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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
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CONRAIL INC.
(NAME OF SUBJECT COMPANY)
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CONRAIL INC.
(NAME OF PERSON(S) FILING STATEMENT)
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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)
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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)
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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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INTRODUCTION
This Solicitation/Recommendation Statement on Schedule 14D-9 (this
"Schedule 14D-9") relates to an offer by Atlantic Acquisition Corporation, a
Pennsylvania corporation ("Atlantic") and a wholly owned subsidiary of Norfolk
Southern Corporation, a Virginia corporation ("Norfolk"), to purchase all the
outstanding Shares (as defined below) of Conrail Inc., a Pennsylvania
corporation ("Conrail").
ITEM 1. SECURITY AND SUBJECT COMPANY.
The name and address of the principal executive offices of Conrail is
Conrail Inc., 2001 Market Street, Two Commerce Square, Philadelphia,
Pennsylvania 19101. This Schedule 14D-9 relates to Conrail's Common Stock, par
value $1.00 per share (including the associated Common Stock Purchase Rights)
(the "Common Stock"), and Conrail's Series A ESOP Convertible Junior Preferred
Stock, without par value (including the associated Common Stock Purchase Rights)
(the "Preferred Stock", and together with the Common Stock, the "Shares").
ITEM 2. TENDER OFFER OF THE BIDDER.
This Schedule 14D-9 relates to the tender offer made by Atlantic, disclosed
in a Tender Offer Statement on Schedule 14D-1 (the "Norfolk Schedule 14D-1")
dated February 12, 1997, to purchase all the outstanding Shares at $115 per
Share (the "Norfolk Offer Price"), net to the seller in cash and without
interest (the "Norfolk Offer"), upon the terms and subject to the conditions set
forth in the Offer to Purchase dated February 12, 1997 (the "Norfolk Offer to
Purchase"), and the related Letter of Transmittal. The Norfolk Schedule 14D-1
states that the principal executive offices of Atlantic and Norfolk are located
at Three Commercial Place, Norfolk, Virginia 23510.
According to the Norfolk Offer to Purchase, the purpose of the Norfolk
Offer is to acquire the entire equity interest in Conrail, and Norfolk is
seeking to negotiate with Conrail a merger agreement pursuant to which each
outstanding Share (other than Shares held by Conrail or a subsidiary of Conrail
and Shares held by Norfolk, Atlantic or any other direct or indirect subsidiary
of Norfolk) would, as soon as practicable after the consummation of the Norfolk
Offer, be converted into the right to receive an amount in cash equal to the
Norfolk Offer Price (the "Proposed Norfolk Merger" and, together with the
Norfolk Offer, the "Proposed Norfolk Transactions").
According to the Norfolk Offer to Purchase, the Norfolk Offer is
conditioned upon, among other things:
(1) termination of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of October 14, 1996, as amended, among Conrail, CSX
Corporation ("CSX") and a wholly owned subsidiary of CSX;
(2) the redemption by the Board of Directors of Conrail (the "Conrail
Board"), or the invalidity or inapplicability to the Proposed Norfolk
Transactions, of the Common Stock Purchase Rights (the "Rights") issued
pursuant to the Rights Agreement dated as of July 19, 1989, as amended (the
"Rights Agreement"), between Conrail and First Chicago Trust Company of New
York;
(3) the approval by the Conrail Board of the Proposed Norfolk
Transactions or the invalidity or inapplicability to the Proposed Norfolk
Transactions of Subchapter F of Chapter 25 of the Pennsylvania Business
Corporation Law of 1988, as amended (the "PBCL"); and
(4) there being validly tendered and not withdrawn prior to the
expiration of the Norfolk Offer a number of Shares that, together with the
8,200,100 Shares (or approximately 9.9% of the outstanding Shares) acquired
by Norfolk pursuant to its first tender offer which expired on February 4,
1997 (the "Norfolk First Offer"), would be equal to at least a majority of
the outstanding Shares on a fully diluted basis (such majority estimated in
the Norfolk Offer to Purchase to be 45,254,079 Shares, so that 37,053,979
Shares would be required to be tendered pursuant to the Norfolk Offer to
satisfy this condition, assuming that the Option (as defined below) is not
exercised).
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The Norfolk Offer also provides that Norfolk and Atlantic may terminate the
Norfolk Offer if any of the following events shall have occurred at any time on
or after February 12, 1997:
(a) there shall have been threatened, instituted or pending any
action, proceeding, application or counterclaim before any court or
governmental regulatory or administrative agency, authority, tribunal or
commission, domestic or foreign, by any government or governmental
authority or agency or commission, domestic or foreign, or by any other
person, domestic or foreign (whether brought by Conrail, an affiliate of
Conrail or any other person), which (i) challenges or seeks to challenge
the acquisition by Norfolk or Atlantic or any affiliate of either of them
of the Shares, restrains, delays or prohibits or seeks to restrain, delay
or prohibit the making of the Norfolk Offer, consummation of the
transactions contemplated by the Norfolk Offer or any other subsequent
business combination, restrains or prohibits or seeks to restrain or
prohibit the performance of any of the contracts or other arrangements
entered into by Atlantic or any of its affiliates in connection with the
acquisition of Conrail or obtains or seeks to obtain any material damages
or otherwise directly or indirectly relating to the transactions
contemplated by the Norfolk Offer, the Proposed Norfolk Merger or any other
subsequent business combination, (ii) prohibits or limits or seeks to
prohibit or limit Norfolk's or Atlantic's ownership or operation of all or
any portion of their or Conrail's business or assets (including without
limitation the business or assets of their respective affiliates and
subsidiaries) or compels or seeks to compel Norfolk or Atlantic to dispose
of or hold separate all or any portion of their own or Conrail's business
or assets (including without limitation the business or assets of their
respective affiliates and subsidiaries) or imposes or seeks to impose any
limitation on the ability of Norfolk, Atlantic or any affiliate of either
of them to conduct its own business or own such assets as a result of the
transactions contemplated by the Norfolk Offer or any other subsequent
business combination, (iii) makes or seeks to make the acceptance for
payment, purchase of, or payment for, some of all of the Shares pursuant to
the Norfolk Offer or the Proposed Norfolk Merger illegal or results in a
delay in, or restricts, the ability of Norfolk or Atlantic, or renders
Norfolk or Atlantic unable to accept for payment, purchase or pay for some
or all of the Shares or to consummate the Proposed Norfolk Merger, (iv)
imposes or seeks to impose limitations on the ability of Norfolk or
Atlantic or any affiliate of either of them effectively to acquire or hold
or to exercise full rights of ownership of the Shares, including, without
limitation, the right to vote the Shares purchased by them on an equal
basis with all other Shares on all matters properly presented to the
shareholders of Conrail, (v) in the sole judgment of Norfolk or Atlantic,
might adversely affect Conrail or any of its subsidiaries or affiliates or
Norfolk or Atlantic, or any of their respective affiliates or subsidiaries,
(vi) in the sole judgement of Norfolk or Atlantic, might result in a
diminution in the value of the Shares or the benefits expected to be
derived by Norfolk or Atlantic as a result of the transactions contemplated
by the Norfolk Offer, (vii) in the sole judgment of Norfolk or Atlantic,
imposes or seeks to impose any material condition to the Norfolk Offer
unacceptable to Norfolk or Atlantic or (viii) otherwise directly or
indirectly relates to the Norfolk Offer, the Proposed Norfolk Merger or any
other business combination with Conrail;
(b) there shall be any action taken, or any statute, rule, regulation
or order or injunction shall be sought, proposed, enacted, promulgated,
entered, enforced or deemed or become applicable to the Norfolk Offer, the
Proposed Norfolk Merger or any other subsequent business combination
between Atlantic or any affiliate of Atlantic and Conrail or any affiliate
of Conrail or any other action shall have been taken, proposed or
threatened, by any government, governmental authority or other regulatory
or administrative agency or commission or court, domestic, foreign or
supranational, that, in the sole judgment of Norfolk or Atlantic, might,
directly or indirectly, result in any of the consequences referred to in
clauses (i) through (vii) of paragraph (a) above;
(c) any change (or any condition, event or development involving a
prospective change) shall have occurred or been threatened in the business,
properties, assets, liabilities, capitalization, shareholders' equity,
condition (financial or otherwise), operations, licenses, franchises,
permits, permit applications, results of operations or prospects of Conrail
or any of its subsidiaries or affiliates which, in the sole judgment of
Norfolk or Atlantic, is or may be materially adverse to Conrail or any of
its subsidiaries or affiliates, or Norfolk or Atlantic shall have become
aware of any fact which, in the sole judgment of
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Norfolk or Atlantic, has or may have material adverse significance with
respect to either the value of Conrail or any of its subsidiaries or the
value of the Shares to Norfolk or Atlantic;
(d) there shall have occurred (i) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States (whether or not mandatory), (ii) any limitation (whether or not
mandatory) by any governmental authority or agency on, or other event
which, in the sole judgment of Norfolk or Atlantic, might affect the
extension of credit by banks or other lending institutions; (iii) a
commencement of a war, armed hostilities or other national or international
crisis directly or indirectly involving the United States, (iv) any
significant change in United States or any other currency exchange rates or
any suspension of, or limitation on, the markets therefor (whether or not
mandatory), (v) any significant adverse change in the market price of the
Shares or in the securities or financial markets of the United States, or
(vi) in the case of any of the foregoing existing at the time of the
commencement of the Norfolk Offer, in the sole judgment of Norfolk or
Atlantic, a material acceleration or worsening thereof;
(e) other than the redemption of the Rights at the redemption price
therefor, Conrail or any subsidiary of Conrail shall have, at any time
after February 12, 1997, (i) issued, distributed, pledged, sold or
authorized, proposed or announced the issuance of or sale, distribution or
pledge to any person of (A) any shares of its capital stock (other than
sales or issuances pursuant to options outstanding on February 12, 1997 in
accordance with their terms as disclosed on such date or conversions of the
Preferred Stock in accordance with its terms) of any class (including
without limitation the Shares) or securities convertible into any such
shares of capital stock, or any rights, warrants or options to acquire any
such shares or convertible securities or any other securities of Conrail,
or (B) any other securities in respect of, in lieu of or in substitution
for Shares outstanding on February 12, 1997, (ii) purchased, acquired or
otherwise caused a reduction in the number of, or proposed or offered to
purchase, acquire or otherwise reduce the number of, any outstanding Shares
or other securities, (iii) declared, paid or proposed to declare or pay any
dividend or distribution on any Shares (other than the regular quarterly
dividend on the Common Stock not in excess of the amount per share, and
with record and payment dates, in accordance with recent practice) or on
any Preferred Stock (other than the regular semi-annual dividend on the
Preferred Stock not in excess of the amount per share payable in accordance
with recent practice) or on any other security or issued, authorized,
recommended or proposed the issuance or payment of any other distribution
in respect of the Common Stock or the Preferred Stock, whether payable in
cash, securities or other property, (iv) altered or proposed to alter any
material term of any outstanding security, (v) incurred any debt other than
in the ordinary course of business and consistent with past practice or any
debt containing burdensome covenants, (vi) issued, sold or authorized or
announced or proposed the issuance of or sale to any person of any debt
securities or any securities convertible into or exchangeable for debt
securities or any rights, warrants or options entitling the holder thereof
to purchase or otherwise acquire any debt securities or incurred or
announced its intention to incur any debt other than in the ordinary course
of business and consistent with past practice, (vii) split, combined or
otherwise changed, or authorized or proposed the split, combination or
other change of the Common Stock, the Preferred Stock or its
capitalization, (viii) authorized, recommended, proposed or entered into or
publicly announced its intent to enter into any merger, consolidation,
liquidation, dissolution, business combination, acquisition or disposition
of a material amount of assets or securities, any material change in its
capitalization, any waiver, release or relinquishment of any material
contract rights or comparable right of Conrail or any of its subsidiaries
or any agreement contemplating any of the foregoing or any comparable event
not in the ordinary course of business, or taken any action to implement
any such transaction previously authorized, recommended, proposed or
publicly announced, (ix) transferred into escrow any amounts required to
fund any existing benefit, employment or severance agreements with any of
its employees or entered into any employment, severance or similar
agreement, arrangement or plan with any of its employees other than in the
ordinary course of business and consistent with past practice or entered
into or amended any agreements, arrangements or plans so as to provide for
increased benefits to the employees as a result of or in connection with
the transactions contemplated by the Norfolk Offer or any other change in
control of Conrail, (x) except as may be required by law, taken any action
to terminate or amend any employee benefit plan (as defined in Section 3(2)
of ERISA) of
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Conrail or any of its subsidiaries, or Norfolk or Atlantic shall have
become aware of any such action which was not previously disclosed in
publicly available filings, (xi) amended or proposed or authorized any
amendment to its articles of incorporation or bylaws or similar
organizational documents, (xii) authorized, recommended, proposed or
entered into any other transaction that in the sole judgment of Norfolk or
Atlantic could, individually or in the aggregate, adversely affect the
value of the Shares to Norfolk or Atlantic or (xiii) agreed in writing or
otherwise to take any of the foregoing actions or Norfolk or Atlantic shall
have learned about any such action which has not previously been publicly
disclosed by Conrail and also set forth in filings with the SEC;
(f) Conrail and Norfolk or Atlantic shall have reached an agreement or
understanding that the Norfolk Offer be terminated or amended or Norfolk or
Atlantic (or one of their respective affiliates) shall have entered into a
definitive agreement or an agreement in principle to acquire Conrail by
merger or similar business combination, or purchase of Shares or assets of
Conrail;
(g) Norfolk or Atlantic shall become aware (i) that any material
contractual right of Conrail or any of its subsidiaries or affiliates shall
be impaired or otherwise adversely affected or that any material amount of
indebtedness of Conrail or any of its subsidiaries shall become accelerated
or otherwise become due prior to its stated due date, in either case with
or without notice or the lapse of time or both, as a result of the
transactions contemplated by the Norfolk Offer or the Proposed Norfolk
Merger, or (ii) of any covenant, term or condition in any of Conrail's or
any of its subsidiaries' instruments or agreements that are or may be
materially adverse to the value of the Shares in the hands of Atlantic or
any other affiliate of Norfolk (including, but not limited to, any event of
default that may ensue as a result of the consummation of the Norfolk
Offer, consummation of the Proposed Norfolk Merger or any other business
combination or the acquisition of control of Conrail); or
(h) Norfolk or Atlantic shall not have obtained any waiver, consent,
extension, approval, action or non-action from any governmental authority
or agency (other than approval by the Surface Transportation Board (the
"STB") of the acquisition of control of Conrail) which in its judgment is
necessary to consummate the Norfolk Offer;
which, in the sole judgment of Norfolk or Atlantic in any such case, and
regardless of the circumstances (including any action or inaction by Norfolk or
Atlantic or any of their affiliates) giving rise to any such condition, makes it
inadvisable to proceed with the Norfolk Offer and/or with such acceptance for
payment or payment. Norfolk and Atlantic have the right to rely on any condition
set forth in the immediately preceding sentence being satisfied in determining
whether to consummate the Norfolk Offer; however, if Norfolk or Atlantic asserts
the failure of any such condition without relying on the exercise of its
reasonable judgment or some other objective criteria, Norfolk and Atlantic shall
promptly disclose such assertion and the expiration date (of the Norfolk Offer)
will be (and, if necessary, will be extended to be) at least five business days
after the date of such disclosure.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and business address of Conrail, which is the person filing
this statement, are set forth in Item 1 above.
(b)(1) General. Reference is hereby made to the information contained
under the captions "OWNERSHIP BY MANAGEMENT OF EQUITY SECURITIES", and
"COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS", in Conrail's proxy statement
dated April 3, 1996 relating to Conrail's 1996 Annual Meeting of Shareholders.
The relevant pages thereof are filed as Exhibit (c)(1) hereto and are
incorporated herein by reference. Except as described herein or incorporated
herein by reference, there are no contracts, agreements, arrangements or
understandings or any actual or potential conflicts of interest between Conrail
or its affiliates and (i) Conrail, its executive officers, directors or
affiliates or (ii) Norfolk or Atlantic, or their respective executive officers,
directors or affiliates.
CSX and Green Acquisition Corp., a Pennsylvania corporation and a wholly
owned subsidiary of CSX ("Purchaser"), have commenced an offer to purchase up to
an aggregate of 18,344,845 Shares at $110 per
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Share (the "CSX Offer Price"), net to the seller in cash and without interest
(the "CSX Offer"), upon the terms and subject to the conditions set forth in the
Offer to Purchase dated December 6, 1996, as amended (the "CSX Offer to
Purchase"), and the related Letter of Transmittal. The CSX Offer to Purchase has
been mailed to holders of Shares and has been filed by CSX with the Securities
and Exchange Commission (the "SEC") as part of a Tender Offer Statement on
Schedule 14D-1 (the "CSX Schedule 14D-1") dated December 6, 1996.
The CSX Offer is being made pursuant to the Merger Agreement, which
provides for the making of the CSX Offer by Purchaser, subject to the terms and
conditions of the Merger Agreement, and for the subsequent merger of Conrail
with and into Purchaser (which merger has been structured for tax reasons as two
mergers with subsidiaries of CSX, with the second occurring one day following
the first, and which is collectively referred to herein as the "Merger"), with
Purchaser continuing as the surviving corporation (the "Surviving Corporation").
Pursuant to the Merger Agreement, Purchaser now owns, through a voting trust
(the "Voting Trust"), 17,775,124 Shares (or approximately 19.9% of the
outstanding Shares) pursuant to its tender offer (the "CSX First Offer" and,
together with the CSX Offer, the "CSX Offers") which expired on November 20,
1996 (after giving effect to the sale of 85,000 Shares by CSX on January 2,
1997). If the CSX Offer is consummated, Purchaser shall have acquired Shares
representing approximately 40% of the outstanding Shares on a fully diluted
basis (other than upon exercise of the Option) pursuant to the CSX Offers.
In the Merger, each Share outstanding at the effective time of the Merger
(the "Effective Time") (other than Shares held in the treasury of Conrail or
held by CSX or any subsidiary of CSX or Conrail) will, by virtue of the Merger
and without any action by the holder thereof, be converted into the right to
receive (a) 1.85619 shares of Common Stock, par value $1.00 per share, of CSX
("CSX Common Stock") and (b) $16 in convertible preferred stock of CSX, the
terms of which will be set prior to the Merger such that such securities would,
in the opinion of certain financial advisors at such time, trade at par on a
fully distributed basis (the "CSX Preferred Stock" and, together with the CSX
Common Stock, the "CSX Merger Securities"). If the CSX Offer is not fully
subscribed and consummated, then the Merger would have a cash election component
such that shareholders, upon consummation of the Merger, would have received
(including pursuant to the CSX Offers) $110 in cash per Share for an aggregate
of 40% of the Shares on a fully diluted basis, and CSX Merger Securities for
each of the remaining 60% of the fully diluted Shares.
The Merger is not conditioned on receipt of STB approval. Upon consummation
of the Merger, 100% of the shares of the Surviving Corporation will be held in
the Voting Trust until STB approval is received (the "STB Approval Date"). As a
result, Conrail shareholders will receive the CSX Merger Securities upon
consummation of the Merger whether or not STB approval is granted.
Under the Merger Agreement, during the period until December 31, 1998 (the
"Exclusivity Period"), each party has agreed that it will not discuss, approve,
recommend or enter into any agreement regarding any takeover proposal with a
third party, or withdraw or modify, or publicly propose to withdraw or modify,
its approval or recommendations of the transactions contemplated by the Merger
Agreement (the "CSX Transactions"). Because certain conditions to the Norfolk
Offer, including those described in paragraphs (1) through (3) under Item 2
above, can only be satisfied if the Conrail Board takes such actions to approve
the Norfolk Offer, under the terms of the Merger Agreement, the Norfolk Offer
cannot be consummated until at least after December 31, 1998. In addition, the
Conrail Board has no obligation at any time under the PBCL to agree to or
recommend any takeover proposal (such as the Proposed Norfolk Transactions) or
to take any such action to facilitate any such takeover proposal.
Under the Merger Agreement, in the event that the matters to be considered
at a CSX shareholders meeting called for the purpose of approving the issuance
of CSX Merger Securities in connection with the Merger or at a Conrail
shareholders meeting called for the purpose of approving the Merger or called
for the purpose of opting out of Subchapter 25E of the PBCL ("Subchapter 25E")
are not approved at any such meeting, from time to time CSX or Conrail,
respectively, may, and will at the request of Conrail or CSX, respectively, duly
call one or more meetings of shareholders for such purposes. On January 17,
1997, Conrail shareholders did not approve a proposal to opt out of Subchapter
25E (the "Opt Out Proposal"), which was
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not unexpected given Norfolk's last-minute enticement of amending the Norfolk
First Offer to buy 9.9% of the outstanding Shares at $115 conditioned upon a
negative vote on the Opt Out Proposal. No additional meeting of Conrail
shareholders concerning the Opt Out Proposal has been set at this time. The CSX
Offer is conditioned, among other things, on Subchapter 25E no longer being
applicable to Conrail.
The Merger Agreement also provides that CSX has an option to purchase
15,955,477 Shares, subject to adjustment from time to time as provided therein
(the "Option"), pursuant to the Conrail Stock Option Agreement dated as of
October 14, 1996, between CSX and Conrail (the "Conrail Stock Option
Agreement"), at $92.50 per Share, which is currently exercisable.
If Subchapter 25E is no longer applicable to Conrail and the CSX Offer is
consummated for the full number of Shares sought thereunder, the approval of the
Merger by a majority of votes cast at a special meeting of the holders of Shares
will be virtually certain. If CSX acquires 40% of the fully diluted Shares
through the CSX Offers and exercises the Option, CSX, through the Voting Trust,
will then hold approximately 50% of the Shares, which will be sufficient to
approve the Merger regardless of the votes of other shareholders. All the Shares
held by the Voting Trust are required to be voted in favor of the Merger and
transactions necessary or desirable to effect, or consistent with the
effectuation of, the Merger, including for a slate of nominees to the Conrail
Board that support the Merger.
Shareholders should also be aware that, if Subchapter 25E is no longer
applicable to Conrail, shareholders may decide to tender their Shares to CSX in
the CSX Offer (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 then
current market prices, may have a per Share value that is significantly less
than the $110 per Share being offered in the CSX Offer. Therefore, the CSX Offer
may succeed regardless of the perceived relative values of the CSX Transactions
and the Proposed Norfolk Transactions. As of the close of business on February
24, 1997, the closing market price for shares of CSX common stock on the New
York Stock Exchange Composite Tape was $47.625.
According to Norfolk's Offer to Purchase, on February 10, 1997, Norfolk
notified Conrail of its intention at the next annual meeting of Conrail
shareholders, which has been scheduled by the Conrail Board for December 19,
1997, to (i) nominate five new persons for election as directors of Conrail,
(ii) introduce a proposal to amend Conrail's by-laws to declassify the Conrail
Board, (iii) introduce a proposal to remove all directors from the Conrail
Board, other than Norfolk's nominees and Daniel B. Burke, David B. Lewis and
John C. Marous and (iv) introduce a proposal to amend Conrail's by-laws to
decrease the size of the Conrail Board to a total of eight directors. As of the
date of this Schedule 14D-9, except as set forth above, Conrail is not aware of
Norfolk's specific intentions with respect to the possible retention of any or
all of Conrail's executive officers following any consummation of the Proposed
Norfolk Transactions. Conrail believes, however, that the terms of Norfolk's
proposals are invalid under Pennsylvania law and may also violate Federal
transportation law.
The terms and conditions of the CSX Offer and a summary of the terms of the
Merger Agreement are set forth in the CSX Offer to Purchase, which was filed by
CSX with the SEC as an exhibit to the CSX Schedule 14D-1 and mailed to Conrail
shareholders. Conrail has filed a Solicitation/Recommendation Statement on
Schedule 14D-9 dated December 6, 1996, as amended (the "CSX Schedule 14D-9" and
together with this Schedule 14D-9, the "Schedule 14D-9s") with respect to the
CSX Offer, which states the Conrail Board's recommendation of the CSX Offer.
Conrail shareholders are urged to carefully consider the information contained
in the Schedule 14D-9s.
(2) Certain Executive Compensation and Other Employee-Related Matters in
Connection with a Change of Control of Conrail. The consummation of either the
CSX Transactions or the Norfolk Offer will affect the compensation and benefits
provided to certain executive officers of Conrail as follows:
VESTING OF EQUITY-BASED AWARDS. All of the outstanding equity-based awards
granted by Conrail (which include stock options, restricted stock, phantom stock
and performance shares subject to financial
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performance-related conditions) immediately vest and become exercisable or
deliverable, as applicable, upon a "change of control" of Conrail. Except as
noted below, "change of control" for this purpose is generally defined as (i)
shareholder approval of Conrail's consolidation with another entity, (ii)
shareholder approval of a sale of all or substantially all of Conrail's assets,
(iii) the filing of a report on Schedule 13D or Schedule 14D-1 that any person
has become beneficial owner of 20% or more of the voting power of Conrail's
voting stock, (iv) shareholder approval of Conrail's complete liquidation or
dissolution, (v) shareholder approval of a transaction with another company at
the conclusion of which Conrail's pre-transaction shareholders own less than 80%
of the voting power of the entity surviving the transaction, (vi) the failure of
the continuing directors of the Conrail Board to constitute a majority thereof,
or (vii) a determination by the Conrail Board of the threat or occurrence of an
event that has effects similar to the foregoing. Consummation of the CSX
Transactions would not constitute a "change in control" with respect to the
equity-based awards granted by Conrail on February 19, 1997. These awards will
vest either upon STB approval of the CSX Transactions or upon the later of
February 19, 1999 or STB denial of the CSX Transactions.
CHANGE OF CONTROL AGREEMENTS. Conrail has contracts with approximately 70
employees (including all executive employees) pursuant to which such employees
receive specified benefits upon their involuntary or constructive termination
within a specified period of a "change of control". The definition of a "change
of control" is the same as that summarized above with respect to equity-based
awards. Employees receive the specified benefits if they are terminated within
the later of (i) three years of a change of control, or (ii) two years of final
regulatory approval of a change of control (if the change of control is subject
to regulatory approval). The following benefits are provided to eligible
employees following their termination: (a) payment of all accrued salary and
deferred compensation, (b) a pro rata portion of any bonus payable in the year
of termination, (c) vesting of all outstanding equity-based awards, (d)
continuation of certain welfare coverage for 36 months, (e) 36 months additional
service credit under Conrail's retirement programs, (f) a lump sum payment equal
to three times the sum of the employee's base salary and highest bonus paid in
the three years preceding the change of control or termination date, and (g) a
gross-up payment for any excise taxes imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code").
(3) Certain Executive Compensation and Other Employee-Related Matters in
Connection with the CSX Transactions. In replacement of his existing change of
control agreement with Conrail (which is summarized in Section (b)(2) of this
Item 3), on October 14, 1996, Mr. LeVan entered into a new employment agreement
and a new change of control agreement with CSX, both of which will become
effective as of the Control Date, as defined in the Merger Agreement. If the
Merger Agreement is terminated prior to the Control Date, Mr. LeVan's new
employment agreement and new change of control agreement will not take effect,
and his existing change of control agreement with Conrail will continue in
effect.
MR. LEVAN'S NEW EMPLOYMENT AGREEMENT. Mr. LeVan's new employment agreement
with CSX (the "LeVan Agreement") provides that, as of the Control Date, Mr.
LeVan will become the Chief Operating Officer and President of CSX following the
Control Date (as such entity is then to be renamed, "Parent") and Chief
Executive Officer and President of each of Parent's railroad businesses. The
LeVan Agreement provides that no later than the second anniversary of the
Control Date, Mr. LeVan will become Chief Executive Officer of Parent, and no
later than two years thereafter, will become Chairman of the Board of Parent.
The initial term of the LeVan Agreement is five years and it will automatically
renew, subject to any prior termination, for successive one-year periods on the
fifth anniversary of the Control Date and each anniversary thereafter unless
either party gives at least three months' prior notice of non-renewal.
Under the LeVan Agreement, if Mr. LeVan is involuntarily terminated without
"cause," or he voluntarily terminates for "good reason," his termination
benefits will include (i) a lump sum payment equal to the greater of (x) and
(y), where (x) equals the sum of (a) his annual base salary and (b) highest
annual bonus paid in the three preceding years ("Recent Bonus") times (c) the
number of years (prorated for partial years) then remaining in the five-year
term of the LeVan Agreement, and where (y) equals three times the sum of (a) his
annual base salary and (b) his Recent Bonus, (ii) a lump sum payment equal to
the additional amount he would have accrued under CSX's qualified and
nonqualified pension plans had he been credited with three years of additional
service, (iii) welfare benefit continuation for three years, and (iv)
outplacement services. The LeVan Agreement also provides that Mr. LeVan will
receive a "gross-up" payment to reimburse him, on
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an after-tax basis, for excise taxes that may be imposed upon him under Section
4999 of the Code on account of the payment of any "excess parachute payments,"
as defined in Section 280G of the Code ("Excise Taxes").
The LeVan Agreement defines "cause" as a finding by 75% or more of the
Board of Directors of Parent of Mr. LeVan's (i) continued failure to
substantially perform his duties, (ii) his willful engagement in illegal conduct
or gross misconduct which is materially and demonstrably injurious to Parent,
(iii) his conviction of a felony or entering of a guilty or nolo contendere plea
or (iv) his breach of certain confidentiality covenants. The LeVan Agreement
defines "good reason" as (a) a material diminution in his position, authority,
duties or responsibilities, (b) a breach by Parent of a material provision of
the LeVan Agreement, (c) the required relocation of Mr. LeVan, without his
consent, more than 35 miles from his employment location at the STB Approval
Date, (d) any purported termination by Parent of Mr. LeVan not in accordance
with the LeVan Agreement, (e) a successor to Parent failing to assume any
liabilities under the LeVan Agreement, (f) a failure to elect Mr. LeVan as Chief
Executive Officer of Parent by the second anniversary of the Control Date, (g) a
failure to elect Mr. LeVan as Chairman of the Board of Parent by the fourth
anniversary of the Control Date and (h) the removal of Mr. LeVan as a director
or from any of his specified employment positions.
The LeVan Agreement further provides (i) prior to Mr. LeVan becoming Chief
Executive Officer of Parent, for a minimum base salary equal to the greater of
90% of the annual base salary of CSX's current Chief Executive Officer and
$810,000, and a minimum bonus equal to 100% of base salary, but not less than
90% of the bonus paid or awarded to CSX's current Chief Executive Officer and
not less (as a percentage of base salary) than any bonus paid or awarded to any
other senior executive of Parent, and (ii) upon Mr. LeVan become Chief Executive
Officer of Parent, for a minimum annual base salary of not less than the annual
base salary then being paid to CSX's current Chief Executive Officer and not
less than $900,000, and long-term incentive (including stock award)
opportunities not less than those afforded any other senior executive of Parent
and not less than 90% of CSX's current Chief Executive Officer's long-term
incentive opportunities. A copy of the LeVan Agreement is filed as Exhibit
(c)(2) hereto, is incorporated herein by reference and the foregoing description
is qualified in its entirety by such reference.
MR. LEVAN'S NEW CHANGE OF CONTROL AGREEMENT. Mr. LeVan has also entered
into a new change of control agreement which will become effective on the
Control Date. Under the new change of control agreement for Mr. LeVan (which
would replace his existing change of control agreement with Conrail), if Mr.
LeVan is involuntarily terminated or terminates for "good reason" within three
years following a change of control (for purposes of Mr. LeVan's new agreement,
the CSX Transactions will not constitute a change of control thereunder), he
will be paid an amount equal to three times the sum of (i) his annual base
salary and (ii) the highest bonus paid within the three years preceding such
termination, three years' deemed additional service under CSX's qualified and
nonqualified pension plans, three years' welfare benefit continuation and
outplacement services. The agreement also provides for a gross-up for any Excise
Taxes payable by Mr. LeVan. Compensation and benefits payable or provided under
the change of control agreement will be offset by any comparable compensation
and benefits paid under the LeVan Agreement. A copy of the new change of control
agreement for Mr. LeVan is filed as Exhibit (c)(3) hereto, is incorporated
herein by reference and the foregoing description is qualified in its entirety
by such reference.
BENEFIT ISSUES RELATED TO THE CSX TRANSACTIONS. The Merger Agreement
provides that certain actions will be taken in respect of employee benefit and
stock plans in which executive officers of Conrail are eligible to participate.
CSX shall cause the Surviving Corporation to honor all obligations under
employment agreements and employee benefit plans, programs, policies and
arrangements of Conrail in accordance with the terms of the Merger Agreement.
CSX will provide, or cause its subsidiaries to provide, benefits to Conrail
employees on a basis no less favorable in the aggregate to those provided to
similarly-situated employees of CSX. For a two-year period following the Control
Date, CSX shall, or shall cause the Surviving Corporation to establish and
maintain a plan to provide severance and termination benefits to all non-union
employees of Conrail terminated as a result of, or in connection with, the
Merger, which benefits shall be determined consistent with industry standards
and taking into account those benefits provided in recent similar transactions
in the industry.
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In accordance with the Merger Agreement and the terms of Conrail's
outstanding employee stock options, as of the First Effective Time, as defined
in the Merger Agreement (with respect to vested options) or the STB Approval
Date (with respect to nonvested options) all such options will be deemed to
constitute an option to acquire (on the same terms and conditions as were
applicable under such options, including vesting) the same number of shares of
CSX Common Stock as the holder of such options would have been entitled to
receive pursuant to the Merger Agreement had such holder exercised such option
in full immediately prior to the First Effective Time or STB Approval Date, as
applicable, and had the holder received additional shares of CSX Common Stock,
in lieu of CSX Preferred Stock, at equivalent value to such CSX Preferred Stock
(based, for this propose, upon an assumed value of $16 price per share for CSX
Preferred Stock and a price per share of CSX Common Stock based upon the average
per share closing price of CSX Common Stock reported on the New York Stock
Exchange Composite Tape for the five consecutive trading days preceding the
First Effective Time) at a price per CSX share equal to (i) the aggregate
exercise price for the Shares otherwise purchasable pursuant to such Conrail
option, divided by (ii) the aggregate number of CSX shares deemed purchasable
pursuant to such option.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Recommendations of the Board of Directors.
THE CONRAIL BOARD CONTINUES TO BELIEVE THAT A MERGER OF EQUALS WITH CSX IS
IN THE BEST INTERESTS OF CONRAIL AND ITS CONSTITUENCIES AND, THEREFORE, THE
CONRAIL BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF CONRAIL NOT TENDER
THEIR SHARES PURSUANT TO THE NORFOLK OFFER.
At a meeting held on February 19, 1997, the Conrail Board, including the
disinterested members of the Conrail Board, unanimously (i) determined that the
terms of the Norfolk Offer and the Proposed Norfolk Merger are not in the best
interests of Conrail (taking into account the Conrail constituencies affected by
such proposed transactions, the short-term and long-term interests of Conrail,
the resources, intent and conduct (past, stated and potential) of any person
seeking to acquire control of Conrail, and all other pertinent factors); and
(ii) recommended that the shareholders of Conrail reject the Norfolk Offer and
not tender their Shares pursuant to the Norfolk Offer. ACCORDINGLY, THE CONRAIL
BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF CONRAIL NOT TENDER THEIR
SHARES PURSUANT TO THE NORFOLK OFFER.
A copy of a letter to the shareholders of Conrail communicating the Board's
recommendations is filed as Exhibit (a)(1) hereto and is incorporated herein by
reference.
(b)(1) Background.
GENERAL. As part of its long-term planning process, Conrail has been
involved in an ongoing review of its commercial and strategic alternatives,
which has included analyses of potential acquisitions of and combinations with
other railroads. Recent industry consolidations confirm that railroads must
offer their customers broad market reach via efficient, single-line service.
Conrail continued to assess and reassess its position in the industry, resulting
in Conrail's consideration of a possible combination with CSX. Conrail's
analysis demonstrates that a potential merger with CSX is in the best interests
of Conrail and offers the needed combination of synergies and public benefits
(including network efficiencies).
From time to time prior to March 1994, certain members of senior management
of Conrail, including James A. Hagen, Mr. LeVan's predecessor, have spoken with
members of Norfolk's senior management, including David R. Goode, Chairman and
Chief Executive Officer of Norfolk, concerning a possible business combination
between Conrail and Norfolk. While the companies determined to proceed with
certain business cooperation opportunities, no decisions were reached concerning
a business combination. From March through September 1994, Conrail and Norfolk
management, including Mr. Hagen and Mr. Goode, met several times to discuss the
possibility of a combination of Conrail and Norfolk. The parties entered into a
confidentiality agreement on August 17, 1994. In September 1994, the parties
terminated such discussions,
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having failed to reach agreement on an appropriate price or other material terms
of a possible strategic combination.
During 1995, members of Conrail's and Norfolk's senior management,
including Mr. LeVan and Mr. Goode, met several times to discuss general business
opportunities between the companies. On these occasions, members of Conrail's
management, including Mr. LeVan, stated that Conrail thought its best strategy
was to remain independent and that Conrail was not interested in a possible
combination with Norfolk. On July 2, 1996, and again during the week of July 29
to August 2, 1996, Mr. LeVan stated to Mr. Goode that Conrail was not interested
in a possible combination with Norfolk, but that Conrail would be reviewing its
strategic alternatives in September 1996. Mr. Goode expressed the continuing
interest of Norfolk in pursuing such discussions. On September 19 or 20, Mr.
LeVan and Mr. Goode again had a brief conversation on this subject, in which the
most recent positions of the parties as just stated did not change.
On September 25 and 26, 1996, the Conrail Board met to consider, among
other things, various strategic alternatives that Conrail could pursue in
furtherance of its objective of continued growth, including potential franchise
extensions and other improvements in services and competitiveness. The Conrail
Board expressly considered the relative merits to Conrail and its constituencies
of a strategic business combination with CSX and with Norfolk and concluded that
a strategic business combination with CSX would be in the best interests of
Conrail. The Conrail Board then authorized representatives of Conrail to proceed
with confidential discussions with CSX regarding a possible strategic
combination, and, following numerous discussions among Conrail and CSX and their
respective legal and financial advisors, on October 15, 1996, CSX and Conrail
announced they had entered into the Merger Agreement. On October 16, 1997, CSX
commenced the CSX First Offer.
On October 7, 1996, Mr. LeVan told Mr. Goode that Conrail was not in a
position to discuss with Norfolk the outcome of its September 1996 strategic
alternatives review.
On October 23, 1996, Norfolk issued a press release announcing its
intention to commence the Norfolk First Offer for all outstanding Shares, to be
followed by the Proposed Norfolk Merger. The press release included a letter to
the Conrail Board indicating Norfolk's intention to effect the Proposed Norfolk
Transactions, setting forth Norfolk's reasons for believing that its proposal
was superior to that of CSX, indicating Norfolk's desire to negotiate a merger
agreement with Conrail and stating that Norfolk was flexible as to all aspects
of its proposal reflected in the Proposed Norfolk Transactions.
On October 24, 1996, Norfolk filed with the SEC a Schedule 14D-1 (the
"First Norfolk Schedule 14D-1") and commenced the Norfolk First Offer for all
outstanding Shares.
Following the announcement by Norfolk of its intention to commence the
Norfolk First Offer for all outstanding Shares on October 23, 1996, Conrail and
CSX held discussions and engaged in negotiations relative to the Merger
Agreement and an amendment thereto (the "First Amendment") culminating in the
execution of the First Amendment and the revision of the terms of the CSX First
Offer on November 5, 1996.
On November 8, 1996, Norfolk amended the Norfolk First Offer to purchase
all the outstanding Shares for $110 per Share, rather than $100 per Share.
On November 20, 1996, the CSX First Offer expired. On December 6, 1996, CSX
commenced the CSX Offer.
On December 18, 1996, CSX and Conrail entered into a second amendment to
the Merger Agreement (the "Second Amendment") to, among other things, (i)
increase the consideration payable pursuant to the Merger, (ii) accelerate the
consummation of the Merger to immediately following the receipt of applicable
shareholder approvals and prior to STB approval and (iii) extend the Exclusivity
Period during which the Conrail Board has agreed under the Merger Agreement not
to withdraw or modify its recommendations of the CSX Transactions, approve or
recommend any takeover proposal or cause Conrail to enter into any agreement
related to any takeover proposal to December 31, 1998.
On December 18, 1996, the Second Amendment was approved by the Conrail
Board and the disinterested members of the Conrail Board, with one abstention.
Mr. David B. Lewis advised the Conrail
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Board that while he continues to fully support the CSX Offer and the Merger, he
wished to abstain from the vote approving the Second Amendment in light of the
provision in the Second Amendment extending the Exclusivity Period to December
31, 1998.
On December 27, 1996, Norfolk filed a Petition for Declaratory Order with
the STB claiming that certain provisions of the Second Amendment constitute an
unauthorized acquisition of control by CSX over Conrail. On January 9, 1997, the
STB issued a decision rejecting as premature and unwarranted at this time
Norfolk's petition challenging the extension of the Exclusivity Period to
December 31, 1998.
On January 9, 1997, CSX filed with the SEC a Registration Statement on Form
S-4 (Registration No. 333-19523) containing a Joint Proxy Statement/Prospectus
relating to the special meetings of shareholders with respect to the Merger,
which includes, among other things, pro forma financial statements and notes
thereto relating to the CSX Transactions.
On January 13, 1997, Norfolk issued a press release announcing that it
would offer to purchase Shares representing 9.9% of the outstanding Shares for
$115 per Share, in the event that Conrail shareholders do not approve the Opt
Out Proposal at the meeting of shareholders to be held on January 17, 1997
("Pennsylvania Special Meeting").
On January 15, 1997, the United States Court of Appeals for the Third
Circuit (the "Third Circuit") denied Norfolk's motion for an order enjoining the
Pennsylvania Special Meeting pending the appeal of the decision of the United
States District Court for the Eastern District of Pennsylvania (the "District
Court") denying Norfolk's motion, among other things, for a preliminary
injunction on the grounds that the Exclusivity Period contained in the Merger
Agreement is invalid and that a control transaction under Subchapter 25E had
occurred.
On January 17, 1997, Conrail shareholders voted at the Pennsylvania Special
Meeting against the Opt Out Proposal.
On January 22, 1997, CSX extended the CSX Offer until 5:00 p.m., Eastern
Standard Time, on February 14, 1997.
On January 22, 1997, Norfolk amended the Norfolk First Offer to purchase up
to 8.2 million Shares at $115 per Share, net to the seller in cash and without
interest. The Conrail Board took no position with respect to the amended Norfolk
First Offer.
On January 31, 1997, Conrail designated December 19, 1997, as the date for
its 1997 annual shareholders meeting.
On January 31, 1997, Conrail, CSX and Norfolk met jointly and, upon the
conclusion of such meeting, issued a press release announcing their agreement
that no further details of the meeting or timing of future meetings would be
announced.
On February 4, 1997, the amended Norfolk First Offer expired, and Norfolk
subsequently purchased approximately 8.2 million Shares pursuant thereto.
On February 10, 1997, Norfolk made several proposals regarding the
constitution of the Conrail Board, including the nomination of a slate of five
directors to the Conrail Board. Conrail responded to the Norfolk proposals by
announcing that the terms of the proposals are invalid under Pennsylvania law
and also appear to violate Federal transportation law.
On February 12, 1997, Norfolk commenced the Norfolk Offer.
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On February 14, 1997, CSX extended the CSX Offer until 5:00 p.m., Eastern
Standard Time, on Friday, March 14, 1997.
On February 14, 1997, the STB issued an informal, nonbinding staff opinion
letter approving certain amendments to Norfolk's voting trust.
The Conrail Employee Benefits Trust intends to use the proceeds received
from the tender of Shares pursuant to the amended Norfolk First Offer to
purchase additional Shares in the market. The Trustee of the Conrail Employee
Stock Option Plan (the "ESOP") may purchase additional Shares, to the extent
consistent with the fiduciary responsibilities of the Trustee.
NORFOLK LITIGATION.
On October 23, 1996, Norfolk, Atlantic and Kathryn B. McQuade, a
shareholder of Conrail (collectively, the "Plaintiffs"), filed a Complaint for
Declaratory and Injunctive Relief (the "Complaint") against Conrail, its
directors and CSX (collectively, the "Defendants" in the "Pennsylvania
Litigation") in the District Court. The Plaintiffs have amended their Complaint
on several occasions to add certain additional allegations and claims. The
Complaint, as amended, alleges, among other things, that the Defendants have
breached their fiduciary duties with respect to the CSX Transactions, the Rights
Agreement, Subchapter 25F of the PBCL ("Subchapter 25F"), the provision of the
Merger Agreement establishing the Exclusivity Period (the "Exclusivity Period
Provision") and certain lock-up provisions contained in the Merger Agreement;
that the "continuing director" requirement of the Rights Agreement is void under
Pennsylvania law and under Conrail's articles of incorporation and by-laws and
constitutes a breach of the director defendants' duty of loyalty; that the
provisions in the Merger Agreement which prohibit the Conrail Board from
redeeming the Rights, and amending or otherwise taking further action with
respect to the Rights Agreement, are ultra vires under Pennsylvania law and
constitute a breach of the Conrail directors' fiduciary duties of loyalty and
care; that the Defendants have violated Sections 14(a), (d) and (e) of the
Exchange Act and the rules and regulations promulgated thereunder; that Conrail
and its directors are estopped from effectuating a sale of Conrail without
giving Norfolk an adequate opportunity to present its competing offer; that
Section 5.1(b) of the Merger Agreement ("Section 5.1(b)") constitutes a breach
of fiduciary duty in that it purports to delegate the Conrail directors'
fiduciary responsibilities relating to the processes of corporate democracy,
and, alternatively, that Section 5.1(b) is void and ultra vires; that the entire
Conrail Board, or one or more Conrail directors, can be removed without cause;
and that consummation of the CSX First Offer caused a "control transaction" to
occur with respect to Conrail pursuant to Subchapter 25E, thus obligating the
group consisting of CSX, the Conrail directors and certain executive officers of
Conrail to pay to each demanding Conrail shareholder at least $110 cash per
share.
Plaintiffs seek declaratory relief and an order preliminarily and
permanently enjoining the Defendants, their directors, officers, partners,
employees, agents, subsidiaries and affiliates, and all other persons acting in
concert with or on behalf of the Defendants directly or indirectly, from, among
other things, commencing or continuing a tender offer for Shares or other
securities of Conrail; seeking the approval by Conrail shareholders of the Opt
Out Proposal, or, in the event it has been approved by Conrail shareholders,
from taking any steps to make the Opt Out Proposal effective; taking any action
to redeem the Rights or render the Rights Agreement inapplicable as to any offer
by CSX without, at the same time, taking the same action as to the Norfolk Offer
and Norfolk First Offer; taking any action to enforce the "continuing director"
requirement of the Rights Agreement; taking any action to enforce the
termination fee granted to CSX by Conrail in the Merger Agreement, the Conrail
Stock Option Agreement or other lock-up or lock-out provisions contained in the
Merger Agreement; failing to take such action as is necessary to exempt
Norfolk's proposed acquisition of Conrail from the provisions of Subchapter 25F;
and holding any Pennsylvania Special Meeting until all necessary corrective
disclosures have been made and adequately disseminated to Conrail shareholders.
Plaintiffs also seek declaratory relief concerning certain of the other claims
summarized in the preceding paragraph.
On November 1, 1996, Plaintiffs filed a motion, supporting brief and
proposed form of order with the District Court seeking a temporary restraining
order in the Pennsylvania Litigation (the "TRO Motion"). In
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the TRO Motion, Plaintiffs requested that the District Court temporarily enjoin
Defendants and all persons acting on their behalf or in concert with them from
taking any action to enforce Sections 3.1(n) and 5.13 of the Merger Agreement
and any other provisions of the Merger Agreement which purport to limit the
ability of the Conrail Board to take action or make any determination with
regard to the Rights Agreement and temporarily enjoin Defendants and all persons
acting on their behalf or in concert with them from distributing any Rights
pursuant to the Rights Agreement. Plaintiffs also requested that the District
Court require Defendants to take such action as necessary to prevent a
"Distribution Date" from occurring pursuant to the Rights Agreement. At the
hearing on November 4, 1996 to hear arguments concerning the TRO Motion, counsel
to Conrail advised the District Court that the Conrail Board had on that date
adopted a resolution deferring the "Distribution Date" under the Rights
Agreement until such date as the Rights become exercisable (i.e., ten days after
a party other than CSX acquires more than 10% of the Shares). Counsel to CSX
advised the District Court that CSX had consented to the terms of such
resolution. In view of the fact that Conrail and CSX had taken the action that
Plaintiffs requested be ordered by the District Court, the District Court stated
that it was not necessary for the District Court to take further action and
therefore denied the TRO Motion as moot.
On November 19, 1996, the District Court issued an oral ruling denying
Plaintiffs' motion for preliminary injunctive relief concerning the CSX First
Offer and the Exclusivity Period Provision after two days of hearings. After the
ruling, Plaintiffs asked the District Court for an injunction pending appeal
which was denied. On the same date, Plaintiffs filed an emergency motion for an
injunction pending appeal and a motion seeking an expedited appeal to the Third
Circuit. The motion for an injunction pending appeal was denied on November 20,
1996. Plaintiffs then withdrew their request for an expedited appeal but
continued to pursue their appeal on an unexpedited basis.
On December 5, 1996, Defendants filed their answer and defenses generally
denying, and asserting various defenses to, the allegations contained in the
Complaint, as it then existed, and requesting judgment on all claims and an
award of costs and attorneys' fees. Conrail and CSX also filed a Counterclaim
(the "Counterclaim"), naming Plaintiffs as counterclaim defendants, alleging
that David R. Goode and another executive officer of Norfolk are
co-conspirators/aiders and abettors, and stating the following claims: tortious
interference with current and prospective contractual relationships; intentional
infliction of harm; unfair competition; and civil conspiracy. Further, the
Counterclaim alleges that Norfolk and certain of its executive officers have
engaged in (i) dissemination of materially false and misleading information,
(ii) promotion of an illusory tender offer, (iii) improper commencement of a
lawsuit, (iv) false and misleading solicitation of proxies for the Conrail
shareholder vote at the Pennsylvania Special Meeting and (v) efforts to
manipulate the market through unfair, tortious conduct, in violation of the
federal securities laws. The Counterclaim requests a jury trial and an award of
damages, punitive damages, costs and attorneys' fees. On December 20, 1996,
Plaintiffs filed a Motion to Dismiss the Counterclaim for failure to state a
claim pursuant to Rule 12(b) of the Federal Rules of Civil Procedure and an
accompanying brief.
On December 17, 1996, the District Court held a hearing to consider
Plaintiffs' Motion for a Preliminary Injunction as to Plaintiffs' claims (i)
that Defendants' stated intention not to convene the special meeting of
Conrail's shareholders scheduled for December 23, 1996 constitutes a breach of
fiduciary duty; and (ii) that Defendant's stated intention to successively
postpone the vote of Conrail's shareholders scheduled for December 23, 1996
until it appeared likely that the Opt Out Proposal would be approved by
shareholders constitutes fraudulent and fundamentally unfair conduct. At the
conclusion of the hearing, the District Court issued an order enjoining
Defendants from failing to convene, and/or from postponing, and/or from
adjourning the Pennsylvania Special Meeting scheduled for Monday, December 23,
1996, by reason of Conrail or its nominees not having received sufficient
proxies to assure approval of the Opt Out Proposal.
On January 2, 1997, Plaintiffs filed a Motion for Preliminary Injunction
and a Motion for Partial Summary Judgment in the District Court. In their Motion
for Partial Summary Judgment, Plaintiffs requested an order stating that
consummation of the CSX First Offer caused a "control transaction" with respect
to Conrail to occur under Subchapter 25E and created joint and several liability
among CSX, the Conrail directors and certain Conrail executive officers to pay
at least $110 cash per Share to each demanding Conrail shareholder. In their
Motion for Preliminary Injunction, Plaintiffs requested that the District Court
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enjoin Defendants, and all persons acting in concert with them, from seeking to
enforce, or requiring compliance with, the Exclusivity Period Provision, as
extended, and to enjoin Defendants from convening the Pennsylvania Special
Meeting until ten business days after Conrail shareholders receive notice of the
District Court's ruling on Plaintiffs' Motions for Preliminary Injunction and
Partial Summary Judgment. On January 8, 1997, Plaintiffs filed a Supplemental
Motion for Preliminary Injunction requesting that Defendants be enjoined from
convening the Pennsylvania Special Meeting until ten business days after Conrail
shareholders receive notice of the District Court's final judgment on the
Subchapter 25E issue. Such motions were denied on January 9, 1997, after one day
of hearings.
On January 10, 1997, Plaintiffs filed a motion for an injunction pending
appeal with the Third Circuit, which was denied on January 15, 1997.
On January 28, 1997, the Third Circuit issued an order consolidating the
pending appeals and setting a briefing schedule and requesting oral argument on
February 25, 1997.
(2) Reasons for Recommendation.
In making the determinations and recommendations set forth above in Section
(a) of this Item 4, the Conrail Board considered a number of factors, including,
without limitation, the following:
(i) The factors which led the Conrail Board to recommend the CSX
Offers and the terms of the Merger Agreement at the Conrail Board meetings
held on October 14, 1996, November 5, 1996 and December 18, 1996,
including, without limitation, the following:
(A) the historical and recent market prices of the Shares and the
fact that the CSX Offer and the Merger will enable shareholders to
realize a significant premium over the prices at which the Shares traded
prior to execution of the Merger Agreement;
(B) the receipt by the Conrail Board of fairness opinions of Lazard
Freres & Co. LLC ("Lazard Freres") and Morgan Stanley & Co. Incorporated
("Morgan Stanley"), dated December 18, 1996, to the effect that the
consideration to be received by Conrail's shareholders in the CSX Offer
and the Merger, taken together, is fair to such shareholders from a
financial point of view. In rendering their respective fairness
opinions, based on the factors described therein and at the request of
the Conrail Board, neither Lazard Freres nor Morgan Stanley addressed
the relative merits of the CSX Transactions, the Proposed Norfolk
Transactions or any alternative potential transactions;
(C) the Conrail Board's duties under Pennsylvania law to act in the
best interests of Conrail, and that under such law the Conrail Board may
consider (a) the interests of all constituencies, including
shareholders, employees, suppliers, customers and creditors, as well as
communities in which Conrail has operations, (b) the short-term and
long-term interests of Conrail, (c) the resources, intent and conduct
(past, stated and potential) of any person seeking to acquire control of
Conrail and (d) all other pertinent factors;
(D) the Conrail Board's view that the transactions contemplated by
the Merger Agreement would result in significant efficiencies, operating
benefits and commercial and other synergies that would better benefit
Conrail and its customers and be more in the public interest than would
combinations with other railroads, such as Norfolk, and that Conrail's
shareholders would also benefit greatly from such efficiencies, benefits
and synergies through their significant continued interest in the
combined company following the Merger;
(E) the Conrail Board's view that the benefits, efficiencies and
synergies in the Merger would better meet the needs of Conrail's
constituencies than would other combinations with other railroads, such
as Norfolk;
(F) the benefits that the Merger would provide to the customers of
Conrail and CSX, including by providing them with the benefits of
efficient high-quality service from a more comprehensive rail system
with more points of origin and more new single-line and integrated
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transportation services, and with a railroad company with the financial
strength to support substantial capital investment in the railroad
system;
(G) the benefits that the Merger would provide to the public
through increased safety and improved air quality due to, among other
things, the resulting improvements in the principal alternative to truck
movement over heavily-congested highways;
(H) the benefits provided generally to the communities served by
Conrail, and particularly to local communities in Pennsylvania,
including through maintaining the headquarters of the combined company
in Philadelphia;
(I) the fact that the Merger, while providing a significant premium
to Conrail's shareholders, has been structured as a true
merger-of-equals transaction in which 50% of the Board of Directors, and
each Board committee, of Parent would be designated by Conrail; and
(J) Mr. LeVan being named as the President and Chief Operating
Officer of Parent and the President and Chief Executive Officer of the
railroads as of the STB Approval Date, and the fact that he is to become
Chief Executive Officer of Parent two years after the STB Approval Date
and Chairman of the Board of Parent four years after the STB Approval
Date.
(ii) The view of the Conrail Board that a strategic combination with
CSX remains in the best interests of Conrail, notwithstanding the
commencement of the Norfolk Offer, and that the terms of the CSX
Transactions are fair from a financial point of view.
(iii) The Conrail Board's recognition that the near-term trading price
for the Shares, if the Norfolk Offer could be effected, would likely be
higher than the near-term trading price for the Shares that would result
from the CSX Transactions.
(iv) The fact that the CSX shares to be received by the shareholders
in the CSX Transaction would provide the shareholders with the opportunity
to participate in the long-term benefits which, in the view of the Conrail
Board, are likely to be realized from the CSX Transactions.
(v) The facts that (A) several of the conditions of the Norfolk Offer
can only be satisfied if the Conrail Board takes certain actions, which, as
described above, the Conrail Board has agreed not to take until after the
end of the Exclusivity Period, and (B) the Conrail Board has no obligation
at any time under the PBCL to agree to or recommend any takeover proposal
or to take any action to facilitate any such takeover proposal.
(vi) The determination by the Conrail Board that the Merger would
increase competition with the trucking industry.
(vii) The determination by the Conrail Board that the Merger would
produce a stronger balance sheet, greater capital investment and less risk
during recessions than would the Proposed Norfolk Transactions.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Lazard Freres and Morgan Stanley have been retained by the Conrail Board to
act as financial advisors to Conrail with respect to the transactions
contemplated by the Merger Agreement. Pursuant to an engagement letter with
Lazard Freres, Conrail has agreed to pay Lazard Freres for its services a cash
fee equal to .17% of the aggregate consideration received by the holders of
Shares, $2,750,000 of which was paid upon the execution of the Merger Agreement,
$3,700,500 of which is payable upon the receipt of the requisite approvals of
the shareholders of Conrail and CSX and the balance of which is payable at the
Effective Time. Pursuant to an engagement letter with Morgan Stanley, Conrail
has agreed to pay Morgan Stanley for its services a cash fee equal to .13% of
the aggregate consideration received by holders of Shares, $2,000,000 of which
was paid at the time the Merger Agreement was executed, $2,750,000 of which is
payable on the date of a Conrail shareholder vote in favor of the Merger and the
balance of which is payable at the Effective Time.
15
<PAGE> 17
Conrail has also agreed to pay Lazard Freres and Morgan Stanley for their
usual and customary expenses, including the fees of counsel, and to indemnify
Lazard Freres and Morgan Stanley against certain liabilities.
Conrail has retained D.F. King & Co., Inc. ("D.F. King") to assist Conrail
in connection with its communications with its shareholders with respect to, and
to provide other services to Conrail in connection with, (i) the special
meetings relating to the Opt Out Proposal and to the approval of the Merger and
the Merger Agreement and (ii) the Proposed Norfolk Transactions. D.F. King will
receive reasonable and customary compensation in connection with the services
provided by it, and reimbursement of out-of-pocket expenses in connection
therewith. Conrail has agreed to indemnify D.F. King against certain liabilities
arising out of or in connection with its engagement.
Conrail has retained Abernathy MacGregor Scanlon ("Abernathy") as its
public relations advisor in connection with the CSX Transactions and the
Proposed Norfolk Transactions. Abernathy will receive reasonable and customary
compensation for its services and reimbursement of out-of-pocket expenses in
connection therewith. Conrail has agreed to indemnify Abernathy against certain
liabilities arising out of or in connection with its engagement.
Neither Conrail nor any person acting on its behalf currently intends to
employ, retain or compensate any other person to make solicitations or
recommendations to shareholders on its behalf concerning the CSX Transactions or
the Proposed Norfolk Transactions.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) During the past 60 days, neither Conrail nor any subsidiary of Conrail
nor, to the best of Conrail's knowledge, any executive officer, director or
affiliate of Conrail has effected a transaction in the Shares except that shares
of Preferred Stock of the following officers were tendered by the ESOP Trustee
in the Norfolk First Offer. No Conrail officer instructed the ESOP Trustee to
tender shares of Preferred Stock to Norfolk. Contrary to the terms of the Trust
Agreement between Conrail and the ESOP Trustee, the Shares of the officers were
tendered by the ESOP Trustee pursuant to the amended Norfolk Offer despite the
absence of express instructions of such officers to so tender.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PREFERRED STOCK
NUMBER OF SHARES OF PURCHASED BY ATLANTIC
NAME AND TITLE OF PREFERRED STOCK TENDERED IN NORFOLK FIRST
OFFICER OR DIRECTOR IN NORFOLK FIRST OFFER OFFER
--------------------------------------------- ------------------------ ---------------------
<S> <C> <C>
Lucy S. Amerman.............................. 1,488.2 187.7
Vice President
Risk Management
Dennis A. Arouca............................. 1,923.0 242.5
Vice President
Labor Relations
Gerald T. Gates.............................. 1,662.1 209.6
Vice President
Customer Service
Hugh J. Kiley................................ 1,560.5 196.8
Vice President
Service Design & Planning
Craig R. MacQueen............................ 1,457.9 183.9
Vice President
Corporate Communications
Donald W. Mattson............................ 1,928.0 243.1
Vice President
Controller
William B. Newman............................ 1,972.5 248.8
Vice President
Government Affairs &
Washington Counsel
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PREFERRED STOCK
NUMBER OF SHARES OF PURCHASED BY ATLANTIC
NAME AND TITLE OF PREFERRED STOCK TENDERED IN NORFOLK FIRST
OFFICER OR DIRECTOR IN NORFOLK FIRST OFFER OFFER
--------------------------------------------- ------------------------ ---------------------
<S> <C> <C>
Timothy T. O'Toole........................... 1,790.6 225.8
Senior Vice President
Law & Government Affairs
Lester M. Passa.............................. 1,533.0 193.3
Senior Vice President
Automotive Service Group
Albert M. Polinsky........................... 1,529.0 192.8
Vice President
Information Systems
George P. Turner............................. 1,699.4 214.3
Senior Vice President
Merger Consolidation
Bruce B. Wilson.............................. 1,945.5 245.4
Senior Vice President
Merger
</TABLE>
On January 27, 1997, Ronald J. Conway sold 724 Shares at $106.00 per Share
in connection with the settlement of a broker's error.
(b) Conrail's executive officers and directors intend not to tender their
Shares to Atlantic pursuant to the Norfolk Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Other than as set forth or referenced in Items 3(b) or 4, or as set
forth in this Item 7(a), no negotiation is being undertaken or is underway by
Conrail in response to the Norfolk Offer which relates to or would result in:
(1) an extraordinary transaction such as a merger or reorganization,
involving Conrail or any subsidiary of Conrail;
(2) a purchase, sale or transfer of a material amount of assets by
Conrail or any subsidiary of Conrail;
(3) a tender offer for or other acquisition of securities by or of
Conrail; or
(4) any material change in the present capitalization or dividend
policy of Conrail.
Conrail and CSX have had, and may continue to have, discussions with other
Class 1 railroads (including Norfolk) to address regulatory requirements and
other competition issues arising from the Merger. Such discussions may lead to
various concessions, such as the grant of trackage rights or other dispositions
of assets, by the post-merger combined company. Under the Merger Agreement, CSX
and Conrail have agreed that all such discussions will be conducted jointly.
(b) Except as described above or in Item 3(b), there are no transactions,
board resolutions, agreements in principle or signed contracts in response to
the Norfolk Offer which relate or would result in one or more of the matters
referred to in Item 7(a).
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
None.
17
<PAGE> 19
ITEM 9. MATERIALS TO BE FILED AS EXHIBITS.
<TABLE>
<C> <S>
*(a)(1) Letter to shareholders of Conrail dated February 25, 1997.
(b) Not applicable.
(c)(1) Pages 4-5 and 9-14 of Conrail's Proxy Statement dated April 3, 1996 (incorporated
by reference to Exhibit (c)(7) to the Solicitation/Recommendation Statement on
Schedule 14D-9 of Conrail Inc. dated October 16, 1996, as amended (the "First CSX
14D-9")).
(c)(2) Employment Agreement of Mr. David M. LeVan dated as of October 14, 1996
(incorporated by reference to Exhibit (c)(5) to the First CSX 14D-9).
(c)(3) Change of Control Agreement of Mr. David M. LeVan dated as October 14, 1996
(incorporated by reference to Exhibit (c)(6) to the First CSX 14D-9).
</TABLE>
- ---------------
* Included in materials delivered to shareholders of Conrail.
18
<PAGE> 20
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/ JOHN A. MCKELVEY
------------------------------------
Name: John A. McKelvey
Title: Senior Vice
President -- Finance
Dated as of February 25, 1997
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
- -------- ------------------------------------------------------------------------- --------
<C> <S> <C>
*(a)(1) Letter to shareholders of Conrail dated February 25, 1997................
(b) Not applicable...........................................................
(c)(1) Pages 4-5 and 9-14 of Conrail's Proxy Statement dated April 3, 1996
(incorporated by reference to Exhibit (c)(7) to the
solicitation/Recommendation Statement on Schedule 14D-9 of Conrail Inc.
dated October 16, 1996, as amended (the "First CSX 14D-9"))..............
(c)(2) Employment Agreement of Mr. David M. LeVan dated as of October 14, 1996
(incorporated by reference to Exhibit (c)(5) to the First CSX 14D-9).....
(c)(3) Change of Control Agreement of Mr. David M. LeVan dated as October 14,
1996 (incorporated by reference to Exhibit (c)(6) to the First CSX
14D-9)...................................................................
</TABLE>
- ------------------
* Included in materials delivered to shareholders of Conrail.
<PAGE> 1
EXHIBIT (a)(1)
[CONRAIL LOGO]
February 25, 1997
Dear Shareholders:
On February 12, 1997, Norfolk Southern Corporation commenced a second
unsolicited tender offer for all outstanding Conrail shares. The Conrail Board
of Directors unanimously recommends that the Conrail shareholders reject and not
tender their shares pursuant to the second Norfolk tender offer. The enclosed
Schedule 14D-9 contains Conrail's response to this second tender offer. I urge
you to consider this information carefully.
Sincerely,
/s/ David M. LeVan
DAVID M. LEVAN
Chairman, President and
Chief Executive Officer
