foregoing, Green shall convene each
such meeting(s) as soon as practicable after receipt
of any request to do so by White (and in the case of
the initial Green Pennsylvania Shareholders Meeting,
as soon as practicable after December 5, 1996). The
foregoing shall not affect White's obligations to
make the Amended Offer, and, if the conditions
therefor in Section 1.1(d) are satisfied, the Second
Offer, whether or not the Green Merger Shareholder
Approval has been received or any such Green Merger
Shareholders Meeting(s) have been called or held.
123. Under Section 5.1(b), CSX, in effect, purports
to have the right to call a special meeting of stockholders as
the Conrail Board has no discretion not to call a special
meeting if CSX so demands.
124. This provision of the amended CSX Merger
Agreement is a deliberate attempt to circumvent Section 2521 of
the PBCL.
125. Section 2521(a) of the PBCL provides that, "the
shareholders of a registered corporation shall not be entitled
by statute to call a special meeting of shareholders." Section
2521(b) states that subsection (a) "shall not apply to the call
of a special meeting by an interested shareholder (as defined
in section 2553 (relating to interested shareholders) for the
purpose of approving a business combination under section
2555(3) or (4) (relating to requirements relating to certain
business combinations.) Under section 2553, an "interested
shareholder" is the beneficial holder of at least 20% of the
votes entitled to be cast in an election of directors. Section
2555, in Subchapter F, relates to the five-year moratorium
provision.
126. Section 2501(c) provides, in effect, that
section 2521 will not apply only if Conrail chose in its
articles of incorporation to grant to its stockholders a right
to call a special meeting.
127. Because Conrail has no such provision in its
Articles of Incorporation, section 2521 applies and CSX cannot
call a special meeting of Conrail's stockholders. Thus,
section 5.1(b) of the amended CSX Merger Agreement is illegal,
ultra vires, and void, and its adoption constituted a breach of
the Director Defendants' fiduciary duties, aided and abetted by
CSX.
Defendants' Campaign Of Misinformation
128. On October 15, 1996, Conrail and CSX issued
press releases announcing the CSX Transaction, and Conrail
published and filed preliminary proxy materials with the SEC.
On October 16, 1996, CSX filed and published its Schedule 14D-1
Tender Offer Statement and Conrail filed its Schedule 14D-9
Solicitation/Recommendation Statement. These communications to
Conrail's shareholders reflect a scheme by defendants to
coerce, mislead and fraudulently manipulate such shareholders
to swiftly deliver control of Conrail to CSX and effectively
frustrate any competing higher bid.
129. Conrail's Preliminary Proxy Statement contains
the following misrepresentations of fact:
(a) Conrail states that "certain provisions of
Pennsylvania law effectively preclude ... CSX from
purchasing 20% or more" of Conrail's shares in the
CSX Offer "or in any other manner (except the [CSX]
Merger." This statement is false. The provisions of
Pennsylvania law to which Conrail is referring are
those of Subchapter 25E of the Pennsylvania Business
Corporation Law. This law does not "effectively
preclude" CSX from purchasing 20% or more of
Conrail's stock other than through the CSX Merger.
Rather, it simply requires a purchaser of 20% or more
of Conrail's voting stock to pay a fair price in
cash, on demand, to the holders of the remaining 80%
of the shares. The real reason that CSX will not
purchase 20% or more of Conrail's voting stock absent
the Charter Amendment is that, unlike NS, CSX is
unable or unwilling to pay a fair price in cash for
100% of Conrail's stock.
(b) Conrail states that its "Board of Directors
believes that Conrail shareholders should have the
opportunity to receive cash in the near-term for 40%
of [Conrail's] shares," and that "[t]he Board of
Directors believes it is in the best interests of
shareholders that they have the opportunity to
receive cash for 40% of their shares in the near
term." These statements are false. First of all,
the Conrail Board believes that Conrail shareholders
should have the opportunity to receive cash in the
near-term for 40% of Conrail's shares only if such
transaction will swiftly deliver effective control of
Conrail to CSX. Second, the Conrail Board of
Directors does not believe that such swift transfer
of control to CSX is in the best interests of Conrail
shareholders; rather, the Conrail Board of Directors
believes that swift transfer of effective control
over Conrail to CSX through the CSX Offer will lock
up the CSX Transaction and preclude Conrail
shareholders from any opportunity to receive the
highest reasonably available price in a sale of
control of Conrail.
130. CSX's Schedule 14D-1 contains the following
misrepresentations of fact:
(a) CSX states that:
At any time prior to the announcement by
[Conrail] or an Acquiring Person that an
Acquiring Person has become such, [Conrail] may
redeem the [Conrail Poison Pill Plan]
rights ....
This statement is false. In fact, the Conrail Poison
Pill rights are redeemable any time prior to the
Distribution Date. After the Distribution Date, they
cannot be redeemed. CSX further states that:
The terms of the [Conrail Poison Pill]
rights may be amended by the [Conrail Board]
without the consent of the holders of the Rights
... to make any other provision with respect to
the Rights which [Conrail] may deem desirable;
provided that from and after such time as
Acquiring Person becomes such, the Rights may
not be amended in any manner which would
adversely affect the interests of holders of
Rights.
This statement is also false. The Conrail Board's
power to freely amend the poison pill rights
terminates on the Distribution Date, not the date
when someone becomes an Acquiring Person.
(b) CSX states that the "purpose of the [CSX]
Offer is for [CSX] . . . to acquire a significant
equity interest in [Conrail] as the first step in a
business combination of [CSX] and [Conrail]." This
statement is false. The purpose of the CSX Offer is
to swiftly transfer effective control over Conrail to
CSX in order to lock up the CSX Transaction and
foreclose the acquisition of Conrail by any competing
higher bidder.
(c) CSX states that "the Pennsylvania Control
Transaction Law effectively precludes [CSX, through
its acquisition subsidiary] from purchasing 20% or
more of Conrail's shares pursuant to the [CSX]
Offer." This statement is false. The provisions of
Pennsylvania law to which Conrail is referring are
those of Subchapter 25E of the Pennsylvania Business
Corporation Law. This law does not "effectively
preclude" CSX from purchasing 20% or more of
Conrail's stock other than through the CSX Merger.
Rather, it simply requires a purchaser of 20% or more
of Conrail's voting stock to pay a fair price in
cash, on demand, to the holders of the remaining 80%
of the shares. The real reason that CSX will not
purchase 20% or more of Conrail's voting stock absent
the Charter Amendment is that, unlike NS, CSX is
unable or unwilling to pay a fair price in cash for
100% of Conrail's stock.
131. Conrail's Schedule 14D-9 states that "the [CSX
Transaction] . . . is being structured as a true merger-of-
equals transaction." This statement is false. The CSX
Transaction is being structured as a rapid, locked-up sale of
control of Conrail to CSX involving a significant, albeit
inadequate, control premium.
132. Each of the Conrail Preliminary Proxy Statement,
the CSX Schedule 14D-1 and the Conrail Schedule 14D-9 omit to
disclose the following material facts, the disclosure of which
are necessary to make the statements made in such documents not
misleading:
(a) That the Conrail Board will lose its power
to redeem or freely amend the Conrail Poison Pill
Plan rights on the "Distribution Date."
(b) That both Conrail (and its senior
management) and CSX (and its senior management) knew
(i) that NS was keenly interested in acquiring
Conrail, (ii) that NS has the financial capacity and
resources to pay a higher price for Conrail than CSX
could, and (iii) that a financially superior
competing bid for Conrail by NS was inevitable.
(c) That Conrail management led NS to believe
that if and when the Conrail Board determined to sell
Conrail, it would do so through a process in which NS
would be given the opportunity to bid, and that in
the several weeks prior to the announcement of the
CSX Transaction, defendant LeVan on two occasions
prevented Mr. Goode from presenting an acquisition
proposal to Conrail by stating to him that making
such a proposal would be unnecessary and that Mr.
LeVan would contact Mr. Goode concerning NS's
interest in acquiring Conrail following (i) the
Conrail Board's strategic planning meeting scheduled
for September 1996 and (ii) a meeting of the Conrail
Board purportedly scheduled for October 16, 1996.
(d) That in September of 1994, NS had proposed
a stock-for-stock acquisition of Conrail at an
exchange ratio of 1.1 shares of NS stock for each
share of Conrail stock, which ratio, if applied to
the price of NS stock on the day before announcement
of the CSX Transaction, October 14, 1996, implied a
bid by NS worth over $101 per Conrail share.
(e) That the CSX Transaction was structured to
swiftly transfer effective, if not absolute voting
control over Conrail to CSX, and to prevent any other
bidders from acquiring Conrail for a higher price.
(f) That although Conrail obtained opinions
from Morgan Stanley and Lazard Freres that the
consideration to be received by Conrail stockholders
in the CSX Transaction was "fair" to such
shareholders from a financial point of view,
Conrail's Board did not ask its investment bankers
whether the CSX Transaction consideration was
adequate, from a financial point of view, in the
context of a sale of control of Conrail such as the
CSX Transaction.
(g) That although in arriving at their
"fairness" opinions, both Morgan Stanley and Lazard
Freres purport to have considered the level of
consideration paid in comparable transactions, both
investment bankers failed to consider the most
closely comparable transaction -- NS's September 1994
merger proposal, which as noted above, would imply a
price per Conrail share in excess of $101.
(h) That, if asked to do so, Conrail's
investment bankers would be unable to opine in good
faith that the consideration offered in the CSX
Transaction is adequate to Conrail's shareholders
from a financial point of view.
(i) That Conrail's Board failed to seek a
fairness opinion from its investment bankers
concerning the $300 million breakup fee included in
the CSX Transaction.
(j) That Conrail's Board failed to seek a
fairness opinion from its investment bankers
concerning the Stock Option Agreement granted by
Conrail to CSX in connection with the CSX
Transaction.
(k) That the Stock Option Agreement is
structured so as to impose increasingly severe
dilution costs on a competing bidder for control of
Conrail for progressively higher acquisition bids.
(l) That the Conrail Board intends to withhold
the filing of the Charter Amendment following its
approval by Conrail's stockholders if the
effectiveness of such amendment would facilitate any
bid for Conrail other than the CSX Transaction.
(m) That the Charter Amendment and/or its
submission to a vote of the Conrail shareholders is
illegal and ultra vires under Pennsylvania law.
(n) That the Conrail Board's discriminatory (i)
use of the Charter Amendment, (ii) amendment of the
Conrail Poison Pill and (iii) action exempting the
CSX Transaction from Pennsylvania's Business
Combination Statute, all to facilitate the CSX
Transaction and to preclude competing financially
superior offers for control of Conrail, constitute a
breach of the Director Defendants' fiduciary duty of
loyalty.
(o) That Conrail's Board failed to conduct a
reasonable, good faith investigation of all
reasonably available material information prior to
approving the CSX transaction and related agreements,
including the lock-up Stock Option Agreement.
(p) That in recommending that Conrail's
shareholders tender their shares to CSX in the CSX
Offer, Conrail's Board did not conclude that doing so
would be in the best interests of Conrail's
shareholders.
(q) That in recommending that Conrail's
shareholders approve the Charter Amendment, the
Conrail Board did not conclude that doing so would be
in the best interests of Conrail's shareholders.
(r) That in recommending that Conrail
shareholders tender their shares to CSX in the CSX
Offer, primary weight was given by the Conrail Board
to interests of persons and/or groups other than
Conrail's shareholders.
(s) That in recommending that Conrail
shareholders tender their shares to CSX in the CSX
Offer, primary weight was given to the personal
interests of defendant LeVan in increasing his
compensation and succeeding Mr. Snow as Chairman and
Chief Executive Officer of the combined CSX/Conrail
company.
(t) That the Continuing Director Requirement in
Conrail's Poison Pill (described above in paragraphs
84 through 91), adopted by Conrail's board in
September 1995 and publicly disclosed at that time,
is illegal and ultra vires under Pennsylvania law and
therefore is void and unenforceable.
133. In connection with the defendants' announcement
of the Revised CSX Transaction on November 6, 1996 and the
Conrail Board's Schedule 14D-9 recommendation against the NS
Offer, defendants issued several false and misleading
statements:
(a) In their joint press release dated
November 6, 1996, defendants:
(i) stated that the Conrail Board
carefully considered the relative merits of the CSX
Transaction and the NS Proposal, when in fact they
specifically directed their financial advisors not to
do so in rendering their fairness opinions; and
(ii) claim that they have discovered
additional synergies of $180 million that "will be
realized" in connection with the CSX Transaction, yet
omitted disclosure in the press release or in any
disclosure materials of any support or explanation of
how and why these claimed additional synergies were
suddenly discovered at or about the time of
announcement of the increase in the cash component of
the CSX Transaction.
(b) In CSX's Schedule 14D-1, Amendment No. 4,
defendant CSX, with Conrail's knowing and active
participation:
(i) states that the NS Proposal is a
"nonbid," when in fact it is a bona fide superior
offer that is available to Conrail shareholders if
the Conrail board were to properly observe its
fiduciary duties and recognize that the purported
contractual prohibitions against doing so contained
in the CSX Merger Agreement are illegal and
unenforceable;
(ii) states falsely that Norfolk Southern
initiated discussions with CSX during the weekend of
November 2 and 3, when in fact CSX initiated those
talks;
(iii) states that the November 2 and 3
talks concerned sales of Conrail assets to NS after
an acquisition of Conrail by CSX, while in fact such
discussions also included scenarios in which NS would
acquire Conrail and then sell certain Conrail assets
to CSX;
(iv) state that the Conrail board
"carefully considered" the relative merits of a
merger with Norfolk Southern rather than with CSX,
while in fact Conrail's financial advisors were
instructed not to do so in rendering their fairness
opinions;
(v) fails to disclose the basis for and
analysis, if any, underlying the "discovery" of an
additional $180 million in CSX/Conrail merger
synergies.
(c) In Conrail's Schedule 14D-9 with respect to
the NS Offer, defendant Conrail, with CSX's knowing
and active participation:
(i) stated that Conrail's board of
directors "unanimously recommends" that Conrail
shareholders not tender their shares into the NS
Offer while failing to disclose that the directors
were bound by contract, under the CSX Merger
Agreement, to make such recommendation, that such
contractual obligation is void under Pennsylvania
law, and what effect the unenforceability of such
contractual obligation, if considered by the Conrail
board, would have upon their recommendation;
(ii) stated that Conrail's board of
directors "unanimously recommends" that Conrail
shareholders who desire to receive cash for their
shares tender their shares in the CSX Offer, while
failing to disclose that the CSX Merger Agreement
bound the directors contractually to make such
recommendation, that such contractual obligation is
void under Pennsylvania law, and what effect the
unenforceability of such contractual obligation, if
considered by the Conrail board, would have upon
their recommendation;
(iii) failed to disclose that in
negotiating the revised terms of the CSX Transaction,
Conrail could have demanded, in consideration for
agreeing to the revised terms, that its board of
directors be released from the poison pill lock-in
and 180-day lock-out provisions, that Conrail
management and Conrail's advisors failed to so inform
the Conrail board, and that instead, management
unilaterally determined to negotiate an increase in
the lock-out provision from 180 days to 270 days;
(iv) failed to disclose the basis for and
analysis underlying the defendants "discovery" of
$180 million in new CSX/Conrail merger synergies.
(d) In Conrail's Schedule 14D-9, Amendment No.
4, with respect to the CSX Offer, defendant Conrail,
with CSX's knowing and active participation:
(i) stated that Conrail's board of
directors "unanimously recommends" that Conrail
shareholders not tender their shares into the NS
Offer while failing to disclose that the directors
were bound by contract, under the CSX Merger
Agreement, to make such recommendation, that such
contractual obligation is void under Pennsylvania
law, and what effect the unenforceability of such
contractual obligation, if considered by the Conrail
board, would have upon their recommendation;
(ii) stated that Conrail's board of
directors "unanimously recommends" that Conrail
shareholders who desire to receive cash for their
shares tender their shares in the CSX Offer, while
failing to disclose that the CSX Merger Agreement
bound the directors contractually to make such
recommendation, that such contractual obligation is
void under Pennsylvania law, and what effect the
unenforceability of such contractual obligation, if
considered by the Conrail board, would have upon
their recommendation;
(iii) failed to disclose that in
negotiating the revised terms of the CSX Transaction,
Conrail could have demanded, in consideration for
agreeing to the revised terms, that its board of
directors be released from the poison pill lock-in
and 180-day lock-out provisions, that Conrail
management and Conrail's advisors failed to so inform
the Conrail board, and that instead, management
unilaterally determined to negotiate an increase in
the lock-out provision from 180 days to 270 days;
(iv) failed to disclose the basis for and
analysis, if any, underlying the defendants
"discovery" of $180 million in new CSX/Conrail merger
synergies.
134. Each of the misrepresentations and omitted facts
detailed above are material to the decisions of Conrail's
shareholders concerning whether to vote in favor of the Charter
Amendment and whether, in response to the CSX Offer, to hold,
sell to the market, or tender their shares, because such
misrepresentations and omitted facts bear upon (i) the good
faith of the Conrail directors in recommending that Conrail
shareholders approve the Charter Amendment and tender their
shares in the CSX Offer, (ii) whether taking such actions are
in the best interests of Conrail shareholders, (iii) whether
the CSX Offer represents financially adequate consideration for
the sale of control of Conrail and/or (iv) whether the
economically superior NS Proposal is a viable, available
alternative to the CSX Transaction. Absent adequate corrective
disclosure by the defendants, these material misrepresentations
and omissions threaten to coerce, mislead, and fraudulently
manipulate Conrail shareholders to approve the Charter
Amendment and deliver control of Conrail to CSX in the CSX
Offer, in the belief that the NS Proposal is not an available
alternative.
Conrail's Directors Attempt To Override Fundamental Principles
of Corporate Democracy By Imposing A Continuing Directors
Requirement in Conrail's Poison Pill And By Extending The
Lock-Out Provision of the CSX Merger Agreement Past The Next
Election of Conrail Directors
-------------------------------------------------------------
135. As noted above, Conrail's directors have long
known that it was an attractive business combination candidate
to other railroad companies, including NS.
136. Neither Conrail management nor its Board,
however, had any intention to give up their control over
Conrail, unless the acquiror was willing to enter into board
composition, executive succession, and compensation and benefit
arrangements satisfying the personal interests of Conrail
management and the defendant directors, such as the
arrangements provided for in the CSX Transaction. They were
aware, however, that through a proxy contest, they could be
replaced by directors who would be receptive to a change in
control of Conrail regardless of defendants' personal
interests. Accordingly, on September 20, 1995, the Conrail
directors attempted to eliminate the threat to their continued
incumbency posed by the free exercise of Conrail's
stockholders' franchise. They drastically altered Conrail's
existing Poison Pill Plan, by adopting a "Continuing Director"
limitation to the Board's power to redeem the rights issued
pursuant to the Rights Plan (the "Continuing Director
Requirement").
137. Prior to adoption of the Continuing Director
Requirement, the Conrail Poison Pill Plan was a typical "flip-
in, flip-over" plan, designed to make an unsolicited
acquisition of Conrail prohibitively expensive to an acquiror,
and reserving power in Conrail's duly elected board of
directors to render the dilative effects of the rights
ineffective by redeeming or amending them.
138. The September 20, 1995 adoption of the
Continuing Director Requirement changed this reservation of
power. It added an additional requirement for amendment of the
plan or redemption of the rights. For such action to be
effective, at least two members of the Board must be
"Continuing Directors," and the action must be approved by a
majority of such "Continuing Directors." "Continuing
Directors" are defined as members of the Conrail Board as of
September 20, 1995, i.e., the incumbents, or their hand-picked
successors.
139. By adopting the Continuing Director Requirement,
the Director Defendants intentionally and deliberately have
attempted to destroy the right of stockholders of Conrail to
replace them with new directors who would have the power to
redeem the rights or amend the Rights Agreement in the event
that such new directors deemed such action to be in the best
interests of the company. That is, instead of vesting the
power to accept or reject an acquisition in the duly elected
Board of Directors of Conrail, the Rights Plan, as amended,
destroys the power of a duly elected Board to act in connection
with acquisition offers, unless such Board happens to consist
of the current incumbents or their hand-picked successors.
Thus, the Continuing Director Requirement is the ultimate
entrenchment device.
140. The Continuing Director Requirement is invalid
per se under Pennsylvania statutory law, in that it purports to
limit the discretion of future Boards of Conrail. Pennsylvania
law requires that any such limitation on Board discretion be
set forth in a By-Law adopted by the stockholders. See Pa. BCL
SECTION 1721. Thus, the Director Defendants were without power to
adopt such a provision unilaterally by amending the Rights
Agreement.
141. Additionally, the Continuing Director
Requirement is invalid under Conrail's By-Laws and Articles of
Incorporation. Under Section 3.5 of Conrail's By-Laws, the
power to direct the management of the business and affairs of
Conrail is broadly vested in its duly elected board of
directors. Insofar as the Continuing Director Requirement
purports to restrict the power of Conrail's duly elected board
of directors to redeem the rights or amend the plan, it
conflicts with Section 3.5 of Conrail's By-Laws and is
therefore of no force or effect. Article Eleven of Conrail's
Articles of Incorporation permits Conrail's entire board to be
removed without cause by stockholder vote. Read together with
Section 3.5 of Conrail's By-Laws, Article Eleven enables
Conrail's stockholders to replace the entire incumbent board
with a new board fully empowered to direct the management of
Conrail's business and affairs, and, specifically, to redeem
the rights or amend the plan. Insofar as the Continuing
Director Requirement purports to render such action impossible,
it conflicts with Conrail's Articles of Incorporation and is
therefore of no force or effect.
142. Furthermore, the adoption of the Continuing
Director Requirement constituted a breach of the Director
Defendants' fiduciary duty of loyalty. There existed no
justification for the directors to attempt to negate the right
of stockholders to elect a new Board in the event the
stockholders disagree with the incumbent Board's policies,
including their response to an acquisition proposal.
143. Moreover, while the Director Defendants
disclosed the adoption of the Continuing Director Requirement,
they have failed to disclose its illegality and the illegality
of their conduct in adopting it. If they are not required to
make corrective disclosures, defendants will permit the
disclosure of the Continuing Director Requirement's adoption to
distort stockholder choice in connection with the CSX Offer,
the Special Meeting, and (if they have not successfully locked
up voting control of Conrail by then) in the next annual
election of directors. The Director Defendants' conduct is
thus fraudulent, in that they have failed to act fairly and
honestly toward the Conrail stockholders, and intended to
preserve their incumbency and that of current management, to
the detriment of Conrail's stockholders and other
constituencies. Accordingly, such action should be declared
void and of no force or effect. Furthermore, adequate
corrective disclosure should be required.
144. The newly-extended Two-Year Lock-Out provision
in the CSX Merger Agreement is invalid not only because it
constitutes an abdication and breach of the current Conrail
directors' fiduciary duties, but also for the same reasons as
the Continuing Director Provision. The Two-Year Lock-Out
purports to restrict the managerial discretion of future
Conrail directors -- new directors who could be elected at
Conrail's 1997 Annual Meeting. Thus, as does the Continuing
Director Provision, the Two-Year Lock-Out violates Pennsylvania
statutory law, Conrail's Bylaws and Articles of Incorporation,
and the Conrail directors' fiduciary duties.
Conrail's Charter Permits The Removal and Replacement of Its
Entire Board of Directors At Its Next Annual Meeting
------------------------------------------------------------
145. As noted above, plaintiff NS intends to
facilitate the NS Proposal, if necessary, by replacing the
Conrail board at Conrail's next annual meeting. Conrail's next
annual meeting is scheduled to be held on May 21, 1997
(according to Conrail's April 3, 1996 Proxy Statement, as filed
with the Securities and Exchange Commission).
146. The Director Defendants adopted the Continuing
Director Requirement in part because they recognized that under
Conrail's Articles, its entire Board, even though staggered,
may be removed without cause at Conrail's next annual meeting.
147. Section 3.1 of Conrail's By-Laws provides that
the Conrail Board shall consist of 13 directors, but presently
there are only 11. The Conrail Board is classified into three
classes. Each class of directors serves for a term of three
years, which terms are staggered.
148. Article 11 of Conrail's Articles of
Incorporation provides that:
The entire Board of Directors, or a class of the
Board where the Board is classified with respect to
the power to elect directors, or any individual
director may be removed from office without assigning
any cause by vote of stockholders entitled to cast at
least a majority of the votes which all stockholders
would be entitled to cast at any annual election of
directors or of such class of directors.
149. Under the plain language of Article 11, the
entire Conrail Board, or any one or more of Conrail's
directors, may be removed without cause by a majority vote of
the Conrail stockholders entitled to vote at the annual
meeting. Plaintiffs anticipate, however, that defendants will
argue that under Article 11, only one class may be removed at
each annual meeting. Accordingly, plaintiffs seek a
declaratory judgment that pursuant to Article 11, the entire
Conrail Board, or any one or more of Conrail's directors, may
be removed without cause at Conrail's next annual meeting.
Declaratory Relief
150. The Court may grant the declaratory relief
sought herein pursuant to 28 U.S.C. SECTION 2201. The Director
Defendants' adoption of the CSX Transaction (with its
discriminatory Charter Amendment poison pill, and state anti-
takeover statute treatment and draconian lock-up provisions) as
well as their earlier adoption of the Continuing Director
Requirement, clearly demonstrate their bad faith entrenchment
motivation and, in light of the NS Proposal, that there is a
substantial controversy between the parties. Indeed, given the
NS Proposal, the adverse legal interests of the parties are
real and immediate. Defendants can be expected to vigorously
oppose each judicial declaration sought by plaintiffs, in order
to maintain their incumbency and defeat the NS Proposal --
despite the benefits it would provide to Conrail's stockholders
and other constituencies.
151. The granting of the requested declaratory relief
will serve the public interest by affording relief from
uncertainty and by avoiding delay and will conserve judicial
resources by avoiding piecemeal litigation.
Irreparable Injury
152. The Director Defendants' adoption of the CSX
Transaction (with its discriminatory Charter Amendment, poison
pill and state antitakeover statute treatment and draconian
lock-up provisions), their adoption of the revised CSX
Transaction with its highly coercive, multi-tier, front end
loaded structure, as well as their earlier adoption of the
Continuing Director Requirement threaten to deny Conrail's
stockholders of their right to exercise their corporate
franchise without manipulation, coercion or false and
misleading disclosures and to deprive them of a unique
opportunity to receive maximum value for their stock. The
resulting injury to plaintiffs and all of Conrail's
stockholders would not be adequately compensable in money
damages and would constitute irreparable harm.
Derivative Allegations
153. Plaintiffs bring each of the causes of action
reflected in Counts One through Seven and Fourteen and Fifteen
below individually and directly. Alternatively, to the extent
required by law, plaintiffs bring such causes of action
derivatively on behalf of Conrail.
154. No demand has been made on Conrail's Board of
Directors to prosecute the claims set forth herein since, for
the reasons set forth below, any such demand would have been a
vain and useless act since the Director Defendants constitute
the entire Board of Directors of Conrail and have engaged in
fraudulent conduct to further their personal interests in
entrenchment and have ratified defendant LeVan's self-dealing
conduct:
(a) The Director Defendants have acted
fraudulently by pursuing defendants' campaign of
misinformation, described above, in order to coerce,
mislead, and manipulate Conrail shareholders to
swiftly deliver control of Conrail to the low bidder.
(b) The form of resolution by which the
shareholders are being asked to approve the Charter
Amendment is illegal and ultra vires in that it
purports to authorize the Conrail Board to
discriminatorily withhold filing the certificate of
amendment even after shareholder approval. Thus, its
submission to the shareholders is illegal and ultra
vires and, therefore, not subject to the protections
of the business judgment rule.
(c) The Conrail directors' selective amendment
of the Conrail poison pill and discriminatory
preferential treatment of the CSX Transaction under
the Pennsylvania Business Combination Statute were
motivated by their personal interest in entrenchment,
constituting a breach of their fiduciary duty of
loyalty and rendering the business judgment rule
inapplicable.
(d) The Director Defendants' adoption of the
breakup fee and stock option lock-ups in favor of CSX
was motivated by their personal interest in
entrenchment, constituting a breach of their duty of
loyalty and rendering the business judgment rule
inapplicable.
(e) The Continuing Director Requirement is
illegal and ultra vires under Pennsylvania statutory
law and under Conrail's charter and by-laws,
rendering the business judgment rule inapplicable to
its adoption by the Director Defendants.
(f) In adopting the Continuing Director
Requirement, each of the Defendant Directors has
failed to act fairly and honestly toward Conrail and
its stockholders, insofar as by doing so the
Defendant Directors, to preserve their own
incumbency, have purported to eliminate the
stockholders' fundamental franchise right to elect
directors who would be receptive to a sale of control
of Conrail to the highest bidder. There is no reason
to think that, having adopted this ultimate in
entrenchment devices, the Director Defendants would
take action that would eliminate it.
(g) Additionally, the Director Defendants have
acted fraudulently, in that they intentionally have
failed to disclose the plain illegality of their
conduct.
(h) There exists no reasonable prospect that
the Director Defendants would take action to
invalidate the Continuing Director Requirement.
First, pursuant to Pennsylvania statute, their
fiduciary duties purportedly do not require them to
amend the Rights Plan in any way. Second, given
their dishonest and fraudulent entrenchment
motivation, the Director Defendants would certainly
not commence legal proceedings to invalidate the
Continuing Director Requirement.
155. Plaintiffs are currently beneficial owners of
Conrail common stock. Plaintiffs' challenge to the CSX
Transaction (including the coercive front end loaded tender
offer, the illegal Charter Amendment, discriminatory treatment,
and lock-ups) and to the Continuing Director Requirement
presents a strong prima facie case, insofar as the Director
Defendants have deliberately and intentionally, without
justification, acted to foreclose free choice by Conrail's
shareholders. If this action were not maintained, serious
injustice would result, in that defendants would be permitted
illegally and in pursuit of personal, rather than proper
corporate interests to deprive Conrail stockholders of free
choice and a unique opportunity to maximize the value of their
investments through the NS Proposal, and to deprive plaintiff
NS of a unique acquisition opportunity.
156. This action is not a collusive one to confer
jurisdiction on a Court of the United States that it would not
otherwise have.
COUNT ONE
---------
(Breach of Fiduciary Duty with
Respect to the Charter Amendment)
157. Plaintiffs withdraw Count One as moot.
COUNT TWO
---------
(Breach of Fiduciary Duty
With Respect to the Poison Pill)
158. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
159. The Conrail board of directors adopted its
Poison Pill Plan with the ostensible purpose of protecting its
shareholders against the consummation of unfair acquisition
proposals that may fail to maximize shareholder value.
160. The Conrail Board has announced its intention to
merge with CSX, and the Conrail Board has also sought to exempt
CSX from the provisions of the Poison Pill.
161. Additionally, the Conrail Board has committed
itself to not pursue any competing offer for the Company.
162. By selectively and discriminately determining to
exempt CSX, and only CSX, from the Poison Pill provisions, to
the detriment to Conrail's shareholders, the Conrail directors
have breached their fiduciary duties of care and loyalty.
163. Plaintiffs have no adequate remedy at law.
COUNT THREE
-----------
(Breach of Fiduciary Duty
with Respect to the Pennsylvania
Business Combinations Statute)
164. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
165. By approving the CSX Offer prior to its
consummation, the Director Defendants have rendered the
Pennsylvania Business Combinations Statute, subchapter 25F of
the Pennsylvania Business Corporation Law, and, particularly,
its five-year ban on mergers with substantial stockholders,
inapplicable to the CSX Transaction, while it remains as an
impediment to competing higher acquisition offers such as the
NS Proposal.
166. By selectively and discriminately exempting the
CSX Transaction from the five-year merger ban, for the purpose
of facilitating a transaction that will provide substantial
personal benefits to Conrail management while delivering
Conrail to the low bidder, the Director Defendants have
breached their fiduciary duties of care and loyalty.
167. Plaintiffs have no adequate remedy at law.
COUNT FOUR
----------
(Declaratory Judgment Against All
Defendants that the Poison Pill
Lock-In is Void Under Pennsylvania Law)
168. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
169. By purporting to bind Conrail and its directors
not to amend or take any action with respect to the Conrail
Poison Pill Plan without CSX's consent, the CSX Merger
Agreement purports to restrict the managerial discretion of
Conrail's directors.
170. Under Pennsylvania law, agreements restricting
the managerial discretion of the board of directors are
permissible only in statutory close corporations. Conrail is
not a statutory close corporation.
171. No statute countenances Conrail's and the
Director Defendants' adoption of the Poison Pill Lock-In terms
of the CSX Merger Agreement. No Conrail By-Law adopted by the
Conrail shareholders provides that Conrail's directors may
contractually abdicate their fiduciary duties and managerial
powers and responsibilities with respect to the Conrail Poison
Pill Plan.
172. Plaintiffs have no adequate remedy at law.
COUNT FIVE
----------
(Against the Defendant Directors
for Breach of Fiduciary Duty with
Respect to the Poison Pill Lock-In)
173. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
174. By entering into the Poison Pill Lock-In
provisions of the CSX Merger Agreement, the Director Defendants
purported to relinquish their power to act in the best
interests of Conrail in connection with proposed acquisitions
of Conrail.
175. Thus, by entering into the CSX Transaction with
its poison pill lock-in provisions, the Director Defendants
have intentionally, in violation of their duty of loyalty,
completely abdicated their fiduciary duties and
responsibilities.
176. Absent prompt injunctive relief, plaintiffs, as
well as Conrail and all of its legitimate constituencies, face
imminent irreparable harm.
177. Plaintiffs have no adequate remedy at law.
COUNT SIX
---------
(Declaratory Judgment Against All
Defendants That the Two-Year Lock-Out
is Void Under Pennsylvania Law)
178. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
179. By purporting to bind Conrail and its directors
from acting to protect the interests of Conrail, its
shareholders and its other legitimate constituencies by
withdrawing its recommendation that Conrail's shareholders
accept the CSX Offer and approve the CSX Merger even when the
fiduciary duties of Conrail's directors would require them to
do so, the Two-Year Lock-Out provision of the CSX Merger
Agreement purports to restrict the managerial discretion of
Conrail's directors.
180. By purporting to prohibit Conrail's directors
from terminating the CSX Merger Agreement when their fiduciary
duties would require them to do so, the Two-Year Lock-Out
provision of the CSX Merger Agreement purports to restrict the
managerial discretion of Conrail's directors.
181. Under Pennsylvania law, agreements restricting
the managerial discretion of the board of directors are
permissible only in statutory close corporations. Conrail is
not a statutory close corporation.
182. No statute countenances Conrail's and the
Director Defendants' adoption of the Two-Year Lock-Out terms of
the CSX Merger Agreement. No Conrail By-Law adopted by the
Conrail shareholders provides that Conrail's directors may
contractually abdicate their fiduciary duties and managerial
powers and responsibilities.
183. Moreover, to the extent that the Two-Year Lock-
Out purports to bind future directors of Conrail, it is ultra
vires, void and unenforceable.
184. Unless the Two-Year Lock-Out provision is
declared ultra vires and void and defendants are enjoined from
taking any action enforcing it, Conrail and its legitimate
constituencies face irreparable harm.
185. Plaintiffs have no adequate remedy at law.
COUNT SEVEN
-----------
(Against the Defendant Directors
for Breach of Fiduciary Duty with
Respect to the Two-Year Lock-Out)
186. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
187. By entering into the Two-Year Lock-Out provision
of the CSX Merger Agreement, the Director Defendants purported
to relinquish their power to act in the best interest of
Conrail in connection with proposed acquisitions of Conrail.
188. Thus, by entering into the Two-Year Lock-Out
provision, the Conrail directors have abdicated their fiduciary
duties, in violation of their duties of loyalty and care.
189. Plaintiffs have no adequate remedy at law.
COUNT EIGHT
-----------
(Breach of Fiduciary Duty with
Respect to the Lock-Up Provisions)
190. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
191. In conjunction with the CSX Merger Agreement,
the Conrail Board has agreed to termination fees of $300
million and to the lock-up Stock Option Agreement.
192. These provisions confer no benefit upon
Conrail's shareholders and in fact operate and are intended to
operate to impede or foreclose further bidding for Conrail.
193. The Conrail directors have adopted these
provisions without regard to what is in the best interest of
the Company and its shareholders, in violation of their
fiduciary duties.
194. Plaintiffs have no adequate remedy at law.
COUNT NINE
----------
(Declaratory Relief Against
Conrail and Director Defendants That
The Continuing Director Requirement
Is Void Under Pennsylvania Law)
195. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
196. Under Pennsylvania law, the business and affairs
of a Pennsylvania corporation are to be managed under the
direction of the Board of Directors unless otherwise provided
by statute or in a By-Law adopted by the stockholders. Pa. BCL
SECTION 1721.
197. Under Pennsylvania law, agreements restricting
the managerial discretion of directors are permissible only in
statutory close corporations.
198. No statute countenances Conrail's and the
current Board's adoption of the Continuing Director
Requirement. No Conrail By-Law adopted by the Conrail
stockholders provides that the current Board may limit a
future Board's management and direction of Conrail. Conrail is
not a statutory close corporation.
199. Adoption of the Continuing Director Requirement
constitutes an unlawful attempt by the Director Defendants to
limit the discretion of a future Board of Directors with
respect to the management of Conrail. In particular, under the
Continuing Director Requirement, a duly elected Board of
Directors that includes less than two continuing directors
would be unable to redeem or modify Conrail's Poison Pill even
upon determining that to do so would be in Conrail's best
interests.
200. Plaintiffs seek a declaration that the
Continuing Director Requirement is contrary to Pennsylvania
statute and, therefore, null and void.
201. Plaintiffs have no adequate remedy at law.
COUNT TEN
---------
(Declaratory Relief Against Conrail
and The Director Defendants That
The Continuing Director Requirement
Is Void Under Conrail's Articles
of Incorporation And By-Laws)
202. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
203. Under Section 3.5 of Conrail's By-Laws,
The business and affairs of the Corporation
shall be managed under the direction of the Board
which may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by
statute or by the Articles or by these By-Laws
directed or required to be exercised and done by the
shareholders.
204. Pursuant to Section 1505 of the Pennsylvania
Business Corporation Law, the By-Laws of a Pennsylvania
corporation operate as regulations among the shareholders and
affect contracts and other dealings between the corporation and
the stockholders and among the stockholders as they relate to
the corporation. Accordingly, the Rights Plan and the rights
issued thereunder are subject to and affected by Conrail's By-
Laws.
205. Insofar as it purports to remove from the duly
elected board of Conrail the power to redeem the rights or
amend the Rights Plan, the Continuing Director Requirement
directly conflicts with Section 3.5 of Conrail's By-Laws, and
is therefore void and unenforceable.
206. Article Eleven of Conrail's Articles of
Incorporation provides that Conrail's entire board may be
removed without cause by vote of a majority of the stockholders
who would be entitled to vote in the election of directors.
Read together with Section 3.5 of Conrail's By-Laws, Article
Eleven enables the stockholders to replace the entire incumbent
board with a new board with all powers of the incumbent board,
including the power to redeem the rights or to amend the Rights
Agreement. The Continuing Director Requirement purports to
prevent the stockholders from doing so, and is therefore void
and unenforceable.
207. Plaintiffs have no adequate remedy at law.
COUNT ELEVEN
------------
(Declaratory Relief Against Conrail
and The Director Defendants That Adoption
of the Continuing Director Requirement
Constituted A Breach of the Duty of Loyalty)
208. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
209. Adoption of the Continuing Director Requirement
constituted a breach of the duty of loyalty on the part of the
Director Defendants. Such adoption was the result of bad faith
entrenchment motivation rather than a belief that the action
was in the best interests of Conrail. In adopting the
Continuing Director Requirement, the Director Defendants have
purported to circumvent the Conrail stockholders' fundamental
franchise rights, and thus have failed to act honestly and
fairly toward Conrail and its stockholders. Moreover, the
Director Defendants adopted the Continuing Director Requirement
without first conducting a reasonable investigation.
210. The Continuing Director Requirement not only
impedes acquisition of Conrail stock in the NS Offer, it also
impedes any proxy solicitation in support of the NS Proposal
because Conrail stockholders will, unless the provision is
invalidated, believe that the nominees of plaintiffs will be
powerless to redeem the Poison Pill rights in the event they
conclude that redemption is in the best interests of the
corporation. Thus, stockholders may believe that voting in
favor of plaintiffs' nominees would be futile. The Director
Defendants intended their actions to cause Conrail's
stockholders to hold such belief.
211. Plaintiffs seek a declaration that the Director
Defendants' adoption of the Continuing Director Requirement was
in violation of their fiduciary duties and, thus, null, void
and unenforceable.
212. Plaintiffs have no adequate remedy at law.
COUNT TWELVE
------------
(Against Conrail And The Director
Defendants For Actionable Coercion)
213. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
214. The Director Defendants owe fiduciary duties of
care and loyalty to Conrail. Furthermore, Conrail and the
Director Defendants, insofar as they undertake to seek and
recommend action by Conrail's shareholders, for example with
respect to the Charter Amendment, the CSX Offer or the NS
Offer, stand in a relationship of trust and confidence vis a
vis Conrail's shareholders, and accordingly have a fiduciary
obligation of good faith and fairness to such shareholders in
seeking or recommending such action. Furthermore, shareholders
are entitled to injunctive relief against fundamental
unfairness pursuant to PBCL SECTION 1105.
215. Conrail and its directors are seeking the
approval by Conrail's shareholders of the Charter Amendment and
are recommending such approval.
216. Conrail and its directors are seeking the tender
by Conrail's shareholders of their shares into the CSX Offer
and are recommending such tender.
217. In seeking such action and making such
recommendations, Conrail and its directors have sought to
create the impression among the Conrail shareholders that the
NS Proposal is not a financially superior, viable, and actually
available alternative to the CSX Transaction. This impression,
however, is false. The only obstacles to the NS Proposal are
the ultra vires, illegal impediments constructed by defendants,
including the Poison Pill Lock-In, the Two-Year Lock-Out, and
the continuing director provisions of the Conrail Poison Pill
Plan.
218. The purpose for which defendants' seek to create
this impression is to coerce Conrail shareholders into
delivering control over Conrail swiftly to CSX. Furthermore,
the effect of this false impression is to coerce Conrail
shareholders into delivering control over Conrail to CSX.
219. This coercion of the Conrail shareholders
constitutes a breach of the fiduciary relation of trust and
confidence owed by the Corporation and its directors to
shareholders from whom they seek action and to whom they
recommend the action sought. Moreover, this coercion, as well
as the intense structural coercion imposed by the revised CSX
Transaction's highly front end loaded first step tender offer,
constitutes fundamental unfairness to Conrail shareholders.
220. The conduct of defendants Conrail and its
directors is designed to, and will, if not enjoined, wrongfully
induce Conrail's shareholders to sell their shares to CSX in
the CSX Offer not for reasons related to the economic merits of
the sale, but rather because the illegal conduct of defendants
has created the appearance that the financially (and otherwise)
superior NS Proposal is not available to them, and that the CSX
Transaction is the only opportunity available to them to
realize premium value on their investment in Conrail.
221. Plaintiffs have no adequate remedy at law.
COUNT THIRTEEN
--------------
(Against CSX For Aiding And Abetting)
222. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
223. Defendant CSX, through its agents, was aware of
and knowingly and actively participated in the illegal conduct
and breaches of fiduciary duty committed by Conrail and the
Director Defendants and set forth in Counts One through Eight,
Twelve and Twenty-Two through Twenty-Four of this complaint.
224. CSX's knowing and active participation in such
conduct has harmed plaintiffs and threatens irreparable harm to
plaintiffs if not enjoined.
225. Plaintiffs have no adequate remedy at law.
COUNT FOURTEEN
--------------
(Declaratory and Injunctive Relief Against
Conrail and the Director Defendants for
Violation of Section 14(a) of the Exchange Act
and Rule 14a-9 Promulgated Thereunder)
226. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
227. Section 14(a) of the Exchange Act provides that
it is unlawful to use the mails or any means or instrumentality
of interstate commerce to solicit proxies in contravention of
any rule promulgated by the SEC. 15 U.S.C. SECTION 78n(a).
228. Rule 14a-9 provides in pertinent part: "No
solicitation subject to this regulation shall be made by means
of any ... communication, written or oral, containing any
statement which, at the time, and in light of the circumstances
under which it is made, is false and misleading with respect to
any material fact, or which omits to state any material fact
necessary in order to make the statements therein not false or
misleading...." 17 C.F.R. SECTION 240.14a-9.
229. Conrail's Preliminary Proxy Statement contains
the misrepresentations detailed in paragraph 123 above. It
also omits to disclose the material facts detailed in paragraph
126 above.
230. Further, Conrail's press releases, public
filings, and November 25, 1996 Definitive Proxy Statement
detailed in paragraphs 59, 62, and 129 to 133 above, are
misleading as set forth in such paragraphs.
231. Conrail's November 25, 1996 Definitive Proxy
Statement also omits to disclose, as to each class of voting
securities of Conrail entitled to vote, the number of shares
outstanding as of the December 5, 1996 record date.
232. This omission is a violation of the proxy rules
and in particular, Item 6 of Schedule 14A which provides that:
"As to each class of voting securities of the registrant
entitled to be voted at the meeting ... state the number of
shares outstanding and the number of votes to which each class
is entitled."
233. Each of the false and misleading statements and
omissions made by defendants and alleged in this Complaint were
made under circumstances that should be expected to result in
the granting or withholding of proxies in the vote on the
Charter Amendment, and was intended to have such result.
234. Unless defendants are required by this Court to
make corrective disclosures, Conrail's stockholders will be
deprived of their federal right to exercise meaningfully their
voting franchise.
235. The defendants' false and misleading statements
and omissions described above are essential links in
defendants' effort to deprive Conrail's shareholders of their
ability to exercise choice concerning their investment in
Conrail and their voting franchise.
236. Plaintiffs have no adequate remedy at law.
COUNT FIFTEEN
-------------
(Against Defendant CSX For Violation
Of Section 14(d) Of The Exchange Act
And Rules Promulgated Thereunder)
237. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
238. Section 14(d) provides in pertinent part: "It
shall be unlawful for any person, directly or indirectly by use
of the mails or by any means or instrumentality of interstate
commerce ... to make a tender offer for ... any class of any
equity security which is registered pursuant to section 78l of
this title, ... if, after consummation thereof, such person
would, directly or indirectly, be the beneficial owner of more
than 5 per centum of such class, unless at the time copies of
the offer, request or invitation are first published, sent or
given to security holders such person has filed with the
Commission a statement containing such of the information
specified in section 78m(d) of this title, and such additional
information as the Commission may by rules and regulations
prosecute ...." 15 U.S.C. SECTION 78n(d).
239. On October 16, 1996, defendant CSX filed with
the SEC its Schedule 14D-1 pursuant to Section 14(d).
240. CSX's Schedule 14D-1 contains each of the false
and misleading material misrepresentations of fact detailed in
paragraph 124 above. Furthermore, CSX's Schedule 14D-1 omits
disclosure of the material facts detailed in paragraph 126
above. Additionally, CSX's Amendment No. 4 to its Schedule
14D-1 contains the misstatements and/or omissions alleged in
paragraphs 127(a) and (d) above. As a consequence of the
foregoing, CSX has violated, and unless enjoined will continue
to violate, Section 14(d) of the Exchange Act and the rules and
regulations promulgated thereunder.
241. CSX made the material misrepresentations and
omissions described above intentionally and knowingly, for the
purpose of fraudulently coercing, misleading and manipulating
Conrail's shareholders to tender their shares into the CSX
Offer.
242. Plaintiffs have no adequate remedy at law.
COUNT SIXTEEN
-------------
(Against Defendant Conrail For Violation
Of Section 14(d) Of The Exchange Act
And Rules Promulgated Thereunder)
243. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
244. Section 14(d)(4) provides in pertinent part:
"Any solicitation or recommendation to the holders of
[securities for which a tender offer has been made] to accept
or reject a tender offer or request or invitation for tender
shall be made in accordance with such rules and regulations as
the [SEC] may prescribe as necessary or appropriate in the
public interest of investors." Rule 14d-9 provides in
pertinent part: "No solicitation or recommendation to security
holders shall be made by [the subject company] with respect to
a tender offer for such securities unless as soon as
practicable on the date such solicitation or recommendation is
first published or sent or given to security holders such
person ... file[s] with the [SEC] eight copies of a Tender
Offer Solicitation/Recommendation Statement on Schedule 14D-9."
245. On October 16, 1996, Conrail (i) published its
board of directors' recommendation that Conrail shareholders
tender their shares in the CSX Offer and (ii) filed with the
SEC its Schedule 14D-9.
246. Conrail's Schedule 14D-9 contains each of the
false and misleading material misrepresentations detailed in
paragraph 125 above. Further, Conrail's Schedule 14D-9 omits
disclosure of the material facts detailed in paragraph 126
above. Additionally, Conrail's Amendment No. 4 to its Schedule
14D-9 with respect to the CSX Offer and its Schedule 14D-9 with
respect to the NS Offer contain the misstatements and/or
omissions alleged in paragraphs 127 (a), (c) and (d) above. As
a consequence of the foregoing, Conrail has violated, and
unless enjoined will continue to violate, Section 14(d) of the
Exchange Act and the rules and regulations promulgated
thereunder.
247. Conrail made the material misrepresentations and
omissions described above intentionally and knowingly, for the
purpose of fraudulently coercing, misleading and manipulating
Conrail's shareholders to tender their shares into the CSX
Offer.
248. Plaintiffs have no adequate remedy at law.
COUNT SEVENTEEN
---------------
(Against Conrail and CSX for Violation
of Section 14(e) of the Exchange Act
and Rules Promulgated Thereunder)
249. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
250. Section 14(e) provides in pertinent part: "It
shall be unlawful for any person to make any untrue statement
of a material fact or omit to state any material fact necessary
in order to make the statements made, in the light of the
circumstances under which they are made, not misleading, or to
engage in any fraudulent, deceptive, or manipulative acts or
practices in connection with any tender offer . . . or any
solicitation of security holders in opposition to or in favor
of any such offer . . . ." Defendants have violated and
threaten to continue to violate Section 14(e).
251. The CSX Schedule 14D-1 constitutes a
communication made under circumstances reasonably calculated to
result in the procurement of tenders from Conrail shareholders
in favor of the CSX Offer.
252. The Conrail Schedule 14D-9 and Proxy Statement
constitute communications made under circumstances reasonably
calculated to result in the procurement of tenders from Conrail
shareholders in favor of the CSX Offer.
253. The CSX Schedule 14D-1 contains the false and
misleading material misrepresentations detailed in paragraph
124 above. The CSX Schedule 14D-1 omits disclosure of the
material facts detailed in paragraph 126 above. Additionally,
Amendment No. 4 to such Schedule contains the misstatements
and/or omissions alleged in paragraphs 127(a) and (b) above.
254. The Conrail Schedule 14D-9 contains the false
and misleading material misrepresentations detailed in
paragraph 125 above. The Conrail Schedule 14D-9 omits
disclosure of the material facts detailed in paragraph 126
above. Additionally, Amendment No. 4 to such Schedule contains
the misstatements and/or omissions alleged in paragraphs 127(a)
and (d) above. Also, Conrail's Schedule 14D-9 with respect to
the NS Offer contains the misstatements and/or omissions
alleged in paragraphs 127(a) and (c) above.
255. The Conrail Preliminary Proxy Statement contains
the false and misleading material misrepresentations detailed
in paragraph 124 above. The Conrail Proxy Statement omits
disclosure of the material facts detailed in paragraph 126
above.
256. These omitted facts are material to the
decisions of Conrail shareholders to hold, sell to market, or
tender their shares in the CSX tender offer.
257. The defendants intentionally and knowingly made
the material misrepresentations and omissions described above,
for the purpose of coercing, misleading, and manipulating
Conrail shareholders to swiftly transfer control over Conrail
to CSX by tendering their shares in the CSX Tender Offer.
258. Absent declaratory and injunctive relief
requiring adequate corrective disclosure, plaintiffs, as well
as all of Conrail's shareholders, will be irreparably harmed.
Conrail shareholders will be coerced by defendants' fraudulent
and manipulative conduct to sell Conrail to the low bidder.
Plaintiffs NS and AAC will be deprived of the unique
opportunity to acquire and combine businesses with Conrail.
259. Plaintiffs have no adequate remedy at law.
COUNT EIGHTEEN
--------------
(Against Defendants Conrail and CSX
For Civil Conspiracy To Violate
Section 14 Of The Exchange Act
And Rules Promulgated Thereunder)
260. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
261. Defendants Conrail and CSX conspired and agreed
to conduct the campaign of misinformation described in
paragraphs 95 through 101 above for the purpose of coercing,
misleading and manipulating Conrail shareholders to swiftly
transfer control over Conrail to CSX. As set forth in Counts
Fourteen through Seventeen above, which are incorporated by
reference herein, the defendants' campaign of misinformation is
violative of Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder.
262. Plaintiffs have no adequate remedy at law.
COUNT NINETEEN
--------------
(Against Conrail for
Estoppel/Detrimental Reliance)
263. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
264. By his actions, silence and statements during
the period from September 1994 to October 15, 1996, and
particularly by his statements to Mr. Goode in September and
October of 1996 (as detailed above in paragraphs 24 through 26,
defendant LeVan, purporting to act on behalf of Conrail and its
Board of Directors and with apparent authority to so act, led
Mr. Goode to believe that Conrail's Board was not interested in
a sale of the company and that if and when the Conrail Board
decided to pursue such a sale, it would let NS know and give NS
an opportunity to bid.
265. Prior to October 15, 1996, NS had justifiably
relied on Mr. LeVan's false statements and representations in
refraining from making a proposal to Conrail's Board or
initiating a tender offer of its own for Conrail shares.
266. Mr. LeVan and Conrail knew or should have known
that their actions, silence, statements and representations to
NS would induce NS to believe that Conrail's board was not
interested in selling the company and that NS would be given an
opportunity to bid if Conrail's Board decided that Conrail
would be sold.
267. Mr. LeVan and Conrail knew or should have known
that NS would rely upon their actions, silence, statements and
representations to its detriment in refraining from making a
proposal to Conrail's Board or initiating a tender offer of its
own for Conrail shares.
268. NS did in fact rely upon LeVan's and Conrail's
actions, silence, statements and representations to its
detriment in refraining from making a proposal to Conrail's
Board or initiating a tender offer of its own for Conrail
shares.
269. Conrail and its Board are estopped from
effectuating a sale of the company without giving NS an
adequate opportunity to present its competing tender offer to
the Conrail Board of Directors and Conrail shareholders.
Similarly, any provision in the CSX Merger Agreement that would
impede directors' or shareholders' ability to approve a
competing tender offer or takeover proposal, such as that made
by NS, is null and void.
270. By virtue of NS's justifiable reliance on
Conrail's and Mr. LeVan's actions, silence and statements, it
has suffered and will continue to suffer irreparable harm.
271. Plaintiffs have no adequate remedy at law.
COUNT TWENTY
------------
(Unlawful And Ultra Vires Amendment
of Conrail's Articles of Incorporation)
272. Plaintiffs withdraw Count Twenty as moot.
COUNT TWENTY-ONE
----------------
(Declaratory Judgment Against Conrail and the
Director Defendants That the Entire Conrail
Board, Or Any One or More of Conrail's
Directors, Can Be Removed Without Cause)
273. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
274. Plaintiffs intend, if necessary to facilitate
the NS Proposal, to solicit proxies to be used at Conrail's
next annual meeting to remove Conrail's current Board of
Directors.
275. There is presently a controversy among Conrail,
the Director Defendants and the plaintiffs as to whether the
entire Conrail Board, or any one or more of Conrail's
directors, may be removed without cause at the annual meeting
by a vote of the majority of Conrail stockholders entitled to
cast a vote at the Annual Meeting.
276. Plaintiffs seek a declaration that Article 11 of
Conrail's Articles of Incorporation permits the removal of the
entire Conrail Board, or any one or more of Conrail's
directors, without cause by a majority vote of the Conrail
stockholders entitled to cast a vote at an annual election.
277. Plaintiffs have no adequate remedy at law.
COUNT TWENTY-TWO
----------------
(For Breach of Fiduciary Duty
with Respect to the New Special Meeting)
278. Plaintiffs repeat each of the foregoing
allegations as if fully set forth herein.
279. The director defendants, as members of the
Conrail Board, owe fiduciary duties to plaintiffs and all
Conrail shareholders to exercise their positions of trust and
confidence with due care, loyalty and fair dealing.
280. By acting with improper motivations, including,
but not limited to, indicating their intention to deny
plaintiffs and all Conrail shareholders the exercise of their
right of shareholder suffrage in an effort to ensure victory
for the Charter Amendment, defendants have breached their
fiduciary duties to (i) plaintiffs and (ii) to all Conrail
shareholders by attempting to manipulate the shareholders' vote
and interfering with the exercise of shareholders' voting
rights.
281. The director defendants' conduct is, and,
unless corrected, will continue to be, wrongful, unfair and
harmful to plaintiffs as shareholders of Conrail.
282. Because the threatened failure to convene the
Special Meeting of December 23 will interfere with the
shareholders' ability to exercise their voting rights, it also
is contrary to public policy.
283. Plaintiffs have been and will continue to be
irreparably damaged by the acts of the director defendants.
284. Plaintiffs have no adequate remedy at law.
COUNT TWENTY-THREE
------------------
(For An Injunction Pursuant to
Pennsylvania Business Corporations Law
15 Pa. Cons. Stat. SECTION 1105)
285. Plaintiffs repeat each of the foregoing
allegations above, as if fully set forth herein.
286. As more fully alleged above, the director
defendants' conduct with regard to the December 23 Special
Meeting has been taken with improper motives and in bad faith
for the sole or primary purpose of depriving plaintiffs and
Conrail's other shareholders the free exercise of their right
of shareholder suffrage. Such conduct strikes at the
foundation of corporate democracy and governance and is
fundamentally unfair.
287. The director defendants have acted fraudulently
in at least two respects: first, contrary to their public
representations and representations before this Court that
Conrail shareholders would have a choice with respect to the
CSX Transaction, defendants now say that only a vote approving
the Charter Amendment will be counted and given effect; and
second, by recommending approval of the Charter Amendment
without disclosing that they do not believe such approval is in
the shareholders' best interests.
288. Moreover, by announcing that the New Special
Meeting may be successively postponed until the Conrail
shareholders submit to their will, defendants are attempting to
discourage opposition and coerce approval of the Charter
Amendment. This, too, constitutes fundamental unfairness.
289. Further, defendants are threatening to utilize
corporate assets to solicit proxies to be voted at successively
postponed meetings, while shareholders such as NS must utilize
their own assets to finance countersolicitations. Thus, the
successive postponement of the New Special Meeting threatens to
multiply the costs of opposing management's solicitation, while
management draws upon the corporate coffers. This, too,
constitutes fundamental unfairness.
290. Plaintiffs have been and will continue to be
irreparably harmed by the conduct of the director defendants.
291. Plaintiffs have no adequate remedy at law.
COUNT TWENTY-FOUR
-----------------
(Against the Defendant Directors
for Breach of Fiduciary Duty with
Respect to Section 5.1(b) of the Merger Agreement)
292. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
293. In conjunction with the Amended Merger
Agreement, the Conrail Board has relinquished its power to act
in the best interest of Conrail in connection with the proposed
acquisitions of Conrail by improperly delegating to CSX the
ability to call a Special Meeting of Conrail's stockholders.
294. The Conrail Board improperly has given to CSX,
pursuant to the amended Merger Agreement, the ability to call a
Special Meeting of Conrail stockholders in violation of Section
2521 of the PBCL. CSX is not entitled to call a special
meeting of Conrail's stockholders under Section 2521. Conrail
has not opted out of Section 2521 by providing its stockholders
in its Articles of Incorporation with a right to call a special
meeting.
295. Thus, by contractually binding itself to call a
special meeting of stockholders at the request of CSX, the
Conrail directors have abdicated their fiduciary duties, in
violation of their duties of care and loyalty. In addition,
they have attempted to circumvent the provisions of the PBCL by
allowing CSX to call special meetings of Conrail stockholders,
which CSX cannot do under the PBCL.
296. If CSX is going to assert that it should have
the power to call special meetings of stockholders under
Section 5.1 of the amended Merger Agreement -- a power which
holders of at least 20% or more of a corporation's stock have
and, then, in only limited circumstances not applicable here --
then it must be treated as a 20% stockholder for all purposes
under the PBCL, including for purposes of Subchapter 25E.
297. Alternatively, Section 5.1(b) must be declared a
void and ulta vires act of the Conrail Board.
298. Plaintiffs have no adequate remedy at law.
COUNT TWENTY-FIVE
-----------------
(For Declaratory Relief
Against All Defendants Relating
To Subchapter 25E of the PBCL)
299. Plaintiffs repeat and reallege all of the
foregoing allegations as if fully set forth in this paragraph.
300. Subchapter 25E of the PBCL was designed and
intended to provide protection for shareholders of Pennsylvania
Corporations against coercive partial tender offers.
Subchapter 25E provides that "[a]ny holder of voting shares of
a registered corporation that becomes the subject of a control
transaction who shall object to the transaction shall be
entitled to the rights and remedies provided in this
subchapter." "Control transaction" is defined as the
"acquisition by a person or group of the status of a
controlling person or group." "Controlling person or group"
means "a person who has, or a group of persons acting in
concert that has, voting power over voting shares of the
registered corporation that would entitle the holders thereof
to cast at least 20% of the votes that all shareholders would
be entitled to cast in an election of directors."
301. The remedy provided by Subchapter 25E is the
right to receive "fair value", as defined, upon demand, for
each of the shares held by an objecting shareholder, from the
controlling person or group. "Fair value" means a value "not
less than the highest price paid for shares by the controlling
person or group at any time during the 90-day period ending on
and including the date of the control transaction plus an
increment representing any value, including without limitation,
any proportion of any value payable for acquisition of control
of the corporation, that may not be reflected in such price."
Subchapter 25E sets forth defined procedures for demand,
appraisal, and payment of "fair value."
302. For the purpose of Subchapter 25E, "a person has
voting power over a voting share if the person has or shares,
directly or indirectly, through any option, contract,
arrangement, understanding, conversion right or relationship,
or by acting jointly or in concert or otherwise, the power to
vote, or to direct the vote of, the voting share."
303. CSX, Green Acquisition Corp., Conrail's
directors, senior executives and officers of Conrail constitute
a group acting in concert and for the common purpose of
facilitating, pursuing, and causing to be consummated the CSX
Transaction (the "Control Transaction Group").
304. CSX purchased an aggregate of 17,860,124 shares
of Conrail stock pursuant to its first tender offer which
expired on November 20, 1996. It paid $110 in cash per share.
305. Upon information and belief, the sum of the
shares purchased by CSX in its first tender offer and the
shares held by Conrail's directors and senior executive
officers is in excess of 20% of the voting shares of Conrail
stock. If one also takes into account the unallocated shares
held by the Conrail ESOP and Employee Benefit Trust over which
Conrail's officers have voting power, consummation of the first
CSX tender offer resulted in the Control Transaction Group
having acquired voting power over very substantially in excess
of 20% of Conrail's voting stock. Thus, upon consummation of
the first CSX tender offer, a control transaction occurred with
respect to Conrail.
306. Accordingly, the Control Transaction Group is
required by Subchapter 25E to give prompt notice of a control
transaction and to pay to each demanding shareholder at least
$110 per share in cash for each share held by such demanding
shareholder. Plaintiffs seek a declaratory judgment that this
is so.
307. Plaintiffs have no adequate remedy at law.
WHEREFORE, plaintiffs respectfully request that this
Court enter judgment against all defendants, and all persons in
active concert or participation with them, as follows:
A. Declaring that:
(a) defendants have violated Sections 14(a),
14(d) and 14(e) of the Exchange Act and the rules and
regulations promulgated thereunder;
(b) defendants' use of the Charter Amendment is
violative of Pennsylvania statutory law and their fiduciary
duties;
(c) defendants' discriminatory use of Conrail's
Poison Pill Plan violates the director defendants' fiduciary
duties;
(d) the termination fees and stock option
agreements granted by Conrail to CSX are violative of the
defendants' fiduciary duties;
(e) the Continuing Director Requirement of
Conrail's Poison Pill Plan is ultra vires and illegal under
Pennsylvania Law and Conrail's Articles of Incorporation and
Bylaws; and is illegal because its adoption constitutes a
breach of the defendants' fiduciary duties;
(f) Conrail's entire staggered board or any one
or more of its directors, can be removed without cause at
Conrail's next annual meeting of stockholders;
(g) the defendants have engaged in a civil
conspiracy to violate Section 14 of the Exchange Act and the
rules and regulations promulgated thereunder;
(h) the Poison Pill Lock-In provisions in the
CSX Merger Agreement are ultra vires and, therefore, void under
Pennsylvania Law;
(i) the Two-Year Lock-Out provision in the CSX
Merger Agreement is ultra vires under Pennsylvania law and,
therefore, void;
(j) the Director Defendants, by approving the
CSX Merger Agreement, breached their fiduciary duties of care
and loyalty;
(k) the coercive nature of the CSX Transaction
constitutes fundamental unfairness to Conrail's shareholders;
(l) the defendants' conduct concerning the New
Special Meeting constitutes an illegal and inequitable
manipulation of the processes of corporate democracy and is
fraudulent and fundamentally unfair;
(m) section 5.1(b) of the revised CSX Merger
Agreement constitutes an unlawful delegation of the Director
Defendants' fiduciary duties, is illegal and ultra vires, and
its adoption by Conrail constituted a breach of the Director
Defendants' fiduciary duties, aided and abetted by CSX; and
(n) consummation of the first CSX Offer caused
a "Control Transaction" with respect to Conrail to occur under
subchapter 25E of the PBCL and created a joint and several
liability among the members of the Control Transaction Group to
pay $110 cash per share to each demanding Conrail shareholder.
B. Preliminarily and permanently enjoining the
defendants, their directors, officers, partners, employees,
agents, subsidiaries and affiliates, and all other persons
acting in concert with or on behalf of the defendants directly
or indirectly, from:
(a) commencing or continuing a tender offer for
shares of Conrail stock or other Conrail securities or
accepting shares for payment in connection with such tender
offer;
(b) seeking the approval by Conrail's
stockholders of the Charter Amendment, or, in the event it has
been approved by Conrail's stockholders, from taking any steps
to make the Charter Amendment effective;
(c) taking any action to redeem rights issued
pursuant to Conrail's Poison Pill Plan or render the rights
plan inapplicable as to any offer by CSX without, at the same
time, taking such action as to NS's outstanding offer;
(d) taking any action to enforce the Continuing
Director Requirement of Conrail's Poison Pill Plan;
(e) taking any action to enforce the
termination fee or stock option agreement granted to CSX by
Conrail;
(f) failing to take such action as is necessary
to exempt the NS Proposal from the provisions of the
Pennsylvania Business Combination Statute;
(g) holding the Conrail special meeting until
all necessary corrective disclosures have been made and
adequately disseminated to Conrail's stockholders;
(h) taking any action to enforce the Poison
Pill Lock-In and/or the Two-Year Lock-Out provisions of the CSX
Merger Agreement;
(i) failing to take such action as is necessary
to ensure that a Distribution Date does not occur under the
terms of the Conrail Poison Pill Plan;
(j) failing to take any action required by the
fiduciary duties of the Director Defendants; and
(k) postponing the shareholder vote scheduled
for December 23, 1996.
(l) taking any further action toward
consummation of the CSX Transaction.
C. Granting compensatory damages for all incidental
injuries suffered as a result of defendants' unlawful conduct.
D. Awarding plaintiffs the costs and disbursements
of this action, including attorneys' fees.
E. Granting plaintiffs such other and further
relief as the court deems just and proper.
________________________
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: December 20, 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, :
:
v. :
: C.A. No. 96-CV-7167
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 MOTION TO DISMISS
DEFENDANTS COUNTERCLAIM
Pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure, plaintiffs Norfolk Southern Corporation,
Atlantic Acquisition Corporation, and Kathryn B. McQuade
hereby move that Defendants Counterclaim against them be
dismissed with prejudice for failure to state a claim for
which relief may be granted.
In support of their motion, plaintiffs rely upon
the accompanying memorandum of law.
Respectfully Submitted:
________________________
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
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: December 23, 1996
