SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-1
(AMENDMENT NO. 13)
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. 13 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 thereto,
dated November 8, 1996 (the "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 Supplement or the Schedule 14D-1.
ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER.
Item 5 is hereby amended and supplemented by the following:
(e) On November 21, 1996, CSX announced that 76,629,202 Shares had been
tendered pursuant to the CSX Offer, and that Green Acquisition Corp., a wholly
owned subsidiary of CSX, had accepted for payment 17,860,124 Shares,
representing 19.9% of the Company's outstanding Shares. According to CSX, the
preliminary proration factor in the CSX Offer was 23% for all Shares tendered.
The CSX Offer expired at midnight, New York City time, on Wednesday, November
20, 1996.
ITEM 10. ADDITIONAL INFORMATION.
Item 10 is hereby amended and supplemented by the following:
(e) In view of CSX's purchase of 19.9% of the Shares, Parent announced
that no purpose would be served by seeking expedited review by the Third
Circuit of the decision not to enjoin the CSX Offer. While the closing of the
CSX Offer has made the need for an expedited review unnecessary, Parent
continues to pursue on the merits its lawsuit against the Company and CSX.
(f) On November 21, 1996, Parent and Purchaser announced that they were
extending the expiration date of the Offer to 12:00 midnight, New York City
time, on Monday, December 16, 1996, unless the Offer is further extended. As
of the afternoon of November 21, 1996, approximately 1.4 million Shares, or
approximately 1.6% of the outstanding Shares, had been tendered pursuant to
the Offer.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
Item 11 is hereby amended and supplemented by the following:
(a)(47) Press Release issued by Parent on November 21, 1996.
(g)(4) Emergency Motion for an Injunction Pending Appeal filed by
Parent, Purchaser and Kathryn B. McQuade against the Company,
CSX et. al. (dated November 19, 1996, United States Court
Appeals for the Third Circuit.
(g)(5) Motion for an Expedited Appeal filed by Parent, Purchaser and
Kathryn B. McQuade against the Company, CSX et. al. (dated
November 19, 1996, United States Court Appeals for the Third
Circuit.
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.
November 21, 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 Page
(a)(47) Press Release issued by Parent on November 21, 1996.
(g)(4) Emergency Motion for an Injunction Pending Appeal
filed by Parent, Purchaser and Kathryn B. McQuade
against the Company, CSX et. al. (dated November 19,
1996, United States Court Appeals for the Third Circuit.
(g)(5) Motion for an Expedited Appeal filed by Parent, Purchaser
and Kathryn B. McQuade against the Company, CSX
et. al. (dated November 19, 1996, United States Court
Appeals for the Third Circuit.
FOR IMMEDIATE RELEASE
NOVEMBER 21, 1996
Media Contact: Robert Fort
(757) 629-2714
NS EXTENDS CONRAIL TENDER OFFER
NORFOLK, VA Norfolk Southern Corporation (NYSE: NSC) today
announced that it is extending its previously announced tender
offer for shares of Conrail. The tender offer has been extended
through 12:00 midnight, New York City time, on Monday, December
16, 1996. Norfolk Southern continues to offer $110 cash per
share for all shares of Conrail. According to the depositary
for the Norfolk Southern tender offer, approximately 1.4 million
Conrail shares had been tendered and not withdrawn pursuant to
Norfolk Southern's offer as of the afternoon of November 21.
Regarding the announcement concerning CSX's purchase today
of Conrail shares under the CSX offer, Norfolk Southern said the
response to the CSX offer clearly demonstrates that most holders
of Conrail stock want $110 cash per share, the price Norfolk
Southern continues to offer. Unfortunately for Conrail
stockholders, CSX is willing to make this payment only for up to
40 percent of the outstanding shares.
-- MORE --
To preserve their opportunity to receive the best price for
all their shares, Conrail stockholders need to vote against
Conrail's proposal to opt out of the Pennsylvania fair value
statute. Norfolk Southern intends to take every step necessary
to convince Conrail stockholders to vote against the opt-out
proposal.
In view of CSX's purchase of 19.9% of the Conrail shares,
Norfolk Southern indicated that no purpose would be served by
seeking expedited review by the Third Circuit Court of Appeals
of the decision not to enjoin CSX's purchase. While the closing
of the CSX offer has made the need for an expedited review
unnecessary, Norfolk Southern continues to pursue on the merits
its lawsuit against Conrail and CSX.
Based on advice received from federal regulatory agencies,
Norfolk Southern confirmed that the two regulatory conditions to
its offer have been satisfied. As a result, the only major
conditions that remain to be satisfied are those requiring
action by Conrail's board of directors.
###
World Wide Web Site - http://www.nscorp.com
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
====================================================================
NO. ---------
====================================================================
NORFOLK SOUTHERN CORPORATION, a Virginia corporation,
ATLANTIC ACQUISITION CORPORATION, a Pennsylvania
corporation AND KATHRYN B. McQUADE,
Appellants
v.
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,
Appellees
====================================================================
On Appeal from the United States District Court for the Eastern
District of Pennsylvania
Civil Action No. 96-CV-7167
====================================================================
APPELLANTS' EMERGENCY MOTION FOR AN INJUNCTION PENDING APPEAL
====================================================================
DECHERT PRICE & RHOADS
Mary A. McLaughlin
George G. Gordon
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2703
(215) 994-4000
(215) 994-2222 Facsimile
OF COUNSEL:
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM
Steven J. Rothschild
One Rodney Square
P.O. Box 636
Wilmington, DE 19801
(302) 651-3000
(302) 651-3001 Facsimile
Pursuant to Federal Rule of Appellate Procedure 8(a)
and on the grounds set forth herein, appellants Norfolk Southern
Corporation ("Norfolk"), Atlantic Acquisition Corporation and
Kathryn B. McQuade (collectively, "appellants") hereby move this
Court for an injunction pending resolution of their appeal of the
November 19, 1996 Order of the United States District Court for
the Eastern District of Pennsylvania denying Plaintiffs' Motion
for a Preliminary Injunction.
PRELIMINARY STATEMENT
By the end of the day tomorrow, Wednesday, November 20,
1996, Conrail's fate will be sealed. Unless this Court acts to
maintain the status quo, CSX's tender offer for 19.9% of
Conrail's shares will close on that date. If that is allowed to
happen, Conrail's and CSX's collusive scheme to lock up control
of Conrail, and to disenfranchise Conrail shareholders, will have
succeeded. Consequently, appellants respectfully request that
this Court issue an injunction maintaining the status quo pending
the resolution of their appeal of the District Court's November
19, 1996 Order denying Plaintiffs' Motion for a Preliminary
Injunction.
I. THE ORIGINAL CONRAIL-CSX TRANSACTION
After maintaining for months that Conrail was not for
sale (and repeatedly dissuading Norfolk from making an offer for
Conrail shares), on October 15, 1996 Conrail announced a surprise
merger agreement between CSX and Conrail (the "CSX Transaction").
Central to the CSX Transaction were covenants substantially
increasing the compensation of Conrail's CEO, David LeVan, and
guaranteeing that Mr. LeVan would succeed John Snow as CEO and
Chairman of CSX, the surviving company. Moreover, also integral
to the CSX Transaction were an unprecedented array of defensive
provisions designed to enhance the coercive effect of the CSX
Transaction and through which the Conrail directors effectively
abdicated their fiduciary duties.
The CSX Transaction was structured as a coercive,
multi-tiered, front-end loaded tender offer. The original merger
agreement provided that CSX would purchase 40% of Conrail stock
via a tender offer for $92.50 a share. Conrail also granted CSX
options to purchase an additional 15,955,477 shares of common
stock that would, in combination with the 40% purchased through
the tender offer, bring its holdings to 50% of Conrail stock.
Once that happens, according to Conrail's own preliminary proxy
materials, "approval of the merger by the Conrail shareholders
would be certain."
In the proposed merger, the remaining Conrail shares
will be exchanged for shares of CSX stock at a rate of 1.85619
CSX shares for each share of Conrail stock. This back-end
exchange of stock is currently worth only $82.37 per share using
the closing price of CSX stock as of November 15, 1996. The
large disparity between the consideration offered in the front-
end tender offer and that offered in the back-end merger is
intentionally designed to coerce shareholders to tender their
shares in the front-end tender offer, thereby locking up approval
of the merger.
Conrail and CSX hope that shareholders fear of having
to accept the less valuable CSX stock in the back-end merger will
create a "stampede" effect, allowing CSX (1) to obtain 40% of the
shares in the front-end tender offer; (2) then to exercise its
stock option to bring its holdings to almost 50% of Conrail s
shares; and (3) finally to force the remaining shareholders to
accept the less generous exchange of stock in the merger.
Indeed, Professor John E. Coffee of Columbia University School of
Law testified that he had "not seen a disparity this great in any
tender offer in well over a decade." (Hrg. Tr. at 68)1
One problem, however, prevents Conrail and CSX from
getting away with this coercive scheme. Subchapter 25E of the
Pennsylvania Business Corporation Law ("PBCL") provides that any
person acquiring voting power over 20% or more of a corporation s
voting shares must acquire any additional shares tendered for a
"fair price", which is defined in the statute as not less than
the highest price per share paid by the acquiring person within
90 days before obtaining control over 20% of the voting shares
plus an increment representing the proportionate value of any
control premium. In other words, if CSX acquired 20% or more of
Conrail s shares for $110 (its current tender offer), it would
have to purchase 100% of Conrail s shares, if tendered, for at
least $110. A corporation may amend its articles of
incorporation to "opt-out" of Subchapter 25E. To date, Conrail
has not done so.
To avoid this problem, the CSX Transaction was
originally structured as follows: (1) a first step cash tender
offer for up to 19.9% of Conrail s stock (originally scheduled to
close on November 15); (2) a "Charter Amendment" to Conrail s
articles of incorporation to opt-out of Subchapter 25E
(originally scheduled to be voted on at a shareholders meeting
scheduled for November 14, the day before the first stage of the
CSX tender offer was to close); (3) an acquisition of additional
shares which would represent, in combination with the shares
already purchased, at least 40%, and possibly up to 50%, of
Conrail s stock; and (4) consummation of the merger following
appropriate regulatory approvals.
The CSX Transaction also contained an unprecedented
array of defensive provisions designed to enhance the coercive
effect of the CSX tender offer and to freeze out competing tender
offers, including:
* a provision which prevents Conrail's board from
terminating the CSX Transaction or approving a
competing transaction for 180 days from the date
of the merger agreement, regardless of whether its
fiduciary duty would require it to do so.
* a provision prohibiting the Conrail board from
exempting any other competing bidder from the
Conrail poison pill plan without CSX s approval.
* a lock-up stock option to purchase 15,955,477
shares of Conrail common stock for $92.50 which
has a virtually unlimited dilution effect on a
competing bidder. Under the current $110 per
share Norfolk tender offer, the dilution
attributable to the option would be approximately
$280 million.
* a $300 million breakup fee if the CSX merger
agreement is terminated following a competing
takeover proposal. In conjunction with the lock-
up stock option, this breakup fee would currently
add $580 million to the cost of the most recent
Norfolk tender offer.
Through these provisions, the Conrail board has
effectively delegated its fiduciary duties to CSX - a party who
"has the strongest conflict in the entire world with the
shareholders." (Hrg. Tr. at 79[Coffee Testimony]) Indeed,
Furlong Baldwin, a Conrail director, candidly testified that he
believes his "responsibility is to [the CSX] merger agreement."
(Hrg. Tr. at 239) Moreover, these provisions enhance the
coercive effect of the CSX tender offer by creating the
appearance that no competing offer could be viable.
Despite these impediments to a Norfolk-Conrail
transaction, Norfolk decided to offer Conrail shareholders a
better deal. On October 23, 1996, Norfolk announced an all cash
tender offer for Conrail stock at $100 per share. This tender
offer was worth approximately $15 per share more than the
original CSX offer, which had a blended value of slightly more
than $85.00 per share as of October 29, 1996.
II. THE REVISED CONRAIL-CSX TRANSACTION
In response to Norfolk's financially superior tender
offer, Conrail and CSX amended their merger agreement to further
pressure Conrail shareholders to tender their shares into the
first step of the CSX offer (the "Amended CSX Transaction"). CSX
increased the first stage of its tender offer to $110, but did
not increase or guarantee the value of the back-end
consideration, thereby exacerbating the coercive nature of its
offer. Under the Amended CSX Transaction, CSX will acquire only
40% of the Conrail shares for $110; the remaining 60% of Conrail
would be exchanged for CSX stock worth only $82.37 as of November
15, 1996. The amendment also extended by three months the period
of time during which the directors cannot withdraw their support
of the CSX Transaction or approve another transaction (the "270-
Day Lock-Out Provision"). The amended time period now runs until
July 12, 1996.
Conrail and CSX also changed the timing of the CSX
Transaction to increase its coercive effect. The first stage of
the CSX tender offer will now close on November 20, 1996. The
new record date for the shareholders meeting to consider the
Charter Amendment is December 5, 1996 (with the meeting to take
place in "mid-December"). In short, CSX and Conrail are now
trying to stampede Conrail's shareholders into selling a
substantial block of Conrail stock through an illegally coercive
tender offer before the vote on the Charter Amendment. That
stock would then be voted as a block in favor of the Charter
Amendment -- effectively stuffing the ballot box in connection
with CSX's and Conrail's effort to have Conrail shareholders opt-
out of the protections provided to them by Subchapter 25E.
On November 7, 1996, one day after CSX and Conrail
announced the Amended CSX Transaction, Norfolk increased its all
cash tender offer for all Conrail shares to $110 per share.
According to the November 8, 1996 edition of The Wall Street
Journal, Norfolk's "increased bid has a value of nearly $17 a
share more than CSX's." In other words, Norfolk's all cash $110
per share tender offer is worth approximately $1.5 billion more
to Conrail shareholders than the Amended CSX Transaction. Yet
without an injunction pending appeal, Conrail shareholders will
effectively be deprived of the opportunity to accept Norfolk's
financially superior offer.
PROCEDURAL HISTORY
On October 23, 1996, appellants filed an action in the
United States District Court for the Eastern District of
Pennsylvania challenging the coercive provisions of the CSX
Transaction. Pursuant to the briefing schedule suggested by the
Court, appellants served their Opening Memorandum of Law in
Support of Their Motion for a Preliminary Injunction on November
11, 1996 and filed their Motion for a Preliminary Injunction and
supporting papers on November 13, 1996. After a hearing on
November 18-19, 1996, the District Court denied appellants
Motion. Appellants immediately filed a Notice of Appeal, a
Motion for Expedited Appeal, and this Emergency Motion for an
Injunction Pending Appeal.
ARGUMENT
I. THE APPLICABLE LEGAL STANDARDS.
A federal court may issue an injunction or a stay
pending appeal in order "to prevent irreparable injury to the
parties or to the public resulting from the premature enforcement
of a determination which may later be found to have been wrong."
Scripps-Howard Radio, Inc. v. Federal Communications Commission,
316 U.S. 4, 9 (1942); see also Fed. R. App. P. 8(a). For an
injunction to issue, a court must weigh four factors: (1) the
applicants likelihood of success on the merits of their appeal;
(2) whether the applicants will be irreparably injured absent an
injunction; (3) whether issuance of an injunction will
substantially injure the other parties interested in the
procedure; and (4) where the public interest lies. See Republic
of the Philippines v. Westinghouse Elec. Corp., 949 F.2d 653, 658
(3d Cir. 1991).
No single factor is controlling. If one factor weighs
heavily in favor of an injunction, a lesser showing is needed for
the others. In particular, when irreparable harm is clearly
demonstrated, a lesser showing of success on the merits is
required for an injunction to issue. See e.g. Ohio v. Nuclear
Regulatory Commission, 812 F.2d 288, 290 (6th Cir. 1987) ("The
probability of success that must be demonstrated is inversely
proportional to the degree of irreparable injury the plaintiff
will suffer absent an injunction"). Where - as here - a case
involves matters of first impression or unsettled law, several
courts have recognized that it is particularly appropriate to
focus more on the harm that will be suffered by the applicants if
the injunction is denied and less on the issue of success on
appeal. First Amendment Coalition v. Judicial Inquiry and Review
Bd., 584 F. Supp. 635, 638 (E.D. Pa. 1984)(Pollak, J.)(holding
that, because the case involved "essentially untested
constitutional analysis" and there was "no single authoritative
decision" on point, if a "reasonable possibility" of success on
appeal could be shown, "the equities would then shift strongly
towards granting a stay" under F.R.C.P. 62(c)), vac. on other
grounds, 784 F.2d 467 (3d. Cir. 1986); see also U.S. v. Eleven
Vehicles, 1995 WL 635332 at *3 (E.D. Pa. Oct. 24, 1995); Republic
Industries v. Central Pennsylvania Teamsters Pension Fund, 537 F.
Supp. 1036, 1037 (E.D.Pa. 1982) (stay granted where appeal was
"non-frivolous").
As explained below, if this Court does not grant
injunctive relief pending resolution of this appeal, Conrail s
shareholders will suffer catastrophic and irreparable harm.
Moreover, even though appellants are entitled to a lower standard
with respect to the likelihood of success on appeal, they do not
need it. Appellants have a strong likelihood of success on the
merits of their appeal and the remaining factors of the harm to
other parties and the public interest also weigh in favor of an
injunction.
II. IF THE COURT DOES NOT ENJOIN CSX'S TENDER OFFER FROM CLOSING
PENDING APPEAL, CONRAIL'S FATE WILL BE SEALED
If this Court does not issue an injunction to maintain
the status quo pending appeal, the irreparable harm to appellants
is plain. Courts have recognized that a plaintiff is irreparably
harmed if he loses the opportunity to acquire the object of his
acquisition bid as a result of illegal conduct by defendants.
See A. Copeland Enters., Inc. v. Guste, 706 F. Supp. 1283, 1293
(W.D. Tex. 1989); Asarco, Inc. v. M.R.H. Homes A Court, 611 F.
Supp. 468, 480 (D.N.J. 1985); West Point-Pepperell, Inc. v.
Farley, Inc., 711 F. Supp. 1088, 1095 (N.D.Ga. 1988); Buckhorn,
Inc. v. Ropak Corp., 656 F. Supp. 209, 235-36 (S.D. Ohio), aff d
mem., 815 F.2d 76 (6th Cir. 1987). Moreover, the irreparable
harm to Conrail s shareholders that flows from the lack of an
opportunity to exercise choice free from coercion must be given
substantial weight. See Conoco, Inc. v. Seagram Co., 517 F.
Supp. 1299, 1303 (S.D.N.Y. 1981)("The Directors are free to
continue by proper legal means to express to the shareholders
their objection and hostility to the [offeror s] proposal, but
they are not free to deny them their right to pass upon this
offer or any other offer for the purchase of their shares"); see
also, Amalgamated Sugar Co. LLC v. NL Indus., 644 F. Supp. 1229,
1239 (S.D.N.Y. 1986); Buckhorn, 656 F. Supp. at 235-36.
Here, the CSX Transaction and the Amended CSX
Transaction were designed specifically to stampede shareholders
into tendering their shares to CSX in the front-end tender offer,
which now closes on Wednesday, November 20, 1996. Without an
injunction pending appeal, CSX and Conrail will have succeeded in
the first stage of their coercive scheme. Indeed, if CSX
acquires the 19.9% of Conrail shares sought in the tender offer
(which is likely given the coercive nature of the offer),2 it
will set in motion an irreversible process that will result in
CSX locking up control of Conrail swiftly and without the chance
for shareholders to have a meaningful say.
For example, once CSX owns 19.9% of Conrail's stock,
Norfolk will be foreclosed from entering into a "business
combination" with Conrail for five years under Subchapter 25F of
the PBCL. That provision of the PBCL prevents a company from
entering into a "business combination" for five years with a
shareholder that owns 20% or more of its shares. Thus, even if
Norfolk's tender offer were successful and it obtained more than
20% of Conrail's shares, it could not merge with Conrail unless:
(i) the Conrail Board approved Norfolk's proposed
business combination;
(ii) the business combination received the approval of
the holders of all of Conrail's outstanding shares not owned by
Norfolk; or
(iii) Norfolk owned 80% of the Conrail shares, and the
business combination received the approval of the holders of a
majority of the shares not owned by Norfolk (and Norfolk complies
with certain fair price provisions).
As a practical matter, however, once the CSX tender
offer closes, these exceptions are unavailable to Norfolk. The
first exception is precluded by the CSX Transaction -- the
merger agreement, as amended, forbids the Conrail board from
approving a business combination with anyone but CSX for 270
days. In addition, if CSX obtains 19.9% of the outstanding
Conrail shares through its coercive tender offer, the second and
third exceptions will be mathematically impossible.
Moreover, if the CSX tender offer closes, CSX and
Conrail will have successfully manipulated the outcome of the
upcoming vote on the Charter Amendment in their favor. If the
Charter Amendment passes (which is highly likely when at least
20% of the shares will already be committed to vote in favor of
the Amendment), CSX will launch a second tender offer for 20.1%
of the remaining Conrail shares. At that point, shareholders
only choice will be to tender into the front-end of the CSX offer
or risk getting stuck with the less valuable back-end exchange of
stock. Conrail has conceded in its proxy materials that
shareholder approval of the proposed CSX-Conrail merger is
"certain" once CSX obtains 40% of the outstanding shares and
exercises its lock-up stock option.
Thus, on Wednesday November 20, Conrail's fate will be
effectively sealed. Once the CSX tender offer closes, it will be
too late to "unscramble the eggs." Conrail and CSX will have
succeeded in their scheme to deny shareholders any meaningful say
in determining Conrail's fate and to lock-up CSX s control of
Conrail.
III. APPELLANTS HAVE A STRONG LIKELIHOOD OF SUCCESS ON APPEAL
An injunction pending appeal is compelled not only by
the plain irreparable harm that appellants will suffer if the
status quo is not maintained pending appeal, but by appellants'
strong likelihood of success on appeal as well. The CSX
Transaction is unprecedented in terms of the array of defensive
provisions employed to coerce shareholders into acting contrary
to their best interests. Professor Coffee testified that he has
"never seen a transaction that has the cumulative amount of
obstacles in terms of their total effect." (Hrg. Tr. at 83.)
Through these defensive provisions, the Conrail board has
abdicated its fiduciary duties in an effort to "bulletproof" the
CSX Transaction. Moreover, Conrail and its Board have acted to
mislead and coerce shareholders into tendering their shares to
CSX.
A. CONRAIL'S DIRECTORS HAVE ABDICATED THEIR FIDUCIARY
DUTIES
The PBCL requires that the "business and affairs of
every [Pennsylvania] Corporation shall be managed under the
direction of, a board of directors." PBCL SECTION 1721. The PBCL also
makes clear that the directors of a Pennsylvania corporation must
act with due care and in good faith. Here, the Conrail Board has
refused to direct the management of the affairs of Conrail and
has contractually bound itself to allow CSX to have the final
word on certain critical matters without regard to what may be
in the best interests of Conrail, its shareholders or its other
constituencies. As noted above, Mr. Baldwin testified that his
responsibility was to adhere to the CSX merger agreement, and
that, because of the merger agreement, Conrail could not sign an
agreement with Norfolk even if it was better for Conrail s
constituencies. (Hrg. Tr. at 236, 243)
For example, the 270-Day Lock-Out provision purports to
bind Conrail's directors not to terminate the CSX Transaction for
270 days regardless of the circumstances. Moreover, the CSX
merger agreement also purports to bind the Conrail board not to
take any action with respect to the Conrail poison pill plan to
facilitate any offer to acquire Conrail other than the CSX
Transaction. Through these provisions the Conrail directors have
ceded to CSX their authority and ability to consider and pursue
other acquisition proposals. In short, Conrail's directors gave
up their ability to use their own best judgment on matters
critical to Conrail's shareholders. As Professor Coffee
explained:
Until the merger agreement is unwound with the consent
of CSX or the 270-day period expires the Conrail
directors are not in a position to live up to their own
fiduciary duties even if they wanted to.
(Hrg. Tr. at 86, 87)
Neither Conrail nor CSX can point to a single case
giving the Conrail's directors the right to abdicate their
fiduciary duties under Pennsylvania law. Indeed, case law from
Pennsylvania and across the country makes clear that directors
cannot delegate away those duties that lie at the heart of the
management of the corporation. See e.g., Neal v. Neumann Medical
Center, 667 A.2d 479, 483 (Pa. Commw. Ct. 1995) ("Certainly, if
enforcement of the bylaws provision providing for the mandatory
advancement of defense expenses would conflict with the
directors' fiduciary duties in this case, then it is of no moment
whether the enforcement is pursuant to a contract separate from
the bylaws or pursuant to the bylaws themselves"); Paramount
Communications Inc., v. QVC Network Inc., 637 A.2d 34, 51 (Del.
1994)("To the extent that a contract, or a provision thereof,
purports to require a board to act or not act in such a fashion
as to limit the exercise of fiduciary duties, it is invalid and
unenforceable").(3)
Moreover, Conrail's directors have abdicated their
fiduciary duties with little, if any, investigation or
understanding of what they were doing. For example, Mr. Baldwin
testified that:
* He did not read the Norfolk offer (Hrg. Tr. at
196)
* He did not read the CSX offer to purchase (Id.)
* He did not ask whether Conrail's Board would be
free to accept a deal that was "twice as good" as
the CSX offer. (Id. at 207.)
Mr. Baldwin also appeared to lack a basic understanding
of some of the key elements of the CSX Transaction, such as the
fact that the CSX merger agreement exempted CSX from the poison
pill. (Id. at 222-23.)
B. CONRAIL AND CSX HAVE ACTED TO COERCE CONRAIL
SHAREHOLDERS INTO TENDERING THEIR SHARES TO CSX
Not only have the Conrail directors abdicated their
fiduciary duties, but they (along with CSX) have acted
affirmatively to coerce Conrail shareholders into tendering their
shares to CSX. Indeed, Conrail, in Amendment No. 4 to its
Schedule 14D-9, acknowledges that because of the coercive nature
of the CSX Transaction "the 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." That admission is truly remarkable.
No Pennsylvania authority holds that a target company s
board of directors can coerce its shareholders into acting
against their own interests. Indeed, Subchapter 25E of the PBCL
was designed to avoid precisely the type of coercion being
practiced by Conrail and CSX.(4) According to the Pennsylvania
Corporation Law and Practice treatise:
Specifically, the control transaction provisions of the
1988 BCL [in Subchapter 25E] protect shareholders of
registered corporations against two-tier front end
loaded tender offers, tender offers for fewer than all
of the outstanding shares and tender offers with a non-
cash component for common stock by forcing the acquiror
to pay fair value in cash to all demanding shareholders
regardless of the stated terms of the offer.
John W. McLamb, Jr. and Wendy C. Shiba, Pennsylvania Corporation
Law and Practice, SECTION 10.14(b) at 551 (1993 Supp.)(Prentice Hall &
Business).
Here, however, the CSX and the Conrail board seek to
stand Subchapter 25E on its head. They are attempting to coerce
shareholders into opting out of Subchapter 25E - which was
specifically designed to protect shareholders from precisely this
type of coercive multi-tiered tender offer - so that they can
force through a back-end merger where the consideration to be
received has a value of $82. The gross disparity between the
$110 per share consideration in the first CSX tender offer and
the $82 per share value of the CSX back-end merger would lead any
rational shareholder to tender their shares in the first tender
offer, thereby giving CSX a "leg-up" in the vote on the proposed
Charter Amendment opting out of Subchapter 25E. In short, CSX
and Conrail are trying to use the protections of PBCL, which were
designed as a shield to be used for the benefit of shareholders,
as a sword against shareholders in CSX s effort to lock-up swift
control of the company.
This coercive effect of the CSX tender offer is
enhanced by draconian defensive provisions, including the 270-Day
Lock-Out provision, the $300 million break-up fee and the lock-up
stock option (which has a current dilution effect of $280
million). These provisions were specifically designed to make
Conrail shareholders believe that any competing bid, including
Norfolk's, is effectively unavailable. Thus, Conrail
shareholders would be left with the perception that they have
only one rational choice to tender their shares to CSX.(5)
IV. THE LACK OF HARM TO DEFENDANTS AND THE PUBLIC INTEREST ALSO
WARRANT AN INJUNCTION PENDING APPEAL
The remaining two factors to be considered by the Court
in granting a preliminary injunction, harm to other parties and
the public interest, also mandate the granting of an injunction
here.
First, Conrail and CSX will suffer no harm if CSX is
prohibited from purchasing shares of Conrail until the appeal is
resolved. Indeed, CSX itself has delayed the closing of the
first stage tender offer once already. Another short delay will
cause no harm. Moreover, appellants have filed a Motion for an
Expedited Appeal and are willing to work toward a swift
resolution to this appeal.
Second, Norfolk's $110 offer is clearly better for
Conrail's shareholders and other constituencies than the CSX
offer. It is in the public s best interests to insure that
directors of Pennsylvania corporations cannot coerce shareholders
into accepting proposals that are in the interests of management
as opposed to the interests of the corporation and its
constituencies.
THE RELIEF REQUESTED
Accordingly, for the reasons set forth above,
appellants request that this Court enter an injunction pending
appeal and order that, pending final resolution of this appeal:
(a) Defendant CSX, any subsidiary, affiliate or parent
of CSX, or any person or entity acting on behalf of CSX
may not accept shares for payment pursuant to a tender
offer for shares of Conrail Common Stock and Series A
ESOP Convertible Junior Preferred Stock (the "CSX
Offer");
(b) Defendants may not take any action toward
consummation of the Agreement and Plan of Merger by and
among Conrail, Inc., Green Acquisition Corp. and CSX
Corp., as amended (the "CSX Merger Agreement"),
including, without limitation, the consummation of the
CSX Offer; and
(c) Defendant Conrail, Inc. or its Board of Directors
may not count or give effect to votes of Conrail shares
acquired by CSX or a CSX subsidiary in the CSX Offer or
otherwise in the yet-to-be scheduled vote of Conrail's
shareholders on the amendment to Conrail's Articles of
Incorporation to opt-out of Subchapter 25E of the PBCL.
Respectfully submitted,
_______________________
Mary A. McLaughlin
George G. Gordon
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
(215) 994-2222 (facsimile)
Attorneys for Appellants
Of counsel:
Skadden, Arps, Slate, Meagher & Flom
Steven J. Rothschild
R. Michael Lindsey
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
Dated: November 19, 1996
- -----------------------
(1) Professor Coffee further testified that CSX s offer was so
coercive that it s a practical certainty that all shareholders
will tender." (Hrg. Tr. at 69) The selected excerpts from the
hearing transcript cited herein are attached as Exhibit A.
(2) See Hrg. Tr. at 67 (Professor Coffee testified that "It is
an empirical certainty that a 20 percent partial tender offer
will be oversubscribed").
(3) See also, Jewel Cos. v Pay Less Drug Stores Northwest, Inc.,
741 F.2d 1555, 1560 n.5 (9thCir. 1984) (noting that a number of
courts have declared unlawful attempts to curtail the board s
traditional management function by contract); ConAgra, Inc. v.
Cargill Inc., 382 N.W.2d 576, 587 (Neb. 1986) (noting that
directors cannot not enter into agreements to violate their fiduciary
obligations); Great W. Producers Co-op. v. Great W. United Corp., 613
P.2d 873, 878 (Colo. 1980) (holding that where a decision lies
at the heart of the directors corporate management duties, the
directors may not lawfully agree to abrogate their duty to exercise
independent judgment with respect to that decision); Abercrombie v.
Davies, 123 A.2d 893, 899 (Del. Ch. 1956) (declaring that the court
would not give legal sanction to agreements which have the effect
of removing from directors their duty to use their own best judgment
on management matters); Chapin v. Benwood Foundation, Inc., 402 A.2d
1205, 1210 (Del. Ch. 1979), aff d sub nom., Harrison v. Chapin, 415
A.2d 1068 (Del. 1980) (directors may not delegate to others those
duties which lay at the heart of the management of the corporation).
(4) Also, SECTION 1105 of the PBCL specifically contemplates that a
shareholder may obtain injunctive relief if the operation of any
plan would result in fundamental unfairness to the shareholder.
(5) Conrail and CSX have argued that Norfolk and Kathryn McQuade
lack standing to bring their shareholder derivative claims.
Their arguments are meritless. First, CSX and Conrail rely
heavily on SECTION 1717 of the PBCL in support of their argument
that Norfolk and Ms. McQuade do not have standing to bring fidu-
ciary duty claims because they are beneficial, not record,
shareholders. Section 1717, however, simply requires that breach
of fiduciary duty claims be brought as derivative claims, not as
direct claims. It does not govern who can bring derivative
claims. See Hrg. Tr. at 90(Professor Coffee noted that SECTION 1717
was designed to reverse "the Revlon rule that permits a bidder to
bring a direct action, instead relegating him to a derivative
action.") The question of who can bring derivative claims is
governed by SECTION 1782 of the PBCL, which clearly allows such
claims to be brought by beneficial owners.
Second, Conrail and CSX argue that Norfolk cannot adequately
represent the interests of shareholders because it is a competing
bidder. Here, however, Norfolk is seeking to open up the bidding
process. Numerous federal courts have recognized that, in such a
situation, the interests of a bidder plainly coincide with those
of shareholders. See Granada Investments, Inc. v. DWG Corp., 717
F. Supp. 533, 538 (N.D. Ohio 1989) ("Both Granada and the other
shareholders share an interest in preventing DWG s directors from
locking up control of DWG."); Air Line Pilots Ass n v. UAL
Corp., 717 F. Supp. 575, 579 (N.D. Ill. 1989) (Offeror "like
other shareholders is interested in maximizing the value of his
shares and ensuring that management does not block potentially
profitable offers in breach of their fiduciary duty."); Shamrock
Associates v. Horizon Corp., 632 F. Supp. 566, 571 (S.D.N.Y.
1986) (Potential acquirer s "interest corresponds with that of
Horizon's other unaffiliated shareholders who, no doubt, desire
competitive bidding for their shares."); c.f. MacAndrews & Forbes
Holding, Inc. v. Revlon, Inc., 1885 WL 21129 (Del. Ch. Ct., Oct.
9, 1985) (Offeror s derivative suit seeks to "secur[e] for itself
and for all other shareholders the ability to bargain in the
marketplace."). As Professor Coffee testified, Norfolk and the
Conrail shareholders "are not in conflict and they have a common
interest in trying to eliminate the takeover barriers that
prevent there from being a consideration by shareholders either
of the voting decision or of other decisions." (Hrg. Tr. at 190.)
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
==================================================================
NO. _________
==================================================================
NORFOLK SOUTHERN CORPORATION, a Virginia corporation,
ATLANTIC ACQUISITION CORPORATION, a Pennsylvania
corporation AND KATHRYN B. McQUADE,
Appellants
v.
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,
Appellees
=====================================================================
On Appeal from the United States District Court for the Eastern
District of Pennsylvania
Civil Action No. 96-CV-7167
=====================================================================
APPELLANTS' MOTION FOR AN EXPEDITED APPEAL
=====================================================================
DECHERT PRICE & RHOADS
Mary A. McLaughlin
George G. Gordon
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2703
(215) 994-4000
(215) 994-2222 Facsimile
OF COUNSEL:
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM
Steven J. Rothschild
One Rodney Square
P.O. Box 636
Wilmington, DE 19801
(302) 651-3000
(302) 651-3001 Facsimile
APPELLANTS' MOTION FOR AN EXPEDITED APPEAL
Appellants Norfolk Southern Corporation ( Norfolk ),
Atlantic Acquisition Corporation, and Kathryn B. McQuade hereby
move for an expedited appeal from the November 19, 1996 Order of
the United States District Court for the Eastern District of
Pennsylvania denying Plaintiffs' Motion for a Preliminary
Injunction.
GROUNDS FOR EXPEDITED APPEAL
At issue in this appeal are the rights of Conrail
shareholders to choose the fate of the company that they own and
the ability of Conrail's Board to abdicate its duties to those
shareholders and Conrail's other constituencies. Norfolk and
defendant CSX have made competing tender offers for shares of
defendant Conrail. Norfolk's all cash $110 tender offer is worth
approximately $1.5 billion more to shareholders than CSX's
coercive, multi-tiered, front-end loaded tender offer. CSX and
Conrail's board, however, have conspired to handicap the Norfolk
offer and to coerce shareholders into tendering their shares to
CSX. If the first stage of the CSX tender offer is allowed to
close on November 20, 1996 and the impediments to the Norfolk
Southern offer remain, Conrail s fate will be sealed.
In support of this Motion, appellants incorporate their
Emergency Motion For An Injunction Pending Appeal (the "Emergency
Motion") filed today. As the Emergency Motion demonstrates, this
appeal is extremely time sensitive.
PROPOSED BRIEFING SCHEDULE
Appellants respectfully request that this Court set the
following briefing schedule if this Motion is granted:
(1) Brief for the appellant and the appendix to be
served and filed within two (2) days of the Court's Order
granting this motion;
(2) Brief for the appellees to be served and filed
within two (2) days of service of the appellants' brief; and
(3) Reply brief for the appellants to be served and
filed within two (2) days of service of the appellees'
brief.
Appellants also respectfully request that oral argument
be scheduled as soon as practicable after completion of the
briefing.
CONCLUSION
For the foregoing reasons, appellants respectfully
request that the Court adopt and order the proposed expedited
briefing schedule.
Respectfully submitted,
_______________________
Mary A. McLaughlin
George G. Gordon
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
(215) 994-2222 (facsimile)
Attorneys for Appellants
Of counsel:
Skadden, Arps, Slate, Meagher & Flom
Steven J. Rothschild
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
Dated: November 19, 1996
