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302689 BEFORE the SURFACE TRANSPORTATION BOARD ______ENTERED Office of Proceedings STB FINANCE DOCKET NO

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302689 BEFORE the SURFACE TRANSPORTATION BOARD ______ENTERED Office of Proceedings STB FINANCE DOCKET NO CN-26 KCS-9 PUBLIC VERSION 302689 BEFORE THE SURFACE TRANSPORTATION BOARD ___________________________ ENTERED Office of Proceedings STB FINANCE DOCKET NO. 36514 July 6, 2021 ___________________________ Part of Public Record CANADIAN NATIONAL RAILWAY COMPANY, GRAND TRUNK CORPORATION, AND CN’S RAIL OPERATING SUBSIDIARIES – CONTROL – KANSAS CITY SOUTHERN, THE KANSAS CITY SOUTHERN RAILWAY COMPANY, GATEWAY EASTERN RAILWAY COMPANY, AND THE TEXAS MEXICAN RAILWAY COMPANY ___________________________ APPLICANTS’ REPLY TO COMMENTS ON PROPOSED VOTING TRUST AGREEMENT ___________________________ EXPEDITED CONSIDERATION REQUESTED ___________________________ Sean Finn Kathryn J. Gainey Raymond A. Atkins Olivier Chouc CN Terence M. Hynes CN 601 Pennsylvania Ave, Matthew J. Warren 935 de La Gauchetière NW Sidley Austin LLP Street West, Suite 500, North 1501 K Street, N.W. 16th Floor Building Washington, DC 20005 Montreal, QC H3B 2M9 Washington, DC 20004 (202) 736-8000 CANADA (202) 347-7840 [email protected] [email protected] Counsel for Canadian National Railway Company, Grand Trunk Corporation, and CN’s Rail Operating Subsidiaries Adam Godderz William A. Mullins The Kansas City Southern Crystal Zorbaugh Railway Company Baker and Miller PLLC 427 W 12th Street 2401 Pennsylvania Avenue, Suite 300 Kansas City, MO 64105 Washington, DC 20037 (816) 983-1324 (202) 663-7823 [email protected] [email protected] Counsel for Kansas City Southern, The Kansas City Southern Railway Company, Gateway Eastern Railway Company, and the Texas Mexican Railway Company Dated: July 6, 2021 CN-26 KCS-9 PUBLIC VERSION TABLE OF CONTENTS EXECUTIVE SUMMARY ................................................................................................................ 1 ARGUMENT .................................................................................................................................... 12 I. THE BOARD’S VOTING TRUST REVIEW IS FOCUSED ON THE VOTING TRUST AND DOES NOT PREJUDGE ITS ULTIMATE MERGER DECISION. ............................... 14 II. THE KEY FACTORS RELEVANT TO THE VOTING TRUST REVIEW STRONGLY SUPPORT APPROVAL. ............................................................................................................ 20 A. There Is No Risk of Unauthorized Control. .......................................................................... 20 B. No Party Has Identified a Legitimate Risk of Harm From the Voting Trust. ...................... 22 1. KCS will not be harmed by divestiture. .......................................................................... 22 2. CP’s allegations that voting trust approval could cause other financial harms are baseless. .......................................................................................................................... 25 3. CP’s claims that a voting trust would create incentives for CN and KCS not to compete are meritless. ..................................................................................................... 34 C. Approval of the Voting Trust Will Serve Important Public Interests. .................................. 40 1. Voting trusts allow railroad bids to be competitive. ....................................................... 40 2. Approval of the voting trust is important to achieving the substantial public benefits that will result from the CN-KCS combination. ............................................................. 46 3. Substantial public support demonstrates that the voting trust is in the public interest. ............................................................................................................................ 48 III. MANY COMMENTS RAISE ISSUES NOT RELEVANT TO THIS VOTING TRUST REVIEW. .................................................................................................................................... 51 A. A CN-KCS Combination Does Not Change the Competitive Balance of the Industry and Would Have No Negative Downstream Effects. ........................................................... 53 B. Claims That CN-KCS Would Cause Competitive Harm Are Incorrect. .............................. 58 1. End-to-end mergers like CN-KCS pose few competitive issues. ................................... 58 2. CN-KCS’s divestiture commitment removes all concerns about “horizontal competition.” ................................................................................................................... 60 3. The merger will enhance, not reduce, geographic competition. ..................................... 69 4. CN-KCS’s gateway commitment eliminates all concerns about vertical foreclosure. ... 71 C. KCS’s Shreveport-Kansas City Line Would Be Critically Important to a CN-KCS Combination and Would Not Be Downgraded. .................................................................... 73 D. Amtrak’s Interest in Potential Future Passenger Service Over KCS’s Baton Rouge-New Orleans Line Is Not Relevant to the Voting Trust. ............................................................... 75 E. Any Traffic Impacts from a CN-KCS Combination Will Be Fully Addressed in the Board’s Environmental Review and Are Not Relevant to the Voting Trust. ....................... 76 CN-26 KCS-9 PUBLIC VERSION F. No Rail Employees Are Affected by the Voting Trust, and Impacts of a CN-KCS Consolidation Will Be Thoroughly Reviewed in the Application. ....................................... 78 G. Voting Trust Approval Does Not Affect CP’s Ability to Present an Inconsistent Application If It Chooses to Do So. ...................................................................................... 78 CONCLUSION ................................................................................................................................. 80 EXHIBIT 1: Reply Verified Statement of Jean-Jacques Ruest EXHIBIT 2: Reply Verified Statement of Michael J. Naatz EXHIBIT 3: Reply Verified Statement of Ghislain Houle EXHIBIT 4: Reply Verified Statement of Mark Zmijewski EXHIBIT 5: Reply Verified Statement of James Cairns EXHIBIT 6: Reply Verified Statement of William Rennicke EXHIBIT 7: Index of Previously Submitted Voting Trust Support Letters EXHIBIT 8: Additional Voting Trust Support Letters EXHIBIT 9: William Clyburn, Jr., “CN Voting Trust Clears STB New Merger Rules Tests. It Should Be Approved,” Railway Age (June 8, 2021) EXHIBIT 10: Dr. William Huneke, “Why CN’s Open Gateways Offer Is a Big Deal,” Railway Age (June 22, 2021). EXHIBIT 11: CP White Paper (December 15, 2015) EXHIBIT 12: CP White Paper (February 3, 2016) EXHIBIT 13: Email Correspondence Between Counsel Concerning Workpapers (July 1, 2021) CN-26 KCS-9 PUBLIC VERSION EXECUTIVE SUMMARY A CN-KCS combination will increase customer options, enhance rail-to-rail competition with larger Class Is, and benefit both the global environment and local communities by converting truck traffic to rail. Applicants1 look forward to demonstrating those benefits in a comprehensive current-rules application and to participating in a robust, careful review process that will allow full stakeholder input. The only question presented to the Board now, however, is whether Applicants’ voting trust agreement satisfies the test for voting trust review established in Major Rail Consolidation Procedures.2 It does. Applicants demonstrated in their Motion that their proposed voting trust satisfies the Board’s test. First, it precludes premature control of KCS during the trust period. Second, approval of the proposed voting trust is in the public interest, because it causes no harms and serves the public interest, including by placing CN on equal footing with other bidders in the market for KCS. None of the comments on the voting trust agreement changes either conclusion. The first point is literally uncontested: No party contends that the voting trust would not fully insulate KCS from CN control during the trust period. Nor do the comments undermine Applicants’ strong public interest 1 “Applicants” are Canadian National Railway Company (“CNR”), Grand Trunk Corporation (“GTC”), and CN’s rail operating subsidiaries (collectively, “CN”) and The Kansas City Southern Railway Company, Gateway Eastern Railway Company, and The Texas Mexican Railway Company (collectively, “KCS”). 2 Major Rail Consolidation Procedures, Docket No. EP 582 (Sub-No. 1) (STB served June 11, 2001) (“Major Rail Consolidation Procedures”). 1 CN-26 KCS-9 PUBLIC VERSION showing. Divestiture poses no risk of harm to KCS. The Board has oversight over the divestiture process; if CN were required to divest KCS, it will maintain KCS as an intact entity. There is no risk of financial harm to CN, either. CN’s strong balance sheet and credit rating will allow it to handle and quickly retire the debt associated with this unique transaction. Canadian Pacific Railway Company (“CP”)—a self-interested party hoping to acquire KCS at an inferior price—tries to prove otherwise, often by arguing the opposite of what it said when seeking approval for its own voting trust. CP’s efforts only underscore why approving Applicants’ voting trust is in the public interest. The Board has specifically recognized the public interest in authorizing voting trusts so as not to tilt the market for railroad purchases in favor of a “pend[ing] . hostile takeover bid.”3 That is what CP seeks to do here. CP’s specific arguments are without merit. CP’s suggestion that the Board’s voting trust review requires a comparison between the merits of the CN- KCS proposal and CP’s unsuccessful bid fails
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