ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Tuesday, November 19, 1996 TAG: 9611190127
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: NEW RIVER VALLEY
DATELINE: PHILADELPHIA
SOURCE: ASSOCIATED PRESS
THE JUDGE seems unlikely to throw out Norfolk Southern's challenge, as Conrail has requested
The battle for control of Conrail Inc. moved into federal court Monday, with Norfolk Southern Corp. arguing stockholders will lose money if Conrail accepts a buyout plan from CSX Corp.
Conrail contended that the CSX merger is the best way to preserve th\e Conrail franchise.
In a courtroom so packed with attorneys that proceedings were moved in the afternoon, U.S. District Judge Donald VanArtsdalen gave the three companies two days to argue two issues: Whether the deal between Conrail and CSX violates federal law, and whether Norfolk Southern has grounds to challenge the buyout.
VanArtsdalen will then decide whether to throw out Norfolk Southern's challenge at Conrail's request or to issue a preliminary injunction blocking the first stage of the CSX-Conrail deal.
The hearing focused on the unusual merger agreement between CSX and Conrail, which has taken advantage of Pennsylvania laws enacted to make hostile takeovers prohibitively expensive.
It is the first time a federal court has faced many of the issues raised, VanArtsdalen said.
Norfolk Southern, which challenged the Conrail-CSX deal a week after it was announced, has offered stockholders $110 per share in cash.
CSX's $8.5 billion offer would give 40 percent of stockholders $110 per share and the other 60 percent CSX stock equivalent to the market price for Conrail. The first CSX tender offer, for 20 percent, expires Wednesday.
Norfolk Southern argued Monday that stockholders on the back end of the merger transaction - those who are unable, or choose not to sell during CSX's first tender offers - could lose an estimated $28 or more a share.
``I've not seen a disparity this great in a tender offer for well over a decade,'' Professor John Coffee Jr. of Columbia University testified for Norfolk Southern.
Lawyers for Conrail pointed out that Pennsylvania - unlike Delaware, where many U.S. companies are incorporated - allows a company to take more than share values into consideration in buyouts. The law also allows a board to weigh the effects on employees, the community and contractors.
CSX has promised to keep the company headquarters in Philadelphia and to retain most of Conrail's executives.
``My biggest interest was in preserving the Conrail franchise,'' said Furlong Baldwin, Conrail director and former CSX director. He repeated the phrase so many times during testimony that at one point the judge told him to stop repeating himself and answer the questions directly.
He noted the price of Conrail's stock rose substantially after plans to merge with CSX were announced.
``I in no way think we've treated the shareholders shabbily in this,'' Baldwin said.
This summer, Conrail's board of directors examined merger possibilities with all four remaining major railroads. By fall, the board decided a merger with CSX would make the best business sense, Baldwin said.
At the time Conrail and CSX agreed to a merger, both sides wanted an agreement that would protect them from the downsides of the costly deal, he said. In return for concessions from CSX, Conrail created several barriers to a hostile takeover:
* A waiver of its ``poison pill,'' which would trigger millions of new shares, worth $205, to be issued to all stockholders except a hostile company.
* A ``breakup'' payment of $300 million to CSX if Conrail cancels the buyout or is taken over by another company.
* A ``lockout'' clause prohibiting Conrail's board from considering a competing bid for nine months, even if the CSX bid fails.
Norfolk Southern argued these provisions will ``coerce'' shareholders into accepting the CSX offer. In particular contention is the lockout provision, which Norfolk Southern contends is illegal because it keeps directors from making future decisions in the best interest of the company.
``The Conrail directors are not in a position to live up to their own fiduciary duties, even if they wanted to,'' Coffee said. ``I don't think you can sell or trade your duty.''
But Baldwin said the directors had done everything necessary to live up to that duty. The ``lockout'' provision applies equally to CSX, he said.
``The critical thing is we got the ability to stop CSX and Norfolk Southern from talking about carving up the franchise,'' he said.
Issuing an injunction to stop CSX's tender offer may be unprecedented, according to testimony.
By VanArtsdalen's comments, it appeared unlikely he would rule to throw out the case, as Conrail and CSX requested. The judge said he believes the case does addresses federal securities issues, putting it in the purview of federal court.
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