Kansas City Southern Industries, Inc. v. I.C.C.

• Citation: 902 F.2d 423
• Decision Date: 07 June 1990
• Docket Number: Nos. 88-4626,88-4706,s. 88-4626
• Parties: 134 L.R.R.M. (BNA) 2447, 59 USLW 2028 KANSAS CITY SOUTHERN INDUSTRIES, INC., The Kansas City Southern Railway Co., and Louisiana & Arkansas Railway Co., Petitioners, v. INTERSTATE COMMERCE COMMISSION, and United States of America, Respondents.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 423

902 F.2d 423

134 L.R.R.M. (BNA) 2447, 59 USLW 2028

KANSAS CITY SOUTHERN INDUSTRIES, INC., The Kansas City

Southern Railway Co., and Louisiana & Arkansas

Railway Co., Petitioners, v. INTERSTATE COMMERCE COMMISSION, and United States of

America, Respondents.

Nos. 88-4626, 88-4706.

United States Court of Appeals, Fifth Circuit.

June 7, 1990.

Robert K. Dreiling, Kansas City, Mo., Michael A. Patterson, Long Law Firm, Baton Rouge, La., Morris Raker, Sullivan & Worcester, Boston, Mass., for petitioners.

John P. Fonte, Catherine G. O'Sullivan, Richard Thornburgh, Atty. Gen., Dept. of Justice, Washington, D.C., for the U.S.

Laurence H. Schecker, Robert S. Burk, Gen. Counsel, I.C.C., Washington, D.C., for the I.C.C.

Petition for Review of an Order of the Interstate Commerce Commission.

Before JOHNSON, WILLIAMS and GARWOOD, Circuit Judges.

GARWOOD, Circuit Judge:

Pursuant to 28 U.S.C. Secs. 2321(a), 2341(3)(A), and 2344, petitioners Kansas City Southern and its affiliates (Kansas City Southern) seek review of the approval of the merger application of Rio Grande Industries, Inc. and its affiliates (Rio Grande) and related decisions by respondent the Interstate Commerce Commission (ICC). Kansas City Southern claims that the ICC erred by failing to conform to various statutory mandates for evaluating railroad consolidations, to support its factual findings with substantial evidence, to join as applicants others allegedly controlling the merging railroads, and to impose appropriate financial conditions on the merger. Intervenor-petitioner the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (Union) claims that the ICC erred by failing to impose conditions on the merger protecting employees of the motor carrier subsidiaries of one of the merging railroads. For the reasons stated below, we affirm the ICC's decision.

Facts and Proceedings Below

The present case has its roots in an earlier attempt by Santa Fe Southern Pacific Corporation (Santa Fe) to acquire Southern Pacific Transportation Company and its affiliates (Southern Pacific). In late 1983, Santa Fe and Southern Pacific agreed to consolidate their operations. Pending requisite approval of this transaction by the ICC, pursuant to 49 U.S.C. Secs. 11343, 11344, Santa Fe placed Southern Pacific's stock in an independent voting trust. The ICC, however, subsequently denied Santa Fe's application because the merger would have anticompetitive consequences and ordered Santa Fe to divest either its wholly owned rail carrier subsidiary or Southern Pacific. See Santa Fe S. Pac. Corp.--Control--SPT Co., 2 I.C.C.2d 709 (1986); see also Santa Fe S. Pac. Corp.--Control--SPT Co., 3 I.C.C.2d 926 (1987) (declining to reconsider Santa Fe's merger application and further delineating the divestiture process).

In late 1987, Santa Fe contracted to sell Southern Pacific to a subsidiary of Rio Grande, which subsequently filed a merger application with the ICC. Shortly thereafter, Kansas City Southern filed an inconsistent application to merge with Southern Pacific. A number of significant interlocutory rulings preceded the ICC's resolution of these competing applications.

First, Kansas City Southern filed a petition requesting that the ICC join Philip F. Anschutz (Anschutz) and the company that he controls--The Anschutz Corporation (TAC)--(collectively referred to as the Anschutz Parties) as co-applicants with Rio Grande. At that time, TAC wholly owned Rio Grande and, following Rio Grande's acquisition of Southern Pacific, would control seventy-five percent of Rio Grande's common stock. See Rio Grande Indus.--Control--S. Pac. Transp. Co., Finance Docket No. 10, slip op. at 1 (served May 11, 1988). The ICC found that, with TAC as Rio Grande's majority shareholder, the Anschutz Parties undoubtedly would have the power to "control" the merged railroads. See id. at 2 (citing 49 U.S.C. Sec. 11343(a)(5)). Concluding, inter alia, that the Anschutz Parties were not "contributing any funds to the acquisition or the future operations of the combined system," id. at 3, and that Rio Grande would provide all information relevant for a public interest determination, the ICC exempted the Anschutz Parties from joinder. See id. at 3-5 (citing 49 U.S.C. Sec. 10505(a)). The ICC, however, noted that the Anschutz Parties would be subject to all appropriate discovery, except as to the unnecessary discovery of their finances. See id. at 4.

Second, the Morgan Stanley Group, Inc. and its affiliates (Morgan Stanley) filed a petition with the ICC seeking a declaratory order that they would not control Rio Grande if it acquired Southern Pacific.

See Declaratory Order--Control--Rio Grande Indus., Finance Docket No. 31243, slip op. at 1 (served Aug. 25, 1988). Under Rio Grande's operating plan, an affiliate of the Morgan Stanley Group, Inc.--Morgan Stanley Leveraged Equity Fund II. L.P.--would partially finance Rio Grande's acquisition of Southern Pacific in return for twenty-five percent of Rio Grande's common stock, of which five percent would be made available for sale to buyers of Rio Grande's preferred stock. Morgan Stanley also would have the following limited rights to protect its investment: (1) a supermajority (eighty percent) provision for certain extraordinary transactions, such as dissolution; (2) the power to place one director on Rio Grande's nine-member board of directors; (3) a "standstill" provision ensuring that Rio Grande maintained the status quo prior to consummation of the merger; and (4) a "put/call" provision relating to a buy out by Rio Grande of the twenty-five percent of common stock owned by Morgan Stanley and the preferred shareholders. See id. at 3-4. The ICC held that, as a minority shareholder with limited protective rights, Morgan Stanley would not have the day-to-day supervision or other sufficient power over the merged railroads so as to possess control. See id. at 4-5. Kansas City Southern argued that, by acting in concert with Rio Grande to acquire Southern Pacific, Morgan Stanley was in control. The ICC, however, refused to extend its jurisdiction by holding that financiers of railroad mergers were necessarily in control of the resulting entity. See id. (discussing 49 U.S.C. Sec. 11343(b)(3)).

Reviewing the merger applications in light of public interest considerations, see 49 U.S.C. Secs. 11344(b)(1), 11344(c); 49 C.F.R. Sec. 1180.1, the ICC ultimately approved Rio Grande's application and denied that of Kansas City Southern. See Rio Grande Indus.--Control--S. Pac. Transp. Co., --- I.C.C.2d ----, Finance Docket No. 32000, at 3 (served Sept. 12, 1988). In approving Rio Grande's application, the ICC emphasized that the merger would create a more efficient single-line railroad and greater competition in a number of western states referred to as "the Central Corridor." See id. at 3, 34, 47. Although the ICC acknowledged that Kansas City Southern persuasively argued that Rio Grande overestimated the benefits resulting from a Rio Grande-Southern Pacific merger, especially with respect to that derived from locomotive maintenance and internal reroutes, Kansas City Southern conceded that the merger, at a minimum, would produce approximately $21 million quantifiable public benefits. See id. at 39, 55-59. Moreover, the ICC noted that this figure does not account for the unquantifiable benefits of a new single-line alternative for shippers in the Central Corridor. See id. at 39 n. 41. Thus, even accepting Kansas City Southern's criticisms as true, the ICC found that the public benefits clearly outweigh any minimal anticompetitive effects. See id. at 39-40 (applying public benefits analysis, pursuant to 49 C.F.R. Sec. 1180.1(c)).

Kansas City Southern criticized Rio Grande's application as not assuring Southern Pacific's long-term viability. More specifically, Kansas City Southern claimed that Rio Grande's pro forma financial statements overestimated its future revenues and underestimated its capital expenses. The ICC, however, disagreed with a number of Kansas City Southern's adjustments of Rio Grande's projections and with Kansas City Southern's "assumption that only impacts upon [Southern Pacific] can be considered." Id. at 83; see id. app. B. Although determining that Kansas City Southern's "worst case" and the ICC's "intermediate" case scenarios would result in Southern Pacific's technical default in the fixed charge coverage ratios as computed under and required by its loan agreement with Security Pacific National Bank, the ICC found that Southern Pacific had a number of options for avoiding such a result. See id. at 84-85. Moreover, even under the four-year projections of the "worst case" scenario, the ICC found that the merger would satisfy the ICC's own standard fixed charge coverage requirements. See id. at 84-85. The ICC refused to consider any other speculative long-term projections, noting that such a finding is not a statutory requisite. See id. at 85. Although acknowledging that neither Rio Grande nor Southern Pacific were financially strong and their combination would be highly leveraged initially, see id. at 82, the ICC found not only that their merger would create a stronger entity than that of either railroad separately, but also that Southern Pacific likely would have greater long-term stability under Rio Grande's control than under its present trusteeship. See id. at 86.

Kansas City Southern and a number of other parties requested that the ICC impose financial restrictions, including a requirement that Rio Grande make capital expenditures of $1.75 billion over five years to ensure Southern Pacific's future viability. Because it concluded that such conditions may reduce the public and private benefits of a railroad merger, the ICC declined to impose such conditions and emphasized its presumption against imposition unless certain criteria are met, principally relating to the amelioration of possible aspects...