STB Sides With DOJ, Seeks ‘Ordinary Course’ Info From UP-NS

by Jim Mathews / President & CEO

The Surface Transportation Board, which will decide whether Union Pacific should be allowed to swallow up Norfolk Southern, sent another strong signal this week that they expect both companies to share real operational and financial detail to support their transaction, rather than just vague hand-waving and status-quo assurances.

On Wednesday STB issued a decision siding with the Dept. of Justice, which filed a brief before the Board early this month looking to make sure that UP and NS included the same kinds of documents and records that non-railroad companies supply to Justice or the Federal Trade Commission when they want permission to merge.

The Board gave UP and NS until April 7th to comply.

The legal term for these is “ordinary course” documents, and they include most of the things you might expect senior executives and corporate officers to review -- things like competitive analyses, market studies, confidential memos about the details of the proposed sale, and third-party studies or opinions from bankers or consultants which supported the corporate leaders’ decision to move ahead with the transaction.

“In this proceeding where Applicants seek approval to ‘create America’s first transcontinental railroad,’ the highly probative nature of these documents is clear,” STB ruled in its March 18 decision. “And, as discussed below, the Board requires a targeted search for documents that Applicants may have already initiated.”

Supplying these sorts of papers is standard procedure if you’re a big automaker, or a bank, or a manufacturer going before the FTC, for example. But railroads don’t do that. Instead they go before the STB to get their transactions approved. After Justice filed their brief arguing that STB should compel UP and NS to supply “ordinary course” documents, the would-be merger partners responded by saying that while they weren’t refusing to supply them, they didn’t support importing FTC and DOJ procedures into the Board’s rail deliberations.

STB disagreed, dismissing UP’s and NS’s concerns about protecting confidential information in the docket and focusing instead on how this is precisely the kind of detail the Board needs to make the best decision it can.

It’s “appropriate to order the submission of the ‘ordinary course’ documents here given the proposed transaction’s size and significance for the rail transportation system, and because the transaction is the first to be assessed under the 2001 merger rules,” STB said. “Moreover, the Board finds that these documents will assist it in determining whether the proposed transaction is likely to have the effects attributed to it by Applicants and whether the transaction is consistent with the public interest, which requires consideration of the proposal’s competitive effects.”

Here, STB explicitly sides with DOJ: “Thus, as DOJ explains, ‘ordinary course’ documents are of ‘critical importance’ in evaluating a merger, and may be more probative than ‘party advocacy, expert analysis, and self-serving statements’ provided to support a merger application.”

Despite worries by some partisans that the STB would rubber-stamp the transaction, under Chair Patrick Fuchs this Board has made it clear throughout this process that it expects everyone involved to follow the rules and show their work as they seek to justify this giant transaction.

In January, when the Board rejected the two parties’ initial application as incomplete, the order explaining the decision was clear about what was missing and blunt that STB expected more. One particularly glaring example of something missing from the initial application was a schedule spelling out which conditions imposed by regulators could cause Union Pacific to abandon the deal altogether. Pointedly, STB said that these documents were required by regulation, that they were already the subject of discovery disputes, and that UP and NS didn’t even attempt to justify their omission in their application.

I told you back then that one of the clearest through lines in the Board’s reasoning was its insistence on demonstration, not aspiration. The Board didn’t reject the application because it doubted that Union Pacific and Norfolk Southern intend to grow traffic or deliver benefits. It rejected the application because UP and NS didn’t back those claims with the kind of forward-looking analysis the rules require...and which would result in a more critical assessment of the deal.

Don’t get it twisted: STB isn’t telegraphing any kind of stance on the merits of the transaction here. Instead, they’re telling anyone watching this unfolding process -- which could create the biggest single railroad in U.S. history and give a single private entity an effective veto over any passenger-rail decisions for the whole country -- that they’re all out of rubber stamps at the Board’s E Street chambers.