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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
SCHEDULE 14D-1
(Amendment No. 22)
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
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This Amendment No. 22 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 Con-
vertible Junior Preferred Stock, without par value (the "ESOP Pre-
ferred 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 Pur-
chase, the Supplement or the Schedule 14D-1.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
Item 11 is hereby amended and supplemented by the following:
(a)(61) Text of information sent to certain Company share-
holders commencing December 13, 1996.
(g)(7) Motion for Leave to Supplement and Amend the Complaint,
including as an exhibit thereto, Plaintiffs' Third
Amended Complaint, filed by Parent, Purchaser and
Kathryn B. McQuade against the Company, CSX et. al.
(dated December 13, 1996, United States District Court
for the Eastern District of Pennsylvania).
(g)(8) Preliminary Injunction Motion and related brief and
proposed form of Order filed by Parent, Purchaser and
Kathryn B. McQuade (dated December 13, 1996, United
District Court for the Eastern District of Penn-
sylvania).
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 16, 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)(61) Text of information sent to certain Company share-
holders commencing December 13, 1996.
(g)(7) Motion for Leave to Supplement and Amend the Complaint,
including as an exhibit thereto, Plaintiffs' Third
Amended Complaint, filed by Parent, Purchaser and
Kathryn B. McQuade against the Company, CSX et. al.
(dated December 13, 1996, United States District Court
for the Eastern District of Pennsylvania).
(g)(8) Preliminary Injunction Motion and related brief and
proposed form of Order filed by Parent, Purchaser and
Kathryn B. McQuade (dated December 13, 1996, United
District Court for the Eastern District of Pennsyl-
vania).
FYI: I thought you would be interested in two developments
Thursday in the battle for Conrail:
. Institutional Shareholder Services, a Bethesda, Md.,
shareholder consulting firm, recommended that Conrail
shareholders vote against a proposal to "opt out" of
Pennsylvania's takeover law. ISS said CSX's "front-end
loaded, two-tiered takeover does not treat all Conrail
shareholders fairly" and that lock-ups in the agreement have
denied them "the possibility of accepting a higher payment
for their shares." (Please see attached press release
issued by ISS.)
. The Port Authority of New York said it would urge federal
regulators to break up Conrail's rail monopoly at the port
as a condition for approving any sale of the railroad.
(Please see story on Page B-4 in the Eastern Edition of
today's Wall Street Journal.)
Deborah Noxon
Norfolk Southern Corporation
757-629-2861
NEWS RELEASE
CSX/CONRAIL MERGER DISRUPTED
ISS RECOMMENDS AGAINST "OPT OUT" PROVISION
FOR IMMEDIATE RELEASE Contact: Marcy J. Markowitz/(301)215-9507
[email protected]
Bethesda, MD - In a December 12 analysis, Institutional
Shareholder Services (ISS) has recommended AGAINST a proposal by
Conrail Corp. to opt out of a Pennsylvania fair price provision
which would allow CSX Corp. to complete a merger with Conrail.
Norfolk Southern Corp., (NS) seeks to tender for Conrail shares
at a higher price.
In his report, Senior Analyst Peter R. Gleason states, "...CSX's
front-end loaded, two-tiered takeover does not treat all Conrail
shareholders fairly, and the lock-ups contained in the agreement
have denied Conrail's shareholders the possibility of accepting a
higher payment for their shares."
Mr. Gleason met with both Conrail and NS executives before making
his recommendation. His analysis, which recounts these
discussions, is attached. Also attached is a summary of the
analysis, written for The ISS Friday Report by Mr. Gleason.
Timeline:
October 31 - Conrail sent notices to shareholders that it would
hold a special meeting of shareholders on November 14, 1996, to
amend its articles of incorporation to opt out of Subchapter E of
Chapter 25 of the Pennsylvania Business Corporation Law of 1988.
The provision is Pennsylvania's fair price provision which would
inhibit Conrail's proposed merger with CSX Corp.
October 23 - Norfolk Southern Corp. announced a tender offer for
all outstanding Conrail shares at $100.00 per share.
November 19 - The U.S. District Court for the Eastern District of
Pennsylvania issued a ruling denying the Norfolk Southern motion
to block competition of the CSX tender for 19.9 percent of
Conrail's common stock. The decision allowed CSX to continue
with its tender offer, which expired at midnight Wednesday,
November 20, 1996. Norfolk Southern immediately appealed the
decision.
November 20 - The U.S. Third Court of Appeals in Philadelphia
rejected Norfolk Southern's emergency injunction request and
cleared the path for CSX Corp. to acquire 19.9 percent of
Conrail's outstanding common stock in a tender offer valued at
$110 per share. CSX completed the tender offer, which ended at
midnight November 20, 1996, with approximately 85 percent of Conrail
shareholders tendering their shares.
November 26 - Conrail filed definitive proxy materials with the
SEC and set a meeting date of December 23, 1996, for its
shareholder vote to opt out of Pennsylvania's fair price
provision. Norfolk Southern has extended its previously
announced tender offer for Conrail share until Monday, December
16, 1996.
Peter R. Gleason, Senior Analyst
email: [email protected]
Peter Gleason is a Senior Analyst responsible for analyses
regarding proxy contests, mergers, acquisitions, and corporate
restructurings. He earned a B.A. from Dartmouth College in 1988,
and is a candidate for an M.B.A. in finance and marketing from
Virginia Tech. Peter started at ISS in 1990 as an Account
Representative in the Sales & Marketing Department and joined the
Domestic Proxy Advisory Service in 1991. In addition to his work
in research, he oversees several consulting projects for ISS
clients. Prior to joining ISS, Peter was a commercial leasing
broker for Cushman & Wakefield, Inc. in New York and interned on
the Government Securities Trading Desk at Smith Barney Harris
Upham, also in New York.
About ISS
Located in Bethesda, MD, Institutional Shareholder Services (ISS)
is the world's leading provider of proxy voting and corporate
governance services. Serving close to 400 institutional clients
- -- as well as trustees, custodians and corporations throughout
North America, Europe and Australia -- ISS analyzes proxy issues
and recommends votes for approximately 10,000 shareholder
meetings around the world each year.
ISS's main institutional services include Proxy Advisory and
Voting Agent Services, U.S. and Global. Proprietary software
products include ProxyMaster, an electronic proxy voting and
research management tool, and ProxyRecord, a recordkeeping and
reporting package. ProxyReporter, another ISS software product,
is used to provide consolidated reporting packages to plan
sponsors who delegate voting to their managers. In addition,
ISS's corporate governance consulting services are used by a
number of leading corporations, regulatory and self-regulatory
organizations around the world.
Founded in 1985, ISS is unit of CDA Investment Technologies, a
division of Thomson Financial Services.
For more information on ISS, call Marcy J. Markowitz at
(301)215-9507.
###
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- --------------------------------------------------------
NORFOLK SOUTHERN CORPORATION, a :
Virginia Corporation, ATLANTIC :
ACQUISITION CORPORATION, a :
Pennsylvania corporation AND :
KATHRYN B. McQUADE, :
Plaintiffs, :
:
v. :
: C.A. No. 96-CV-7167
CONRAIL INC. a Pennsylvania :
corporation, DAVID M. LEVAN, H. :
FURLONG BALDWIN, DANIEL B. :
BURKE, ROGER S. HILLAS, CLAUDE :
S. BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN :
C. MAROUS, DAVID H. SWANSON, E. :
BRADLEY JONES, AND RAYMOND T. :
SCHULER AND CSX CORPORATION, :
Defendants, :
:
- --------------------------------------------------------
PLAINTIFFS' MOTION FOR LEAVE
TO FILE THEIR THIRD AMENDED COMPLAINT
Pursuant to Rules 15(a) of the Federal Rules of Civil
Procedure, plaintiffs, by and through their attorneys, respectfully move
for leave of Court to file a Third Amended Complaint.
In support of their motion, plaintiffs rely upon the
accompanying memorandum of law.
Respectfully Submitted:
------------------------
Mary A. McLaughlin
I.D. No. 24923
George G. Gordon
I.D. No. 63072
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
Attorneys for Plaintiffs
Of Counsel:
Steven J. Rothschild
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: December 13, 1996
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
NORFOLK SOUTHERN CORPORATION, a Virginia corporation, :
ATLANTIC ACQUISITION CORPORATION, :
a Pennsylvania corporation, and :
KATHRYN B. McQUADE, :
:
Plaintiffs, :
: C.A. No. 96-CV-7167
-against- :
:
CONRAIL INC., :
a Pennsylvania corporation, :
DAVID M. LEVAN, H. FURLONG BALDWIN, :
DANIEL B. BURKE, ROGER S. HILLAS, :
CLAUDE S. BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN C. :
MAROUS, DAVID H. SWANSON, E. :
BRADLEY JONES, RAYMOND T. :
SCHULER and CSX CORPORATION, :
:
Defendants. :
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
THIRD AMENDED COMPLAINT FOR
DECLARATORY AND INJUNCTIVE RELIEF
Plaintiffs, by their undersigned attorneys, as and for their
Third Amended Complaint, allege upon knowledge with respect to themselves
and their own acts, and upon information and belief as to all other
matters, as follows:
Nature of the Action
1. This action arises from the attempt by defendants Conrail
Inc. ("Conrail"), its directors (the "Director Defendants"), and CSX
Corporation ("CSX") to coerce, mislead and fraudulently manipulate
Conrail's shareholders to swiftly deliver control of Conrail to CSX and to
forestall any competing higher bid for Conrail by plaintiff Norfolk
Southern Corporation ("NS"). Although defendants have attempted to create
the impression that NS's superior $110 per share all-cash offer for all of
Conrail's stock is a "non-bid" or a "phantom offer," in reality the only
obstacles to the availability of the $110 per share offered by NS are
illegal actions and ultra vires agreements by defendants. The ultimate
purpose of this action is to establish the illegality of such actions and
agreements so that NS may proceed to provide superior value to Conrail's
shareholders and a superior transaction to Conrail and all of its
constituencies.
2. Additionally, plaintiffs have sought and will seek interim
injunctive relief to maintain the status quo and ensure that Conrail
shareholders will not be coerced, misled and fraudulently manipulated by
defendants' illegal conduct to deliver control over Conrail to CSX before
the Court can finally determine the issues raised in this action.
3. The event that set this controversy in motion was the
unexpected announcement that CSX would take over Conrail. In a surprise
move on October 15, 1996, defendants Conrail and CSX announced a deal to
rapidly transfer control of Conrail to CSX and foreclose any other bids for
Conrail (the "CSX Transaction"). The CSX Transaction is to be accomplished
through a complicated multi-tier structure involving two coercive
front-end loaded cash tender offers, a lock-up stock option and, following
required regulatory approvals or exemptions, a back-end merger in which
Conrail shareholders will receive stock and, under certain circumstances,
cash. The original CSX Transaction had a blended value of slightly more
than $85 per Conrail share as of October 29, 1996. The currently proposed
CSX Transaction has a blended value of approximately $89.80 per Conrail
share, over $20 per share less than the NS Proposal. The NS Proposal has a
value of at least $1.3 billion more than the CSX Transaction. Integral to
the inferior CSX Transaction are executive succession and compensation
guarantees for Conrail management and board composition covenants
effectively ensuring Conrail directors of continued board seats.
4. Because plaintiff NS believes that a business combination
between Conrail and NS would yield benefits to both companies and their
constituencies far superior to any benefits offered by the proposed
Conrail/CSX combination, NS on October 23, 1996 announced its intention to
commence, through its wholly-owned subsidiary, plaintiff Atlantic
Acquisition Corporation ("AAC") a cash tender offer (the "NS Offer") for
all shares of Conrail stock at $100 per share, to be followed by a cash
merger at the same price (the "Proposed Merger," and together with the NS
Offer, the "NS Proposal"). The following day, on October 24, 1996, the NS
Offer commenced. On November 8, 1996, NS increased its offer to $110 in
cash per Conrail share.
5. At the heart of this controversy is the assertion by
defendants, both expressly and through their conduct, that the Director
Defendants, as directors of a Pennsylvania corporation, have virtually no
fiduciary duties. While it is true that Pennsylvania statutory law provides
directors of Pennsylvania corporations with wide discretion in responding
to acquisition proposals, defendants here have gone far beyond what even
Pennsylvania law permits. As a result, this battle for control of Conrail
presents the most audacious array of lock-up devices ever attempted:
o The Poison Pill Lock-In. The CSX Merger Agreement
exempts the CSX Transaction from Conrail's Poison Pill
Plan, and purports to prohibit the Conrail Board from
redeeming, amending or otherwise taking any further
action with respect to the Plan. Under the terms of
the Poison Pill Plan, the Conrail directors would have
lost their power to make the poison pill inap-
plicable to any acquisition transaction other than the
CSX Transaction on November 7, unless CSX agreed to
let them postpone that date. Thus, the Poison Pill
Lock-In threatened to lock-up Conrail, even from
friendly transactions, until the year 2005, when the
poison pill rights expire. Put simply, the CSX Merger
Agreement purported to require Conrail to swallow its
own poison pill. Only after plaintiffs applied for a
temporary restraining order did the Conrail board
request CSX's permission to postpone the Distribution
Date. Although it had no obligation to do so, CSX
permitted the postponement. Adoption of this provision
placed Conrail in serious jeopardy and at the mercy of
CSX, which had no obligation to act in Conrail's best
interests. Conrail remains at CSX's mercy due to the
Poison Pill Lock-In. The Poison Pill Lock-in is ultra
vires under Pennsylvania law and constitutes a
complete abdication and breach of the Conrail
directors' duties of loyalty and care.
o The 270-Day Lock-Out. The CSX Merger Agreement
audaciously and unashamedly purported to prohibit
Conrail's directors from withdrawing their
recommendation that Conrail's shareholders accept and
approve the CSX Transaction and from terminating the
CSX Merger Agreement, even if their fiduciary duties
require them to do so, for a period of 180 days from
execution of the agreement. On November 6, Conrail and
CSX announced that they had agreed to extend the
lock-out period from 180 days to 270 days. Put simply,
Conrail's directors have agreed to take a nine-month
leave of absence during what may be the most critical
six months in Conrail's history. Moreover, while the
270 Day Lock-Out originally permitted Conrail to
provide information to and negotiate with an
unsolicited competing bidder, the completion of the
CSX Offer on November 20 changed that: now Conrail
purportedly cannot even provide information or
negotiate prior to July, 1997. The 270-Day Lock-Out is
ultra vires under Pennsylvania law and constitutes a
complete abdication and breach of the Conrail
directors' duties of loyalty and care.
o The Stock Option Lock-Up And The $300 Million Break-Up
Fee. The CSX Merger Agreement provides, in essence,
that Conrail must pay CSX a $300 million windfall if
the CSX Merger Agreement is terminated and Conrail is
acquired by another company. Further, a Stock Option
Agreement granted by Conrail to CSX threatens over
$275 million in dilution costs to any competing bidder
for Conrail. This lock-up option is particularly
onerous because the higher the competing bid, the
greater the dilution it threatens.
o The Continuing Director Amendments To Conrail's Poison
Pill Plan. Recognizing that Pennsylvania law permits
shareholders of Pennsylvania corporations to elect a
new board of directors if they disagree with an
incumbent board's decisions concerning acquisition
offers, the Conrail Board altered the Conrail Poison
Pill Plan in September 1995 to deprive Conrail's
shareholders of the ability to elect new directors
fully empowered to act to render the poison pill
ineffective or inapplicable to a transaction they deem
to be in the corporation's best interests. This
amendment to the Conrail Poison Pill Plan is ultra
vires under Pennsylvania law and Conrail's Charter and
By-Laws, and constitutes an impermissible interference
in the stockholder franchise and a breach of the
Conrail directors' duty of loyalty.
o The Rolling Special Meeting. On November 25,
defendants announced that the special meeting of
Conrail's shareholders to vote on a proposal to amend
Conrail's Articles of Incorporation to opt-out of the
protections of subchapter 25E of the PBCL, (the
"Charter Amendment"), scheduled for December 23, would
not be convened at all unless defendants had
sufficient proxies in hand to assure approval of the
Charter Amendment, and that such meeting may be
successively postponed until Conrail's shareholders
submit to the defendants' will. Further, the Conrail
directors have in section 5.1(b) of the amended CSX
Merger Agreement improperly delegated their
responsibilities with respect to the processes of
corporate democracy by purporting to contractually
limit their actions pertaining to the special meeting
to those to which CSX consents. Defendants' conduct
strikes at the heart of corporate democracy and is
fundamentally unfair. Such conduct constitutes a
breach of the Director Defendants' fiduciary duties,
aided and abetted by CSX.
At bottom, what defendants have attempted here is to litter the playing
field with illegal, ultra vires apparent impediments to competing
acquisition proposals, and then coerce Conrail shareholders to swiftly
deliver control of Conrail to CSX before the illegality of such
impediments can be determined and revealed.
6. Accordingly, by this action, plaintiffs NS, AAC, and
Kathryn B. McQuade, a Conrail shareholder, seek emergency relief against
defendants' illegal attempt to lock-up the rapid sale of control of
Conrail to CSX through their scheme of coercion, deception and
fraudulent manipulation, in violation of the federal securities laws,
Pennsylvania statutory law, and the fiduciary duties of the Director
Defendants. In addition, to facilitate the NS Proposal, plaintiffs seek
certain declaratory relief with respect to replacement of Conrail's
Board of Directors at Conrail's next annual meeting of shareholders.
Jurisdiction and Venue
7. This Court has jurisdiction over this complaint
pursuant to 28 U.S.C. ss.ss. 1331 and 1367.
8. Venue is proper in this District pursuant to 28 U.S.C.
ss. 1391.
The Parties
9. Plaintiff NS is a Virginia corporation with its
principal place of business in Norfolk, Virginia. NS is a holding
company operating rail and motor transportation services through its
subsidiaries. As of December 31, 1995, NS's railroads operated more than
14,500 miles of road in the states of Alabama, Florida, Georgia,
Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan,
Mississippi, Missouri, New York, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Virginia and West Virginia, and the Province
of Ontario, Canada. The lines of NS's railroads reach most of the larger
industrial and trading centers in the Southeast and Midwest, with the
exception of those in Central and Southern Florida. In the fiscal year
ended December 31, 1995, NS had net income of $712.7 million on total
transportation operating revenues of $4.668 billion. According to the
New York Times, NS "is considered by many analysts to be the nation's
best-run railroad." NS is the beneficial owner of 100 shares of common
stock of Conrail.
10. Plaintiff AAC is a Pennsylvania corporation. The
entire equity interest in AAC is owned by NS. AAC was organized by NS
for the purpose of acquiring the entire equity interest in Conrail.
11. Plaintiff Kathryn B. McQuade is and has been, at all
times relevant to this action, the owner of Conrail common stock.
12. Defendant Conrail is a Pennsylvania corporation with
its principal place of business in Philadelphia, Pennsylvania. Conrail
is the major freight railroad serving America's Northeast-Midwest
region, operating over a rail network of approximately 11,000 route
miles. Conrail's common stock is widely held and trades on the New York
Stock Exchange. During the year ended December 31, 1995, Conrail had net
income of $264 million on revenues of $3.68 billion. On the day prior to
announcement of the CSX Transaction, the closing per share price of
Conrail common stock was $71.
13. Defendant David M. LeVan is President, Chief Executive
Officer, and Chairman of Conrail's Board of Directors. Defendants H.
Furlong Baldwin, Daniel B. Burke, Roger S. Hillas, Claude S. Brinegar,
Kathleen Foley Feldstein, David B. Lewis, John C. Marous, David H.
Swanson, E. Bradley Jones, and Raymond T. Schuler are the remaining
directors of Conrail. The foregoing individual directors of Conrail owe
fiduciary duties to Conrail and its stockholders, including
plaintiffs.
14. Defendant CSX is a Virginia corporation with its
principal place of business in Richmond, Virginia. CSX is a
transportation company providing rail, intermodal, ocean
container-shipping, barging, trucking and contract logistic services.
CSX's rail transportation operations serve the southeastern and
midwestern United States.
Factual Background
The Offer
15. In response to the surprise October 15 announcement of
the CSX Transaction, on October 23, 1996, NS announced its intention to
commence a public tender offer for all shares of Conrail common stock at
a price of $100 cash per share. NS further announced that it intends, as
soon as practicable following the closing of the NS Offer, to acquire
the entire equity interest in Conrail by causing it to merge with AAC
in the Proposed Merger. In the Proposed Merger as originally proposed,
Conrail common stock not tendered and accepted in the NS Offer would
have been converted into the right to receive $100 in cash per share. On
October 24, 1996, NS, through AAC, commenced the NS Offer. The NS Offer
and the Proposed Merger represented a 40.8% premium over the closing
market price of Conrail stock on October 14, 1996, the day prior to
announcement of the CSX Transaction.
16. In a letter delivered on October 23, 1996 to the
Defendant Directors, NS stated that it was flexible as to all aspects of
the NS Proposal and expressed its eagerness to negotiate a friendly
merger with Conrail. The letter indicated, in particular, that while the
NS Proposal is a proposal to acquire the entire equity interest in
Conrail for cash, NS is willing to discuss, if the Conrail board so
desires, including a substantial equity component to the consideration
to be paid in a negotiated transaction so that current Conrail
shareholders could have a continuing interest in the combined NS/Conrail
enterprise.
The Current Crisis: In a Surprise Move Intended To Foreclose Competing
Bids, Conrail and CSX Announce On October 15 That Conrail Has Essentially
Granted CSX A Lock-Up Over Control Of The Company
17. After many months of maintaining that Conrail was not
for sale, on October 16, 1996, the Conrail Board announced an abrupt
about-face: Conrail would be sold to CSX in a multiple-step transaction
designed to swiftly transfer effective, if not absolute, voting control
over Conrail to a voting trustee who would be contractually required to
vote to approve CSX's acquisition of the entire equity interest in
Conrail through a follow-up stock merger.
18. This Court denied plaintiffs' motion for a preliminary
injunction barring the consummation of CSX's highly coercive front-end
loaded tender offer for up to 19.9% of Conrail's shares. As a result,
CSX and Conrail succeeded through this classic hostile takeover tactic
in coercing Conrail's shareholders to cede nearly 20% of Conrail's
voting power to CSX, gaining an overwhelming advantage in the vote of
Conrail's shareholders on the Charter Amendment, now slated for December
23, 1996. This Court's ruling on plaintiffs' motion for preliminary
injunction, and CSX's right to vote the shares it acquired in the
completed CSX offer are currently subject to appeal.
19. The current crisis arises due to the imminent December
23, 1996 special meeting of Conrail's shareholders, scheduled for the
purpose of conducting a shareholder vote on the Charter Amendment.
Defendants have stated that this meeting will not be convened unless
they hold sufficient proxies to assure their victory. Defendants have
also stated that this special meeting may be successively postponed
until Conrail's shareholders submit to their will. Thus defendants are
attempting to manipulate the processes of corporate democracy to coerce
approval of the Charter Amendment and to prevent the true wishes of
Conrail's shareholders from being expressed and given effect. Plaintiffs
accordingly seek a preliminary injunction against any postponement of
the shareholder vote scheduled for December 23.
Defendants Were Well Aware That A Superior Competing
Acquisition Proposal By NS was Inevitable
20. For a number of years, certain members of senior
management of NS, including David R. Goode, Chairman and Chief Executive
Officer of NS, have spoken numerous times with senior management of
Conrail, including former Conrail Chairman and Chief Executive Officer,
James A. Hagen, and current Conrail Chairman and Chief Executive
Officer, defendant David W. LeVan, concerning a possible business
combination between NS and Conrail. Ultimately, Conrail management
encouraged such discussions prior to Mr. Hagen's retirement as Chief
Executive Officer of Conrail. Conrail discontinued such discussions in
September 1994, when the Conrail Board elected Mr. LeVan as Conrail's
President and Chief Operating Officer as a step toward ultimately
installing him as Chief Executive Officer and Chairman upon Mr. Hagen's
departure.
21. Prior to 1994, senior management of NS and Conrail
discussed, from time to time, opportunities for business cooperation
between the companies, and, in some of those discussions, the general
concept of a business combination. While the companies determined to
proceed with certain business cooperation opportunities, including the
Triple Crown Services joint venture, no decisions were reached
concerning a business combination at that time.
22. In March of 1994, Mr. Hagen approached Mr. Goode to
suggest that under the current regulatory environment, Conrail
management now believed that a business combination between Conrail and
NS could be accomplished, and that the companies should commence
discussion of such a transaction. Mr. Goode agreed to schedule a meeting
between legal counsel for NS and Conrail for the purpose of discussing
regulatory issues. Following that meeting, Mr. Goode met with Mr. Hagen
to discuss in general terms an acquisition of Conrail by NS. Thereafter,
during the period from April through August 1994, management and senior
financial advisors of the respective companies met on numerous
occasions to negotiate the terms of a combination of Conrail and NS. The
parties entered into a confidentiality agreement on August 17, 1994.
During these discussions, Mr. Hagen and other representatives of Conrail
pressed for a premium price to reflect the acquisition of control over
Conrail by NS. Initially, NS pressed instead for a stock-for-stock
merger of equals in which no control premium would be paid to Conrail
shareholders. Conrail management insisted on a control premium, however,
and ultimately the negotiations turned toward a premium stock-for-stock
acquisition of Conrail.
23. By early September 1994, the negotiations were in an
advanced stage. NS had proposed an exchange ratio of 1-to-1, but Conrail
management was still pressing for a higher premium. In a meeting in
Philadelphia on September 23, 1994, Mr. Goode increased the proposed
exchange ratio to 1.1-to-1, and left the door open to an even higher
ratio. Mr. Hagen then told Mr. Goode that they could not reach agreement
because the Conrail board had determined to remain independent and to
pursue a stand-alone policy. The meeting then concluded.
24. The 1.1-to-1 exchange ratio proposed by Mr. Goode in
September of 1994 reflected a substantial premium over the market price
of Conrail stock at that time. If one applies that ratio to NS's stock
price on October 14, 1996 -- the day the Conrail Board approved the CSX
Transaction -- it implies a per share acquisition price for Conrail of
over $101. Thus, there can be no question that Mr. LeVan, if not
Conrail's Board, was well aware that NS would likely be willing and able
to offer more -- to Conrail's shareholders, rather than management, that
is -- than CSX could offer for an acquisition of Conrail.
Defendant LeVan Actively Misleads NS Management In
Order To Permit Him To Lock Up The Sale of Conrail to CSX
25. During the period following September of 1994, Mr.
Goode from time to time had conversations with Mr. LeVan. During
virtually all of these conversations, Mr. Goode expressed NS's strong
interest in negotiating an acquisition of Conrail. Mr. LeVan responded
that Conrail wished to remain independent. Nonetheless, Mr. Goode was
led to believe that if and when the Conrail Board determined to pursue a
sale of the company, it would do so through a process in which NS would
have an opportunity to bid.
26. At its September 24, 1996 meeting, the NS Board
reviewed its strategic alternatives and determined that NS should press
for an acquisition of Conrail. Accordingly, Mr. Goode again contacted
Mr. LeVan to (i) reiterate NS's strong interest in acquiring Conrail and
(ii) request a meeting at which he could present a concrete proposal.
Mr. LeVan responded that the Conrail board would be holding a strategic
planning meeting that month and that he and Mr. Goode would be back in
contact after that meeting. Mr. Goode emphasized that he wished to
communicate NS's position so that Conrail's Board would be aware of it
during the strategic planning meeting. Mr. LeVan stated that it was
unnecessary for Mr. Goode to do so. At that point, the conversation
concluded.
27. Following September 24, Mr. LeVan did not contact Mr.
Goode. Finally, on Friday, October 4, 1996, Mr. Goode telephoned Mr.
LeVan. Mr. Goode again reiterated NS's strong interest in making a
proposal to acquire Conrail. Mr. LeVan responded that the Conrail Board
would be meeting on October 16, 1996, and assumed that he and Mr. Hagen
would contact Mr. Goode following that meeting. Mr. Goode again stated
that NS wanted to make a proposal so that the Conrail Board would be
aware of it. Mr. LeVan stated that it was unnecessary to do so.
CSX's Chairman Snow Contributes To LeVan's Deception
28. Several days prior to October 15, CSX's Chairman, John
W. Snow, publicly stated that he did not expect to see any major
business combinations in the railroad industry for several years. On
October 16, 1996, the New York Times reported that "less than a week
ago, Mr. Snow told Wall Street analysts that he did not expect another
big merger in the industry (in the next few years)."
On the Day Before the Purportedly Scheduled Meeting of
Conrail's Board, Defendants Announce the CSX Transaction
29. To NS's surprise and dismay, on October 15, 1996,
Conrail and CSX announced that they had entered into a definitive
merger agreement (the "CSX Merger Agreement") pursuant to which control
of Conrail would be swiftly sold to CSX and then a merger would be
consummated following required regulatory approvals. As of the close of
business on October 29, 1996, the blended value of the original CSX
Transaction was slightly more than $85 per Conrail share. The CSX
Transaction includes a break-up fee of $300 million and a lock-up stock
option agreement threatening substantial dilution to any rival bidder
for control of Conrail. Integral to the CSX Transaction are covenants
substantially increasing Mr. LeVan's compensation and guaranteeing that
he will succeed John W. Snow, CSX's Chairman and Chief Executive
Officer, as the combined company's CEO and Chairman.
CSX Admits That The Conrail Board Approved The CSX Transaction Rapidly.
30. On October 16, 1996, the New York Times reported that
CSX's Snow on October 15, 1996, had stated that the multi-billion dollar
sale of Conrail in the CSX Transaction "came together rapidly in the
last two weeks." The Wall Street Journal reported on October 16 that Mr.
Snow stated that negotiations concerning the CSX Transaction had gone
"very quickly," and "much faster than he and Mr. LeVan had anticipated."
On October 24, 1996, the Wall Street Journal observed that "[i]n
reaching its agreement with CSX, Conrail didn't solicit other bids ...
and appeared to complete the accord at breakneck speed."
31. Thus, Conrail's board approved the CSX Transaction
rapidly without a good faith and reasonable investigation. Given the
nature of the CSX Transaction, with its draconian and preclusive lock-up
mechanisms, the Conrail Board's rapid approval of the deal constitutes
reckless and grossly negligent conduct.
CSX's Snow Implies That the CSX Transaction Is a Fait Accompli
and States That Conrail's Directors Have Almost No Fiduciary Duties
32. On October 16, 1996, Mr. Goode met in Washington, D.C.
with Mr. Snow to discuss the CSX Transaction and certain regulatory
issues that its consummation would raise. Mr. Snow advised Mr. Goode
during that meeting that Conrail's counsel and investment bankers had
ensured that the CSX Transaction would be "bulletproof," implying that
the sale of control of Conrail to CSX is now a fait accompli. Mr. Snow
added that the "Pennsylvania statute," referring to Pennsylvania's
Business Corporation Law, was "great" and that Conrail's directors have
almost no fiduciary duties. Mr. Snow's comments were intended to
discourage NS from making a competing offer for control of Conrail and
to suggest that NS had no choice but to negotiate with CSX for access to
such portions of Conrail's rail system as would be necessary to address
the regulatory concerns that would be raised by consummation of the CSX
Transaction. After Mr. Snow told Mr. Goode what CSX was willing to offer
to NS in this regard, the meeting concluded.
NS Responds With A Superior Offer For Conrail
33. On October 22, the NS Board met to review its
strategic options in light of the announcement of the CSX Transaction.
Because the NS Board believes that a combination of NS and Conrail would
offer compelling benefits to both companies, their shareholders and
their other constituencies, it determined that NS should make a
competing bid for Conrail. On October 23, 1996, NS publicly announced
its intention to commence a cash tender offer for all shares of Conrail
stock for $100 per share, to be followed, after required regulatory
approvals, by a cash merger at the same price. On October 24, 1996, NS,
through AAC, commenced the NS Offer.
CSX Tells The Market That NS's
Superior Proposal To Acquire Conrail Is Not Real
34. CSX responded to the NS Proposal by attempting to lead
the market to believe that the superior NS Proposal does not represent a
real, viable and actually available alternative to the CSX Transaction.
On October 24, 1996, the Wall Street Journal reported:
CSX issued a harshly worded statement last night that called
Norfolk's move a "nonbid" that would face inevitable delays
and be subject to numerous conditions. It said the Norfolk
bid couldn't be approved without Conrail's board, and notes
that the merger pact [with CSX] prohibited Conrail from
terminating its pact until mid-April. It said the present
value of the Norfolk bid was under $90 a share because of the
minimum six-month delay....
On the same day, the New York Times reported that "a source
close to CSX" characterized the NS Proposal as "a phantom
offer."
35. These statements are an integral part of defendants' scheme to
coerce, mislead and manipulate Conrail's shareholders to rapidly deliver
control of Conrail to CSX by creating the false impression that the NS
Proposal is not a viable and actually available alternative.
CSX Lures NS Into Settlement Discussions, Then Falsely Claims That NS
Initiated The Talks In Order to Destabilize The Market For Conrail
Shares
36. During the weekend of November 2 and November 3,
representatives of NS and CSX met. The meetings were held at the
suggestion of CSX, ostensibly for the purpose of exploring a settlement
of the litigation between NS and CSX and a resolution of issues raised
by their respective offers to acquire Conrail. CSX represented to NS
that Conrail was aware of these meetings. NS participated in the
meetings consistent with its announced position favoring a balanced
competition structure for Eastern railroad service.
37. On the morning of November 4, 1996, however, CSX
issued a false and misleading press release in which it claimed (i) that
NS had initiated the discussions and (2) that the subject matter of the
discussions was which pieces of Conrail NS would purchase from CSX once
CSX had purchased Conrail in its entirety. In fact, CSX had initiated
the talks, as stated above, and the talks involved both an acquisition
by NS of Conrail and an acquisition by CSX of Conrail, and what assets
the non-acquiring party would ultimately receive.
38. CSX, with Conrail's knowing participation, issued its
false and misleading press release for the purpose of manipulating and
destabilizing the market for Conrail stock by creating the false
perception that NS was not committed to its $100 per share bid to
acquire Conrail.
39. The CSX press release had its intended effect. On the
morning of November 4, Conrail's stock price dived from $95 1/4 to as
low as $87 per share on heavy volume.
40. Later that morning, NS issued its own press release,
explaining that it was CSX that initiated the talks with NS, that NS
remained committed to its offer to acquire Conrail for $100 per share,
and that the financing condition to its offer had been satisfied.
41. Following NS's announcement, Conrail's stock price
returned to levels at which it had traded prior to CSX's false and
misleading press release. Conrail stock closed the day down $1-5/8, at
$93-5/8.
42. CSX's manipulative tactics are not surprising, given
CSX's previous willingness to employ disinformation against the
financial markets. As noted above, CSX's Snow had told analysts days
prior to announcement of the CSX Transaction that he believed that a
major rail merger was unlikely in the near future. On November 6, the
Wall Street Journal reported:
[S]ome...analysts think they will have trouble trusting CSX
in the future. Two weeks before the announcement of a
CSX-Conrail combination, Mr. Snow told analysts that further
rail mergers may be inevitable, but not imminent, citing the
backlash against Union Pacific Corp's $3.9 billion takeover
of Southern Rail Corp.
"I took that to mean that CSX certainly wouldn't be leading
an acquisition attempt soon, and that was a sensible plan of
action" said Anthony Hatch, an analyst at Norwest Securities
Corp. "I found their subsequent merger announcement to be
startling to say the least."
Defendants Are Forced To Amend The Conrail Poison Pill To Avert A Near
Disaster.
43. As noted above and explained more fully below, the
Poison Pill Lock-In feature of the CSX Merger Agreement purports to
prevent the Conrail board from taking action with respect to the Conrail
Poison Pill without CSX's consent. Yet, due to commencement of the NS
Offer, such action was required in order to prevent a "Distribution
Date" from occurring on November 7, 1996. If the Distribution Date had
been permitted to occur, then Conrail would have been incapable of
engaging in a business combination other than the CSX Transaction as
originally agreed to on November 14, 1996, until the year 2005.
44. Conrail's directors had thus placed Conrail in grave
strategic jeopardy by agreeing to the Poison Pill Lock-In provision.
Essentially, the Conrail board had placed itself at CSX's mercy, with
CSX having no obligation to act other than in its own best interests.
What is worse, the Conrail directors were completely unaware that they
had done so until NS pointed the problem out to counsel for Conrail and
Conrail was forced to call a special board meeting to address the
matter. Thus, in their haste to approve and lock up the CSX Transaction,
Conrail's directors acted with extreme recklessness.
45. Because Conrail refused to give assurances to
plaintiffs that its Board would take action to postpone the Distribution
Date (which it could do only with CSX's consent), NS was forced to file
a motion for a temporary restraining order. The Court scheduled a
hearing on the motion for noon on November 4, 1996.
46. Just hours prior to the scheduled hearing, the Conrail
directors met for the purpose of attempting to extricate Conrail from
the grave jeopardy into which their reckless conduct had placed it. The
Conrail directors adopted a resolution postponing the "Distribution
Date" of the Conrail Poison Pill until the tenth business day following
the date on which any person acquired 10% or more of Conrail's stock.
Although it had no obligation to do so, CSX assented to this postpone-
ment. As a result, the Court denied NS's application for a temporary
restraining order as moot.
Defendants Announce That They Have Restructured The CSX Transaction
By Substantially Front-End Loading The Cash Tender Offers In Order To
Stampede Shareholders Into Effectively Foreclosing The NS Proposal
47. On November 5, 1996, the Conrail board met. The
results of that meeting were announced on November 6, 1996. In that
announcement, defendants disclosed that the cash tender offers
contemplated by the CSX Transaction had been substantially front-end
loaded. That is, the cash price offered to Conrail shareholders in the
initial CSX cash tender offers was increased from $92.50 per share to
$110 per share, while the stock consideration to be paid in the
follow-up merger remains the same 1.85619 shares of CSX stock for each
Conrail share. Based upon the closing sale price of CSX stock on
November 7, 1996, 1.85619 shares were worth approximately $82.14.
48. Defendants also announced that the timing of the steps
toward completion of the CSX Transaction had been changed. The special
meeting of Conrail shareholders for the purpose of voting on the Charter
Amendment, originally scheduled for November 14, was postponed until a
date that defendants stated would likely fall in December 1996, and that
has now been set at December 23, 1996. Further, the expiration date of
the CSX Offer was extended from midnight on November 15 to midnight of
November 20, 1996.
49. Accordingly, defendants planned to close a first
tender offer for 19.9% of Conrail's shares on November 20, prior to the
vote on the Charter Amendment. If the Charter Amendment is approved,
defendants planned to proceed with a second front-end loaded tender
offer, after which CSX will have acquired 40% of Conrail's stock,
constituting effective control and foreclosing the NS Proposal as an
alternative for Conrail's shareholders.
50. Both the front-end loaded structure of the CSX Offers
and the perceived risk that the NS Proposal will not be consummated due
to the draconian defensive measures adopted by the defendants exerted
and continue to exert tremendous coercive pressure upon Conrail
shareholders to tender their shares to CSX.
51. A November 10, 1996 Philadelphia Inquirer article
summed up the coercive situation created by defendants succinctly:
[Conrail shareholders] face a daunting dilemma, which was
deliberately constructed for them by CSX's attorneys and
investment bankers. They can either tender their stock to CSX
-- that is, offer it up to CSX for sale -- by Nov. 20, or
hold back and risk getting a lower price if [CSX] ends up the
successful bidder for Conrail.
52. In their Schedule 14D-9 disclosures, defendants
admitted the coercive design and effect of the revised CSX Transaction:
Shareholders should also be aware that shareholders may
decide to tender their Shares to CSX in the CSX Offer and the
Second CSX Offer, if applicable (even if they believe that
the Proposed Norfolk Transactions, if they could be effected,
would have a higher value to shareholders than the CSX
Transactions), because shareholders may conclude that
sufficient Shares will be tendered by other shareholders and
that failure to tender will result in the non-tendering
shareholders receiving only CSX shares which, based on
current market prices, have a per Share value that is
significantly less that the $110 per Share being offered in
the CSX Offer and the Second CSX Offer, if applicable, may
succeed regardless of the perceived relative values of the
CSX Transactions and the Proposed Norfolk Transactions.
53. CSX and Conrail issued a joint press release on
November 6 to announce the revised CSX Transaction. In that press
release, defendants made several false and misleading statements
calculated to affect the decision making of investors with respect to
the CSX Offers and the NS Offer.
54. For instance, defendants stated in the press release
that Conrail's "board of directors carefully considered the relative
merits of a merger with Norfolk Southern rather than with CSX." However,
review of the fairness opinion letters from Lazard Freres & Co. and
Morgan Stanley attached to Amendment No. 4 to Conrail's Schedule 14D-9
with respect to the CSX Offer reveals that this representation is false.
Both Lazard Freres and Morgan Stanley included a specific caveat to
their letters to Conrail's board:
[A]t your request, in rendering our opinion, we did not
address the relative merits of the [CSX Transaction], the [NS
Offer] and any alternative potential transactions.
Even were shareholders to discover this caveat, the stark contrast
between it and the contrary statement in the joint press release will no
doubt leave shareholders wondering just what the truth is.
55. The joint press release also quotes CSX Chairman Snow
as claiming that CSX and Conrail have conveniently discovered an
additional $180 million of synergies that "will be realized through the"
CSX Transaction, over and above the $550 million in anticipated savings
originally claimed. This claim of "newly discovered" synergies is
material to investors' decisions with respect to the CSX Offer and the
NS Offer because the claim bears directly upon the value of the
follow-up stock merger consideration offered by CSX. The sudden
discovery of such additional synergies is highly suspect, since the
announcement coincides with an increase in the cash offered in the front
end of the CSX Transaction, which increase would otherwise be expected
to negatively impact the value of the back end merger. Making matters
worse, defendants have failed to disclose any details of or support for
these claimed "newly discovered" synergies.
NS Raises Its All Cash Offer For All of
Conrail's Shares to $110 Per Share
56. On November 8, 1996, NS announced that it had raised
its offer to acquire all of Conrail's outstanding shares to $110 cash
per share. This represented, on a per share basis, a nearly $17 per
share margin over the November 8 blended value of the CSX Transaction of
approximately $93 per share. In the aggregate, CSX's offer amounts to
approximately $8.5 billion, while NS's Proposal is $10 billion cash on
the barrel. Thus, the challenged conduct of defendants threatens a
massive $1.5 billion loss to Conrail's shareholders.
Unable To Persuade CSX To Improve The Financial Terms
Of The CSX Transaction, The Conrail Board Is Forced
To Reaffirm Its Support For The Inferior CSX Deal
And To Reject NS's Improved Superior Bid
57. On November 12, 1996, the Conrail Board met. Upon
information and belief, the topics discussed by the Conrail board at
that meeting were (i) whether a revision of the CSX Transaction could be
negotiated that would improve its financial terms for Conrail
shareholders and (ii) what response should be made to NS's improved
offer of $110 per Conrail share.
58. Apparently, Conrail was unable to negotiate an
improvement in the financial consideration offered to Conrail
shareholders in the CSX Transaction. Nevertheless, because of the
270-day lockout provision in the CSX Merger Agreement, the Conrail board
was forced to maintain its recommendation that shareholders tender their
shares to CSX and support the CSX Transaction and to recommend that
shareholders reject the superior NS bid of $110 per share.
Defendants Represent That The CSX Transaction Might Be Improved
59. In a joint press release dated November 13, 1996,
Conrail and CSX stated that "CSX and Conrail also stated that they have
been having, and continue to have, discussions relating to an increase
in the value of the consideration payable upon consummation of the
CSX-Conrail merger. There can be no assurance as to when or if any
such modifications will be made."
The Preliminary Injunction Hearing
60. On November 18 and 19, this court heard the parties'
presentations on plaintiffs' motion for a preliminary injunction.
61. During the hearing, defendants contended, contrary to
plaintiffs' position that Conrail shareholders are being illegally
coerced to tender shares to CSX, that Conrail shareholders have a choice
of whether to or not accept the CSX Transaction since they would be
asked to vote on the Charter Amendment:
(a) Conrail Director Furlong Baldwin testified that "No
one has taken the shareholder's vote away from he or she. No one has
taken it away. To get this thing done, it requires a shareholder's
vote."
(b) Counsel for CSX represented to the Court as follows:
"Here, of course, this transaction [the CSX Transaction] isn't going to
go forward at all unless there's the opt out in December."
(c) CSX's counsel further represented to the Court that
"Well, no one was suggesting that the directors can take away a vote
that shareholders are entitled to under the statute, that's not
happening here."
(d) Finally, CSX's counsel told the Court that "[T]here's
going to be a proxy fight between now and the December meeting. And at
that meeting, the shareholders will decide whether or not to opt out."
(emphasis added). These representations by defendants were not lost upon
the Court. In its oral ruling, the Court observed "[A]ll or a majority
of the shareholders could vote against the proposed opt-out of sub-
chapter E."
62. Also during the hearing, defendants repeatedly
suggested that the terms of the CSX Transaction might be improved:
(a) Conrail director E. Bradley Jones emphasized during
his cross examination on November 19 that, "I think the process is still
continuing. The situation as it sits today is one that hopefully is
going to be represented in continuing discussions, as I believe we
indicated in a press release between our corporation and CSX, and I am
hopeful that we're going to be recognizing improved values."
(b) Jones conceded that as of that date, CSX still had
made no commitment to improve the value of the consideration being
proposed in the CSX Merger. Further, he testified that his only basis
for believing the terms of the CSX Merger might be improved was that
"[CSX] would recognize that if the Conrail shareholders vote against the
opt-out they'll have 19.9 percent of our stock and the value of their
stock is liable to decline appreciably if they lose."
(c) Although Jones testified that "[the Conrail Board was]
hopeful that that process is going to continue and that that will not be
a speculation in the future," he conceded that the Conrail stockholders
are being forced to bear the risk of no increase in the CSX Merger
consideration: "I think that is a risk that they're taking."
(d) Similar statements were made by CSX's Chairman, John
Snow, during his cross examination on November 19, 1996. For example,
Snow testified that "we're in discussions about some enhancement of
value or protection of value on the back end of the transaction."
These statements were intended to further coerce and mislead the Conrail
stockholders to believe that the terms of the CSX Merger, then valued at
only $82.37 as of November 15, 1996, would be improved, so that the
Conrail shareholders would tender into the first step tender offer that
was set to close on November 20, 1996.
63. This Court issued its ruling denying plaintiffs'
motion for a preliminary injunction from the bench on the evening of
November 19. In its ruling, the Court held that it had not been
established that plaintiffs were likely to succeed on the merits of
their claims.
64. Plaintiffs immediately filed a notice of appeal and
motions for injunction pending appeal and for expedited treatment of the
appeal.
65. The following afternoon, on November 20, the United
States Court of Appeals for the Third Circuit denied plaintiffs' motion
for an injunction pending appeal.
Defendants Succeed In Coercing Conrail's
Shareholders Into Vastly Oversubscribing The CSX Offer
66. The CSX Offer expired at midnight on November 20. CSX
promptly accepted for payment the entire 19.9% of Conrail's shares that
it had offered to purchase. Because approximately 85% of Conrail's
shares were tendered, CSX was required to accept the tendered shares on
a prorata basis.
67. As a result of consummation of the first CSX Offer,
defendents gained a substantial leg up in the vote on the Charter
Amendment scheduled for December 23. Also, consummation of the first CSX
Offer purportedly bars Conrail, under Section 4.2 of the Revised Merger
Agreement, from providing information to, and negotiating with a
competing bidder, even if the fiduciary duties of its directors require
such actions. Finally, upon information and belief, consummation of the
first CSX tender offer caused a "control transaction" to occur with
respect to Conrail under subchapter 25E of the PBCL. See Count
Twenty-Five, infra.
68. Despite consummation of the first CSX Offer,
plaintiffs continue their appeal of this Court's preliminary injunction
ruling. Until the shareholder vote on the Charter Amendment is held,
CSX's power to vote the shares acquired will be subject to the equity
power of the Court, and even thereafter, if the vote is held and
thereafter found to have been tainted by the vote of CSX's illegally
acquired shares, the Court could declare the vote invalid.
The New Special Meeting: Defendants Attempt to Convince
Conrail's Shareholders That Resistance is Futile
69. On November 25, 1996, Conrail issued a Notice of
Special Meeting of Shareholders and a definitive proxy statement. This
special meeting (the "New Special Meeting"), to be held for the
purpose of conducting a vote of Conrail's shareholders on the Charter
Amendment, is scheduled to be convened on December 23, 1996.
70. However, while defendants have contended before this
Court that Conrail's shareholders will have a choice with respect to the
CSX Transaction since they will vote on whether the Charter Amendment
will be adopted or not, in fact defendants have determined to leave them
no choice. Put simply, unless and until Conrail management has received
sufficient proxies to assure approval of the Charter Amendment, no
shareholder votes will be counted at all. In its proxy statement,
Conrail states:
Under the Merger Agreement, Conrail has agreed not
to convene, adjourn or postpone the Special Meeting without
the prior consent of CSX, which consent will not be
unreasonably withheld. As a result, it is expected that the
special meeting will not be convened if Conrail has not
received sufficient proxies to assure approval of the
Proposal. Under the Merger Agreement, either CSX or Conrail
can require that additional special meetings be held for the
purpose of considering the Proposal, and a new record date
could be set for any such special meeting (a new record date
would be required if such meeting is held after February 3,
1997).
71. The Philadelphia Inquirer on November 28, 1996
captured the essence of what defendants are attempting to do succinctly:
As elections go, this one might have been devised in
the old Kremlin: Conrail shareholders are scheduled to vote
December 23 on a proposal that will likely decide the
Philadelphia railroad's future. If they approve the
management-endorsed proposal, Conrail's planned $8.5 billion
merger with CSX Corp. will move forward. If the shareholders
don't approve ... they won't vote.
* * * *
In other words, count ballots first, then hold the vote --
after we've won.
72. Thus, defendants are telling Conrail shareholders that
the only vote that they will count as effective is a "for" vote.
Defendants are essentially saying that "against" votes are futile, since
there is no scenario in which the New Special Meeting will result in a
vote rejecting the Charter Amendment, and, by implication, rejecting
the CSX Transaction.
73. Moreover, by further announcing that successive
additional special meetings may be held for the purpose of voting upon
the Charter Amendment, defendants are attempting to discourage
opposition and coerce approval. The intended message is plain:
Resistance is futile.
74. Conrail and its directors are in control of the
electoral processes by which Conrail's shareholders may express their
will regarding the business and affairs of Conrail. By entering into the
Revised Merger Agreement, which includes a covenant subjecting the
Conrail Board's actions regarding the voting process to CSX's consent,
the Conrail directors have once again improperly delegated their
managerial responsibilities. Moreover, acting in concert with CSX, the
Conrail directors are manipulating the processes of corporate democracy
by scheduling the New Special Meeting, announcing that they will permit
the vote to proceed only if they are assured of victory, and further
announcing that they may pursue successive special meetings until the
shareholders submit. Defendants' conduct constitutes a breach of the
Conrail directors' fiduciary duties, aided and abetted by CSX, as well
as fraudulent, coercive, and fundamentally unfair conduct.
The Second Front-End Loaded CSX Offer
75. On December 6, 1996, CSX commenced a second front-end
loaded tender offer to purchase up to a aggregate of 18,344,845 Conrail
shares at $110 each per share (the "Second CSX Offer"). The Second CSX
Offer is conditioned on, among other things, approval by Conrail's
shareholders of the Charter Amendment.
76. The Second CSX Offer is coercive in precisely the same
manner as was the first. In their Definitive Proxy Statement, the
Conrail defendants admit:
"Shareholders should be aware that if the [Charter
Amendment] is approved and CSX is therefore in a position
to consummate the Second CSX Tender Offer for
approximately 20.1% of the fully diluted Shares,
shareholders may decide to tender their Shares to CSX (even
if they believe that the Norfolk Offer (as defined below),
if it could be effected, has a higher value) because
shareholders may conclude that sufficient Shares will be
tendered by other shareholders and that failure to tender
will result in the non-tendering shareholders receiving only
CSX shares pursuant to the Merger which, based on current
market prices, have a per Share value that is less than the
amount to be offered in the Second CSX Tender Offer.
Therefore, if the Proposal is approved, the Second CSX
Tender Offer may succeed regardless of the perceived
relative values of such offer and the Norfolk Offer.
The CSX Transaction
77. Consistent with Mr. Snow's remarks, discussed above,
that Conrail's advisers had ensured that the CSX Transaction is
"bullet-proof" and that Conrail's directors have almost no fiduciary
duties, the CSX Merger Agreement contains draconian "lock-up" provisions
which are unprecedented. These provisions are designed to foreclose
success by any competing bidder for Conrail and to protect the lucrative
compensation increase and executive succession deal promised to
defendant LeVan by CSX.
The Poison Pill Lock-In
78. The CSX Merger Agreement purports to bind the Conrail
board not to take any action with respect to the Conrail Poison Pill to
facilitate any offer to acquire Conrail other than the CSX Transaction.
At the same time, the Conrail board has amended the Conrail Poison Pill
to facilitate the CSX Transaction.
79. Because of certain unusual provisions to the Conrail
Poison Pill Plan -- which provisions, as noted below, not only were not
disclosed in the Schedule 14D-1 filed with the Securities and Exchange
Commission or in the Offer to Purchase circulated to Conrail's
stockholders by CSX, or in the Schedule 14D-9 circulated to Conrail's
shareholders by Conrail, but were in fact affirmatively misdescribed in
CSX's Schedule 14D-1 and Offer to Purchase -- the provision in the CSX
Merger Agreement barring the Conrail Board from taking action with
respect to the Conrail Poison Pill threatened grave, imminent and
irreparable harm to Conrail and all of its constituencies.
80. The problem was that on November 7, 1996, a
"Distribution Date", as that term is defined in the Conrail Poison Pill
Plan, would have occurred. Once that were to happen, the "Rights" issued
under the Plan would no longer be redeemable by the Conrail Board, and
the Plan would no longer be capable of amendment to facilitate any
takeover or merger proposal. Put simply, once the Distribution Date
occurs, Conrail's directors would have no control over the Conrail
Poison Pill's dilutive effect on an acquiror. Because of the draconian
effects of the poison pill dilution on a takeover bidder, no bidder
other than CSX would be able to acquire Conrail until the poison pill
rights expire in the year 2005, regardless of whether such other bidder
offers a transaction that is better for Conrail and its legitimate
constituencies than the CSX Transaction. Further, not even CSX would be
able to acquire Conrail in a transaction other than the CSX Transaction.
In other words, if Conrail were not acquired by CSX in the CSX
Transaction for the level of cash and stock originally offered by CSX,
then it appears that Conrail would not have been capable of being
acquired until at least 2005. In essence, as a result of the Poison Pill
Lock-In, Conrail was about to swallow its own poison pill.
81. Poison Pills -- typically referred to as "shareholders
rights plans" by the corporations which adopt them -- are normally
designed to make an unsolicited acquisition prohibitively expensive to
an acquiror by diluting the value and proportional voting power of the
shares acquired.
82. Under such a plan, stockholders receive a dividend of
originally uncertificated, unexercisable rights. The rights become
exercisable and certificated on the so-called "Distribution Date,"
which under the Conrail Poison Pill Plan was until recently defined as
the earlier of 10 days following public announcement that a person or
group has acquired beneficial ownership of 10% or more of Conrail's
stock or 10 days following the commencement of a tender offer that would
result in 10% or greater ownership of Conrail stock by the bidder. On
the Distribution Date, the corporation would issue certificates
evidencing the rights, each of which would allow the holder to purchase
a share of stock at a set price. Initially, the exercise price of poison
pill rights is set very substantially above market to ensure that the
rights will not be exercised. Once rights certificates were issued, the
rights could trade separately from the associated shares of stock.
83. The provisions of a poison pill plan that cause the
dilution to an acquiror's position in the corporation are called the
"flip-in" and "flip-over" provisions. Poison pill rights typically "flip
in" when, among other things, a person or group obtains some specified
percentage of the corporation's stock; in the Conrail Poison Pill plan,
10% is the "flip-in" level. Upon "flipping in," each right would
entitle the holder to receive common stock of Conrail having a value of
twice the exercise price of the right. That is, each right would permit
the holder to purchase newly issued common stock of Conrail at half
price (specifically, $410 worth of Conrail stock for $205). The person
or group acquiring the 10% or greater ownership, however, would be
ineligible to exercise such rights. In this way, a poison pill plan
dilutes the acquiror's equity and voting position. Poison pill rights
"flip over" if the corporation engages in a merger in which it is not
the surviving entity. Holders of rights, other than the acquiror, would
then have the right to buy stock of the surviving entity at half price,
again diluting the acquiror's position. The Conrail Poison Pill Plan
contains both a "flip-in" provision and a "flip-over" provision.
84. So long as corporate directors retain the power
ultimately to eliminate the anti-takeover effects of a poison pill plan
in the event that they conclude that a particular acquisition would be
in the best interests of the corporation, a poison pill plan can be used
to promote legitimate corporate interests. Thus, typical poison pill
plans reserve power in a corporation's board of directors to redeem the
rights in toto for a nominal payment, or to amend the poison pill plan,
for instance, to exempt a particular transaction or acquiror from the
dilutive effects of the plan.
85. The Conrail Poison Pill Plan contains provisions for
redemption and amendment. However, an unusual aspect of the Conrail
Poison Pill Plan is that the power of Conrail's directors to redeem the
rights or amend the plan to exempt a particular transaction or bidder
terminates on the Distribution Date. While the Conrail Poison Pill Plan
gives Conrail directors the power to effectively postpone the
Distribution Date, the CSX Merger Agreement purports to bind them
contractually not to do so. Thus, the Distribution Date under Conrail's
Poison Pill Plan would have occurred on November 7, 1996 -- ten business
days after the date when NS commenced the Offer -- and Conrail's
directors had entered into an agreement which purports to tie their
hands so that they could do nothing to prevent it.
86. Ironically, the specific provisions of the CSX Merger
Agreement which purport to prevent the Conrail directors from postponing
the Distribution Date are the very same sections which require Conrail
to exempt the CSX Transaction from the Conrail Poison Pill -- Sections
3.1(n) and 5.13. Section 3.1(n) provides, in pertinent part:
Green Rights Agreement and By-laws. (A) The Green Rights
Agreement has been amended (the "Green Rights Plan
Amendment") to (i) render the Green Rights Agreement
inapplicable to the Offer, the Merger and the other
transactions contemplated by this Agreement and the Option
Agreements and (ii) ensure that (y) neither White nor any of
its wholly owned subsidiaries is an Acquiring Person (as
defined in the Green Rights Agreement) pursuant to the Green
Rights Agreement and (z) a Shares Acquisition Date,
Distribution Date or Trigger Event (in each case as defined
in the Green Rights Agreement) does not occur by reason of
the approval, execution or delivery of this Agreement, and
the Green Stock Option Agreement, the consummation of the
Offer, the Merger or the consummation of the other
transactions contemplated by this Agreement and the Green
Stock Option Agreement, and the Green Rights Agreement may
not be further amended by Green without the prior consent of
White in its sole discretion. (emphasis added)
Section 5.13 provides, in pertinent part:
The Board of Directors of Green shall take all further action
(in addition to that referred to in Section 3.1(n))
reasonably requested in writing by White (including redeeming
the Green Rights immediately prior to the Effective Time or
amending the Green Rights Agreement) in order to render the
Green Rights inapplicable to the Offer, the Merger and the
other transactions contemplated by this Agreement and the
Green Stock Option Agreement. Except as provided above with
respect to the Offer, the Merger and the other transactions
contemplated by this Agreement and the Green Stock Option
Agreement, the Board of Directors of Green shall not (a)
amend the Green Rights Agreement or (b) take any action with
respect to, or make any determination under, the Green Rights
Agreement, including a redemption of the Green Rights or
any action to facilitate a Takeover Proposal in respect of
Green.
87. Thus, although under the Conrail Poison Pill Plan the
Conrail Board is empowered to "determine[] by action ... prior to such
time as any person becomes an Acquiring Person" that the Distribution
Date will occur on a date later than November 7, the Conrail board had
contractually purported to bind itself not to do so.
88. If the Distribution Date had been permitted to occur,
Conrail, its shareholders, and its other constituents would have faced
catastrophic irreparable injury. If the Distribution Date occurs and
then the CSX Transaction does not occur for any number of reasons -- for
instance, because (i) the Conrail shareholders do not tender sufficient
shares in the CSX offer, (ii) the Conrail shareholders do not approve
the CSX merger, (iii) the merger does not receive required regulatory
approvals, or (iv) CSX exercises one of the conditions to its obligation
to complete its offer -- Conrail would be essentially incapable of being
acquired or engaging in a business combination until 2005. This would be
so regardless of the benefits and strategic advantages of any business
combination which might otherwise be available to Conrail. In the
present environment of consolidation in the railroad industry, such a
disability would plainly be a serious irremediable disadvantage to
Conrail, its shareholders and all of its constituencies.
89. As a result of plaintiffs' demand that the
Distribution Date be postponed and of their motion for a temporary
restraining order, the Conrail board met on November 4, hours prior to
the scheduled hearing on plaintiffs' motion, and, with the required
permission of CSX, extended the Distribution Date until ten days after
any person acquires 10% or more of Conrail's shares. As a result, the
Court denied plaintiffs' motion as moot.
The 270-Day Lock-Out
90. Setting aside the Poison Pill Lock-In, the CSX Merger
Agreement also contains an unprecedented provision purporting to bind
Conrail's directors not to terminate the CSX Merger Agreement for 270
days regardless of whether their fiduciary duties require them to do so.
The pertinent provisions appear in Section 4.2 of the CSX Merger
Agreement. Under that section, Conrail covenants not to solicit,
initiate or encourage other takeover proposals, or to provide
information to any party interested in making a takeover proposal. The
CSX Merger Agreement builds in an exception to this prohibition -- it
provides that prior to the earlier of the closing of the first CSX Offer
and Conrail shareholder approval of the CSX Merger, or after 270 days
from the date of the CSX Merger Agreement, if the Conrail board
determines upon advice of counsel that its fiduciary duties require it
to do so, Conrail may provide information to and engage in negotiations
with another bidder. Consummation of the first CSX offer resulted, under
this provision, in barring Conrail from providing information to or
negotiating with a competing bidder until after expiration of the
270-Day Lock-Out. However, inclusion of the "fiduciary out" language in
Section 4.2 plainly indicated that the drafters of the CSX Merger
Agreement -- no doubt counsel for Conrail and CSX -- recognize that
there are circumstances in which Conrail's directors would be required
by their fiduciary duties to consider a competing acquisition bid.
91. However, despite the recognition in the CSX Merger
Agreement that the fiduciary duties of the Conrail Board may require it
to do so, Section 4.2(b) of the agreement (the "270-Day Lock-Out")
purports to prohibit the Conrail Board from withdrawing its recommen-
dations that Conrail shareholders tender their shares in the CSX Offer
and approve the CSX Merger for a period of 270 days from the date of the
CSX Merger Agreement. Likewise, it prohibits the Conrail Board from
terminating the CSX Merger Agreement, even if the Conrail Board's
fiduciary duties require it to do so, for the same 270-day period.
92. Thus, despite the plain contemplation of circumstances
under which the Conrail Board's fiduciary duties would require it to
entertain competing offers and act to protect Conrail and its
constituencies by (i) withdrawing its recommendation that Conrail
shareholders approve the CSX Transaction and (ii) terminating the CSX
Merger Agreement, Conrail's Board has seen fit to disable itself
contractually from doing so.
93. As with the Poison Pill Lock-In, this "270-Day
Lock-Out" provision amounts to a complete abdication of the duty of
Conrail's directors to act in the best interests of the corporation.
With the 270-day Lock-Out, the Conrail directors have determined to take
a nine-month leave of absence despite their apparent recognition that
their fiduciary duties could require them to act during this critical
time.
94. The effect of this provision is to lock out competing
superior proposals to acquire Conrail for at least nine months, thus
giving the CSX Transaction an unfair time value advantage over other
offers and adding to the coercive effects of the CSX Transaction.
95. Because it purports to restrict or limit the exercise
of the fiduciary duties of the Conrail directors, the 270-Day Lock-Out
provision of the CSX Merger Agreement is ultra vires, void and
unenforceable. Further, by agreeing to the 270-Day Lock-Out as part of
the CSX Merger Agreement, the Conrail directors breached their fiduciary
duties of loyalty and care.
Rapid Transfer of Control
96. The CSX Transaction is structured to include (i) the
now-completed first-step cash tender offer for up to 19.9% of Conrail's
stock, (ii) an amendment to Conrail's charter to opt out of coverage
under Subchapter 25E of Pennsylvania's Business Corporation Law (the
"Charter Amendment"), which requires any person acquiring control of
over 20% or more of the corporation's voting power to acquire all
other shares of the corporation for a "fair price," as defined in the
statute, in cash, (iii) following such amendment, an acquisition of
additional shares which, in combination with other shares already
acquired, would constitute at least 40% and up to approximately 50% of
Conrail's stock, and (iv) following required regulatory approvals,
consummation of a follow-up stock-for-stock merger.
97. Thus, once the Charter Amendment is approved, CSX will
be in a position to acquire either effective or absolute control over
Conrail. Conrail admits that the CSX Transaction contemplates a sale of
control of Conrail. In its preliminary proxy materials filed with the
Securities and Exchange Commission, Conrail stated that if CSX acquires
40% of Conrail's stock, approval of the merger will be "virtually
certain." CSX could do so either by increasing the number of shares it
will purchase by tender offer, or, if tenders are insufficient, by
accepting all tendered shares and exercising the Stock Option. CSX could
obtain "approximately 50 percent" of Conrail's shares by purchasing 40%
pursuant to tender offer and by exercising the Stock Option, in which
event shareholder approval of the CSX Merger will be, according to
Conrail's preliminary proxy statement, "certain."
98. The swiftness with which the CSX Transaction is
designed to transfer control over Conrail to CSX can only be viewed as
an attempt to lock up the CSX Transaction and benefits it provides to
Conrail management, despite the fact that a better deal, financially and
otherwise, is available for Conrail, its shareholders, and its other
legitimate constituencies.
The Charter Amendment
99. Conrail's Definitive Proxy Materials for the December
23, 1996 Special Meeting set forth the resolution to be voted upon by
Conrail's shareholders as follows:
An amendment of the Articles of Incorporation of Conrail is
hereby approved and adopted, by which, upon the effectiveness
of such amendment, Article Ten thereof will be amended and
restated in its entirety as follows: Subchapter E, Subchapter
G and Subchapter H of Chapter 25 of the Pennsylvania Business
Corporation Law of 1988, as amended, shall not be applicable
to the Corporation.
The $300 Million Breakup Fee
100. The CSX Merger Agreement provides for a $300 million
break-up fee. This fee would be triggered if the CSX Merger Agreement
were terminated following a competing takeover proposal.
101. This breakup fee is disproportionally large,
constituting over 3.5% of the aggregate value of the CSX Transaction.
The breakup fee unreasonably tilts the playing field in favor of the CSX
Transaction -- a transaction that the defendant directors knew, or
reasonably should have known, at the time they approved the CSX
Transaction, provided less value and other benefits to Conrail and its
constituencies than would a transaction with NS.
The Lock-Up Stock Option
102. Concurrently with the CSX Merger Agreement, Conrail
and CSX entered into an option agreement (the "Stock Option Agreement")
pursuant to which Conrail granted to CSX an option, exercisable in
certain events, to purchase 15,955,477 shares of Conrail common stock at
an exercise price of $92.50 per share, subject to adjustment.
103. If, during the time that the option under the Stock
Option Agreement is exercisable, Conrail enters into an agreement
pursuant to which all of its outstanding common shares are to be
purchased for or converted into, in whole or in part, cash, in exchange
for cancellation of the Option, CSX shall receive an amount in cash
equal to the difference (if positive) between the closing market price
per Conrail common share on the day immediately prior to the
consummation of such transaction and the purchase price. In the event
(i) Conrail enters into an agreement to consolidate with, merge into, or
sell substantially all of its assets to any person, other than CSX or a
direct or indirect subsidiary thereof, and Conrail is not the surviving
corporation, or (ii) Conrail allows any person, other than CSX or a
direct or indirect subsidiary thereof, to merge into or consolidate with
Conrail in a series of transactions in which the Conrail common shares
or other securities of Conrail represent less than 50% of the
outstanding voting securities of the merged corporation, then the option
will be adjusted, exchanged, or converted into options with identical
terms as those described in the Stock Option Agreement, appropriately
adjusted for such transaction.
104. CSX and Conrail also entered into a similar option
agreement, pursuant to which CSX granted to Conrail an option,
exercisable only in certain events, to purchase 43,090,773 shares of CSX
Common Stock at an exercise price of $64.82 per share.
105. The exercise price of the option under the Stock
Option Agreement is $92.50 per share. The Stock Option Agreement
contemplates that 15,955,477 authorized but unissued Conrail shares
would be issued upon its exercise. Thus, for each dollar above $92.50
that is offered by a competing bidder for Conrail, such as NS, the
competing acquiror would suffer $15,955,477 in dilution. Moreover, there
is no cap to the potential dilution. At NS's original offer of $100 per
share, the dilution attributable to the Stock Option would have been
$119,666,077.50. At a hypothetical offering price of $101 per share, the
dilution would total $135,621,554.50. At NS's current bid of $110 per
share, the dilution would total $279,220,847.50. Thus, NS's 10% increase
in its offer resulted in a more than doubling of such dilution costs.
This lock-up structure serves no legitimate corporate purpose, as it
imposes increasingly severe dilution penalties the higher the competing
bid!
106. At the current $110 per share level of NS's bid, the
sum of the $300 million break-up fee and Stock Option dilution of
$279,220,847.50 constitutes nearly 6.8% of the CSX Transaction's $8.5
billion value. This is an unreasonable impediment to NS's offer. More-
over, because these provisions were not necessary to induce an offer
that is in Conrail's best interests, but rather were adopted to lock up
a deal providing Conrail's management with personal benefits while
selling Conrail to the low bidder, their adoption constituted a plain
breach of the Director Defendants' fiduciary duty of loyalty.
Selective Discriminatory Treatment of Competing Bids
107. Finally, the Conrail Board has breached its fiduciary
duties by selectively (i) rendering Conrail's Poison Pill Plan
inapplicable to the original CSX Transaction, (ii) approving the CSX
Transaction and thus exempting it from the 5-year merger moratorium
under Pennsylvania's Business Combination Statute, and (iii), as noted
above, purporting to approve the Charter Amendment in favor of CSX only.
108. While Pennsylvania law does not require directors to
amend or redeem poison pill rights or to take action rendering
anti-takeover provisions inapplicable, the law is silent with respect to
the duties of directors once they have determined to do so. Once
directors have determined to render poison pill rights and anti-takeover
statutes inapplicable to a change of control transaction, their
fundamental fiduciary duties of care and loyalty require them to take
such actions fairly and equitably, in good faith, after due
investigation and deliberation, and only for the purpose of fostering
the best interests of the corporation, and not to protect selfish
personal interests of management.
109. Thus, Conrail's directors are required to act
evenhandedly, redeeming the poison pill rights and rendering
anti-takeover statutes inapplicable only to permit the best competing
control transaction to prevail. Directors cannot take such selective and
discriminatory defensive action to favor corporate executives' personal
interests over those of the corporation, its shareholders, and other
legitimate constituencies.
LeVan's Deal
110. As an integral part of the CSX Transaction, CSX,
Conrail and defendant LeVan have entered into an employment agreement
dated as of October 14, 1996 (the "LeVan Employment Agreement"),
covering a period of five-years from the effective date of any merger
between CSX and Conrail. The LeVan Employment Agreement provides that
Mr. LeVan will serve as Chief Operating Officer and President of the
combined CSX/Conrail company, and as Chief Executive Officer and
President of the railroad businesses of Conrail and CSX, for two years
from the effective date of a merger between CSX and Conrail (the "First
Employment Segment"). Additionally, Mr. LeVan will serve as Chief
Executive Officer of the combined CSX/Conrail company for a period of
two years beginning immediately after the First Employment Segment (the
"Second Employment Segment"). During the period commencing immediately
after the Second Employment Segment, or, if earlier, upon the
termination of Mr. Snow's status as Chairman of the Board (the "Third
Employment Segment"), Mr. LeVan will additionally serve as Chairman of
the Board of the combined CSX/Conrail company.
111. Defendant LeVan received a base salary from Conrail
of $514,519 and a bonus of $24,759 during 1995. The LeVan Employment
Agreement ensures substantially enhanced compensation for defendant
LeVan. It provides that during the First Employment Segment, Mr. LeVan
shall receive annual base compensation at least equal to 90% of the
amount received by the Chief Executive Officer of CSX, but not less than
$810,000, together with bonus and other incentive compensation at least
equal to 90% of the amount received by the Chief Executive Officer of
CSX. During 1995, Mr. Snow received a base salary of $895,698 and a
bonus having a cash value of $1,687,500. Thus, if Mr. Snow's salary and
bonus were to equal Mr. Snow's 1995 salary and bonus, the LeVan
Employment Agreement would provide LeVan with a salary of $810,000 and a
bonus of $1,518,750 in the First Employment Period. During the Second
and Third Employment Segments, Mr. LeVan will receive compensation in an
amount no less than that received by the Chief Executive Officer during
the First Employment Segment, but not less than $900,000.
112. If CSX terminates Mr. LeVan's employment for a reason
other than cause or disability or Mr. LeVan terminates employment for
good reason (as those terms are defined in the LeVan Employment
Agreement), Mr. LeVan will be entitled to significant lump sum cash
payments based on his compensation during the five year term of the
employment agreement, continued employee welfare benefits for the longer
of three years or the number of years remaining in the employment
agreement; and the immediate vesting of outstanding stock-based awards.
Improper Delegation of Responsibility Regarding
The Processes of Corporate Democracy
113. In connection with amending the CSX Merger Agreement,
the Conrail Board has contracted away and improperly delegated its
responsibilities relating to its ability to convene, adjourn or postpone
the December 23, 1996 Shareholders Meeting. Pursuant to the terms of the
amended CSX Merger Agreement, Conrail now must have the prior consent of
CSX in order to convene, adjourn or postpone the Shareholders Meeting on
the proposed Charter Amendment.
114. Section 5.1(b) of the amended CSX Merger Agreement
provides in this regard that: Green [Conrail] shall not convene, adjourn
or postpone the Green Pennsylvania Shareholders Meeting without the
prior consent of White [CSX], which consent shall not be unreasonably
withheld.
115. In addition to this improper delegation of power to
CSX, the Conrail Board has purported to give to CSX a right to call a
special meeting in violation of the provisions of the PBCL which provide
that a shareholder of a registered corporation has no right to call a
special meeting, regardless of the size of its holdings, except in
certain limited situations not applicable here.
116. Section 5.1(b) of the amended Merger Agreement
provides in this regard that: In the event that the matters to be
considered at the Green Merger Shareholders Meeting are not approved at
a meeting called for such purpose, from time to time Green may, and
shall at the request of White, duly call, give notice of, convene and
hold one or more meeting(s) of shareholders thereafter for the purpose
of obtaining the Green Merger Shareholder Approval, in which case all
obligations hereunder respecting the Green Merger Shareholders Meeting
shall apply in respect of such other meeting(s), subject in any event to
either party's right to terminate this Agreement pursuant to Section
7.1(b)(ii) or (iii). Subject to the foregoing, Green shall convene each
such meeting(s) as soon as practicable after receipt of any request to
do so by White (and in the case of the initial Green Pennsylvania
Shareholders Meeting, as soon as practicable after December 5, 1996).
The foregoing shall not affect White's obligations to make the Amended
Offer, and, if the conditions therefor in Section 1.1(d) are satisfied,
the Second Offer, whether or not the Green Merger Shareholder Approval
has been received or any such Green Merger Shareholders Meeting(s) have
been called or held.
117. Under Section 5.1(b), CSX, in effect, purports to
have the right to call a special meeting of stockholders as the Conrail
Board has no discretion not to call a special meeting if CSX so demands.
118. This provision of the amended CSX Merger Agreement is
a deliberate attempt to circumvent Section 2521 of the PBCL.
119. Section 2521(a) of the PBCL provides that, "the
shareholders of a registered corporation shall not be entitled by
statute to call a special meeting of shareholders." Section 2521(b)
states that subsection (a) "shall not apply to the call of a special
meeting by an interested shareholder (as defined in section 2553
(relating to interested shareholders) for the purpose of approving a
business combination under section 2555(3) or (4) (relating to
requirements relating to certain business combinations.) Under section
2553, an "interested shareholder" is the beneficial holder of at least
20% of the votes entitled to be cast in an election of directors.
Section 2555, in Subchapter F, relates to the five-year moratorium
provision.
120. Section 2501(c) provides, in effect, that section
2521 will not apply only if Conrail chose in its articles of
incorporation to grant to its stockholders a right to call a special
meeting.
121. Because Conrail has no such provision in its Articles
of Incorporation, section 2521 applies and CSX cannot call a special
meeting of Conrail's stockholders. Thus, section 5.1(b) of the amended
CSX Merger Agreement is illegal, ultra vires, and void, and its adoption
constituted a breach of the Director Defendants' fiduciary duties, aided
and abetted by CSX.
Defendants' Campaign Of Misinformation
122. On October 15, 1996, Conrail and CSX issued press
releases announcing the CSX Transaction, and Conrail published and filed
preliminary proxy materials with the SEC. On October 16, 1996, CSX filed
and published its Schedule 14D-1 Tender Offer Statement and Conrail
filed its Schedule 14D-9 Solicitation/Recommendation Statement. These
communications to Conrail's shareholders reflect a scheme by defendants
to coerce, mislead and fraudulently manipulate such shareholders to
swiftly deliver control of Conrail to CSX and effectively frustrate any
competing higher bid.
123. Conrail's Preliminary Proxy Statement contains the
following misrepresentations of fact:
(a) Conrail states that "certain provisions of
Pennsylvania law effectively preclude ... CSX from purchasing 20% or
more" of Conrail's shares in the CSX Offer "or in any other manner
(except the [CSX] Merger." This statement is false. The provisions of
Pennsylvania law to which Conrail is referring are those of Subchapter
25E of the Pennsylvania Business Corporation Law. This law does not
"effectively preclude" CSX from purchasing 20% or more of Conrail's
stock other than through the CSX Merger. Rather, it simply requires a
purchaser of 20% or more of Conrail's voting stock to pay a fair price
in cash, on demand, to the holders of the remaining 80% of the shares.
The real reason that CSX will not purchase 20% or more of Conrail's
voting stock absent the Charter Amendment is that, unlike NS, CSX is
unable or unwilling to pay a fair price in cash for 100% of Conrail's
stock.
(b) Conrail states that its "Board of Directors believes
that Conrail shareholders should have the opportunity to receive cash in
the near-term for 40% of [Conrail's] shares," and that "[t]he Board of
Directors believes it is in the best interests of shareholders that they
have the opportunity to receive cash for 40% of their shares in the near
term." These statements are false. First of all, the Conrail Board
believes that Conrail shareholders should have the opportunity to
receive cash in the near-term for 40% of Conrail's shares only if such
transaction will swiftly deliver effective control of Conrail to CSX.
Second, the Conrail Board of Directors does not believe that such swift
transfer of control to CSX is in the best interests of Conrail
shareholders; rather, the Conrail Board of Directors believes that swift
transfer of effective control over Conrail to CSX through the CSX Offer
will lock up the CSX Transaction and preclude Conrail shareholders from
any opportunity to receive the highest reasonably available price in a
sale of control of Conrail.
124. CSX's Schedule 14D-1 contains the following
misrepresentations of fact:
(a) CSX states that:
At any time prior to the announcement by [Conrail]
or an Acquiring Person that an Acquiring Person has become
such, [Conrail] may redeem the [Conrail Poison Pill Plan]
rights ....
This statement is false. In fact, the Conrail Poison
Pill rights are redeemable any time prior to the
Distribution Date. After the Distribution Date, they
cannot be redeemed. CSX further states that: The
terms of the [Conrail Poison Pill] rights may be
amended by the [Conrail Board]
without the consent of the holders of the Rights ... to make
any other provision with respect to the Rights which
[Conrail] may deem desirable; provided that from and after
such time as Acquiring Person becomes such, the Rights may
not be amended in any manner which would adversely affect the
interests of holders of Rights.
This statement is also false. The Conrail Board's
power to freely amend the poison pill rights
terminates on the Distribution Date, not the date
when someone becomes an Acquiring Person.
(b) CSX states that the "purpose of the [CSX] Offer is for
[CSX] . . . to acquire a significant equity interest in [Conrail] as the
first step in a business combination of [CSX] and [Conrail]." This
statement is false. The purpose of the CSX Offer is to swiftly transfer
effective control over Conrail to CSX in order to lock up the CSX
Transaction and foreclose the acquisition of Conrail by any competing
higher bidder.
(c) CSX states that "the Pennsylvania Control Transaction
Law effectively precludes [CSX, through its acquisition subsidiary] from
purchasing 20% or more of Conrail's shares pursuant to the [CSX] Offer."
This statement is false. The provisions of Pennsylvania law to which
Conrail is referring are those of Subchapter 25E of the Pennsylvania
Business Corporation Law. This law does not "effectively preclude" CSX
from purchasing 20% or more of Conrail's stock other than through the
CSX Merger. Rather, it simply requires a purchaser of 20% or more of
Conrail's voting stock to pay a fair price in cash, on demand, to the
holders of the remaining 80% of the shares. The real reason that CSX
will not purchase 20% or more of Conrail's voting stock absent the
Charter Amendment is that, unlike NS, CSX is unable or unwilling to pay
a fair price in cash for 100% of Conrail's stock.
125. Conrail's Schedule 14D-9 states that "the [CSX
Transaction] . . . is being structured as a true merger-of-equals
transaction." This statement is false. The CSX Transaction is being
structured as a rapid, locked-up sale of control of Conrail to CSX
involving a significant, albeit inadequate, control premium.
126. Each of the Conrail Preliminary Proxy Statement, the
CSX Schedule 14D-1 and the Conrail Schedule 14D-9 omit to disclose the
following material facts, the disclosure of which are necessary to make
the statements made in such documents not misleading:
(a) That the Conrail Board will lose its power to redeem
or freely amend the Conrail Poison Pill Plan rights on the "Distribution
Date."
(b) That both Conrail (and its senior management) and CSX
(and its senior management) knew (i) that NS was keenly interested in
acquiring Conrail, (ii) that NS has the financial capacity and resources
to pay a higher price for Conrail than CSX could, and (iii) that a
financially superior competing bid for Conrail by NS was inevitable.
(c) That Conrail management led NS to believe that if and
when the Conrail Board determined to sell Conrail, it would do so
through a process in which NS would be given the opportunity to bid, and
that in the several weeks prior to the announcement of the CSX
Transaction, defendant LeVan on two occasions prevented Mr. Goode from
presenting an acquisition proposal to Conrail by stating to him that
making such a proposal would be unnecessary and that Mr. LeVan would
contact Mr. Goode concerning NS's interest in acquiring Conrail
following (i) the Conrail Board's strategic planning meeting scheduled
for September 1996 and (ii) a meeting of the Conrail Board purportedly
scheduled for October 16, 1996.
(d) That in September of 1994, NS had proposed a
stock-for-stock acquisition of Conrail at an exchange ratio of 1.1
shares of NS stock for each share of Conrail stock, which ratio, if
applied to the price of NS stock on the day before announcement of the
CSX Transaction, October 14, 1996, implied a bid by NS worth over $101
per Conrail share.
(e) That the CSX Transaction was structured to swiftly
transfer effective, if not absolute voting control over Conrail to CSX,
and to prevent any other bidders from acquiring Conrail for a higher
price.
(f) That although Conrail obtained opinions from Morgan
Stanley and Lazard Freres that the consideration to be received by
Conrail stockholders in the CSX Transaction was "fair" to such
shareholders from a financial point of view, Conrail's Board did not ask
its investment bankers whether the CSX Transaction consideration was
adequate, from a financial point of view, in the context of a sale of
control of Conrail such as the CSX Transaction.
(g) That although in arriving at their "fairness"
opinions, both Morgan Stanley and Lazard Freres purport to have
considered the level of consideration paid in comparable transactions,
both investment bankers failed to consider the most closely comparable
transaction -- NS's September 1994 merger proposal, which as noted
above, would imply a price per Conrail share in excess of $101.
(h) That, if asked to do so, Conrail's investment bankers
would be unable to opine in good faith that the consideration offered in
the CSX Transaction is adequate to Conrail's shareholders from a
financial point of view.
(i) That Conrail's Board failed to seek a fairness opinion
from its investment bankers concerning the $300 million breakup fee
included in the CSX Transaction.
(j) That Conrail's Board failed to seek a fairness opinion
from its investment bankers concerning the Stock Option Agreement
granted by Conrail to CSX in connection with the CSX Transaction.
(k) That the Stock Option Agreement is structured so as to
impose increasingly severe dilution costs on a competing bidder for
control of Conrail for progressively higher acquisition bids.
(l) That the Conrail Board intends to withhold the filing
of the Charter Amendment following its approval by Conrail's
stockholders if the effectiveness of such amendment would facilitate any
bid for Conrail other than the CSX Transaction.
(m) That the Charter Amendment and/or its submission to a
vote of the Conrail shareholders is illegal and ultra vires under
Pennsylvania law.
(n) That the Conrail Board's discriminatory (i) use of the
Charter Amendment, (ii) amendment of the Conrail Poison Pill and (iii)
action exempting the CSX Transaction from Pennsylvania's Business
Combination Statute, all to facilitate the CSX Transaction and to
preclude competing financially superior offers for control of Conrail,
constitute a breach of the Director Defendants' fiduciary duty of
loyalty.
(o) That Conrail's Board failed to conduct a reasonable, good
faith investigation of all reasonably available material information prior
to approving the CSX transaction and related agreements, including the
lock-up Stock Option Agreement.
(p) That in recommending that Conrail's shareholders
tender their shares to CSX in the CSX Offer, Conrail's Board did not
conclude that doing so would be in the best interests of Conrail's
shareholders.
(q) That in recommending that Conrail's shareholders
approve the Charter Amendment, the Conrail Board did not conclude that
doing so would be in the best interests of Conrail's shareholders.
(r) That in recommending that Conrail shareholders tender
their shares to CSX in the CSX Offer, primary weight was given by the
Conrail Board to interests of persons and/or groups other than Conrail's
shareholders.
(s) That in recommending that Conrail shareholders tender
their shares to CSX in the CSX Offer, primary weight was given to the
personal interests of defendant LeVan in increasing his compensation and
succeeding Mr. Snow as Chairman and Chief Executive Officer of the
combined CSX/Conrail company.
(t) That the Continuing Director Requirement in Conrail's
Poison Pill (described below in paragraphs 80 through 88), adopted by
Conrail's board in September 1995 and publicly disclosed at that time,
is illegal and ultra vires under Pennsylvania law and therefore is void
and unenforceable.
127. In connection with the defendants' announcement of
the Revised CSX Transaction on November 6, 1996 and the Conrail Board's
Schedule 14D-9 recommendation against the NS Offer, defendants issued
several false and misleading statements:
(a) In their joint press release dated November 6, 1996,
defendants:
(i) stated that the Conrail Board carefully considered the
relative merits of the CSX Transaction and the NS Proposal, when in fact
they specifically directed their financial advisors not to do so in
rendering their fairness opinions; and
(ii) claim that they have discovered additional synergies
of $180 million that "will be realized" in connection with the CSX
Transaction, yet omitted disclosure in the press release or in any
disclosure materials of any support or explanation of how and why these
claimed additional synergies were suddenly discovered at or about the
time of announcement of the increase in the cash component of the CSX
Transaction.
(b) In CSX's Schedule 14D-1, Amendment No. 4, defendant
CSX, with Conrail's knowing and active participation:
(i) states that the NS Proposal is a "nonbid," when in
fact it is a bona fide superior offer that is available to Conrail
shareholders if the Conrail board were to properly observe its fiduciary
duties and recognize that the purported contractual prohibitions against
doing so contained in the CSX Merger Agreement are illegal and
unenforceable;
(ii) states falsely that Norfolk Southern initiated
discussions with CSX during the weekend of November 2 and 3, when in
fact CSX initiated those talks;
(iii) states that the November 2 and 3 talks concerned
sales of Conrail assets to NS after an acquisition of Conrail by CSX,
while in fact such discussions also included scenarios in which NS would
acquire Conrail and then sell certain Conrail assets to CSX;
(iv) state that the Conrail board "carefully considered"
the relative merits of a merger with Norfolk Southern rather than with
CSX, while in fact Conrail's financial advisors were instructed not to
do so in rendering their fairness opinions;
(v) fails to disclose the basis for and analysis, if any,
underlying the "discovery" of an additional $180 million in CSX/Conrail
merger synergies.
(c) In Conrail's Schedule 14D-9 with respect to the NS
Offer, defendant Conrail, with CSX's knowing and active participation:
(i) stated that Conrail's board of directors "unanimously
recommends" that Conrail shareholders not tender their shares into the
NS Offer while failing to disclose that the directors were bound by
contract, under the CSX Merger Agreement, to make such recommendation,
that such contractual obligation is void under Pennsylvania law, and
what effect the unenforceability of such contractual obligation, if
considered by the Conrail board, would have upon their recommendation;
(ii) stated that Conrail's board of directors "unanimously
recommends" that Conrail shareholders who desire to receive cash for
their shares tender their shares in the CSX Offer, while failing to
disclose that the CSX Merger Agreement bound the directors contractually
to make such recommendation, that such contractual obligation is void
under Pennsylvania law, and what effect the unenforceability of such
contractual obligation, if considered by the Conrail board, would have
upon their recommendation;
(iii) failed to disclose that in negotiating the revised
terms of the CSX Transaction, Conrail could have demanded, in
consideration for agreeing to the revised terms, that its board of
directors be released from the poison pill lock-in and 180-day lock-out
provisions, that Conrail management and Conrail's advisors failed to so
inform the Conrail board, and that instead, management unilaterally
determined to negotiate an increase in the lock-out provision from 180
days to 270 days;
(iv) failed to disclose the basis for and analysis
underlying the defendants "discovery" of $180 million in new CSX/Conrail
merger synergies.
(d) In Conrail's Schedule 14D-9, Amendment No. 4, with
respect to the CSX Offer, defendant Conrail, with CSX's knowing and
active participation:
(i) stated that Conrail's board of directors "unanimously
recommends" that Conrail shareholders not tender their shares into the
NS Offer while failing to disclose that the directors were bound by
contract, under the CSX Merger Agreement, to make such recommendation,
that such contractual obligation is void under Pennsylvania law, and
what effect the unenforceability of such contractual obligation, if
considered by the Conrail board, would have upon their recommendation;
(ii) stated that Conrail's board of directors "unanimously
recommends" that Conrail shareholders who desire to receive cash for
their shares tender their shares in the CSX Offer, while failing to
disclose that the CSX Merger Agreement bound the directors contractually
to make such recommendation, that such contractual obligation is void
under Pennsylvania law, and what effect the unenforceability of such
contractual obligation, if considered by the Conrail board, would have
upon their recommendation;
(iii) failed to disclose that in negotiating the revised
terms of the CSX Transaction, Conrail could have demanded, in
consideration for agreeing to the revised terms, that its board of
directors be released from the poison pill lock-in and 180-day lock-out
provisions, that Conrail management and Conrail's advisors failed to so
inform the Conrail board, and that instead, management unilaterally
determined to negotiate an increase in the lock-out provision from 180
days to 270 days;
(iv) failed to disclose the basis for and analysis, if
any, underlying the defendants "discovery" of $180 million in new
CSX/Conrail merger synergies.
128. Each of the misrepresentations and omitted facts
detailed above are material to the decisions of Conrail's shareholders
concerning whether to vote in favor of the Charter Amendment and
whether, in response to the CSX Offer, to hold, sell to the market, or
tender their shares, because such misrepresentations and omitted facts
bear upon (i) the good faith of the Conrail directors in recommending
that Conrail shareholders approve the Charter Amendment and tender their
shares in the CSX Offer, (ii) whether taking such actions are in the
best interests of Conrail shareholders, (iii) whether the CSX Offer
represents financially adequate consideration for the sale of control of
Conrail and/or (iv) whether the economically superior NS Proposal is a
viable, available alternative to the CSX Transaction. Absent adequate
corrective disclosure by the defendants, these material
misrepresentations and omissions threaten to coerce, mislead, and
fraudulently manipulate Conrail shareholders to approve the Charter
Amendment and deliver control of Conrail to CSX in the CSX Offer, in the
belief that the NS Proposal is not an available alternative.
Defendants Continue Their Campaign of Misinformation
By Publicly Suggesting, Although Never Committing
To, An Improvement To The CSX Transaction.
129. Following the closing of the first step tender offer,
CSX and Conrail have continued to make public statements to the effect
that the merger consideration offered in the CSX Merger might be
improved. Again, these statements are intended to mislead the Conrail
shareholders into approving the proposed Charter Amendment.
130. For example in its definitive Proxy Statement dated
November 25, 1996, Conrail continues to make these highly misleading
statements. For example, Conrail states that:
Conrail and CSX have announced that they have been
having, and continue to have, discussions relating to an
increase in the value of the consideration payable upon
consummation of the Merger, but that there can be no
assurance as to when or if any such modifications will be
made. In addition, Conrailalso reaffirmed in this
announcement that the Merger is in Conrail's bestinterests
and is the superior strategic combination for Conrail, and
both parties stated that they continue to be fully committed
to the Merger.
Proxy Statement at 6.
131. To date, CSX and Conrail have provided no assurance
that any such increase in the CSX Merger consideration will be
forthcoming.
132. While Conrail and CSX continue to tout the CSX
Transaction as being "superior" to the Norfolk Southern Offer, their
continued efforts to mislead the Conrail shareholders into believing
that the terms of that transaction might be improved are an admission
that the CSX Transaction is inferior.
133. The defendants are engaging in a classic "bait and
switch" tactic that is highly misleading and is designed solely for the
purpose of getting the shareholders of Conrail to approve the next step
in their multi-tiered front-end loaded highly coercive transaction. The
defendants are engaging in a process designed to put themselves in a
position where they will not have to increase the CSX merger
consideration.
Conrail's Directors Attempt To Override Fundamental
Principles of Corporate Democracy By Imposing A
Continuing Directors Requirement in Conrail's Poison Pill
134. As noted above, Conrail's directors have long known
that it was an attractive business combination candidate to other
railroad companies, including NS.
135. Neither Conrail management nor its Board, however,
had any intention to give up their control over Conrail, unless the
acquiror was willing to enter into board composition, executive
succession, and compensation and benefit arrangements satisfying the
personal interests of Conrail management and the defendant directors,
such as the arrangements provided for in the CSX Transaction. They were
aware, however, that through a proxy contest, they could be replaced by
directors who would be receptive to a change in control of Conrail
regardless of defendants' personal interests. Accordingly, on September
20, 1995, the Conrail directors attempted to eliminate the threat to
their continued incumbency posed by the free exercise of Conrail's
stockholders' franchise. They drastically altered Conrail's existing
Poison Pill Plan, by adopting a "Continuing Director" limitation to the
Board's power to redeem the rights issued pursuant to the Rights Plan
(the "Continuing Director Requirement").
136. Prior to adoption of the Continuing Director
Requirement, the Conrail Poison Pill Plan was a typical "flip-in,
flip-over" plan, designed to make an unsolicited acquisition of Conrail
prohibitively expensive to an acquiror, and reserving power in Conrail's
duly elected board of directors to render the dilative effects of the
rights ineffective by redeeming or amending them.
137. The September 20, 1995 adoption of the Continuing
Director Requirement changed this reservation of power. It added an
additional requirement for amendment of the plan or redemption of the
rights. For such action to be effective, at least two members of the
Board must be "Continuing Directors," and the action must be approved by
a majority of such "Continuing Directors." "Continuing Directors" are
defined as members of the Conrail Board as of September 20, 1995, i.e.,
the incumbents, or their hand-picked successors.
138. By adopting the Continuing Director Requirement, the
Director Defendants intentionally and deliberately have attempted to
destroy the right of stockholders of Conrail to replace them with new
directors who would have the power to redeem the rights or amend the
Rights Agreement in the event that such new directors deemed such action
to be in the best interests of the company. That is, instead of vesting
the power to accept or reject an acquisition in the duly elected Board
of Directors of Conrail, the Rights Plan, as amended, destroys the power
of a duly elected Board to act in connection with acquisition offers,
unless such Board happens to consist of the current incumbents or their
hand-picked successors. Thus, the Continuing Director Requirement is the
ultimate entrenchment device.
139. The Continuing Director Requirement is invalid per se
under Pennsylvania statutory law, in that it purports to limit the
discretion of future Boards of Conrail. Pennsylvania law requires that
any such limitation on Board discretion be set forth in a By-Law adopted
by the stockholders. See Pa. BCL ss. 1721. Thus, the Director Defendants
were without power to adopt such a provision unilaterally by amending
the Rights Agreement.
140. Additionally, the Continuing Director Requirement is
invalid under Conrail's By-Laws and Articles of Incorporation. Under
Section 3.5 of Conrail's By-Laws, the power to direct the management of
the business and affairs of Conrail is broadly vested in its duly
elected board of directors. Insofar as the Continuing Director
Requirement purports to restrict the power of Conrail's duly elected
board of directors to redeem the rights or amend the plan, it conflicts
with Section 3.5 of Conrail's By-Laws and is therefore of no force or
effect. Article Eleven of Conrail's Articles of Incorporation permits
Conrail's entire board to be removed without cause by stockholder vote.
Read together with Section 3.5 of Conrail's By-Laws, Article Eleven
enables Conrail's stockholders to replace the entire incumbent board
with a new board fully empowered to direct the management of Conrail's
business and affairs, and, specifically, to redeem the rights or amend
the plan. Insofar as the Continuing Director Requirement purports to
render such action impossible, it conflicts with Conrail's Articles of
Incorporation and is therefore of no force or effect.
141. Furthermore, the adoption of the Continuing Director
Requirement constituted a breach of the Director Defendants' fiduciary
duty of loyalty. There existed no justification for the directors to
attempt to negate the right of stockholders to elect a new Board in the
event the stockholders disagree with the incumbent Board's policies,
including their response to an acquisition proposal.
142. Moreover, while the Director Defendants disclosed the
adoption of the Continuing Director Requirement, they have failed to
disclose its illegality and the illegality of their conduct in adopting
it. If they are not required to make corrective disclosures, defendants
will permit the disclosure of the Continuing Director Requirement's
adoption to distort stockholder choice in connection with the CSX Offer,
the Special Meeting, and (if they have not successfully locked up voting
control of Conrail by then) in the next annual election of directors.
The Director Defendants' conduct is thus fraudulent, in that they have
failed to act fairly and honestly toward the Conrail stockholders, and
intended to preserve their incumbency and that of current management,
to the detriment of Conrail's stockholders and other constituencies.
Accordingly, such action should be declared void and of no force or
effect. Furthermore, adequate corrective disclosure should be
required.
Conrail's Charter Permits The Removal and Replacement of Its
Entire Board of Directors At Its Next Annual Meeting
143. As noted above, plaintiff NS intends to facilitate
the NS Proposal, if necessary, by replacing the Conrail board at
Conrail's next annual meeting. Conrail's next annual meeting is
scheduled to be held on May 21, 1997 (according to Conrail's April 3,
1996 Proxy Statement, as filed with the Securities and Exchange
Commission).
144. The Director Defendants adopted the Continuing
Director Requirement in part because they recognized that under
Conrail's Articles, its entire Board, even though staggered, may be
removed without cause at Conrail's next annual meeting.
145. Section 3.1 of Conrail's By-Laws provides that the
Conrail Board shall consist of 13 directors, but presently there are
only 11. The Conrail Board is classified into three classes. Each class
of directors serves for a term of three years, which terms are
staggered.
146. Article 11 of Conrail's Articles of Incorporation
provides that: The entire Board of Directors, or a class of the Board
where the Board is classified with respect to the power to elect
directors, or any individual director may be removed from office without
assigning any cause by vote of stockholders entitled to cast at least a
majority of the votes which all stockholders would be entitled to cast
at any annual election of directors or of such class of directors.
147. Under the plain language of Article 11, the entire
Conrail Board, or any one or more of Conrail's directors, may be removed
without cause by a majority vote of the Conrail stockholders entitled to
vote at the annual meeting. Plaintiffs anticipate, however, that
defendants will argue that under Article 11, only one class may be
removed at each annual meeting. Accordingly, plaintiffs seek a
declaratory judgment that pursuant to Article 11, the entire Conrail
Board, or any one or more of Conrail's directors, may be removed without
cause at Conrail's next annual meeting.
Declaratory Relief
148. The Court may grant the declaratory relief sought
herein pursuant to 28 U.S.C.ss. 2201. The Director Defendants' adoption
of the CSX Transaction (with its discriminatory Charter Amendment
poison pill, and state anti-takeover statute treatment and draconian
lock-up provisions) as well as their earlier adoption of the Continuing
Director Requirement, clearly demonstrate their bad faith entrenchment
motivation and, in light of the NS Proposal, that there is a substantial
controversy between the parties. Indeed, given the NS Proposal, the
adverse legal interests of the parties are real and immediate.
Defendants can be expected to vigorously oppose each judicial
declaration sought by plaintiffs, in order to maintain their incumbency
and defeat the NS Proposal -- despite the benefits it would provide to
Conrail's stockholders and other constituencies.
149. The granting of the requested declaratory relief will
serve the public interest by affording relief from uncertainty and by
avoiding delay and will conserve judicial resources by avoiding
piecemeal litigation.
Irreparable Injury
150. The Director Defendants' adoption of the CSX
Transaction (with its discriminatory Charter Amendment, poison pill and
state antitakeover statute treatment and draconian lock-up provisions),
their adoption of the revised CSX Transaction with its highly coercive,
multi-tier, front end loaded structure, as well as their earlier
adoption of the Continuing Director Requirement threaten to deny
Conrail's stockholders of their right to exercise their corporate
franchise without manipulation, coercion or false and misleading
disclosures and to deprive them of a unique opportunity to receive
maximum value for their stock. The resulting injury to plaintiffs and
all of Conrail's stockholders would not be adequately compensable in
money damages and would constitute irreparable harm.
Derivative Allegations
151. Plaintiffs bring each of the causes of action
reflected in Counts One through Seven and Fourteen and Fifteen below
individually and directly. Alternatively, to the extent required by law,
plaintiffs bring such causes of action derivatively on behalf of
Conrail.
152. No demand has been made on Conrail's Board of
Directors to prosecute the claims set forth herein since, for the
reasons set forth below, any such demand would have been a vain and
useless act since the Director Defendants constitute the entire Board of
Directors of Conrail and have engaged in fraudulent conduct to further
their personal interests in entrenchment and have ratified defendant
LeVan's self-dealing conduct:
(a) The Director Defendants have acted fraudulently by
pursuing defendants' campaign of misinformation, described above, in
order to coerce, mislead, and manipulate Conrail shareholders to swiftly
deliver control of Conrail to the low bidder.
(b) The form of resolution by which the shareholders are
being asked to approve the Charter Amendment is illegal and ultra vires
in that it purports to authorize the Conrail Board to discriminatorily
withhold filing the certificate of amendment even after shareholder
approval. Thus, its submission to the shareholders is illegal and
ultra vires and, therefore, not subject to the protections of the
business judgment rule.
(c) The Conrail directors' selective amendment of the
Conrail poison pill and discriminatory preferential treatment of the CSX
Transaction under the Pennsylvania Business Combination Statute were
motivated by their personal interest in entrenchment, constituting a
breach of their fiduciary duty of loyalty and rendering the business
judgment rule inapplicable.
(d) The Director Defendants' adoption of the breakup fee
and stock option lock-ups in favor of CSX was motivated by their
personal interest in entrenchment, constituting a breach of their duty
of loyalty and rendering the business judgment rule inapplicable.
(e) The Continuing Director Requirement is illegal and
ultra vires under Pennsylvania statutory law and under Conrail's charter
and by-laws, rendering the business judgment rule inapplicable to its
adoption by the Director Defendants.
(f) In adopting the Continuing Director Requirement, each
of the Defendant Directors has failed to act fairly and honestly toward
Conrail and its stockholders, insofar as by doing so the Defendant
Directors, to preserve their own incumbency, have purported to eliminate
the stockholders' fundamental franchise right to elect directors who
would be receptive to a sale of control of Conrail to the highest
bidder. There is no reason to think that, having adopted this ultimate
in entrenchment devices, the Director Defendants would take action that
would eliminate it.
(g) Additionally, the Director Defendants have acted
fraudulently, in that they intentionally have failed to disclose the
plain illegality of their conduct.
(h) There exists no reasonable prospect that the Director
Defendants would take action to invalidate the Continuing Director
Requirement. First, pursuant to Pennsylvania statute, their fiduciary
duties purportedly do not require them to amend the Rights Plan in any
way. Second, given their dishonest and fraudulent entrenchment
motivation, the Director Defendants would certainly not commence legal
proceedings to invalidate the Continuing Director Requirement.
153. Plaintiffs are currently beneficial owners of Conrail
common stock. Plaintiffs' challenge to the CSX Transaction (including
the coercive front end loaded tender offer, the illegal Charter
Amendment, discriminatory treatment, and lock-ups) and to the Continuing
Director Requirement presents a strong prima facie case, insofar as the
Director Defendants have deliberately and intentionally, without
justification, acted to foreclose free choice by Conrail's shareholders.
If this action were not maintained, serious injustice would result, in
that defendants would be permitted illegally and in pursuit of personal,
rather than proper corporate interests to deprive Conrail stockholders
of free choice and a unique opportunity to maximize the value of their
investments through the NS Proposal, and to deprive plaintiff NS of a
unique acquisition opportunity.
154. This action is not a collusive one to confer
jurisdiction on a Court of the United States that it would not otherwise
have.
COUNT ONE
(Breach of Fiduciary Duty with
Respect to the Charter Amendment)
155. Plaintiffs withdraw Count One as moot.
COUNT TWO
(Breach of Fiduciary Duty
With Respect to the Poison Pill)
156. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
157. The Conrail board of directors adopted its Poison
Pill Plan with the ostensible purpose of protecting its shareholders
against the consummation of unfair acquisition proposals that may fail
to maximize shareholder value.
158. The Conrail Board has announced its intention to
merge with CSX, and the Conrail Board has also sought to exempt CSX from
the provisions of the Poison Pill.
159. Additionally, the Conrail Board has committed itself
to not pursue any competing offer for the Company.
160. By selectively and discriminately determining to
exempt CSX, and only CSX, from the Poison Pill provisions, to the
detriment to Conrail's shareholders, the Conrail directors have breached
their fiduciary duties of care and loyalty.
161. Plaintiffs have no adequate remedy at law.
COUNT THREE
(Breach of Fiduciary Duty
with Respect to the Pennsylvania
Business Combinations Statute)
162. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
163. By approving the CSX Offer prior to its consummation,
the Director Defendants have rendered the Pennsylvania Business
Combinations Statute, subchapter 25F of the Pennsylvania Business
Corporation Law, and, particularly, its five-year ban on mergers with
substantial stockholders, inapplicable to the CSX Transaction, while it
remains as an impediment to competing higher acquisition offers such as
the NS Proposal.
164. By selectively and discriminately exempting the CSX
Transaction from the five-year merger ban, for the purpose of
facilitating a transaction that will provide substantial personal
benefits to Conrail management while delivering Conrail to the low
bidder, the Director Defendants have breached their fiduciary duties of
care and loyalty.
165. Plaintiffs have no adequate remedy at law.
COUNT FOUR
(Declaratory Judgment Against All
Defendants that the Poison Pill
Lock-In is Void Under Pennsylvania Law)
166. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
167. By purporting to bind Conrail and its directors not
to amend or take any action with respect to the Conrail Poison Pill Plan
without CSX's consent, the CSX Merger Agreement purports to restrict the
managerial discretion of Conrail's directors.
168. Under Pennsylvania law, agreements restricting the
managerial discretion of the board of directors are permissible only in
statutory close corporations. Conrail is not a statutory close
corporation.
169. No statute countenances Conrail's and the Director
Defendants' adoption of the Poison Pill Lock-In terms of the CSX Merger
Agreement. No Conrail By-Law adopted by the Conrail shareholders
provides that Conrail's directors may contractually abdicate their
fiduciary duties and managerial powers and responsibilities with respect
to the Conrail Poison Pill Plan.
170. Plaintiffs have no adequate remedy at law.
COUNT FIVE
(Against the Defendant Directors
for Breach of Fiduciary Duty with
Respect to the Poison Pill Lock-In)
171. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
172. By entering into the Poison Pill Lock-In provisions
of the CSX Merger Agreement, the Director Defendants purported to
relinquish their power to act in the best interests of Conrail in
connection with proposed acquisitions of Conrail.
173. Thus, by entering into the CSX Transaction with its
poison pill lock-in provisions, the Director Defendants have
intentionally, in violation of their duty of loyalty, completely
abdicated their fiduciary duties and responsibilities.
174. Absent prompt injunctive relief, plaintiffs, as well
as Conrail and all of its legitimate constituencies, face imminent
irreparable harm.
175. Plaintiffs have no adequate remedy at law.
COUNT SIX
(Declaratory Judgment Against All
Defendants That the 270-Day Lock-Out
is Void Under Pennsylvania Law)
176. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
177. By purporting to bind Conrail and its directors from
acting to protect the interests of Conrail, its shareholders and its
other legitimate constituencies by withdrawing its recommendation that
Conrail's shareholders accept the CSX Offer and approve the CSX Merger
even when the fiduciary duties of Conrail's directors would require them
to do so, the 270-Day Lock-Out provision of the CSX Merger Agreement
purports to restrict the managerial discretion of Conrail's directors.
178. By purporting to prohibit Conrail's directors from
terminating the CSX Merger Agreement when their fiduciary duties would
require them to do so, the 270-Day Lock-Out provision of the CSX Merger
Agreement purports to restrict the managerial discretion of Conrail's
directors.
179. Under Pennsylvania law, agreements restricting the
managerial discretion of the board of directors are permissible only in
statutory close corporations. Conrail is not a statutory close
corporation.
180. No statute countenances Conrail's and the Director
Defendants' adoption of the 270-Day Lock-Out terms of the CSX Merger
Agreement. No Conrail By-Law adopted by the Conrail shareholders
provides that Conrail's directors may contractually abdicate their
fiduciary duties and managerial powers and responsibilities.
181. Unless the 270-Day Lock-Out provision is declared
ultra vires and void and defendants are enjoined from taking any action
enforcing it, Conrail and its legitimate constituencies face
irreparable harm.
182. Plaintiffs have no adequate remedy at law.
COUNT SEVEN
(Against the Defendant Directors
for Breach of Fiduciary Duty with
Respect to the 270-Day Lock-Out)
183. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
184. By entering into the 270-Day Lock-Out provision of
the CSX Merger Agreement, the Director Defendants purported to
relinquish their power to act in the best interest of Conrail in
connection with proposed acquisitions of Conrail.
185. Thus, by entering into the 270-Day Lock-Out
provision, the Conrail directors have abdicated their fiduciary duties,
in violation of their duties of loyalty and care.
186. Plaintiffs have no adequate remedy at law.
COUNT EIGHT
(Breach of Fiduciary Duty with
Respect to the Lock-Up Provisions)
187. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
188. In conjunction with the CSX Merger Agreement, the
Conrail Board has agreed to termination fees of $300 million and to the
lock-up Stock Option Agreement.
189. These provisions confer no benefit upon Conrail's
shareholders and in fact operate and are intended to operate to impede
or foreclose further bidding for Conrail.
190. The Conrail directors have adopted these provisions
without regard to what is in the best interest of the Company and its
shareholders, in violation of their fiduciary duties.
191. Plaintiffs have no adequate remedy at law.
COUNT NINE
(Declaratory Relief Against
Conrail and Director Defendants That
The Continuing Director Requirement
Is Void Under Pennsylvania Law)
192. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
193. Under Pennsylvania law, the business and affairs of a
Pennsylvania corporation are to be managed under the direction of the
Board of Directors unless otherwise provided by statute or in a By-Law
adopted by the stockholders. Pa. BCL ss. 1721.
194. Under Pennsylvania law, agreements restricting the
managerial discretion of directors are permissible only in statutory
close corporations.
195. No statute countenances Conrail's and the current
Board's adoption of the Continuing Director Requirement. No Conrail
By-Law adopted by the Conrail stockholders provides that the current
Board may limit a future Board's management and direction of Conrail.
Conrail is not a statutory close corporation.
196. Adoption of the Continuing Director Requirement
constitutes an unlawful attempt by the Director Defendants to limit the
discretion of a future Board of Directors with respect to the management
of Conrail. In particular, under the Continuing Director Requirement, a
duly elected Board of Directors that includes less than two continuing
directors would be unable to redeem or modify Conrail's Poison Pill even
upon determining that to do so would be in Conrail's best interests.
197. Plaintiffs seek a declaration that the Continuing
Director Requirement is contrary to Pennsylvania statute and, therefore,
null and void.
198. Plaintiffs have no adequate remedy at law.
COUNT TEN
(Declaratory Relief Against Conrail
and The Director Defendants That
The Continuing Director Requirement
Is Void Under Conrail's Articles
of Incorporation And By-Laws)
199. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
200. Under Section 3.5 of Conrail's By-Laws, The business
and affairs of the Corporation shall be managed under the direction of
the Board which may exercise all such powers of the Corporation and do
all such lawful acts and things as are not by statute or by the Articles
or by these By-Laws directed or required to be exercised and done by the
shareholders.
201. Pursuant to Section 1505 of the Pennsylvania Business
Corporation Law, the By-Laws of a Pennsylvania corporation operate as
regulations among the shareholders and affect contracts and other
dealings between the corporation and the stockholders and among the
stockholders as they relate to the corporation. Accordingly, the Rights
Plan and the rights issued thereunder are subject to and affected by
Conrail's By-Laws.
202. Insofar as it purports to remove from the duly
elected board of Conrail the power to redeem the rights or amend the
Rights Plan, the Continuing Director Requirement directly conflicts with
Section 3.5 of Conrail's By-Laws, and is therefore void and
unenforceable.
203. Article Eleven of Conrail's Articles of Incorporation
provides that Conrail's entire board may be removed without cause by
vote of a majority of the stockholders who would be entitled to vote in
the election of directors. Read together with Section 3.5 of Conrail's
By-Laws, Article Eleven enables the stockholders to replace the entire
incumbent board with a new board with all powers of the incumbent board,
including the power to redeem the rights or to amend the Rights
Agreement. The Continuing Director Requirement purports to prevent the
stockholders from doing so, and is therefore void and unenforceable.
204. Plaintiffs have no adequate remedy at law.
COUNT ELEVEN
(Declaratory Relief Against Conrail
and The Director Defendants That Adoption
of the Continuing Director Requirement
Constituted A Breach of the Duty of Loyalty)
205. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
206. Adoption of the Continuing Director Requirement
constituted a breach of the duty of loyalty on the part of the Director
Defendants. Such adoption was the result of bad faith entrenchment
motivation rather than a belief that the action was in the best
interests of Conrail. In adopting the Continuing Director Requirement,
the Director Defendants have purported to circumvent the Conrail
stockholders' fundamental franchise rights, and thus have failed to act
honestly and fairly toward Conrail and its stockholders. Moreover, the
Director Defendants adopted the Continuing Director Requirement without
first conducting a reasonable investigation.
207. The Continuing Director Requirement not only impedes
acquisition of Conrail stock in the NS Offer, it also impedes any proxy
solicitation in support of the NS Proposal because Conrail stockholders
will, unless the provision is invalidated, believe that the nominees of
plaintiffs will be powerless to redeem the Poison Pill rights in the
event they conclude that redemption is in the best interests of the
corporation. Thus, stockholders may believe that voting in favor of
plaintiffs' nominees would be futile. The Director Defendants intended
their actions to cause Conrail's stockholders to hold such belief.
208. Plaintiffs seek a declaration that the Director
Defendants' adoption of the Continuing Director Requirement was in
violation of their fiduciary duties and, thus, null, void and
unenforceable.
209. Plaintiffs have no adequate remedy at law.
COUNT TWELVE
(Against Conrail And The Director
Defendants For Actionable Coercion)
210. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
211. The Director Defendants owe fiduciary duties of care
and loyalty to Conrail. Furthermore, Conrail and the Director
Defendants, insofar as they undertake to seek and recommend action by
Conrail's shareholders, for example with respect to the Charter
Amendment, the CSX Offer or the NS Offer, stand in a relationship of
trust and confidence vis a vis Conrail's shareholders, and accordingly
have a fiduciary obligation of good faith and fairness to such
shareholders in seeking or recommending such action. Furthermore,
shareholders are entitled to injunctive relief against fundamental
unfairness pursuant to PBCL ss. 1105.
212. Conrail and its directors are seeking the approval by
Conrail's shareholders of the Charter Amendment and are recommending
such approval.
213. Conrail and its directors are seeking the tender by
Conrail's shareholders of their shares into the CSX Offer and are
recommending such tender.
214. In seeking such action and making such
recommendations, Conrail and its directors have sought to create the
impression among the Conrail shareholders that the NS Proposal is not a
financially superior, viable, and actually available alternative to the
CSX Transaction. This impression, however, is false. The only
obstacles to the NS Proposal are the ultra vires, illegal impediments
constructed by defendants, including the Poison Pill Lock-In, the 270-
Day Lock-Out, and the continuing director provisions of the Conrail
Poison Pill Plan.
215. The purpose for which defendants' seek to create this
impression is to coerce Conrail shareholders into delivering control
over Conrail swiftly to CSX. Furthermore, the effect of this false
impression is to coerce Conrail shareholders into delivering control
over Conrail to CSX.
216. This coercion of the Conrail shareholders constitutes
a breach of the fiduciary relation of trust and confidence owed by the
Corporation and its directors to shareholders from whom they seek action
and to whom they recommend the action sought. Moreover, this coercion,
as well as the intense structural coercion imposed by the revised CSX
Transaction's highly front end loaded first step tender offer,
constitutes fundamental unfairness to Conrail shareholders.
217. The conduct of defendants Conrail and its directors
is designed to, and will, if not enjoined, wrongfully induce Conrail's
shareholders to sell their shares to CSX in the CSX Offer not for
reasons related to the economic merits of the sale, but rather because
the illegal conduct of defendants has created the appearance that the
financially (and otherwise) superior NS Proposal is not available to
them, and that the CSX Transaction is the only opportunity available to
them to realize premium value on their investment in Conrail.
218. Plaintiffs have no adequate remedy at law.
COUNT THIRTEEN
(Against CSX For Aiding And Abetting)
219. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
220. Defendant CSX, through its agents, was aware of and
knowingly and actively participated in the illegal conduct and breaches
of fiduciary duty committed by Conrail and the Director Defendants and
set forth in Counts One through Eight, Twelve and Twenty-Two through
Twenty-Four of this complaint.
221. CSX's knowing and active participation in such
conduct has harmed plaintiffs and threatens irreparable harm to
plaintiffs if not enjoined.
222. Plaintiffs have no adequate remedy at law.
COUNT FOURTEEN
(Declaratory and Injunctive Relief Against
Conrail and the Director Defendants for
Violation of Section 14(a) of the Exchange Act
and Rule 14a-9 Promulgated Thereunder)
223. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
224. Section 14(a) of the Exchange Act provides that it is
unlawful to use the mails or any means or instrumentality of interstate
commerce to solicit proxies in contravention of any rule promulgated by
the SEC. 15 U.S.C. ss. 78n(a).
225. Rule 14a-9 provides in pertinent part: "No
solicitation subject to this regulation shall be made by means of any
... communication, written or oral, containing any statement which, at
the time, and in light of the circumstances under which it is made, is
false and misleading with respect to any material fact, or which omits
to state any material fact necessary in order to make the statements
therein not false or misleading...." 17 C.F.R. ss. 240.14a-9.
226. Conrail's Preliminary Proxy Statement contains the
misrepresentations detailed in paragraph 123 above. It also omits to
disclose the material facts detailed in paragraph 126 above.
227. Further, Conrail's press releases, public filings,
and November 25, 1996 Definitive Proxy Statement detailed in paragraphs
59, 62, and 129 to 133 above, are misleading as set forth in such
paragraphs.
228. Moreover, each of the false and misleading statements
and omissions made by defendants and alleged in this Complaint were made
under circumstances that should be expected to result in the granting or
withholding of proxies in the vote on the Charter Amendment, and was
intended to have such result.
229. Unless defendants are required by this Court to make
corrective disclosures, Conrail's stockholders will be deprived of
their federal right to exercise meaningfully their voting franchise.
230. The defendants' false and misleading statements and
omissions described above are essential links in defendants' effort to
deprive Conrail's shareholders of their ability to exercise choice
concerning their investment in Conrail and their voting franchise.
231. Plaintiffs have no adequate remedy at law.
COUNT FIFTEEN
(Against Defendant CSX For Violation
Of Section 14(d) Of The Exchange Act
And Rules Promulgated Thereunder)
232. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
233. Section 14(d) provides in pertinent part: "It shall
be unlawful for any person, directly or indirectly by use of the mails
or by any means or instrumentality of interstate commerce ... to make a
tender offer for ... any class of any equity security which is
registered pursuant to section 78l of this title, ... if, after
consummation thereof, such person would, directly or indirectly, be the
beneficial owner of more than 5 per centum of such class, unless at the
time copies of the offer, request or invitation are first published,
sent or given to security holders such person has filed with the
Commission a statement containing such of the information specified in
section 78m(d) of this title, and such additional information as the
Commission may by rules and regulations prosecute ...." 15 U.S.C. ss.
78n(d).
234. On October 16, 1996, defendant CSX filed with the SEC
its Schedule 14D-1 pursuant to Section 14(d).
235. CSX's Schedule 14D-1 contains each of the false and
misleading material misrepresentations of fact detailed in paragraph 124
above. Furthermore, CSX's Schedule 14D-1 omits disclosure of the
material facts detailed in paragraph 126 above. Additionally, CSX's
Amendment No. 4 to its Schedule 14D-1 contains the misstatements and/or
omissions alleged in paragraphs 127(a) and (d) above. As a consequence
of the foregoing, CSX has violated, and unless enjoined will continue to
violate, Section 14(d) of the Exchange Act and the rules and regulations
promulgated thereunder.
236. CSX made the material misrepresentations and
omissions described above intentionally and knowingly, for the purpose
of fraudulently coercing, misleading and manipulating Conrail's
shareholders to tender their shares into the CSX Offer.
237. Plaintiffs have no adequate remedy at law.
COUNT SIXTEEN
(Against Defendant Conrail For Violation
Of Section 14(d) Of The Exchange Act
And Rules Promulgated Thereunder)
238. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
239. Section 14(d)(4) provides in pertinent part: "Any
solicitation or recommendation to the holders of [securities for which
a tender offer has been made] to accept or reject a tender offer or
request or invitation for tender shall be made in accordance with such
rules and regulations as the [SEC] may prescribe as necessary or
appropriate in the public interest of investors." Rule 14d-9 provides in
pertinent part: "No solicitation or recommendation to security holders
shall be made by [the subject company] with respect to a tender offer
for such securities unless as soon as practicable on the date such
solicitation or recommendation is first published or sent or given to
security holders such person ... file[s] with the [SEC] eight copies of
a Tender Offer Solicitation/Recommendation Statement on Schedule 14D-9."
240. On October 16, 1996, Conrail (i) published its board
of directors' recommendation that Conrail shareholders tender their
shares in the CSX Offer and (ii) filed with the SEC its Schedule 14D-9.
241. Conrail's Schedule 14D-9 contains each of the false
and misleading material misrepresentations detailed in paragraph 125
above. Further, Conrail's Schedule 14D-9 omits disclosure of the
material facts detailed in paragraph 126 above. Additionally, Conrail's
Amendment No. 4 to its Schedule 14D-9 with respect to the CSX Offer and
its Schedule 14D-9 with respect to the NS Offer contain the
misstatements and/or omissions alleged in paragraphs 127 (a), (c) and
(d) above. As a consequence of the foregoing, Conrail has violated, and
unless enjoined will continue to violate, Section 14(d) of the
Exchange Act and the rules and regulations promulgated thereunder.
242. Conrail made the material misrepresentations and
omissions described above intentionally and knowingly, for the purpose
of fraudulently coercing, misleading and manipulating Conrail's
shareholders to tender their shares into the CSX Offer.
243. Plaintiffs have no adequate remedy at law.
COUNT SEVENTEEN
(Against Conrail and CSX for Violation
of Section 14(e) of the Exchange Act
and Rules Promulgated Thereunder)
244. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
245. Section 14(e) provides in pertinent part: "It shall
be unlawful for any person to make any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made, in the light of the circumstances under which they are
made, not misleading, or to engage in any fraudulent, deceptive, or
manipulative acts or practices in connection with any tender offer . . .
or any solicitation of security holders in opposition to or in favor of
any such offer . . . ." Defendants have violated and threaten to
continue to violate Section 14(e).
246. The CSX Schedule 14D-1 constitutes a communication
made under circumstances reasonably calculated to result in the
procurement of tenders from Conrail shareholders in favor of the CSX
Offer.
247. The Conrail Schedule 14D-9 and Proxy Statement
constitute communications made under circumstances reasonably
calculated to result in the procurement of tenders from Conrail
shareholders in favor of the CSX Offer.
248. The CSX Schedule 14D-1 contains the false and
misleading material misrepresentations detailed in paragraph 124 above.
The CSX Schedule 14D-1 omits disclosure of the material facts detailed
in paragraph 126 above. Additionally, Amendment No. 4 to such Schedule
contains the misstatements and/or omissions alleged in paragraphs 127(a)
and (b) above.
249. The Conrail Schedule 14D-9 contains the false and
misleading material misrepresentations detailed in paragraph 125 above.
The Conrail Schedule 14D-9 omits disclosure of the material facts
detailed in paragraph 126 above. Additionally, Amendment No. 4 to such
Schedule contains the misstatements and/or omissions alleged in
paragraphs 127(a) and (d) above. Also, Conrail's Schedule 14D-9 with
respect to the NS Offer contains the misstatements and/or omissions
alleged in paragraphs 127(a) and (c) above.
250. The Conrail Preliminary Proxy Statement contains the
false and misleading material misrepresentations detailed in paragraph
124 above. The Conrail Proxy Statement omits disclosure of the material
facts detailed in paragraph 126 above.
251. These omitted facts are material to the decisions of
Conrail shareholders to hold, sell to market, or tender their shares in
the CSX tender offer.
252. The defendants intentionally and knowingly made the
material misrepresentations and omissions described above, for the
purpose of coercing, misleading, and manipulating Conrail shareholders
to swiftly transfer control over Conrail to CSX by tendering their
shares in the CSX Tender Offer.
253. Absent declaratory and injunctive relief requiring
adequate corrective disclosure, plaintiffs, as well as all of Conrail's
shareholders, will be irreparably harmed. Conrail shareholders will be
coerced by defendants' fraudulent and manipulative conduct to sell
Conrail to the low bidder. Plaintiffs NS and AAC will be deprived of the
unique opportunity to acquire and combine businesses with Conrail.
254. Plaintiffs have no adequate remedy at law.
COUNT EIGHTEEN
(Against Defendants Conrail and CSX
For Civil Conspiracy To Violate
Section 14 Of The Exchange Act
And Rules Promulgated Thereunder)
255. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
256. Defendants Conrail and CSX conspired and agreed to
conduct the campaign of misinformation described in paragraphs 95
through 101 above for the purpose of coercing, misleading and
manipulating Conrail shareholders to swiftly transfer control over
Conrail to CSX. As set forth in Counts Fourteen through Seventeen above,
which are incorporated by reference herein, the defendants' campaign of
misinformation is violative of Section 14 of the Exchange Act and the
rules and regulations promulgated thereunder.
257. Plaintiffs have no adequate remedy at law.
COUNT NINETEEN
(Against Conrail for
Estoppel/Detrimental Reliance)
258. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
259. By his actions, silence and statements during the
period from September 1994 to October 15, 1996, and particularly by his
statements to Mr. Goode in September and October of 1996 (as detailed
above in paragraphs 24 through 26, defendant LeVan, purporting to act on
behalf of Conrail and its Board of Directors and with apparent authority
to so act, led Mr. Goode to believe that Conrail's Board was not
interested in a sale of the company and that if and when the Conrail
Board decided to pursue such a sale, it would let NS know and give NS an
opportunity to bid.
260. Prior to October 15, 1996, NS had justifiably relied
on Mr. LeVan's false statements and representations in refraining from
making a proposal to Conrail's Board or initiating a tender offer of its
own for Conrail shares.
261. Mr. LeVan and Conrail knew or should have known that
their actions, silence, statements and representations to NS would
induce NS to believe that Conrail's board was not interested in selling
the company and that NS would be given an opportunity to bid if
Conrail's Board decided that Conrail would be sold.
262. Mr. LeVan and Conrail knew or should have known that
NS would rely upon their actions, silence, statements and
representations to its detriment in refraining from making a proposal to
Conrail's Board or initiating a tender offer of its own for Conrail
shares.
263. NS did in fact rely upon LeVan's and Conrail's
actions, silence, statements and representations to its detriment in
refraining from making a proposal to Conrail's Board or initiating a
tender offer of its own for Conrail shares.
264. Conrail and its Board are estopped from effectuating
a sale of the company without giving NS an adequate opportunity to
present its competing tender offer to the Conrail Board of Directors and
Conrail shareholders. Similarly, any provision in the CSX Merger
Agreement that would impede directors' or shareholders' ability to
approve a competing tender offer or takeover proposal, such as that made
by NS, is null and void.
265. By virtue of NS's justifiable reliance on Conrail's
and Mr. LeVan's actions, silence and statements, it has suffered and
will continue to suffer irreparable harm.
266. Plaintiffs have no adequate remedy at law.
COUNT TWENTY
(Unlawful And Ultra Vires Amendment
of Conrail's Articles of Incorporation)
267. Plaintiffs withdraw Count Twenty as moot.
COUNT TWENTY-ONE
(Declaratory Judgment Against Conrail and the
Director Defendants That the Entire Conrail
Board, Or Any One or More of Conrail's
Directors, Can Be Removed Without Cause)
268. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
269. Plaintiffs intend, if necessary to facilitate the NS
Proposal, to solicit proxies to be used at Conrail's next annual
meeting to remove Conrail's current Board of Directors.
270. There is presently a controversy among Conrail, the
Director Defendants and the plaintiffs as to whether the entire Conrail
Board, or any one or more of Conrail's directors, may be removed without
cause at the annual meeting by a vote of the majority of Conrail
stockholders entitled to cast a vote at the Annual Meeting.
271. Plaintiffs seek a declaration that Article 11 of
Conrail's Articles of Incorporation permits the removal of the entire
Conrail Board, or any one or more of Conrail's directors, without cause
by a majority vote of the Conrail stockholders entitled to cast a vote
at an annual election.
272. Plaintiffs have no adequate remedy at law.
COUNT TWENTY-TWO
(For Breach of Fiduciary Duty
with Respect to the New Special Meeting)
273. Plaintiffs repeat each of the foregoing allegations
as if fully set forth herein.
274. The director defendants, as members of the Conrail
Board, owe fiduciary duties to plaintiffs and all Conrail shareholders
to exercise their positions of trust and confidence with due care,
loyalty and fair dealing.
275. By acting with improper motivations, including, but
not limited to, indicating their intention to deny plaintiffs and all
Conrail shareholders the exercise of their right of shareholder
suffrage in an effort to ensure victory for the Charter Amendment,
defendants have breached their fiduciary duties to (i) plaintiffs and
(ii) to all Conrail shareholders by attempting to manipulate vthe
shareholders' vote and interfering with the exercise of shareholders'
voting rights.
276. The director defendants' conduct is, and, unless
corrected, will continue to be, wrongful, unfair and harmful to
plaintiffs as shareholders of Conrail.
277. Because the threatened failure to convene the Special
Meeting of December 23 will interfere with the shareholders' ability to
exercise their voting rights, it also is contrary to public policy.
278. Plaintiffs have been and will continue to be
irreparably damaged by the acts of the director defendants.
279. Plaintiffs have no adequate remedy at law.
COUNT TWENTY-THREE
(For An Injunction Pursuant to
Pennsylvania Business Corporations Law,
15 Pa. Cons. Stat. ss. 1105)
280. Plaintiffs repeat each of the foregoing allegations
above, as if fully set forth herein.
281. As more fully alleged above, the director defendants'
conduct with regard to the December 23 Special Meeting has been taken
with improper motives and in bad faith for the sole or primary purpose
of depriving plaintiffs and Conrail's other shareholders the free
exercise of their right of shareholder suffrage. Such conduct strikes at
the foundation of corporate democracy and governance and is
fundamentally unfair.
282. The director defendants have acted fraudulently in at
least two respects: first, contrary to their public representations and
representations before this Court that Conrail shareholders would have a
choice with respect to the CSX Transaction, defendants now say that only
a vote approving the Charter Amendment will be counted and given effect;
and second, by recommending approval of the Charter Amendment without
disclosing that they do not believe such approval is in the
shareholders' best interests.
283. Moreover, by announcing that the New Special Meeting
may be successively postponed until the Conrail shareholders submit to
their will, defendants are attempting to discourage opposition and
coerce approval of the Charter Amendment. This, too, constitutes
fundamental unfairness.
284. Further, defendants are threatening to utilize
corporate assets to solicit proxies to be voted at successively
postponed meetings, while shareholders such as NS must utilize their own
assets to finance countersolicitations. Thus, the successive
postponement of the New Special Meeting threatens to multiply the costs
of opposing management's solicitation, while management draws upon the
corporate coffers. This, too, constitutes fundamental unfairness.
285. Plaintiffs have been and will continue to be
irreparably harmed by the conduct of the director defendants.
286. Plaintiffs have no adequate remedy at law.
COUNT TWENTY-FOUR
(Against the Defendant Directors
for Breach of Fiduciary Duty with
Respect to Section 5.1(b) of the Merger Agreement)
287. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
288. In conjunction with the Amended Merger Agreement, the
Conrail Board has relinquished its power to act in the best interest of
Conrail in connection with the proposed acquisitions of Conrail by
improperly delegating to CSX the ability to call a Special Meeting of
Conrail's stockholders.
289. The Conrail Board improperly has given to CSX,
pursuant to the amended Merger Agreement, the ability to call a Special
Meeting of Conrail stockholders in violation of Section 2521 of the
PBCL. CSX is not entitled to call a special meeting of Conrail's
stockholders under Section 2521. Conrail has not opted out of Section
2521 by providing its stockholders in its Articles of Incorporation with
a right to call a special meeting.
290. Thus, by contractually binding itself to call a
special meeting of stockholders at the request of CSX, the Conrail
directors have abdicated their fiduciary duties, in violation of their
duties of care and loyalty. In addition, they have attempted to
circumvent the provisions of the PBCL by allowing CSX to call special
meetings of Conrail stockholders, which CSX cannot do under the PBCL.
291. If CSX is going to assert that it should have the
power to call special meetings of stockholders under Section 5.1 of
the amended Merger Agreement -- a power which holders of at least 20% or
more of a corporation's stock have and, then, in only limited
circumstances not applicable here -- then it must be treated as a 20%
stockholder for all purposes under the PBCL, including for purposes of
Subchapter 25E.
292. Alternatively, Section 5.1(b) must be declared a void
and ulta vires act of the Conrail Board.
293. Plaintiffs have no adequate remedy at law.
COUNT TWENTY-FIVE
(For Declaratory Relief
Against All Defendants Relating
To Subchapter 25E of the PBCL)
294. Plaintiffs repeat and reallege all of the foregoing
allegations as if fully set forth in this paragraph.
295. Subchapter 25E of the PBCL was designed and intended
to provide protection for shareholders of Pennsylvania Corporations
against coercive partial tender offers. Subchapter 25E provides that
"[a]ny holder of voting shares of a registered corporation that becomes
the subject of a control transaction who shall object to the transaction
shall be entitled to the rights and remedies provided in this
subchapter." "Control transaction" is defined as the "acquisition by a
person or group of the status of a controlling person or group."
"Controlling person or group" means "a person who has, or a group of
persons acting in concert that has, voting power over voting shares of
the registered corporation that would entitle the holders thereof to
cast at least 20% of the votes that all shareholders would be entitled
to cast in an election of directors."
296. The remedy provided by Subchapter 25E is the right to
receive "fair value", as defined, upon demand, for each of the shares
held by an objecting shareholder, from the controlling person or group.
"Fair value" means a value "not less than the highest price paid for
shares by the controlling person or group at any time during the 90-day
period ending on and including the date of the control transaction plus
an increment representing any value, including without limitation, any
proportion of any value payable for acquisition of control of the
corporation, that may not be reflected in such price." Subchapter 25E
sets forth defined procedures for demand, appraisal, and payment of
"fair value."
297. For the purpose of Subchapter 25E, "a person has
voting power over a voting share if the person has or shares, directly
or indirectly, through any option, contract, arrangement, understanding,
conversion right or relationship, or by acting jointly or in concert or
otherwise, the power to vote, or to direct the vote of, the voting
share."
298. CSX, Green Acquisition Corp., Conrail's directors,
senior executives and officers of Conrail constitute a group acting in
concert and for the common purpose of facilitating, pursuing, and
causing to be consummated the CSX Transaction (the "Control Transaction
Group").
299. CSX purchased an aggregate of 17,860,124 shares of
Conrail stock pursuant to its first tender offer which expired on
November 20, 1996. It paid $110 in cash per share.
300. Upon information and belief, the sum of the shares
purchased by CSX in its first tender offer and the shares held by
Conrail's directors and senior executive officers is in excess of 20% of
the voting shares of Conrail stock. If one also takes into account the
unallocated shares held by the Conrail ESOP and Employee Benefit Trust
over which Conrail's officers have voting power, consummation of the
first CSX tender offer resulted in the Control Transaction Group having
acquired voting power over very substantially in excess of 20% of
Conrail's voting stock. Thus, upon consummation of the first CSX tender
offer, a control transaction occurred with respect to Conrail.
301. Accordingly, the Control Transaction Group is
required by Subchapter 25E to give prompt notice of a control
transaction and to pay to each demanding shareholder at least $110 per
share in cash for each share held by such demanding shareholder.
Plaintiffs seek a declaratory judgment that this is so.
302. Plaintiffs have no adequate remedy at law.
WHEREFORE, plaintiffs respectfully request that this Court
enter judgment against all defendants, and all persons in active concert
or participation with them, as follows:
A. Declaring that:
(a) defendants have violated Sections 14(a), 14(d) and
14(e) of the Exchange Act and the rules and regulations promulgated
thereunder;
(b) defendants' use of the Charter Amendment is violative
of Pennsylvania statutory law and their fiduciary duties;
(c) defendants' discriminatory use of Conrail's Poison
Pill Plan violates the director defendants' fiduciary duties;
(d) the termination fees and stock option agreements
granted by Conrail to CSX are violative of the defendants' fiduciary
duties;
(e) the Continuing Director Requirement of Conrail's
Poison Pill Plan is ultra vires and illegal under Pennsylvania Law and
Conrail's Articles of Incorporation and Bylaws; and is illegal because
its adoption constitutes a breach of the defendants' fiduciary duties;
(f) Conrail's entire staggered board or any one or more of
its directors, can be removed without cause at Conrail's next annual
meeting of stockholders;
(g) the defendants have engaged in a civil conspiracy to
violate Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder;
(h) the Poison Pill Lock-In provisions in the CSX Merger
Agreement are ultra vires and, therefore, void under Pennsylvania Law;
(i) the 270-Day Lock-Out provision in the CSX Merger
Agreement is ultra vires under Pennsylvania law and, therefore, void;
(j) the Director Defendants, by approving the CSX Merger
Agreement, breached their fiduciary duties of care and loyalty;
(k) the coercive nature of the CSX Transaction constitutes
fundamental unfairness to Conrail's shareholders;
(l) the defendants' conduct concerning the New Special
Meeting constitutes an illegal and inequitable manipulation of the
processes of corporate democracy and is fraudulent and fundamentally
unfair;
(m) section 5.1(b) of the revised CSX Merger Agreement
constitutes an unlawful delegation of the Director Defendants' fiduciary
duties, is illegal and ultra vires, and its adoption by Conrail
constituted a breach of the Director Defendants' fiduciary duties, aided
and abetted by CSX; and
(n) consummation of the first CSX Offer caused a "Control
Transaction" with respect to Conrail to occur under subchapter 25E of
the PBCL and created a joint and several liability among the members of
the Control Transaction Group to pay $110 cash per share to each
demanding Conrail shareholder.
B. Preliminarily and permanently enjoining the defendants,
their directors, officers, partners, employees, agents, subsidiaries and
affiliates, and all other persons acting in concert with or on behalf of
the defendants directly or indirectly, from:
(a) commencing or continuing a tender offer for shares of
Conrail stock or other Conrail securities or accepting shares for
payment in connection with such tender offer;
(b) seeking the approval by Conrail's stockholders of the
Charter Amendment, or, in the event it has been approved by Conrail's
stockholders, from taking any steps to make the Charter Amendment
effective;
(c) taking any action to redeem rights issued pursuant to
Conrail's Poison Pill Plan or render the rights plan inapplicable as to
any offer by CSX without, at the same time, taking such action as to
NS's outstanding offer;
(d) taking any action to enforce the Continuing Director
Requirement of Conrail's Poison Pill Plan;
(e) taking any action to enforce the termination fee or
stock option agreement granted to CSX by Conrail;
(f) failing to take such action as is necessary to exempt
the NS Proposal from the provisions of the Pennsylvania Business
Combination Statute;
(g) holding the Conrail special meeting until all
necessary corrective disclosures have been made and adequately
disseminated to Conrail's stockholders;
(h) taking any action to enforce the Poison Pill Lock-In
and/or the 180-Day Lock-Out provisions of the CSX Merger Agreement;
(i) failing to take such action as is necessary to ensure
that a Distribution Date does not occur under the terms of the Conrail
Poison Pill Plan;
(j) failing to take any action required by the fiduciary
duties of the Director Defendants; and
(k) postponing the shareholder vote scheduled for December
23, 1996.
C. Granting compensatory damages for all incidental
injuries suffered as a result of defendants' unlawful conduct.
D. Awarding plaintiffs the costs and disbursements of this
action, including attorneys' fees.
E. Granting plaintiffs such other and further relief as
the court deems just and proper.
------------------------
Mary A. McLaughlin
George G. Gordon
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
Attorneys for Plaintiffs
Of Counsel:
Steven J. Rothschild
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: December 13, 1996
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- ---------------------------------------------------------
NORFOLK SOUTHERN CORPORATION, a :
Virginia Corporation, ATLANTIC :
ACQUISITION CORPORATION, a :
Pennsylvania corporation AND :
KATHRYN B. McQUADE, :
Plaintiffs, :
:
v. :
: C.A. No. 96-CV-7167
CONRAIL INC. a Pennsylvania :
corporation, DAVID M. LEVAN, H. :
FURLONG BALDWIN, DANIEL B. :
BURKE, ROGER S. HILLAS, CLAUDE :
S. BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN :
C. MAROUS, DAVID H. SWANSON, E. :
BRADLEY JONES, AND RAYMOND T. :
SCHULER AND CSX CORPORATION, :
Defendants, :
:
- ---------------------------------------------------------
PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION
Plaintiffs hereby move for an order enjoining defendants
from postponing the Special Meeting of Conrail Shareholders, currently
scheduled to be held on December 23, 1996.
In support of their motion, plaintiffs rely upon the
accompanying memorandum of law.
Respectfully Submitted:
------------------------
Mary A. McLaughlin
I.D. No. 24923
George G. Gordon
I.D. No. 63072
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
Attorneys for Plaintiffs
Of Counsel:
Steven J. Rothschild
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: December 13, 1996
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- - - - - - - - - - - - - - - - - - - - -x
NORFOLK SOUTHERN CORPORATION, a :
Virginia corporation, ATLANTIC ACQUISI- :
TION CORPORATION, a Pennsylvania :
corporation, and KATHRYN B. McQUADE, :
:
Plaintiffs, :
: C.A. No. 96-CV-7167
-against- :
:
CONRAIL INC., a Pennsylvania corporation,:
DAVID M. LEVAN, H. FURLONG BALDWIN, :
DANIEL B. BURKE, ROGER S. HILLAS, :
CLAUDE S. BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN C. :
MAROUS, DAVID H. SWANSON, :
E. BRADLEY JONES, RAYMOND T. :
SCHULER and CSX CORPORATION, :
:
Defendants. :
- - - - - - - - - - - - - - - - - - - - -x
PLAINTIFFS' OPENING BRIEF IN SUPPORT OF
THEIR MOTION FOR A PRELIMINARY INJUNCTION
Mary A. McLaughlin
George G. Gordon
DECHERT, PRICE & RHOADS
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
Attorneys for Plaintiffs
Of Counsel:
Steven J. Rothschild
Andrew J. Turezyn
Karen L. Valihura
R. Michael Lindsey
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (DELAWARE)
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: December 13, 1996
PRELIMINARY STATEMENT . . . . . . . . . . . . . . . . . . . . 1
STATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . 3
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 7
I. DEFENDANTS SHOULD BE ENJOINED FROM POSTPONING THE
DECEMBER 23 MEETING . . . . . . . . . . . . . . . 7
A. Uncontroverted Evidence Firmly Establishes That
Defendants' Threatened Postponement Of The Meeting
Endangers Plaintiffs' Fundamental Right To Fair
Corporate Suffrage . . . . . . . . . . . . . . . . 7
1. Courts zealously protect the stockholders'
fundamental right to vote . . . . . . . . . . 7
2. The integrity of the voting process must be
protected . . . . . . . . . . . . . . . . . . 9
3. The Conrail board has made clear its purpose
in manipulating the date
of the vote . . . . . . . . . . . . . . . . . 10
4. The defendants' inequitable action does not
become permissible merely because it is
legally possible . . . . . . . . . . . . . . . 12
B. Postponement of the Vote Will Irreparably
Harm the Plaintiffs . . . . . . . . . . . . . . . . 13
C. The Balance Of The Hardships Is All On Plaintiffs'
Side Of The Scale . . . . . . . . . . . . . . . . . 14
D. Public Policy Favors Issuance of An Injunction . . 15
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . 17
PRELIMINARY STATEMENT
At the November 18 and 19 hearing held on plaintiffs'
November 11 motion for a preliminary injunction, defendants
repeatedly assured this Court that the requested injunctive
relief was unnecessary to protect Conrail's shareholders. The
defendants maintained that, ultimately, Conrail shareholders
would themselves decide on the proposed CSX transaction. As
Conrail Director Baldwin testified: "No one has taken the
shareholder's vote away from he or she. No one has taken it
away. To get this thing done, it requires a shareholder's vote."
(November 18 and 19, 1996 Hearing Transcript ("Hearing
Transcript") at 252) CSX's counsel also informed the Court that:
"[T]here's going to be a proxy fight between now and the December
[23] meeting. And at that meeting, the shareholders will decide
whether or not to opt out...." (Hearing Transcript at 634)
(emphasis added).
In fact, however, the defendants are allowing Conrail
shareholders no choice in the scheduled December 23 vote on the
proposed Conrail charter amendment (the "Charter Amendment") to
opt out of Subchapter E of Chapter 25 of the Pennsylvania
Business Corporation Law of 1988, as amended. As the defendants'
recently circulated proxy materials make clear, "it is expected
that the special meeting will not be convened if Conrail has not
received sufficient proxies to assure approval of the Proposal."
Thus, no meeting will be held if the majority of Conrail's
shareholders vote not to opt out.
In short, defendants are manipulating and subverting
the processes of corporate democracy by:
* scheduling the December 23 special meeting, while announcing
that they will permit the vote to proceed only if they are
assured of victory;
* announcing that they may pursue successive special meetings
until the shareholders submit to Conrail's and CSX's will;
and
* abdicating the fiduciary duties they owe to Conrail's
shareholders to ensure fair corporate suffrage.
These acts represent fraudulent, coercive, and fundamentally
unfair conduct directed at Conrail's shareholders' most
fundamental right -- the right to vote.
Defendants must be enjoined from postponing the meeting
and effectively denying Conrail's shareholders of their right to
vote against the Charter Amendment.
STATEMENT OF FACTS
The Preliminary Injunction Hearing
On November 18 and 19, 1996, this Court heard the
parties' presentations on plaintiffs' November 11 motion for a
preliminary injunction. During the hearing, plaintiffs argued
that Conrail shareholders are being illegally coerced to tender
shares to CSX. In response, defendants represented to this Court
that Conrail shareholders would be asked to vote on the Charter
Amendment, claiming that stockholders would have a choice of
whether or not to accept the CSX transaction. Specifically:
* Conrail Director Furlong Baldwin testified that "we [the
Conrail Board] had never, ever given up is the shareholders
must vote .... The shareholders have to make a decision.
They have to take an action whether they interpret our value
added addition has some credibility or not." (Hearing
Transcript at 201).
* Mr. Baldwin further testified that "[The November 14
meeting] was to opt out of that. That's what the
stockholders meeting is -- you know, and if -- but the
interesting [thing] about that, it required a majority of
the shareholders to make that happen. And that's what I
said to you very much earlier. The shareholders still had
to vote, and still have to vote, and the shareholders still
will vote. And so it was still in their purview to do what
a majority of them thinks they want to do." (Hearing
Transcript at 249).
* Mr. Baldwin further testified that "No one has taken the
shareholder's vote away from he or she. No one has taken it
away. To get this thing done, it requires a shareholder's
vote." (Hearing Transcript at 252).
* CSX's counsel represented to the Court as follows: "Here,
of course, this transaction [the CSX Transaction] isn't
going to go forward at all unless there's the opt out in
December." (Hearing Transcript at 625).
* CSX's counsel further represented to the Court that "Well,
no one was suggesting that the directors can take away a
vote that shareholders are entitled to under the statute,
that's not happening here." (Hearing Transcript at 629).
* Finally, CSX's counsel told the Court that "[T]here's going
to be a proxy fight between now and the December meeting.
And at that meeting, the shareholders will decide whether or
not to opt out." (Hearing Transcript at 634) (emphasis
added).
These representations by defendants were not lost upon the Court.
In its oral ruling, the Court observed "[A]ll or a majority of
the shareholders could vote against the proposed opt-out of
subchapter E." (Hearing Transcript at 651).
Despite their representations to this Court that
Conrail's shareholders would have a choice regarding the CSX
Transaction since they would vote on whether the Charter
Amendment will be adopted or not, defendants have determined
instead to leave Conrail's shareholders no choice.
The New Special Meeting: Defendants Attempt to Convince
Conrail's Shareholders That Resistance Is Futile.
On November 25, 1996, Conrail issued a Notice of
Special Meeting of Shareholders and a definitive proxy statement.
This special meeting (the "New Special Meeting"), to be held for
the stated purpose of conducting a vote of Conrail's shareholders
on the Charter Amendment, is scheduled to be convened on December
23, 1996. Conrail's definitive proxy statement dated November
25, 1996 (the "Proxy Statement") makes clear, however, that,
unless and until Conrail management has received sufficient
proxies to assure approval of the Charter Amendment, no
shareholder votes will ever be counted. In its Proxy Statement,
Conrail states:
Under the Merger Agreement, Conrail has agreed not
to convene, adjourn or postpone the Special Meeting
without the prior consent of CSX, which consent will
not be unreasonably withheld. As a result, it is
expected that the Special Meeting will not be convened
if Conrail has not received sufficient proxies to
assure approval of the Proposal. Pursuant to the
Merger Agreement, either CSX or Conrail can require
that additional special meetings be held for the
purpose of considering the Proposal, and a new record
date could be set for any such special meeting (a new
record date would be required if such meeting is held
after February 3, 1997).
(Declaration of George G. Gordon ("Gordon Decl."), Ex. A at 2)
(emphasis added).
The Philadelphia Inquirer on November 28, 1996,
succinctly captured the essence of what defendants are attempting
to do:
As elections go, this one might have been devised
in the old Kremlin: Conrail shareholders are scheduled
to vote December 23 on a proposal that will likely
decide the Philadelphia railroad's future. If they
approve the management-endorsed proposal, Conrail's
planned $8.5 billion merger with CSX Corp. will move
forward. If the shareholders don't approve ... they
won't vote.
* * * *
In other words, count ballots first, then hold the
vote -- after we've won.
(Gordon Decl., Ex. B)
Thus, defendants are telling Conrail shareholders that
the only vote that they will count as effective is a "for" vote.
Defendants are essentially saying that "against" votes are
futile, since there is no scenario in which the New Special
Meeting will result in a vote rejecting the Charter Amendment,
and, by implication, rejecting the CSX Transaction.
Additionally, by announcing that successive additional
special meetings may be held for the purpose of voting upon the
Charter Amendment, defendants are attempting to discourage
opposition and coerce approval. The intended message is plain:
Resistance is futile.
Finally, Conrail and its directors have ceded to CSX
control of the voting processes by which Conrail's other
shareholders may express their will regarding the business and
affairs of Conrail. By entering into the Revised Merger
Agreement, which includes a covenant subjecting the Conrail
Board's actions regarding the voting process to CSX's consent,
the Conrail directors have improperly abandoned their managerial
responsibilities to CSX to the detriment of Conrail's other
shareholders.
In short, defendants are manipulating and subverting
the processes of corporate democracy by:
* scheduling the New Special Meeting, while announcing that
they will permit the vote to proceed only if they are
assured of victory;
* announcing that they may pursue successive special meetings
until the shareholders submit to the defendants' will; and
* abdicating the fiduciary duties they owe to Conrail's
shareholders to ensure fair corporate suffrage.
Each of these acts alone constitutes a breach of the defendants'
fiduciary duties, aided and abetted by CSX. Taken together they
paint a bright picture of fraudulent, coercive, and fundamentally
unfair conduct directed at Conrail's shareholders' most
fundamental right -- the right to vote.
ARGUMENT
I. DEFENDANTS SHOULD BE ENJOINED FROM POSTPONING THE
DECEMBER 23 MEETING.
To obtain preliminary injunctive relief, a plaintiff
must show: (i) a reasonable probability of success on the
merits; (ii) a substantial threat of irreparable injury if the
injunction is not granted; (iii) the grant of preliminary relief
will result in greater harm to the non-moving party; and (iv)
preliminary relief will be in the public interest. SI Handling
Sys. Inc. v. Heisley, 753 F.2d 1244, 1254 (3d Cir. 1985);
Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186, 197-98 (3d
Cir. 1990). The "quantum of evidence needed to prove probability
of success...meshes with the quantum of evidence necessary to
meet [the] other requirements." D & N Fin. Corp. v. RCM Partners
L.P., 735 F. Supp. 1242, 1247 (D. Del. 1990), citing Polaroid
Corp. v. Disney, 862 F.2d 987, 1006 (3d Cir. 1988). In other
words, the evidence needed to establish any one of the four
factors is measured on a sliding scale; a strong showing on any
one factor will lessen the significance of the others. Id.
As shown below, each element of the preliminary
injunction mixture weighs in favor of enjoining postponement of
the vote. The plaintiffs' motion for preliminary injunction
should be granted.
A. Uncontroverted Evidence Firmly Establishes That
Defendants' Threatened Postponement Of The Meeting
Endangers Plaintiffs' Fundamental Right To Fair
Corporate Suffrage.
1. Courts zealously protect the stockholders'
fundamental right to vote.
"The right to vote is often considered a shareholder's
most fundamental right." Reifsnyder v. Pittsburgh Outdoor
Advertising Co., 405 Pa. 142, 149 n.8, 173 A.2d 319, 322 n.8 (Pa.
1961) (citing 13 Fletcher, Cyclopedia Corporations, SECTION 5717 (rev.
Col. 1961)). See also Mills v. Electric Auto-Lite Co., 396 U.S.
375, 381 (1970) (same); J.I. Case Co. v. Borak, 377 U.S. 426, 431
(1964) (same); ER Holdings, Inc. v. Norton Co., 735 F. Supp.
1094, 1100 (D. Mass. 1990) ("[O]ne of the most sacred rights of
any shareholder is to participate in corporate democracy"); Holly
Sugar Corp. v. Buchsbaum, No. 81-C-743, 1981 WL 1708 (D. Colo.
Oct. 18, 1981) at *4 (Gordon Decl., Ex. C); and Studebaker Corp.
v. Allied Products Corp., 256 F. Supp. 173, 189 (W.D. Mich.
1966). "Courts and commentators have noted repeatedly the
significance of shareholder voting rights." ER Holdings, 735 F.
Supp. at 1100 (citations omitted).
Corporate directors and management act as agents of the
shareholders and are authorized to act only in the best interests
of the corporation. Blasius Indus. v. Atlas Corp., 564 A.2d 651,
660 (Del. Ch. 1988); Danaher Corp. v. Chicago Pneumatic Tool Co.,
Nos. 86 civ. 3499 (PNL), 86 Civ. 3638 (PNL), 1986 WL 7001
(S.D.N.Y. June 19, 1986), slip op. at *4 (Gordon Decl., Ex. D).
The shareholder franchise is thus "the ideological underpinning
upon which the legitimacy of directorial power rests." Blasius
Indus., 564 A.2d at 659. It is "critical to the theory that
legitimates the exercise of power by some (directors and
officers) over vast aggregations of property that they do not
own." Id.(1)
________________
1 In the absence of controlling Pennsylvania law,
Pennsylvania courts have repeatedly looked to the corporate
law of Delaware, which Pennsylvania's Supreme Court has
termed "a sophisticated jurisdiction in the determination of
corporate issues." Smith v. Brown-Borhek Co., 414 Pa. 325,
200 A.2d 398, 404 (Pa. 1964); see also In re Watt & Shand,
452 Pa. 287, 304 A.2d 694, 699 n. 10 (Pa. 1973); Landy v.
Amsterdam, 815 F.2d 925, 929 (3d Cir. 1987); Dower v. Mosser
Indus., 648 F.2d 183 (3d Cir. 1981).
Analogous Delaware law is particularly apt on this
motion alleging fundamental unfairness in connection with
the vote on a charter amendment. Subchapter 17G, entitled,
"Judicial Supervision of Corporate Action" applies.
Specifically, section 1792(a)(2) states that, "This
(continued...)
2. The integrity of the voting process must be
protected.
The voting process, if it is to have any validity, must
be conducted with scrupulous fairness and without any advantage
being conferred upon one side, to the detriment of the other.
Aprahamian v. HBO & Co., 531 A.2d 1204, 1207 (Del. Ch. 1987). In
the interests of corporate democracy, those in charge of the
election machinery must be held to the highest standards in
providing for and conducting corporate elections and votes. Id.
"When the election machinery appears, at least facially, to have
been manipulated, those in charge of the election have the burden
of persuasion to justifying their actions"; board action taken
for the principal purpose of impeding the exercise of the
stockholder franchise must be enjoined. Aprahamian, 531 A.2d at
1207.
Employing these principles, courts have consistently
applied an enhanced level of scrutiny to action designed for the
primary purpose of interfering with the effectiveness of a
stockholder vote. See, e.g., Stahl v. Apple Bancorp, Inc., 579
A.2d 1115, 1122 (Del. Ch. 1990) (reading cases as "approximating
a per se rule that board action taken for the principal purpose
of impeding the effective exercise of the stockholder franchise
is inequitable and will be restrained or set aside in proper
circumstances"); Blasius, 564 A.2d at 660 (finding that directors
bear the burden of demonstrating "compelling justification" for
___________________
1(...continued)
subchapter shall apply to and the term 'corporate action' in
this subchapter shall mean any of the following actions . .
. (2) The taking of any action . . . submitted for action to
the shareholders, directors or officers of a business
corporation." The Committee Comment to section 1791 states,
"The provisions of the Nonprofit Corporation Law of 1972 on
statutory review of corporate action, derived from Delaware
General Corporation Law, SECTION 211(c) and 225, are extended to
business corporations by this subchapter." (emphasis
added).
actions that interfere with the exercise of the shareholders'
right of franchise); Aprahamian, 531 A.2d at 1206 ("Those in
charge of the election have the burden of persuasion" and are
held to the "highest standards"); Danaher Corp. v. Chicago
Pneumatic Tool Co., slip op. at *14 (applying "special
scrutiny"); ER Holdings, 735 F. Supp. 1094 (D. Mass. 1990)
(same). The business judgment rule does not apply in this
context. E.g., Blasius, 564 A.2d at 659; Aprahamian, 531 A.2d at
1206. As the United States Court of Appeals for the Second
Circuit noted:
Our most important duty is to protect the fundamental
structure of corporate governance....[D]ecisions
affecting a corporation's ultimate destiny are for the
shareholders to make in accordance with democratic
procedures.
Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 258 (2d Cir.
1984).
There appears to be no Pennsylvania authority on the
level of scrutiny applied to actions designed to interfere with
shareholder suffrage.(2) Nevertheless, whatever the level of
scrutiny this Court adopts, the defendants' manipulation of
Conrail's voting process to ensure their desired outcome cannot
stand.
3. The Conrail board has made clear its purpose in
manipulating the date
of the vote.
The Conrail board has:
(i) announced in its proxy materials and other
public statements that it will not permit the vote to go forward
____________________
2 Pennsylvania law does not differ from the law of other
jurisdictions, including Delaware, with respect to the
sanctity of shareholder voting rights. As noted above, the
Pennsylvania Supreme Court has noted the central importance
of corporate democracy. Reifsnyder, 173 A.2d at 322 n.8.
Additionally, the Pennsylvania legislature has enacted
legislation to ensure fairness to all shareholders in
connection with elections. For example, 15 Pa. C. S. SECTION 1765
provides for Judges Of Election, who are charged with acting
in "good faith" to "conduct the election or vote with
fairness to all shareholders." (emphasis added)
on December 23 unless it is assured that its position is the
prevailing one;
(ii) announced that it will pursue successive
meetings until shareholders submit to the defendants' will; and
(iii) abdicated its fiduciary duties to Conrail's
shareholders to ensure corporate suffrage by ceding authority
over the voting process to CSX.
In other words, the Conrail shareholders must vote the
way that management wants them to vote, or they will not be
permitted to vote at all. Through this manipulation of the
voting process, defendants seek to coerce Conrail's stockholders
into voting for the proposed Charter Amendment and disenfranchise
those who will not.(3)
Courts repeatedly have rejected tactics much less
subversive of the voting process than those employed by
defendants here. Thus, in Aprahamian v. HBO & Co., 531 A.2d 1204
(Del. Ch. 1987), the incumbent board had moved the date of the
annual meeting on the eve of that meeting when it learned that a
dissident stockholder group had, or appeared to have, in hand
proxies representing a majority of the outstanding shares. The
court restrained that action and compelled the meeting to occur
as noticed. In so doing, the Aprahamian court rejected the
board's argument that it had good business reasons to move the
_____________________
3 While the defendants have taken the position in these
proceedings that section 1712 and 1715 "preclude judicial
review of director action in the merger/acquisition
context," see, e.g., CSX Preliminary Injunction Br. at 56,
-- a position that even Conrail director Hillas disagreed
with, see, e.g., Hillas Dep at 16-18 (Gordon Decl., Ex. E),
-- section 1791 of Subchapter G (entitled "Judicial
Supervision of Corporate Action") makes clear that the Court
has the power to review "corporate action." Section
1791(a)(2) defines as "corporate action, "The taking of any
action on any matter that is required under this subpart or
under any other provision of law to be, or that under the
bylaws may be, submitted for action to the shareholders,
directors or officers of a business corporation." Included
in this definition of "corporate action" is a vote on an
amendment to a corporation's articles of incorporation.
meeting date and that the action was recommended by a special
committee -- justifications not even available to the defendants
here.
Similarly, in Danaher v. Chicago Pneumatic Tool Co.,
the Federal District Court for the Southern District Of New York
preliminarily enjoined management from cancelling or postponing a
scheduled meeting. In so doing, the Danaher court stated that
"[t]he law is clear that when a board of directors has improperly
postponed or manipulated the timing of the shareholders annual
meeting, courts have the authority to compel the board promptly
to hold such a meeting." Danaher, 1986 WL 7001, *13. (citing
Elkins v. Camden & Atlantic R.R., 36 N.J. Eq. 467 (N.J.S. Ch.
1883) and Holly Sugar Corp. v. Buchsbaum, supra). See also ER
Holdings, Inc. v. Norton Co., 735 F. Supp. 1094 (D. Mass. 1990)
(entering mandatory preliminary injunction requiring company to
hold its annual meeting as scheduled); Hubbard v. Hollywood Park,
C.A. No. 11779 (Del. Ch. Jan. 14, 1991) (preliminarily enjoining
advance notice bylaw) (Gordon Decl., Ex. F); Schnell v. Chris-
Craft Indus., 285 A.2d 437 (Del. 1971) (holding that board could
not advance meeting date to frustrate stockholder action); Lerman
v. Diagnostic Data, Inc., 421 A.2d 906 (Del. Ch. 1980)
(invalidating by-law amendments that authorized a change from
fixed annual meeting date to discretionary management-set date to
frustrate vote); Lutz v. Webster, 94 A. 834 (Pa. 1915) (affirming
a decree from a bill in equity requiring a Pennsylvania
corporation to hold a stockholders meeting).
Application of these cases to the facts here compels
the conclusion that the defendants should be enjoined from
postponing the scheduled vote.
4. The defendants' inequitable action does not become
permissible merely because it is legally possible.
Inequitable and unfair conduct by a board may be
actionable even if the board has complied strictly with statutory
and common law in taking such action. See Lutz v. Webster, 94 A.
834 (Pa. 1915); Steinberg v. American Bantam Car Co., 76 F. Supp.
426, 435-36 (W.D. Pa. 1948); Aprahamian, 531 A.2d at 1207 (citing
Steinberg); Schnell v. Chris-Craft Indus., 285 A.2d 437, 439
(Del. 1971) ("[I]nequitable action does not become permissible
simply because it is legally possible"); Condec Corp. v.
Lunkenheimer Co., 230 A.2d 769 (Del. Ch. 1967).
In Lutz, for example, the Pennsylvania Supreme Court
affirmed the issuance of a decree in equity requiring the
defendant corporation to hold a shareholders' meeting,
notwithstanding the provisions of a valid corporate by-law. In
so doing, the Lutz court noted that, even though the by-law
required four-fifths of the capital stock to be present at a
shareholders meeting for a quorum was a valid exercise of
corporate power under Pennsylvania's statutes, it must be used
for "a lawful purpose." The Court concluded that a director, who
was also a substantial stockholder, had improperly used this by-
law to prevent a quorum of shareholders and thereby "defeat an
election." Id. at 835. Here, although the defendants may not
have violated any Pennsylvania statute, their proposed actions
are inequitable and fundamentally unfair in the effect they have
on the shareholders of Conrail.
B. Postponement of the Vote Will Irreparably Harm the
Plaintiffs.
If the defendants are permitted to postpone the meeting
until they have the necessary votes to prevail, plaintiffs and
Conrail's non-CSX shareholders will be irreparably harmed. Here,
as in Aprahamian:
Plaintiffs have expended considerable sums of money on
this proxy contest. If the meeting is postponed,
arguably, the proxies solicited and returned in good
faith by the stockholders will become void and a
postponement may well defeat the efforts of plaintiffs
and the will of the majority of the stockholders.
Irreparable harm may be assumed in such a case.
Aprahamian, 531 A.2d at 1208.
As the Federal District Court for the Southern District
of New York recognized in Danaher:
It is well settled in law that corporate management
subjects shareholders to irreparable harm by denying
them the right to vote their shares and to exercise
their rightful control over the corporation. See
Treco, Inc. v. Land of Lincoln Savings and Loan, 577 F.
Supp. 1447 (N.D. Ill. 1983) ("plaintiffs would be
irreparably harmed if a preliminary injunction were
denied because plaintiffs would be unnecessarily
frustrated in their attempt to obtain representation on
... the board ... at the [next] ... annual meeting");
Beekman v. Rust Craft Greetings Cards, Inc., 454 F.
Supp. 789 (S.D.N.Y. 1978); Holly Sugar Corp. v.
Buchbaum, supra; EAC Industries Inc. v. Frantz Mfg.
Co., C.A. No. 8003 (Del. Ch. June 28, 1985), aff'd,
Fed.Sec.L.Rep. (CCH) 92,405 (Del. Sup. 1985)
("[shareholders'] continued inability to secure the
benefit of its written consents in the face of the
defendants' refusal to [recognize the consents] is
clear evidence of irreparable injury"). See also
Fletcher, supra SECTION 717, n.1 ("the right to vote is often
considered a shareholder's most fundamental right").
Danaher, slip op. at *14. The same reasoning applies here.
C. The Balance Of The Hardships Is All On Plaintiffs' Side
Of The Scale.
"If the will of the stockholders is thwarted. . . there
may be considerable hardship to the stockholders and their
corporation." Aprahamian, 531 A.2d at 1208; see also Danaher,
slip op. at *14. In sharp contrast, the defendants cannot claim
any offsetting hardship if the meeting goes forward on the date
they scheduled for it. The only hardship they can suffer is if
they lose the vote. That is not a cognizable harm as the
shareholders are entitled to exercise their franchise as they see
fit.
D. Public Policy Favors Issuance of An Injunction.
Finally, public policy demands that Conrail's
shareholders be permitted the free exercise of their franchise
rights to determine whether their corporation should opt out of
Subchapter E of Chapter 25 of the Pennsylvania Business
Corporation Law of 1988, as amended.
Subchapter E of Chapter 25, among other things, governs
"control transactions" (defined generally as a transaction in
which a person acquires at least 20% of the voting power of a
corporation) involving a "registered corporation" and provides
that the shareholders of such corporation are entitled to demand
that they be paid the fair value of their shares. Pursuant to
Subchapter E, the minimum value the shareholders can receive may
not be less than the highest price paid per share by the control
person within the 90-day period ending on and including the date
of the control transaction.
According to the Pennsylvania Corporation Law and
Practice treatise:
By forcing the controlling person or group to pay fair
value in cash to all shareholders who object to the
controlling person's or group's ownership in the
registered corporation, the 1988 BCL makes it
potentially more expensive for the acquiror seeking to
obtain control of a target corporation. Specifically,
the control transaction provisions of the 1988 BCL [in
Subchapter E] 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. & Wendy C. Shiba, Pennsylvania Corporation
Law and Practice SECTION 10.4(b) at 551 (1993 Supp.) (Prentice Hall Law
& Business).
Pursuant to the CSX Merger Agreement, Conrail has
proposed the Charter Amendment to facilitate exactly the kind of
transaction that Subchapter E was designed to prohibit. Through
a coerced vote, Conrail's stockholders will be forced to approve
the Charter Amendment in recognition of the fact that that is the
only way Conrail's directors, unless enjoined, will permit them
to vote.
Thus, permitting defendants essentially to
disenfranchise those shareholders who refuse to vote to opt out
of the statute designed to protect them against coercive, two-
tier front end loaded tender offers like the CSX Transaction
defeats the purpose and intent of the statute and contravenes the
public policy concern for "credible corporate democracy." See
Blasius, 564 A.2d at 660 n.2.
The plaintiffs' motion for a preliminary injunction
shall be granted.
CONCLUSION
For the reasons stated in this brief, the plaintiffs'
motion for a preliminary injunction should be granted.
Respectfully submitted,
_________________________________
Mary A. McLaughlin
(I.D. No. 24923)
George G. Gordon
(I.D. No. 63072)
DECHERT, PRICE & RHOADS
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
Attorneys for Plaintiffs
Of Counsel:
Steven J. Rothschild
Andrew J. Turezyn
Karen L. Valihura
R. Michael Lindsey
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM (DELAWARE)
One Rodney Square
P.O. Box 636
Wilmington, DE 19899
(302) 651-3000
DATED: December 13, 1996
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
- -- - - - - - - - - - - - - - - - - - - - - x
NORFOLK SOUTHERN CORPORATION, a :
Virginia corporation, ATLANTIC ACQUISI- :
TION CORPORATION, a Pennsylvania :
corporation, and KATHRYN B. McQUADE, :
:
Plaintiffs, :
: C.A. No. 96-CV-7167
-against- :
:
CONRAIL INC., a Pennsylvania corporation, :
DAVID M. LEVAN, H. FURLONG BALDWIN, :
DANIEL B. BURKE, ROGER S. HILLAS, :
CLAUDE S. BRINEGAR, KATHLEEN FOLEY :
FELDSTEIN, DAVID B. LEWIS, JOHN C. :
MAROUS, DAVID H. SWANSON, :
E. BRADLEY JONES, RAYMOND T. :
SCHULER and CSX CORPORATION, :
:
Defendants. :
- - - - - - - - - - - - - - - - - - - - - - -x
PRELIMINARY INJUNCTION ORDER
Plaintiffs having moved for a Preliminary
Injunction, and the Court having considered the
presentations of the parties,
IT IS HEREBY ORDERED that defendants are enjoined from
postponing the vote of Conrail's shareholders scheduled
for December 23, 1996.
SO ORDERED this
day of December, 1996.
United States District Judge
