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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 8
to
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
CONRAIL INC.
(Name of Subject Company)
CONRAIL INC.
(Name of Person(s) Filing Statement)
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)
N/A
(CUSIP Number of Class of Securities)
James D. McGeehan
Corporate Secretary
Conrail Inc.
2001 Market Street
Two Commerce Square
Philadelphia, Pennsylvania 19101
(215) 209-4000
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person(s) Filing Statement)
With a copy to:
Robert A. Kindler, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
(212) 474-1000
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<PAGE>
INTRODUCTION
Conrail Inc. ("Conrail") hereby amends and supplements its
Solicitation/Recommendation Statement on Schedule 14D-9, originally filed
on October 16, 1996, as amended on October 25, 1996, November 1, 1996, and
November 4, 1996, November 6, 1996, November 7, 1996, November 8, 1996 and
November 13, 1996 (as amended, the "Schedule 14D-9"), with respect to an
offer by Green Acquisition Corp., a wholly owned subsidiary of CSX
Corporation ("CSX") to purchase an aggregate of 17,860,124 of the
outstanding Shares. Capitalized terms not defined herein have the meanings
assigned thereto in the Schedule 14D-9.
Item 8. Additional Information to be Furnished.
Item 8 of the Schedule 14D-9 is hereby amended and supplemented as
follows:
On November 15, 1996, Norfolk filed its Second Amended
Complaint for Declaratory and Injunctive Relief in the United States
District Court of the Eastern District of Pennsylvania against
Conrail, CSX and the directors of Conrail. Norfolk's second amended
complaint amends its original complaint, filed as Exhibit (c)(8)
hereto (as amended by its first amended complaint, filed as Exhibit
(c)(9) hereto), principally by asserting additional allegations of
misrepresentations and omissions of material fact. Conrail believes
that the allegations set forth in Norfolk's second amended complaint
are entirely without merit. The Norfolk second amended complaint
specifically alleges the following misrepresentations and omissions of
material fact by Conrail and CSX (capitalized terms used in the
following quoted paragraphs not defined herein shall have the meanings
set forth in the Norfolk second amended complaint):
"95. 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.
<PAGE>
96. 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.
<PAGE>
97. 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. These misrepresentations
operate to conceal the fact that the Conrail Board
will lose its power to control the drastic effects of the
poison pill ten days following commencement of a
competing tender offer.
(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
<PAGE>
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.
98. 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.
99. 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", which will occur 10
business days from the date when a competing tender
offer for Conrail is commenced.
(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
<PAGE>
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
<PAGE>
the $300 million break-up 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
defendant directors' 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.
<PAGE>
(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.
(u) That, in deciding to pursue a transaction
with CSX, the Conrail Board relied on an internal
management analysis that was based on public
information as opposed to analysis by Conrail's
financial advisers.
100. 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;
(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
<PAGE>
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
<PAGE>
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.
(v) failed to disclose the basis for the
opinions of Conrail's investment bankers that the
CSX Transaction was "fair" to shareholders from a
financial perspective.
(vi) stated that, in rendering their fairness
opinions to the Conrail Board, Conrail's
financial advisers did not address the relative merits of
the CSX and Norfolk Southern transactions, while
failing to disclose that in fact Conrail's
financial advisers provided Conrail with advice
<PAGE>
concerning the relative merits of the CSX and
Norfolk Southern tender offers.
(vii) failed to disclose the substance of its
financial advisers' advice concerning the
relative merits of the CSX and Norfolk Southern
transactions.
(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 con-
tractual 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;
<PAGE>
(iv) failed to disclose the basis for and
analysis, if any, underlying the defendants
"discovery" of $180 million in new CSX/Conrail
merger synergies.
(v) failed to disclose the basis for the
opinions of Conrail's investment bankers that the
CSX Transaction was "fair" to shareholders from a
financial perspective.
(vi) stated that, in rendering their fairness
opinions to the Conrail Board, conrail's
financial advisers did not address the relative merits of
the CSX and Norfolk Southern transactions, while
failing to disclose that in fact Conrail's
financial advisers provided Conrail with advice
concerning the relative merits of the CSX and
Norfolk Southern tender offers.
(vii) failed to disclose the substance of its
financial advisers' advice concerning the
relative merits of the CSX and Norfolk Southern
transactions."
A copy of Norfolk's second amended complaint is attached hereto
as Exhibit (c)(12) and is incorporated herein by reference, and the
foregoing summary description is qualified in its entirety by reference to
such exhibit.
Item 9. Materials to be filed as Exhibits.
Item 9 of the Schedule 14D-9 is hereby amended and supplemented by
adding the following text thereto:
(c)(12) Second Amended Complaint in Norfolk Southern et. al. v.
Conrail Inc., et al., No. 96-CV-7167, filed on November 15,
1996 in the United States District Court for the Eastern
District of Pennsylvania.
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete
and correct.
CONRAIL INC.
By /s/ Timothy T. O'Toole
----------------------
Name: Timothy T. O'Toole
Title: Senior Vice President--Finance
Dated as of November 18, 1996
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
*(a)(1) Offer to Purchase dated October 16, 1996.........
*(a)(2) Letter of Transmittal............................
*(a)(3) Text of press release issued by Conrail,
dated October 15, 1996...........................
*(a)(4) Letter to shareholders of Conrail dated
October 16, 1996.................................
*(a)(5) Form of Summary Advertisement dated
October 16, 1996.................................
*(a)(6) Opinion of Lazard Freres & Co. L.L.C.............
*(a)(7) Opinion of Morgan Stanley & Co. Incorporated.....
*(a)(8) Text of press release issued by Norfolk,.........
dated October 23, 1996...........................
*(a)(9) Text of press release issued by Conrail,
dated October 23, 1996...........................
*(a)(10) Text of press release issued by Conrail,
dated October 24, 1996...........................
*(a)(11) Supplement to the Offer to Purchase dated
November 6, 1996.................................
*(a)(12) Text of press release issued by Conrail and
CSX dated November 6, 1996.......................
*(a)(13) Letter to shareholders dated November 6,
1996.............................................
*(a)(14) Opinion of Lazerd Freres & Co. LLC dated
November 5, 1996.................................
*(a)(15) Opinion of Morgan Stanley & Co.
Incorporated Dated November 5, 1996..............
*(a)(16) Text of press release issued by Conrail,
dated November 7, 1996...........................
*(a)(17) Text of press release issued by Conrail,
dated November 7, 1996...........................
*(a)(18) Text of press release issued by Conrail,
dated November 8, 1996...........................
*(a)(19) Text of press release issued by Conrail and
CSX, dated November 13, 1996.....................
(b) Not applicable...................................
----------------------
*Previously filed
<PAGE>
*(c)(1) Agreement and Plan of Merger dated as of
October 14, 1996.................................
*(c)(2) Conrail Stock Option Agreement, dated as of
October 14, 1996.................................
*(c)(3) CSX Stock Option Agreement dated as of
October 14, 1996.................................
*(c)(4) Form of Voting Trust Agreement...................
*(c)(5) Employment Agreement of Mr. LeVan dated as
of October 14, 1996..............................
*(c)(6) Change of Control Agreement of Mr. LeVan
dated as of October 14, 1996.....................
*(c)(7) Pages 4-5, and 9-14 of Conrail's Proxy
Statement dated April 3, 1996....................
*(c)(8) Complaint in Norfolk Southern et al. v.
Conrail Inc., et al., No. 96-CV-7167, filed
on October 23, 1996 in the United States
District Court for the Eastern District of
Pennsylvania.....................................
*(c)(9) First Amended Complaint in Norfolk Southern
et al. v. Conrail Inc., et al., No. 96-CV-
7167, filed on October 30, 1996 in the
United States District Court for the
Eastern District of Pennsylvania.................
*(c)(10) Resolution adopted by the Board of
Directors of Conrail on November 4, 1996.........
*(c)(11) First Amendment dated as of November 5,
1996 to Agreement and Plan of Merger.............
(c)(12) Second Amended Complaint in Norfolk
Southern et. al. v. Conrail Inc., et al.,
No. 96-CV-7167, filed on November 15, 1996 in
the United States District Court for the
Eastern District of Pennsylvania.................
- ----------------------
* Previously filed
EXHIBIT (c)(12)
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
SECOND AMENDED COMPLAINT FOR
DECLARATORY AND INJUNCTIVE RELIEF
Plaintiffs, by their undersigned attorneys, as and for their
Second 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:
<PAGE>
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 will seen interim injunctive relief
to maintain the status quo and ensure that Contrail shareholders will not
be coerced, misled and fraudulently manipulated by defendants' illegal
conduct
<PAGE>
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 a coercive front-end
loaded cash tender offer, 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 $93 per Conrail share,
still $17 per share less than the NS Proposal. In aggregate, the CSX
Transaction offers Conrail's shareholders $1.5 billion less than does the
NS Proposal. Integral to the inferior CSX Transaction are executive
succession and compensation guarantees for Conrail management and board
<PAGE>
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
<PAGE>
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 inapplicable
to any acquisition transaction other than the CSX Transaction on
November 7, unless CSX agreed to let them postpone that date.
Thus, the Poison Pill Lock-In threatened to lock-up Conrail, even
from friendly transactions, until the year 2005, when the poison
pill rights expire. Put simply, the CSX Merger Agreement
purported to require Conrail to swallow its own poison pill. Only
after plaintiffs applied for a temporary restraining order did
the Conrail board request CSX's permission to postpone the
Distribution Date. Although it had no obligation to do so, CSX
permitted the postponement. Adoption of this provision placed
Conrail in serious jeopardy and at the mercy of CSX, which had no
obligation to act in Conrail's best interests. Conrail remains at
CSX's mercy due to the Poison Pill Lock-In. The Poison Pill
Lock-in is ultra vires under Pennsylvania law and constitutes a
complete abdication and breach of the Conrail directors' duties
of loyalty and care.
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
<PAGE>
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. 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 consti-
<PAGE>
tutes an impermissible interference in the stockholder franchise
and a breach of the Conrail directors' duty of loyalty.
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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 con-
<PAGE>
trol 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. The current crisis is the impending expiration of CSX's
highly coercive front-end loaded tender offer for up to 19.9% of Conrail's
shares. If CSX and Conrail succeed through this classic hostile takeover
tactic in coercing Conrail's shareholders to cede nearly 20% of Conrail's
voting power to CSX, defendants will have gained an overwhelming advantage
in the vote of Conrail's shareholders on the Charter Amendment, now slated
for mid-December. If the Charter Amendment is approved, defendants will
pursue yet another front-end loaded tender offer which will deliver
effective control over Conrail to CSX and foreclose all other bids. Thus,
consummation of the first-step tender offer on November 20 would create a
domino effect leading to the forced sale of control of Conrail to the low
bidder.
Defendants Were Well Aware That
A Superior Competing Acquisition
Proposal By NS was Inevitable
19. 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 numer
<PAGE>
ous 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.
20. 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.
21. In March of 1994, Mr. Hagen approached Mr. Goode to suggest
that under the current regulatory envi-
<PAGE>
ronment, 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.
22. 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 press-
<PAGE>
ing 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.
23. 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
24. During the period following September of 1994, Mr. Goode from
time to time had conversations with Mr. LeVan. During virtually all of
these conversations,
<PAGE>
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.
25. 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.
26. Following September 24, Mr. LeVan did not contact Mr. Goode.
Finally, on Friday, October 4, 1996,
<PAGE>
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
27. 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
28. 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
<PAGE>
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
29. 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
<PAGE>
bids . . . and appeared to complete the accord at breakneck speed."
30. 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
31. 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 por-
<PAGE>
tions 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
32. 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
33. 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 actual-
<PAGE>
ly 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 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 " source close to CSX"
characterized the NS Proposal as "a phantom offer."
34. 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
35. 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
<PAGE>
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.
36. 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.
37. 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.
38. The CSX press release had its intended effect. On the morning
of November 4, Conrail's stock
<PAGE>
price dived from $95 1/4 to as low as $87 per share on heavy volume.
39. 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.
40. 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.
41. 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
Antho-
<PAGE>
ny 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.
42. 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.
43. 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
<PAGE>
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.
44. 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.
45. Just hours prior to the scheduled hearing, the Conrail
directors met for the purpose of extricating Conrail from the grave
jeopardy into which their reckless conduct had placed it. The Conrail
directors adopted a resolution postponing the "Distribution Date" of the
Conrail Poison Pill until the tenth business day following the date on
which any person acquired 10% or more of Conrail's stock. Although it had
no obligation to do so, CSX assented to this postponement. As a result, the
Court denied NS's application for a temporary restraining order as moot.
<PAGE>
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
46. 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.
47. 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 an indefinite
date that defendants have stated will likely fall in December 1996.
Further, the expiration
<PAGE>
date of the CSX Offer was extended from midnight on November 15 to
midnight of November 20, 1996.
48. Accordingly, defendants plan 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 will
proceed with a second 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.
49. Both the front-end loaded structure of the CSX Offer and the
perceived risk that the NS Proposal will not be consummated due to the
draconian defensive measures adopted by the defendants exerts tremendous
coercive pressure upon Conrail shareholders to tender their shares to CSX.
Defendants intend to use this coercion to force Conrail shareholders to
deliver a nearly 20% voting block of Conrail shares to CSX. CSX will then
use this block as an overwhelming advantage in the proxy contest regarding
the Charter Amendment.
50. A November 10, 1996 Philadelphia Inquirer article summed up
the coercive situation created by defendants succinctly:
<PAGE>
[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.
51. In their Schedule 14D-9 disclosures, defendants admit 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.
52. 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 Offer and the NS
Offer.
<PAGE>
53. 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.
54. 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
<PAGE>
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
55. 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 represents, 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.
<PAGE>
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
56. 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.
57. 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.
The CSX Transaction
58. 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
<PAGE>
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
59. 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.
60. Because of certain unusual provisions to the Conrail Poison
Pill Plan -- which provisions, as noted below, not only were to 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
<PAGE>
and irreparable harm to Conrail and all of its constituencies.
61. 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 dilative
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, than it appears that Conrail would not have been
capable of being acquired until at least 2005. In es-
<PAGE>
sence, as a result of the Poison Pill Lock-In, Conrail was about
to swallow its own poison pill.
62. Poison Pills -- typically referred to as "shareholdersrights
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.
63. 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 cer-
<PAGE>
tificates were issued, the rights could trade separately from the
associated shares of stock.
64. 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.
<PAGE>
The Conrail Poison Pill Plan contains both a "flip-in" provision
and a "flip-over" provision.
65. 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
dilative effects of the plan.
66. 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 terminate 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 Novem-
<PAGE>
ber 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.
67. 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)
<PAGE>
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.
68. 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.
69. 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
<PAGE>
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.
70. 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
71. Setting aside the Poison Pill Lock-In, the CSX
Merger Agreement also contains an unprecedented
<PAGE>
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 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. Thus, 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.
72. 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
<PAGE>
the agreement (the "270-Day Lock-Out") purports to prohibit the Conrail
Board from withdrawing its recommendations that Conrail shareholders tender
their shares in the CSX Offer and approve the CSX Merger 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.
73. 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 been fit to disable itself contractually from doing so.
74. 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 recog-
<PAGE>
nition that their fiduciary duties could require them to act during
this critical time.
75. 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 the other offers
and adding to the coercive effects of the CSX Transaction.
76. 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
77. The CSX Transaction is structured to include (i) a first-step
cash tender offer for up to 19.9% of Conrail's stock, (ii) an amendment to
Conrail's charter to opt out of coverage under Subchapter 25E of
Pennsylvania's Business Corporation Law (the "Charter Amendment"), which
requires any person acquiring control of over 20% or more of the
corporation's voting power to acquire all other shares of the corporation
for a "fair price," as defined in the statute, in cash, (iii) follow-
<PAGE>
ing such amendment, an acquisition of additional share 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.
78. 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 materials filed with the Securities and
Exchange Commission, Conrail stated that if CSX acquired 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 the 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."
<PAGE>
79. 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
80. Conrail's Preliminary Proxy Materials for the November 14,
1996 Special Meeting set forth the resolution to be voted upon by Conrail's
shareholders as follows:
An amendment (the "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; and further, that the Board of Directors of Conrail, in
its discretion, shall be authorized to direct certain executive
officers of Conrail to file or not to file the Articles of Amendment
to Conrail's Articles of Incorporation reflecting such Amendment or to
terminate the Articles of Amendment prior to their effective date, if
the Board determines such action to be in the best interests of
Conrail.
<PAGE>
81. Further, the preliminary proxy materials state that
Pursuant to the Merger Agreement and in order to facilitate the
transactions contemplated thereby, if the [Charter Amendment] is
approved, Conrail would be required to file the Amendment with the
Pennsylvania Department of State so as to permit the acquisition by
CSX of in excess of 20% of the shares, such filing to be made and
effective immediately prior to such acquisition. If CSX is not in a
position to make such acquisition (because, for example, shares have
not been tendered to CSX, Conrail is not required to make such filing,
(although approval of the [Charter Amendment] will authorize Conrail
to do so) and Conrail does not currently intend to make such filing
unless it is required under the Merger Agreement to permit CSX to
acquire in excess of 20% of the Shares.
The $300 Million Breakup Fee
82. 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.
83. This breakup fee is disproportionately 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
<PAGE>
Conrail and its constituencies than would a transaction with NS.
The Lock-Up Stock Option
84. 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.
85. 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
<PAGE>
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.
86. 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.
87. 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 at-
tributable to the Stock Option would have been
<PAGE>
$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 imposed
increasingly severe dilution penalties the higher the competing bid!
88. 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. Moreover, because these provisions were
not necessary to induce an offer that is in Conrail's best
interests, but rather were adopted to lock up a deal providing
Conrail's management with personal benefits while selling Conrail
to the low bidder, their adoption constituted a plain breach of
the Director Defendants' fiduciary duty of loyalty.
Selective Discriminatory
Treatment of Competing Bids
89. Finally, the Conrail board has breached its fiduciary duties
by selectively (i) rendering
<PAGE>
Conrail's Poison Pill Plan inapplicable to the 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 Amend- ment in favor of CSX
only.
90. 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.
91. 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
<PAGE>
defensive action to favor corporate executives' personal interests over
those of the corporation, its shareholders, and other legitimate
constituencies.
LeVan's Deal
92. 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"),
<PAGE>
Mr. LeVan will additionally serve as Chairman of the Board of the
combined CSX/Conrail Company.
93. 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.
<PAGE>
94. 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.
Defendants'Campaign Of Misinformation
95. 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.
96. Conrail's Preliminary Proxy Statement contains the
following misrepresentations of fact:
<PAGE>
(a) Conrail states that "certain provisions of Pennsylvania
law effective 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
<PAGE>
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.
97. 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
<PAGE>
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
<PAGE>
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.
98. 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.
99. 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,
<PAGE>
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
<PAGE>
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
or 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.
<PAGE>
(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
<PAGE>
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 Contrail'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.
<PAGE>
(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
<PAGE>
in September 1995 and publicly disclosed at that time,
is illegal and ultra vires under Pennsylvania law and therefore is
void and unenforceable.
(u) That, in deciding to pursue a transaction with CSX, the
Conrail Board relied on an internal management analysis that was based
on public information as opposed to analysis by Conrail's financial
advisers.
100. 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
<PAGE>
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
<PAGE>
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 con-
<PAGE>
tractual 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;
<PAGE>
(iv) failed to disclose the basis for and analysis
underlying the defendants "discovery" of $180 million in new
CSX/Conrail merger synergies.
(v) failed to disclose the basis for the opinions of
Conrail's investment bankers that the CSX Transaction was "fair" to
shareholders from a financial perspective.
(vi) stated that, in rendering their fairness opinions to
the Conrail Board, Conrail's financial advisers did not address the
relative merits of the CSX and Norfolk Southern transactions, while
failing to disclose that in fact Conrail's financial advisers provided
Conrail with advice concerning the relative merits of the CSX and
Norfolk Southern tender offers.
(vii) failed to disclose the substance of its financial
advisers' advice concerning the relative merits of the CSX and Norfolk
Southern transactions.
(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:
<PAGE>
(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
<PAGE>
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.
(v) failed to disclose the basis for the opinions of
Conrail's investment bankers that the CSX Transaction was "fair" to
shareholders from a financial perspective.
(vi) stated that, in rendering their fairness opinions
to the Conrail Board, Conrail's financial advisers did not address the
relative merits of the CSX and Norfolk Southern transactions, while
failing to disclose that in fact Conrail's financial advisers provided
Conrail with advice concerning the relative merits of the CSX and
Norfolk Southern tender offers.
<PAGE>
(vii) failed to disclose the substance of its financial
advisers' advice concerning the relative merits of the CSX and Norfolk
Southern transactions.
101. 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
<PAGE>
of Conrail to CSX in the CSX Offer, in the belief that the NS Proposal
is not an available alternative.
Conrail's Directors Attempt to Override
Fundamental Principles of Corporate Democracy
By Imposing a Continuing Directors
Requirement in Conrail's Poison Pill
102. As noted above, Contrail's directors have long known that it
was an attractive business combination candidate to other railroad
companies, including NS.
103. 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
<PAGE>
the Board's power to redeem the rights issued pursuant to the Rights
Plan (the "Continuing Director Requirement").
104. 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.
105. 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.
106. 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
<PAGE>
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.
107. 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.
108. 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 director the management of the business and
affairs of Conrail is broadly vested in its duly elected board of
directors. Insofar as the Continuing
<PAGE>
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.
109. 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.
<PAGE>
110. 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
111. As noted above, plaintiff NS intends to facilitate the NS
Proposal, if necessary, by replacing the Conrail board at Conrail's next
annual meeting.
<PAGE>
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).
112. 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.
113. 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.
114. 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.
115. Under the plain language of Article 11, the entire Conrail
Board, or any one or more of Conrail's
<PAGE>
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
116. 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 --
<PAGE>
despite the benefits it would provide to Conrail's stockholders and other
constituencies.
117. 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
118. 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), 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.
<PAGE>
Derivative Allegations
119. 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.
120. 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
discrimi-
<PAGE>
natorily 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.
<PAGE>
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 Right Plan in any
way. Second, given their dishonest and fraudulent entrenchment
motivation, the Director Defendant would certainly not
<PAGE>
commence legal proceedings to invalidate the Continuing Director
Requirement.
121. 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 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.
122. This action is not a collusive one to confer jurisdiction on
a Court of the United States that it would not otherwise have.
<PAGE>
COUNT ONE
(Breach of Fiduciary Duty with
Respect to the Charter Amendment)
123. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
124. The Conrail directors were and are obligated by their
fiduciary duties of due care and loyalty, to act in the best interests of
the corporation.
125. In conjunction with the proposed merger, the Conrail board
of directors has approved, and recommended that the shareholders approve,
an amendment to Conrail's Charter. The amendment is required to allow a
third party to acquire more than 20% of Conrail's stock.
126. The Conrail directors have publicly stated their intention
to file the amendment only if the requisite number of shares are tendered
to CSX.
127. By adopting the illegal Charter Amendment and then
discriminately applying to benefit themselves, the Conrail directors have
breached their fiduciary duties of care and loyalty.
128. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT TWO
(Breach of Fiduciary Duty With
Respect to the Poison Pill)
129. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
130. 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.
131. 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.
132. Additionally, the Conrail Board has committed itself to not
pursue any competing offer for the Company.
133. By selectively and discriminately determining to exempt CSX,
and only CSX, from the Poison Pill provisions, to the determent to
Conrail's shareholders, the Conrail directors have breached their fiduciary
duties of care and loyalty.
134. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT THREE
(Breach of Fiduciary Duty with
Respect to the Pennsylvania
Business Combinations Statute)
135. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
136. 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.
137. 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.
138. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT FOUR
(Declaratory Judgment Against All
Defendants that the Poison Pill
Lock-In is Void Under Pennsylvania Law)
139. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
140. 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.
141. 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.
142. 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.
143. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT FIVE
(Against the Defendant Directors
for Breach of Fiduciary Duty with
Respect to the Poison Pill Lock-In)
144. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
145. 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.
146. 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.
147. Absent prompt injunctive relief, plaintiffs, as well as
Conrail and all of its legitimate constituencies, face imminent irreparable
harm.
148. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT SIX
(Declaratory Judgment Against All
Defendants That the 270-Day Lock-Out
is Void Under Pennsylvania Law)
149. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully net forth in this paragraph.
150. 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.
151. 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.
152. Under Pennsylvania law, agreements restricting the
managerial discretion of the board of
<PAGE>
directors are permissible only in statutory close corporations. Conrail is
not a statutory close corporation.
153. 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.
154. 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.
155. 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)
156. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
157. 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
<PAGE>
interest of Conrail in connection with proposed acquisitions of Conrail.
158. 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.
159. Plaintiffs have no adequate remedy at law.
COUNT EIGHT
(Breach of Fiduciary Duty with
Respect-to the Lock-Up Provisions)
160. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
161. 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.
162. 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.
163. 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.
164. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT NINE
(Declaratory Relief Against
Conrail and Director Defendants That
The Continuing Director Requirement
Is Void Under Pennsylvania Law)
165. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
166. 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.
167. Under Pennsylvania law, agreements restricting the
managerial discretion of directors are permissible only in statutory close
corporations.
168. 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.
169. 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
<PAGE>
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.
170. Plaintiffs seek a declaration that the Continuing Director
Requirement is contrary to Pennsylvania statute and, therefore, null and
void.
171. 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)
172. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
173. 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 theme By-Laws directed or required to
be exercised and done by the shareholders.
174. Pursuant to Section 1505 of the Pennsylvania Business
Corporation Law, the By-Laws of a Pennsylvania corporation operate as
regulations among the share
<PAGE>
holders 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.
175. 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.
176. 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.
177. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT ELEVEN
(Declaratory Relief Against Conrail
and The Director efendants That Adoption
of the Continuing Director Requirement
Constituted A Breach of the Duty of Loyalty)
178. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
179. 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.
180. 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
<PAGE>
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.
181. 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.
182. Plaintiffs have no adequate remedy at law.
COUNT TWELVE
(Against Conrail And The Director
Defendants For Actionable Coercion)
183. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
184. The Director Defendants owe fiduciary duties of care and
loyalty to Conrail. Furthermore, Conrail and the Director Defendants,
insofar an 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
<PAGE>
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.
185. Conrail and its directors are seeking the approval by
Conrail's shareholders of the Charter Amendment and are recommending such
approval.
186. Conrail and its directors are seeking the tender by
Conrail's shareholders of their shares into the CSX Offer and are
recommending such tender.
187. 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.
188. The purpose for which defendants seek to create this
impression is to coerce Conrail shareholders
<PAGE>
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.
189. 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.
190. 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.
191. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT THIRTEEN
(Against CSX For Aiding And Abetting)
192. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
193. 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 and Twelve of this complaint.
194. CSX's knowing and active participation in such conduct has
harmed plaintiffs and threatens irreparable harm to plaintiffs if not
enjoined.
195. 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)
196. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
197. 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
<PAGE>
proxies in contravention of any rule promulgated by the SEC. 15 U.S.C. ss.
78n(a).
198. 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.
199. Conrail's Preliminary Proxy Statement contains the
misrepresentations detailed in paragraph 96 above. It also omits to
disclose the material facts detailed in paragraph 99 above.
200. 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.
201. Unless defendants are required by this Court to
make corrective disclosures, Conrail's stockholders
<PAGE>
will be deprived of their federal right to exercise meaningfully their
voting franchise.
202. 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.
203. 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)
204. Plaintiffs repeat and reallege each of the
foregoing allegations as if fully set forth in this paragraph.
205. 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 781 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 prohibited, sent or
<PAGE>
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).
206. On October 16, 1996, defendant CSX filed with the SEC its
Schedule 14D-1 pursuant to Section 14(d).
207. CSX's Schedule 14D-1 contains each of the false and
misleading material misrepresentations of fact detailed in paragraph 97
above. Furthermore, CSX's Schedule 14D-1 omits disclosure of the material
facts detailed in paragraph 99 above. Additionally, CSX's Amendment No. 4
to its Schedule 14D-1 contains the misstatements and/or omissions alleged
in paragraphs 100(a) and (b) 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.
208. 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.
<PAGE>
209. 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)
210. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
211. 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."
212. On October 16, 1996, Conrail (i) published its board of
directors' recommendation that Conrail
<PAGE>
shareholders tender their shares in the CSX Offer and (ii) filed with the
SEC its Schedule 14D-9.
213. Conrail's Schedule 14D-9 contains each of the false and
misleading material misrepresentations detailed in paragraph 98 above.
Further, Conrail's Schedule 14D-9 omits disclosure of the material facts
detailed in paragraph 99 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 100(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.
214. 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.
215. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT SEVENTEEN
(Against Conrail and CSX for Violation
of Section 14(e) of the Exchange Act
and Rules Promulgated Thereunder)
216. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
217. 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).
218. 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.
219. The Conrail Schedule 14D-9 and Proxy Statement constitute
communications made under circumstances reasonably calculated to result in
the procurement
<PAGE>
of tenders from Conrail shareholders in favor of the CSX Offer.
220. The CSX Schedule 14D-1 contains the false and misleading
material misrepresentations detailed in paragraph 97 above. The CSX
Schedule 14D-1 omits disclosure of the material facts detailed in paragraph
99 above. Additionally, Amendment No. 4 to such Schedule contains the
misstatements and/or omissions alleged in paragraphs 100(a) and (b) above.
221. The Conrail Schedule 14D-9 contains the false and misleading
material misrepresentations detailed in paragraph 98 above. The Conrail
Schedule 14D-9 omits disclosure of the material facts detailed in paragraph
99 above. Additionally, Amendment No. 4 to such Schedule contains the
misstatements and/or omissions alleged in paragraphs 100(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 100(a) and (c) above.
222. The Conrail Proxy Statement contains the false and
misleading material misrepresentations detailed in paragraph 96 above. The
Conrail Proxy Statement omits disclosure of the material facts detailed in
paragraph 99 above.
<PAGE>
223. 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.
224. 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.
225. 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.
226. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT EIGHTEEN
(Against Defendants Conrail and CSX
For Civil Conspiracy To Violate
Section 14 Of The Exchange Act
And Rules Promulgated Thereunder)
227. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
228. 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.
229. Plaintiffs have no adequate remedy at law.
COUNT NINETEEN
(Against Conrail for
Estoppel/Detrimental Reliance)
230. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
231. By his actions, silence and statements during the period
from September 1994 to October 15,
<PAGE>
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.
232. Prior to October 16, 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.
233. 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.
234. Mr. LeVan and Conrail knew or should have known that NS
would rely upon their actions, silence, statements and representations to
its detriment in
<PAGE>
refraining from making a proposal to Conrail's Board or initiating a tender
offer of its own for Conrail shares.
235. NS did in fact rely upon LeVan's and Conrail's actions,
silence, statements and representation to its detriment in refraining from
making a proposal to Conrail's Board or initiating a tender offer of its
own for Conrail shared.
236. 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.
237. 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.
238. Plaintiffs have no adequate remedy at law.
<PAGE>
COUNT TWENTY
(Unlawful And Ultra Vires Amendment
of Conrail's Articles
of Incorporation)
239. Plaintiffs repeat and reallege each of the foregoing
allegations as if fully set forth in this paragraph.
240. The Conrail Board of Directors is attempting to freeze out
any competing tender offers and lock up the CSX deal, to the detriment of
shareholders, by improperly maneuvering to "opt-out" of the "anti-takeover"
provisions of the Pennsylvania Business Corporation Law in a discriminatory
fashion. This procedure distorts and subverts the provisions of the
Pennsylvania statute.
241. At the special meeting of Conrail shareholders, such
shareholders will be asked to approve the following amendment to Conrail's
Articles of Incorporation, which has already been approved by the Conrail
Board of Directors: "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."
242. The Director Defendants are also asking for authorization to
exercise discretion in deciding whether or not to file the Charter
Amendment. According to the proposed proxy materials, the defendant directors
<PAGE>
only intend to file the Charter Amendment if CSX is in a position to
purchase more than 20% of Conrail's shares. Consequently, in effect, the
Charter Amendment becomes a "deal specific" opt-out.
243. The PBCL does not allow for such a discriminatory
application of an opt-out provision. Section 2541(a) of the PBCL provides
that Subchapter 25E will not apply to corporations that have amended their
articles of incorporation to state that the Subchapter does not apply.
Section 1914 of the PECL provides that an articles amendment "shall be
adopted" if it received the affirmative vote of a majority of shareholders
entitled to vote on the amendment. While section 1914 also provides that
the amendment need not be deemed to be adopted unless it has been approved
by the directors, that approval has already been given.
244. Conrail's Board is trying to distort and subvert the
provisions of the Pennsylvania statute by keeping a shareholder-approved
opt-out from taking effect unless the CSX deal is moving forward. The PBCL
is quite clear -- it allows corporations to exercise general, not
selective, opt-outs. Therefore, any action taken at the November 14, 1996
shareholder meeting would be a nullity.
<PAGE>
245. If the November 14, 1996 shareholder meeting is allowed to
take place and the amendment is passed, NS will suffer irreparable harm.
246. Plaintiffs have no adequate remedy at law.
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)
247. Plaintiffs repeat and reallege each of the foregoing
allegations as it fully set forth in this paragraph.
248. 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.
249. 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.
250. 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
<PAGE>
of Conrail's directors, without cause by a majority vote of the Conrail
stockholders entitled to cast a vote at an annual election.
251. 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
<PAGE>
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; and
(k) the coercive nature of the CSX Transaction
constitutes fundamental unfairness to Conrail's shareholders.
B. Preliminarily and permanently enjoining the defendants, their
directors, officers, partners, employees, agents, subsidiaries and
affiliates, and all
<PAGE>
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;
<PAGE>
(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; and
(j) failing to take any action required by the
fiduciary duties of the Director Defendants.
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.
<PAGE>
E. Granting plaintiffs such other and further relief as the
court deems just and proper.
Respectfully submitted:
/s/ Mary A. McLaughlin
----------------------
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: November 25, 1996
<PAGE>
VERIFICATION
------------
Pursuant to Federal Rule of Civil Procedure 23.1 and 28
U.S.C. ss. 1746, I, Henry C. Wolf, hereby verify under penalty of
perjury that the allegations and averments in the foregoing
Second Amended Complaint for Declaratory and Injunctive Relief
are true and correct.
/s/ Henry C. Wolf
-----------------
Henry C. Wolf
Executive Vice President
Norfolk Southern Corporation
Executed on November 15, 1996.
<PAGE>
CERTIFICATE OF SERVICE
----------------------
I hereby certify that I caused this day Plaintiffs' Motion for
Leave to Amend and Supplement their Complaint and accompanying memorandum
of law to be served on the following attorneys in the manner specified
below: Theodore N. Mirvis, Esq. Wachtell, Lipton, Rosen & Katz 51 West 52nd
Street New York, New York 10019-6150 By Fedex
David H. Pittinsky, Esq.
Ballard Spahr Andrews & Ingersoll
1735 Market Street
51st Floor
Philadelphia, PA 19103-7599
By Fedex
Thomas L. VanKirk, Esq.
Stanley Yorsz, Esq.
Buchanan Ingersoll
Professional Corporation
One Oxford Centre
301 Grant Street, 20th Floor
Pittsburgh, PA 15219
By Fedex
John Beerbower, Esq.
Gerald Ford, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
By Fedex
Stuart H. Savett, Esq.
Savett Frutkin Podell & Ryan, PC
320 Walnut Street, Suite 508
Philadelphia, PA 19106
By Fedex
Steven G. Schulman, Esq.
Milberg Weiss Bershad Hynes & Lerach LLP
One Pennsylvania Plaza
New York, New York 10119
By Fedex
<PAGE>
Jules, Brody, Esq.
Stull, Stull & Brody
6 East 45th Street
New York, New York 10017
By Fedex
Jill Abrams, Esq.
Abbey & Ellis
212 East 39th Street
New York, New York 10016
By Fedex
Dated: November 15, 1996 /s/ Joseph A. O'Connor
----------------------
Joseph A. O'Connor, Esq.
