SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-1
(Amendment No. 30)
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. 30 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 10. Additional Information.
Item 10 is hereby amended and supplemented by the following:
(e) On December 27, 1996, Parent filed a petition with the STB
alleging that the No Negotiation Provision, as in effect after the Second
Amendment, constitutes unlawful control of the Company by CSX for the
purposes of the federal statute that requires prior STB approval of control
and seeking, among other things, a declaratory order that CSX is in
violation of such federal law by reason of the No Negotiation Provision and
that such provision is unlawful and unenforceable.
Item 11. Material to be Filed as Exhibits.
Item 11 is hereby amended and supplemented by the following:
(a)(78) Press Release issued by Parent on December 27, 1996.
(g)(11) Petition for Declaratory Order and Other Appropriate
Relief, filed by Parent and Norfolk Southern Railway
Company (dated December 27, 1996, Surface Transportation
Board).
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 30, 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
(a)(78) Press Release issued by Parent on December 27, 1996.
(g)(11) Petition for Declaratory Order and Other Appropriate Relief,
filed by Parent and Norfolk Southern Railway Company (dated
December 27, 1996, Surface Transportation Board).
FOR IMMEDIATE RELEASE
December 27, 1996
Media Contact: Robin Chapman
757-629-2713
NS ASKS STB TO RULE CSX-CONRAIL "LOCK-OUT" PROVISION UNLAWFUL
NORFOLK, VA -- Norfolk Southern Corporation (NYSE: NSC) today
asked the Surface Transportation Board to rule that a December 18
amendment to the merger agreement between CSX and Conrail
constitutes unlawful control by one railroad over another.
The amendment prohibits Conrail, without CSX's consent, from
entering into or discussing a merger agreement with any other
company until 1999, even if Conrail shareholders or the STB
disapprove the proposed CSX merger.
"Unless the Board intervenes to protect its jurisdiction
over the control of one rail carrier by another," Norfolk
Southern said in its petition to the STB, "CSX will be able to
use the unlawful control afforded by the lock-out provision to
coerce a critical vote of Conrail stockholders scheduled for
January 17, 1997, by portraying CSX as the only choice available
to them -- even though the terms of CSX's acquisition would
provide Conrail's shareholders other than CSX $1.16 billion less
than Norfolk Southern's offer and even though a CSX-Conrail
consolidation on its face presents extremely serious competitive
issues, as CSX officials acknowledged years ago in testimony to
Congress."
Norfolk Southern said that while provisions are commonly
used in merger agreements that allow the merging parties time to
secure needed corporate and regulatory approvals to consummate
the transaction, a "lock-out" extending more than one year after
the expected date of the STB's final decision on the CSX-Conrail
merger is "extraordinary and wholly unjustified" and is intended
to coerce Conrail shareholders to approve the transaction.
"The obvious and only intent of the amended lock-out
provision is to preclude even the possibility of NS's superior
offer from being realized for so long that Conrail shareholders
will feel that they are left with no other effective choice but
to accept the CSX merger," Norfolk Southern said.
# # #
World Wide Web Site - http://www.nscorp.com
NS-4
BEFORE THE
SURFACE TRANSPORTATION BOARD
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FINANCE DOCKET NO. 33220
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CSX CORPORATION AND CSX TRANSPORTATION, INC.
--CONTROL AND MERGER--
CONRAIL INC. AND CONSOLIDATED RAIL CORPORATION
-----------------------
PETITION OF NORFOLK SOUTHERN CORPORATION AND
NORFOLK SOUTHERN RAILWAY COMPANY FOR DECLARATORY
ORDER AND OTHER APPROPRIATE RELIEF
-----------------------
INTRODUCTION AND SUMMARY
Norfolk Southern Corporation and Norfolk Southern Railway
Company (collectively "NS"), hereby petition the Surface
Transportation Board (the "Board") for a declaratory order that
CSX Corporation, CSX Transportation, Inc., and Green Acquisition
Corporation (collectively "CSX") are in violation of 49 U.S.C. SECTION
11323 by reason of an amendment, dated December 18, 1996, to the
merger agreement between CSX and Conrail Inc. ("Conrail"). This
extraordinary amendment prohibits Conrail, without CSX's consent,
from entering into a merger agreement with any other company, or
even discussing such an agreement with any other company, until
1999 -- more than two years from now -- even if Conrail
shareholders vote in the next few months to disapprove the
proposed CSX merger and even if the Board issues a decision in
1997 refusing to approve that merger.
The unlawful control over Conrail that this amendment gives
to CSX threatens to have immediate and irreparable consequences,
which the Board needs to act promptly to prevent. The obvious
purpose of the amendment is to preclude consideration by Conrail
shareholders of any other merger proposal for more than two
years. Unless the Board intervenes to protect its jurisdiction
over the acquisition of control of one rail carrier by another,
CSX will be able to use the unlawful control afforded by the
lock-out provision to coerce a critical vote of Conrail
shareholders scheduled for January 17, 1997, by portraying CSX as
the only choice available to them -- even though the terms of
CSX's acquisition would provide Conrail's shareholders other than
CSX $1.16 billion less than Norfolk Southern's offer(1) and even
though a CSX/Conrail consolidation on its face presents extremely
serious competitive issues, as CSX officials acknowledged years
ago in testimony to Congress (see pp. 18-19, below). The Board
should not allow CSX to circumvent the Board's jurisdiction over
the acquisition of control to gain an advantage in a stockholder
vote.
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1/ This estimate is based on the closing price of CSX stock on
December 26, 1996 and assumes that a new series of CSX
convertible preferred stock to be issued to Conrail shareholders
is worth its purported $16 per Conrail share.
The amendment in question is a form of what is commonly
referred to as a "lock-out" or "no-shop" provision. Such
provisions usually prohibit parties to a merger or acquisition
agreement from negotiating a similar transaction with other
parties for such time as may be necessary to obtain needed
corporate and regulatory approvals and consummate the
transaction.(2) For example, prior to its recent amendment, the
lock-out provision in the CSX-Conrail merger agreement barred
Conrail from negotiating a merger with any other party until July
12, 1997.
The amendment in question, however, extends the lock-out
period until December 31, 1998. That is more than one year after
the expected date of the Board's final decision on the
CSX/Conrail merger under their own proposed procedural schedule,
and almost two years after the anticipated shareholder vote to
consider the proposed merger. As so extended, the amended lock-
out provision is extraordinary and wholly unjustified. Its
purpose and function are obviously not to ensure that CSX and
____________________
2/ In addition, such provisions typically include a "fiduciary
out" clause which permits a board of directors to consider
competing proposals in certain circumstances.
Conrail will both diligently seek corporate approvals and
prosecute their application for regulatory approval, since it
extends well beyond the time those parties expect a final Board
decision and a shareholder vote. The obvious and only function
of the amended lock-out provision is to preclude even the
possibility of NS's superior offer from being realized for so
long that Conrail shareholders will feel that they are left with
no other effective choice but to accept the CSX merger.
NS's position is straightforward. NS submits that any
agreement that gives one railroad power to prevent another
railroad from negotiating a consolidation with any other entity
has no regulatory justification and is unlawful to the extent it
prohibits such negotiations after the Board has completed its
review of the two railroads' consolidation or after the
shareholders of either railroad have themselves refused to
approve that transaction. Such a provision gives the aspiring
acquiror railroad control over the most basic attribute of the
target railroad -- its future -- without the Board's prior
approval, and thus violates 49 U.S.C. SECTION 11323.(3) No one could
seriously contend, for example, that a railroad could, without
the Board's authority, surrender to another railroad its freedom
to negotiate a consolidation with any other entity for 20 years.
Such an agreement would obviously cripple the first railroad's
ability to raise capital and, perhaps, even to survive in
changing conditions.(4) The only conceivable rationale for
permitting such an agreement (prior to Board approval) would be
to provide a reasonable period of time for parties to an
agreement to determine whether their shareholders and their
regulators will approve the transaction. Whatever the period, it
is too long if it goes beyond what may be reasonably expected for
the Board to consider and act upon the consolidation application
of the two railroads themselves. It is also too long if it
extends beyond other actions, such as a shareholder vote
rejecting the merger, that effectively foreclose the possibility
of the transaction taking place as proposed. Norfolk Southern
therefore seeks a declaratory order that CSX is in violation of
49 U.S.C. SECTION 11323 by reason of the recently amended lock-out
provision, and that that provision is unlawful and unenforceable.
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3/ Such provisions may also be objectionable as a matter of
state law governing corporations and the fiduciary duties of
corporate directors to the shareholders of the corporation. See,
e.g., Paramount Communications, Inc. v. QVC Network Inc., 637
A.2d 34 (Del. 1994). See also, note 5, infra. The present
petition presents no issues of state law; rather, it presents a
fundamental issue of unlawful control under the statute
administered by the Board.
4/ Imagine, for example, the probable fate of the Southern
Pacific Transportation Company if in 1983 it had ceded to the
Atchison, Topeka & Santa Fe Railroad the right to preclude SP
from negotiating consolidations with any other railroad until the
year 2003.
The need for such an order is urgent. CSX's violation
threatens immediate, extreme and irreparable harm to both NS and
Conrail's shareholders. Unless the Board declares that provision
to be unlawful and unenforceable well in advance of the vote
scheduled for January 17, 1997, Conrail shareholders may be
coerced to vote for what CSX wants them to believe is the only
choice left to them -- CSX. If CSX wins that vote, it will have
achieved a critical step in its planned acquisition of Conrail by
means circumventing the Board's jurisdiction over control
transactions.
If the Board is unable to reach a final decision on the
legality of the amended lock-out provision well in advance of
January 17, 1997, it is essential that the Board take action to
prevent that irreparable harm. It could do so by directing
Conrail to postpone the January 17 shareholder meeting until
after the Board decides the question. It could also do so by
prohibiting the trustee under CSX's voting trust from voting any
Conrail shares held in that trust in favor of actions permitting
further share acquisitions by CSX or in favor of the CSX/Conrail
merger until after the Board decides the question.(5)
Because of the urgency and importance of this matter, NS
respectfully requests the Board to give expedited consideration
to this petition. NS suggests that the Board may wish to require
that responses to this petition be filed by a date that will
permit the Board to take appropriate action before January 17, 1997.
STATEMENT OF FACTS
BACKGROUND: THE CSX-CONRAIL MERGER
On October 14, 1996, CSX and Conrail entered into an
agreement for CSX to acquire Conrail, subject to the Board's
approval and other conditions. On October 18, 1996, CSX and
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5/ This petition is being filed in Finance Docket No. 33220
because it presents issues central to that proceeding.
NS has also challenged the legality of the amended lockout
provision, as well as other provisions of the CSX-Conrail merger
agreement, in an action pending in the United States District
Court for the Eastern District of Pennsylvania with claims based
on the Pennsylvania corporation laws and the fiduciary duties of
Conrail's board of directors. The present petition, however,
presents a fundamental issue of illegal control under 49 U.S.C. SECTION
11323, which the Board must address and enforce independently of
any issue of state law.
Conrail filed with the Board a notice of intent (CSX/CR-1) to
file an application seeking the Board's prior authorization under
49 U.S.C. SECTION 11323-25 for the acquisition of control of Conrail by
a wholly-owned subsidiary of CSX, the merger of Conrail into the
wholly-owned CSX subsidiary, and the resulting common control of
CSX Transportation, Inc. and Consolidated Rail Corporation by
CSX.
THE STRUCTURE OF THE CSX
PLAN TO ACQUIRE CONRAIL
Although the merger agreement between CSX and Conrail has
been amended twice, the underlying structure of the proposed CSX
acquisition of Conrail remains the same: two cash tender offers
for the acquisition of up to an aggregate of 40% of the Conrail
stock, followed by a merger to acquire the remaining 60% of the
Conrail stock.(6) The process is one that is known as "front
loaded," because it provides Conrail shareholders greater value,
to be paid in cash, for each share purchased by CSX in the first
two tender offers than for each share that Conrail shareholders
will be forced to exchange after the merger is consummated. Such
a process is designed to pressure Conrail shareholders to tender
their shares in the initial stages for fear of being forced to
exchange them for less later if they do not.
Under the original Merger Agreement, the three-step process
would work as follows: first, CSX would make a tender offer to
purchase 19.9% of the outstanding Conrail shares for cash.(7)
Once CSX had those shares in hand, Conrail would hold a
shareholder vote on whether Conrail would "opt out" of Subchapter
25E of the Pennsylvania Business Corporation Law,(8) which,
without such opt-out, would require CSX to purchase all Conrail
shares for the same cash price as it paid for the first 19.9%.(9)
If and when a majority of the Conrail shares (including the 19.9%
held by CSX) were voted to opt-out of Subchapter 25E, CSX would
make a second tender offer for another 20.1% of the outstanding
Conrail shares, again for cash. Once CSX acquired these shares,
Conrail would schedule a shareholder vote on the merger
itself.(10) If a majority of the shares (including CSX's 40%)
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6/ The merger agreement dated as of October 14, 1996 (the
hereinafter the "Merger Agreement"), appears as Exhibit (c)(1) to
Schedule 14D-1, Tender Offer Statement, dated October 16, 1996,
which CSX and Conrail submitted to the Board on November 27, 1996
in F.D. 33220. The Merger Agreement was amended on November 5,
1996 (the "First Amendment"), and again on December 18, 1996 (the
"Second Amendment"). Provisions of the Merger Agreement, the
First Amendment and the Second Amendment that are cited in this
petition are attached in Attachment 1 hereto.
7/ Merger Agreement, Section 1.1.
8/ These provisions appear at Pa. Stat. Ann., tit. 15, Section
Section 2541 through 2548 (West 1995).
9/ Merger Agreement, Section 5.1(b).
10/ As required by Conrail's bylaws and by Section 3.1(k) of the
Merger Agreement, any merger with CSX must be approved by a vote
of a majority of Conrail voting shares outstanding.
were voted in favor of the merger, the third, "back end," step in
the process would take place: when and if this Board approved
the merger, the merger would be consummated and all remaining
Conrail shares would be exchanged for CSX common stock at a ratio
of 1.85619 shares of CSX common stock for each share of Conrail
common stock.
THE BATTLE FOR CONRAIL: THE BIDDING
WAR AND THE LOCK-OUT PROVISIONS
Pursuant to the original Merger Agreement, CSX initially
offered to pay $92.50 in cash for each of the 19.9% of the shares
of Conrail stock it sought to purchase in the first step of the
process. CSX announced it would exchange 1.85619 shares of CSX
for each remaining share of Conrail stock in the third step of
the process, after the STB regulatory process had run its course.
On October 23, 1996, NS responded with an all-cash tender
offer for all of the outstanding shares of Conrail stock at $100
per share, subject to certain conditions.
Although NS wishes to acquire Conrail and is prepared to pay
Conrail's shareholders substantially more than CSX is willing to
pay, provisions of the Merger Agreement have prevented NS from
reaching an agreement, or even discussing NS's proposal, with
Conrail's management. Section 4.2 of the Merger Agreement
(hereinafter, the "lock-out provision"), prohibits Conrail's
management for a specified period from taking various actions
with respect to any proposal by any entity other than CSX to
acquire more than 50% of the assets or voting stock of Conrail
(defined in the agreement as a "Takeover Proposal"). Section
4.2(a) provides that Conrail may not "(i) solicit, initiate or
encourage (including by way of furnishing information) . . . any
inquiries or the making of any proposal which constitutes any
Takeover Proposal or (ii) participate in any discussions or
negotiations regarding any Takeover Proposal. . . ." Section
4.2(b) prohibits Conrail's Board of Directors for a specified
period from (1) withdrawing or modifying its approval or
recommendation that shareholders approve the CSX/Conrail merger
agreement, (2) approving or recommending any merger agreement
with any party other than CSX, or (3) entering into any letter of
intent or merger agreement related to any Takeover Proposal.
Under the original Merger Agreement, Conrail was permitted
to negotiate with respect to other unsolicited takeover proposals
after April 12, 1997 if Conrail's Board concluded, on advice of
counsel, that their fiduciary duties required them to do so. The
original Merger Agreement also permitted Conrail actually to
enter into a letter of intent or agreement with another party
after April 12, 1997 if Conrail's Board concluded that the other
party's proposal was superior to CSX's and that CSX was unlikely
to acquire 40% of Conrail's stock.
On November 5, 1996, CSX and Conrail amended the Merger
Agreement to, among other things, increase CSX's cash offer for
the "front end" of its acquisition to $110 per Conrail share.(11)
CSX and Conrail did not change the terms for the "back end" of
the merger at this time. This amendment also extended the
period within which Conrail could not under any circumstances
negotiate any other takeover proposal with another entity until
July 12, 1997.
On November 8, 1996, Norfolk Southern increased its all-cash
offer for Conrail stock to $110 per share, subject to the same
conditions as its initial offer.
CSX consummated its first tender offer and announced that it
had acquired 19.9% of Conrail's shares on November 20, 1996.
Also, the shareholder meeting to vote on whether to opt out of
Subchapter 25E, originally scheduled for November 14, 1996, was
rescheduled to December 23, 1996. Conrail stated in its proxy
materials, however, that it would further postpone the December
23 meeting if it appeared that the Conrail shareholders would
vote against the proposed opt out.
Notwithstanding CSX's ownership of at least 19.9% of
Conrail's shares, it appeared certain that a majority of
Conrail's shares would have been voted against opting out of
Subchapter 25E on December 23, and that Conrail would therefore
postpone the vote. Accordingly, NS filed a motion in U.S.
District Court in Philadelphia on December 13, 1996 for a
preliminary injunction to block Conrail from postponing the vote.
The District Court ruled on December 17, 1996 that the right
asserted by Conrail's management to postpone scheduled
shareholder votes whenever it appeared they would not win them
was "fundamentally unfair," "effectively disenfranchises those
shareholders who may be opposed to the proposal," and amounts to
a "sham election," and it enjoined Conrail from postponing the
vote in the absence of changed circumstances, such as a new
proposal.(12)
In response to this legal setback, CSX amended its proposal
once again. This change also permitted Conrail to postpone the
Conrail shareholder opt out vote yet again, and Conrail has now
scheduled the stockholders meeting for January 17, 1997.
Under CSX's latest offer, CSX will continue to offer only
$110 cash for each of the 20.1% of Conrail shares that CSX
proposes to purchase under its "second offer." This second
offer is conditioned on Conrail shareholders voting to opt out of
Subchapter 25E. If a majority of the shares vote to opt out of
Subchapter 25E and CSX is able to acquire the additional 20.1% of
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11/ Section 1 to the First Amendment, attached to Schedule 14D-
1, Tender Offer Statement (Amendment No. 4), transmitted to
Secretary Williams on November 27, 1996.
12/ Transcript of Hearing on December 17, 1996 in Norfolk
Southern Corp., et al. v. Conrail, Inc., et al., C.A. No. 96-CV-
7167 (E.D. Pa.) at 68-69 (Attachment 2).
Conrail's shares, CSX will have effective control over any
subsequent shareholder vote on whether to approve the Conrail/CSX
merger.(13)
As in the original Merger Agreement, after the merger is
approved by the owners of a majority of Conrail shares and the
merger is consummated, the remaining outstanding Conrail stock
would be forcibly exchanged for CSX securities. Under the latest
amendment to the Merger Agreement, CSX will exchange newly issued
CSX convertible preferred stock, with an asserted value of $16
per share (the terms of the issue have not yet been fixed), and
1.85619 shares of CSX common stock for each of the remaining
outstanding shares of Conrail stock. In addition, instead of
waiting until the end of the regulatory approval process, the
Merger Agreement now provides that this "back end" exchange of
securities will take place after the Conrail shareholders meet
and approve the merger, which CSX and Conrail have stated that
they anticipate will occur before the end of the first quarter of
1997.(14) If that occurs before regulatory approval is obtained,
all of the Conrail stock will be placed in a voting trust.
The Second Amendment also dramatically increases CSX's
control over Conrail by extending the lock-out periods in Section
4.2 of the Merger Agreement an additional eighteen months -- from
July 12, 1997 to December 31, 1998. Under the amended Section
4.2(a), Conrail now may not negotiate any merger or acquisition
by any other entity under any circumstances until 1999. That
prohibition applies even if Conrail's board concludes, and its
counsel advises, that its fiduciary responsibilities require it
to do so. Likewise, under the amended Section 4.2(b), Conrail's
board may not, until 1999, withdraw its recommendation to its
shareholders in favor of the CSX/Conrail merger or enter into any
letter of intent or agreement with respect to another entity's
superior proposal even if the Conrail board concludes that there
is no significant chance that CSX will acquire 40% of Conrail's
shares or that the CSX/Conrail merger will be approved by
Conrail's shareholders. Again, no fiduciary out is applicable to
the prohibition.
______________________
13/ That is so because a separate agreement also gives CSX the
option to purchase another 15,955,477 shares of Conrail stock
from Conrail's treasury at $92.50 per share. Section 1 of the
Green Stock Option Agreement, dated as of October 14, 1996,
transmitted to the Board on November 27, 1996 (Attachment 3).
Exercising that option would give CSX an additional 9% of
Conrail's outstanding shares, which, in addition to the 40%
already owned, would virtually ensure a majority vote in favor of
the merger.
14/ Amendment No. 3 to Schedule 14D-1, Tender Offer Statement,
transmitted to the Securities and Exchange Commission on December
19, 1996.
On December 19, 1996, Norfolk Southern increased its all-
cash offer for all of Conrail's outstanding shares to $115 per
share.(15)
ARGUMENT
I. BY THE AMENDED LOCK-OUT PROVISION, CSX HAS ACQUIRED UNLAWFUL
CONTROL OF CONRAIL IN VIOLATION OF 49 U.S.C. SECTION 11323.
49 U.S.C. SECTION 11323 (formerly 49 U.S.C. SECTION 11343) provides
that certain transactions may be carried out only with the prior
approval and authorization of this Board. These include
"[a]cquisition of control of a rail carrier by any number of rail
carriers," "[a]cquisition of control of at least two carriers by
a person that is not a rail carrier," and "[a]cquisition of
control of a rail carrier by a person that is not a rail carrier
but that controls any number of rail carriers." 49 U.S.C. SECTION
11323(a)(3), (4) and (5).
The Interstate Commerce Commission ("ICC" or "Commission")
and the courts have long held that what constitutes control for
purposes of this statute is a question of fact that depends on
the circumstances of each case. See, e.g., Gilbertville Trucking
Co. v. United States, 371 U.S. 115, 125 (1962); Missouri Pacific
Railroad Co.--Control--Chicago & Eastern Illinois Railroad Co.,
327 I.C.C. 279 (1965) ("Missouri Pacific"); Declaratory Order--
Control--Rio Grande Industries, Inc., Finance Docket No. 31243
(Aug. 11, 1988), 1988 ICC LEXIS 257 ("Rio Grande"). They have
also recognized that control does not depend on a particular
percentage of stock ownership, or indeed on any stock ownership
at all, and that control by one railroad of another may exist by
reason of contractual provisions or other circumstances giving
the first railroad the power to block important actions by the
other.
Thus, in Missouri Pacific, the Commission found that
Missouri Pacific Railroad had acquired unlawful control of the
Chicago & Eastern Illinois Railroad. The Commission stated that
"[t]he influence of the one carrier over the other may . . . be
evident from the ability of the one to encumber the other in
accomplishing, or to prevent the accomplishment of, financial
transactions or operational changes. . . ." 327 I.C.C. at
317.(16) Of particular significance for present purposes, the
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15/ As it now stands, the Norfolk Southern offer would provide
Conrail shareholders other than CSX almost $16 per share more
than the blended value of cash and securities that CSX is
offering current Conrail shareholders for their shares, based on
the market price of CSX common stock at closing on December 26,
1996. On that basis, NS estimates that the total amount it is
offering to Conrail shareholders other than CSX is approximately
$1.16 billion more than what CSX is offering.
16/ In Missouri Pacific and other cases, the Commission cited
the following definition of control from Colletti Control--Cornet
Freight Lines, 38 M.C.C. 95, 97 (1942): "[T]he power or
authority to manage, direct, superintend, restrict, regulate,
govern, administer, or oversee." (emphasis added).
Commission found that Missouri Pacific, notwithstanding its
minority stock ownership, had the effective ability to prevent
the Chicago & Eastern Illinois from taking a number of actions,
including "consolidations, mergers, leases, or sales which do not
result in liquidations." 327 I.C.C. at 318. The Commission
ruled that Missouri Pacific's ability to prevent those actions
was not justified as "standard protective provisions afforded
owners of minority stock interests"; instead it was "an
infringement upon the freedom of management in its operations,
and to that extent they constitute elements of control and not
merely stockholder protection." Id.
The amended lock-out provision in the CSX-Conrail merger
agreement is no less an infringement upon the freedom of
Conrail's management to take actions that management may believe
to be in the best interests of Conrail and its shareholders.
Unless CSX consents to waive or delete that provision through a
subsequent amendment, the provision prohibits Conrail from having
any discussions with any other entity about a consolidation with
that entity until January 1, 1999. It does so even if Conrail's
stockholders vote in the next few months to reject the
CSX/Conrail merger proposal and even if this Board issues a final
decision a year from now refusing to approve that merger --
either of which actions would effectively foreclose the
likelihood of the transaction taking place. Furthermore, the
provision precludes such discussions even if Conrail's present or
future directors believe, and are advised by counsel, that their
fiduciary duties require them to discuss and consider such a
consolidation.
The amended lock-out provision thus gives CSX complete
control over a basic and critical aspect of the responsibility
and authority of Conrail's management to manage Conrail in the
best interests of its stockholders and customers. Nor is the
amended lock-out reasonably related to CSX's desire to protect
the status quo pending corporate and regulatory actions needed
for its transaction.
Sworn testimony from Conrail's top executives makes it
crystal clear that, in Conrail management's own view, a
consolidation with another railroad is both a critical and an
urgent necessity for the future well-being of Conrail. In a
hearing just last month, current and former Conrail executives
defended their decision to merge with CSX on the ground that,
after the UP/SP and BN/SF mergers, Conrail would be seriously
harmed if it remained independent and did not combine with
another carrier.
For example, James Hagen, former board chairman and CEO of
Conrail, testified that this Board's decision approving the UP/SP
merger paved the way for more combinations in the rail industry,
and that Conrail therefore evaluated the "harm that would befall
Conrail if everybody merged and we didn't."(17) He also
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17/ Transcript of November 19, 1996 hearing in Norfolk Southern
Corp., et al. v. Conrail Inc., et al., C.A. No. 96-CV-7167 (E.D.
Pa.) (hereafter "Tr. 4") at 414. Cited pages of this transcript
are attached as Attachment 4.
testified that staying independent would put Conrail in "a very
uncomfortable position because what happens then is that you are
now going to be viewed as a lame duck. And that's not where you
want to be."(18)
Similarly, Bradley Jones, a member of Conrail's board of
directors, testified that the BN/SF and UP/SP mergers gave
Conrail "a significant concern . . . that we were going to be
left out and perhaps be not only neutral, but we would not be a
beneficiary of those mergers."(19) David LeVan, Conrail's
current board chairman and CEO, echoed these concerns, testifying
that the decision to merge with CSX followed an evaluation of
"the risks associated with [remaining independent], with the
prospect that the other two eastern railroads would merge with
the other two western railroads, and we would be . . . a left out
player in that scenario. . . ."(20)
In short, through the amended lock-out, CSX has ensured
that, if its acquisition of Conrail is not approved by Conrail's
stockholders or this Board, Conrail will be unable until 1999
even to discuss with another entity what these executives have
indicated to be essential to Conrail's future well being. That
restraint will have significant implications for the way both
Conrail will conduct their businesses and how they will compete
with each other and other railroads. CSX and Conrail have
recognized these implications. In a joint press release issued
on October 15, 1996, announcing their proposed merger (Attachment
5), CSX and Conrail stated that "to continue to improve their
competitive position, better and more innovative services need to
be offered. Neither company by itself can meet the demands of
customers and the public as well as they can in combination.
Together, they can overcome the inherent limitations of more
regionally limited two-carrier service." The amended lock-out
provision, however, gives CSX the power to preclude Conrail until
at least 1999 from "improv[ing] [its] competitive condition,"
providing "better and more innovative services," or "overcom[ing]
the inherent limitations of more regionally limited . . .
service" through a combination with any other railroad if
Conrail's stockholders or this Board refuses to approve the
proposed CSX/Conrail merger.
Moreover, to the extent the lock-out provision precludes
Conrail from developing more competitive and innovative services
through a combination with NS, the effect of the provision is to
shield CSX from increased competition from its two main
competitors. CSX and Conrail compete throughout large areas of
the Northeast and Midwest, and NS and CSX compete throughout the
________________________
18/ Tr. 425.
19/ Tr. 439.
20/ Tr. 524.
Southeast and Midwest. It is easy to see why CSX would wish to
prevent those parties from improving the competitiveness of their
services vis-a-vis CSX until at least 1999. NS submits, however,
that Section 11323 does not permit CSX to do so without prior
Board authority.
In sum, it is clear that Conrail's own management believes
that a merger is critically important for Conrail's future well-
being. Yet, there can be no question that the amended lock-out
will preclude Conrail's management from even discussing other
merger proposals for more than two years that may be superior for
Conrail's shareholders, for Conrail's customers and for
competition in the rail industry. Indeed, the serious
competitive issues presented by a CSX/Conrail merger were
candidly acknowledged by CSX officials -- including CSX's current
chief executive officer, John Snow -- in testimony to Congress
opposing a proposed NS/Conrail combination a decade ago. For,
example, in testimony to the Senate Commerce Committee in 1985,
Mr. Hayes Watkins, then CEO of CSX Corporation, explained that
CSX had carefully considered a CSX acquisition of Conrail but had
rejected it because it concluded that the manifestly
anticompetitive effects of such a merger would make it clearly
unacceptable. He stated:
We had an extensive internal study. Our
lawyers, particularly our antitrust lawyers
and economic consultants, said there is no
way that the anticompetitive effects of a
CSX-Conrail combination could be successfully achieved.
Not believing that, we then went to an
outside group, specifically Arnold & Porter
in Washington, and asked them the same
question: If we make a bid for Conrail, what
chances do we have that this might be
successful? We have a detailed writeup which
you and the other members of the committee
who are lawyers would understand, which says
loud and clear our chances are small to none.(21)
Mr. Snow echoed these views in written responses to questions
posed by the committee. He wrote:
As to why CSX did not bid [for Conrail], we
simply believed that the antitrust laws would
be enforced and that a bid on our part would
just be a bit of puffery.(22)
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21/ Sale of Conrail: Hearings Before the Senate Committee on
Commerce, Science, and Transportation, 99th Cong., 1st Sess. 220
(1985) (emphasis supplied) (hereafter "1985 Hearings") at 242
(emphasis added) (testimony of Hayes T. Watkins, Chairman and
Chief Executive Officer, CSX Corp.). See also id. at 248-449.
Mr. Watkins' full prepared statement (pages 219-224) and other
cited portions of the 1985 Hearings are set forth in Attachment 6.)
22/ 1985 Hearings at 247.
In short, notwithstanding the asserted critical importance
of a merger for Conrail, the amended lock-out provision locks
Conrail's management and shareholders for more than two years,
into a single merger option that CSX's own officials have
described as something whose chances of approval would be "small
to none" and would be "just a bit of puffery."
II. THE LOCK-OUT RESTRAINT CANNOT BE JUSTIFIED AS REASONABLY
RELATED TO CSX'S DESIRE TO PRESERVE THE STATUS QUO PENDING
CORPORATE AND REGULATORY APPROVAL.
Nor can there be any justification for this provision. In
other cases, the ICC found that various negative covenants in
financing agreements or acquisition agreements did not constitute
the acquisition of control because they were reasonably designed
to protect the legitimate interests of various parties without
giving them control of the railroad. In Guilford Transportation
Industries, Inc.--Control--Boston and Maine Corporation, 366
I.C.C. 294 (1982), for example, the ICC held that Guilford
Transportation Industries ("GTI") had not acquired premature
control over the Boston & Maine Corporation ("B&M") (then in
reorganization) by reason of a provision in the GTI-B&M
acquisition agreement requiring GTI's approval for major capital
purchases by B&M. The Commission held:
The negative covenants in the acquisition
agreement are no more than standard
safeguards to ensure that B&M would emerge
from reorganization in a position
substantially similar to the one it was in at
the time of the agreement. It is hardly
unreasonable for an entity making a $24.25
million purchase to obtain contractual
assurance that it would get what it bargained
for.
366 I.C.C. at 327-328. Similarly, in Rio Grande, the Morgan
Stanley Group, Inc. made an agreement with Rio Grande Industries
("RGI") whereby Morgan Stanley would provide and arrange for a
major portion of the financing for RGI's acquisition of the
Southern Pacific Transportation Company and would also acquire 20
percent of RGI's stock. The Commission held that certain
provisions in the agreement between Morgan Stanley and RGI did
not give Morgan Stanley control of RGI but were merely "designed
to give the buyer (here Morgan Stanley) assurance that the seller
(RGI) will not take actions prior to closing to deprive the buyer
of its bargain." Slip. op. at 4.
The rationale of those cases has no application to the
amended lock-out provision at issue here. That rationale might
arguably justify a provision in a merger agreement precluding
either party from negotiating a similar transaction with another
party while their transaction is pending receipt of corporate or
regulatory approvals necessary to permit it to take place so that
both parties will work diligently to obtain those approvals. But
it cannot justify one party precluding the other party from
negotiating a similar transaction with others after the time for
regulatory review has been concluded or after stockholders have
rejected the transaction.
In this case, the lock-out will remain in effect until
December 31, 1998 even if the Conrail stockholders vote not to
approve the proposed CSX/Conrail merger, which vote CSX and
Conrail have stated they anticipate to take place before March
31, 1997. Since stockholder approval is required, disapproval
would effectively foreclose the possibility of the transaction as
proposed taking place. Even so, the lock-out will prevent
Conrail, without CSX's consent, from even discussing other
competitive alternatives until 1999.
The lock-out will also remain in effect until December 31,
1998 even if this Board disapproves the CSX/Conrail merger or
imposes conditions unacceptable to the applicants. Under the
timetable proposed by the Board and anticipated by CSX and
Conrail, however, the Board's final decision in this proceeding
would be issued by December 26, 1997, a year before the end of
the lock-out period. It is apparent, therefore, that the amended
lock-out provision was not designed to serve any legitimate
desire by CSX to preserve "what it bargained for" pending
regulatory review (Guilford at 328), and cannot be justified on
that ground.(23) Instead it was clearly designed to give CSX
control over a vital aspect of the conduct of Conrail's business,
and is therefore unlawful.
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23/ Indeed, the reasonable expectations of CSX concerning the
maintenance of Conrail's status quo ante are largely met by the
separate "standstill" provision of the Merger Agreement, Section
4.1, which sets forth in elaborate detail a long list of actions
regarding the conduct of its business that Conrail may not
undertake prior to the closing of the transaction without the
consent of CSX.
III. CSX'S UNLAWFUL CONTROL THREATENS NS AND CONRAIL'S
STOCKHOLDERS WITH IMMEDIATE IRREPARABLE INJURY WHICH THE
BOARD MUST ACT TO PREVENT.
The amended lock-out provision threatens NS and Conrail's
shareholders with immediate and irreparable injury. Unless the
provision is declared unlawful substantially advance of January
17, 1997, Conrail shareholders will be required to cast a
critical vote on that date without correct information about the
choices available to them. The vote is on whether to waive the
Subchapter 25E of Pennsylvania Business Corporation Act to permit
CSX to consummate its Second Tender Offer, which seeks to acquire
an additional 20 percent of Conrail's shares for $110 per share.
Consummating the Second Tender Offer is a critical step in CSX's
plan to acquire Conrail. Doing so would give CSX 40 percent of
Conrail's outstanding common stock. Coupled with CSX's exercise
of its option to purchase additional shares, this would virtually
ensure a subsequent majority vote in favor of the merger, as
Conrail itself has disclosed in proxy statements. If a majority
of the shares vote in favor of the merger, then the remaining
Conrail shares not owned by CSX (i.e., 60 percent of them) will
be forcibly exchanged for CSX's securities when the merger is
consummated.
Prior to the amendment to the lock-out provision, Conrail
shareholders could vote against permitting CSX to consummate the
Second Tender Offer in the expectation that Conrail could and
would agree to a merger with NS on NS's more favorable terms
after July 12, 1997, and that the shareholders could realize
those terms shortly thereafter. For that very reason, it appears
certain that the owners of a majority of Conrail's shares would
have voted against permitting CSX to consummate the Second Tender
Offer on December 23, 1996, when that vote was originally
scheduled. After the amendment to the lock-out provision,
Conrail shareholders will face considerable uncertainty as to
when they might realize NS's more favorable terms. Certainly,
CSX and Conrail want them to believe that they have no effective
economic choice but to vote in favor of CSX's inferior proposal.
In short, the amended lock-out provision is an effort to
present Conrail shareholders with the proverbial "offer they
cannot refuse." If they yield to that coercion, they will be
irreparably harmed because they will receive substantially less
for their shares than they would receive from NS. NS will also
be irreparably harmed, because CSX will have succeeded in
acquiring 40 percent of Conrail's outstanding shares, thereby
ensuring that a majority of the shares will be voted in favor of
a CSX/CR consolidation rather than in favor of an NS/CR
consolidation.
The Board must act to prevent CSX from using its unlawful
control to cause irreparable harm to Conrail's shareholders and
to NS. A declaratory order that the amended lock-out provision
is unlawful and unenforceable would do so if it were issued
sufficiently in advance of January 17, 1997 to ensure that
Conrail shareholders would be aware of their choices. If the
Board feels it is unable to decide the question in that time
frame, it should order Conrail to postpone the meeting now
scheduled for January 17, 1997 until the Board is able to make a
decision. Alternatively, the Board could prohibit CSX from
directing the trustee under CSX's voting trust agreement to vote
the shares held in the voting trust in favor of opting out of
Subchapter 25E of the Pennsylvania Business Corporation Act or in
favor of any CSX/Conrail merger until the Board is able to make a
decision.
CONCLUSION
The Board should issue a declaratory order that CSX has
acquired control of Conrail in violation of 49 U.S.C. SECTION 11323 by
reason of Section 4.2 of the CSX/Conrail merger, as amended on
December 18, 1996 and that Section 4.2 is void and unenforceable.
If the Board is unable to reach a decision on the question of
unlawful control substantially before January 17, 1997, it should
issue a temporary cease and desist order barring Conrail from
holding the shareholder meeting now scheduled for January 17,
1997, or barring CSX from requiring the trustee under CSX's
voting trust to vote any Conrail shares held in the voting trust
in favor of opting out of Subchapter 25E of the Pennsylvania
Business Corporation Act or in favor of a CSX/Conrail merger,
until the Board is able to decide the question.
Respectfully submitted,
------------------------------
James C. Bishop, Jr. Richard A. Allen
William C. Wooldridge James A. Calderwood
J. Gary Lane Andrew R. Plump
James L. Howe III John V. Edwards
Robert J. Cooney Zuckert, Scoutt & Rasenberger,
George A. Aspatore 888 17th Street, N.W.
Norfolk Southern Corporation Suite 600
Three Commercial Place Washington, D.C. 20006-3939
Norfolk, VA 23510-9241 (202) 298-8660
(757) 629-2838
Counsel for Norfolk Southern
Corporation and Norfolk Southern
Railway Company
