Missouri Pacific Railroad v. United States (346 F. Supp. 1193, 1972)

MATTHES, Circuit Judge.

This is an action by the Missouri Pacific Railroad Co. [MoPac], pursuant to 28 U.S.C. § 1336(a), to set aside the Report and Orders of the Interstate Commerce Commission [ICC] dated December 28, 1971, and March 6, 1972, which authorized the merger of the Illinois Central Railroad Co. [Central] and the Gulf, Mobile and Ohio Railroad Co. [Gulf] into a new railway system, the Illinois Central Gulf Railroad Co. [Central Gulf], to be controlled by Illinois Central Industries [Industries], a non-carrier holding company which presently controls Central. See Illinois Cent. G. R. R. Co.—Acquisition—G.M. & O. R.R. Co., et al., 338 I.C.C. 805 (1971). Annulment of the order was also sought in a separate complaint filed by the Kansas City Southern Railway Co. in the United States District Court for the Western District of Missouri. Separate three-judge courts composed of the same judges were convened pursuant to 28 U.S.C. § 2284, and temporary restraining orders were issued by consent (on March 16, 1972, in this proceeding) restraining implementation of the order pending disposition of this action. The cases were consolidated for argument and separate opinions are filed simultaneously today. See Kansas City Southern Ry. Co. v. United States, 346 F.Supp. 1211 (W.D.Mo.1972).

I. THE PROPOSED MERGER

Central and Gulf applied to the ICC on May 16, 1968, for authority under § 5(2) of the Interstate Commerce Act, 49 U.S.C. § 5(2), to merge the two systems into a new system. The merger method they proposed was described by the ICC as follows:

“The Plan seeks to effect a tax-free reorganization of the three companies while permitting the carrier operations of Central and Gulf to continue uninterrupted. Central Gulf, the vehicle through which this merger is to be effectuated, is to be organized and incorporated in Delaware following approval herein. The Plan calls for Gulf to form Central Gulf and to assign and transfer to the latter all of its properties. In consideration therefor, Central Gulf would transfer to Gulf all of its voting stock, which will consist of 1,000 shares of no-par common stock. Gulf would then be merged into Industries. In turn, Central would transfer substantially all of its assets to Central Gulf, and would then be liquidated and dissolved. Industries would then remain as the surviving parent corporation owning all the capital stock of Central Gulf, which itself would succeed to all the rights, privileges, power, and property of each constituent railroad and would assume their liabilities and obligations.”

Illinois Cent. G. R.R. Co.—Acquisition— G.M. & O. R.R. Co., et al., 338 I.C.C. 805, 809 (1971). Additionally, authority was sought for Industries to issue a new series of stock with which to effect the merger.

The system to be created, Central Gulf, will be primarily a north-south carrier situated in the Mississippi Valley. (See the appended map, identified in the ICC hearings as Finance Docket No. 25203 et al. Part 6, Witness F. M. Dowling.) Central Gulf will operate some 9,484 miles of track, as compared to the following mileage for other railroads in the area: Seaboard Coast Line-L & N, 14,830 miles; Southern Pacific, 13,328; MoPac, 12,324; and Southern, 9,076.

II. THE INVOLVEMENT OF THE UNION PACIFIC

The fact which is at the heart of MoPac’s complaint is the ownership by the Union Pacific Railroad [UP] of stock in Central’s parent corporation, Illinois Central Industries. This stock has ranged from 30% near the turn of the century, to 16% during these ICC hearings, to 12.2% now; the diminution resulting from stock exchanges in other mergers and acquisitions. Furthermore, the intervenors, Central and Gulf, contend the stock exchange involved in the instant merger will reduce UP’s share to 10.4%. The present market value of this stock is said by MoPac to be $79.5 million.

The nexus between UP’s stock in Central and this merger is MoPac’s contention that through this stock UP controls Central, has controlled it since 1906 when E. H. Harriman sold his Central stock to UP, and therefore that UP will control the newly merged Central Gulf.

The consequences to MoPac if such UP control exists is that UP, whose eastern terminus is now Kansas City, would acquire by this merger Gulf’s routes out of Kansas City which connect with Central’s important terminals at Chicago and St. Louis, and thereby would link UP’s western system with its allegedly controlled Central system in Mid-America. As a result, MoPac alleges, UP will divert to Central Gulf almost all the business it now gives MoPac, and thereby will cripple MoPac’s competitive capacity.

MoPac first raised the contention of UP control of Central on November 16, 1967, six months before Central and Gulf filed their merger application. MoPac’s complaint was filed in the proceedings wherein UP seeks to acquire the Rock Island Line, a merger which not coincidentally would also extend UP’s lines from Kansas City to Chicago and St. Louis. By this complaint, MoPac sought an investigation by the ICC pursuant to § 5(7) of the Act to ascertain whether UP had violated § 5(4) of the Act by acquiring control of another carrier without authority from the ICC to do so.

In April of 1968, UP responded to this situation by filing with the ICC copies of trust agreements by which it placed all its holdings in Industries in three, separate voting trusts. On May 20, 1968, the ICC granted MoPac’s request to withdraw its complaint seeking the investigation.

The issue of UP control of Central then arose in the present case when the Columbus and Greenville Railway Co., alleging UP control of Industries through a concert of the holdings and influence of UP, the Harriman family, Brown Brothers Harriman investment bankers [BBH] and Mr. Stephen Hord, a BBH partner who was then on the Executive Committee of Central, moved to dismiss the Central Gulf merger proceedings for want of jurisdiction on the ground that UP was an indispensable party. MoPac subsequently filed a new control complaint pursuant to § 5(7) alleging control by UP of Central in violation of § 5(4). Since these complaints related to the question of a violation of § 5(4) rather than the propriety of this merger under § 5(2), they were separately docketed. Accordingly, the Hearing Examiner in the Central Gulf merger ease excluded evidence on the control question as beyond his assignment.

Although the question of illegal control under § 5(4) was ruled irrelevant, the question of the effect of such control on the propriety of this merger was obviously relevant. On this point, the Examiner found that the voting trusts effectively insulated Central Gulf from control by UP. However, the Examiner suggested in his June, 1970, report that to avoid the lengthy investigation under § 5(4) and subsequent litigation which would delay this merger and the UP-Rock Island merger, UP should consider voluntary divestiture in the manner ordered by the ICC in the Norfolk and Western merger, i. e., divestiture over a 10-year period.

UP acted upon the Examiner’s suggestion and in August, 1971, filed in the separately docketed control case a stipulation between UP and its three trustees requiring the trustees to dispose of the stock over a 10-year period commencing when the ICC approved either the Central Gulf merger or the UP-Rock Island merger.

As will be discussed more fully below, the Commission accepted both the Examiner’s finding that the trusts insulate Central Gulf from control by UP and UP’s decision to divest over ten years.

III. THE PROCEEDINGS ON THE MERGER APPLICATION

Central and Gulf made their application for merger authority on May 16, 1968. Thereafter, the ICC held 73 days of hearings between November, 1968, and August, 1969. Among the protestants and intervenors were the United States- Department of Justice Antitrust Division, 19 railroad companies (including the Chicago, Rock Island and Pacific; Louisville and Nashville; Chicago and North Western; St. Louis-San Francisco; Denver and Rio Grande Western; and Chicago, Milwaukee, St. Paul and Pacific), two ports and one state railroad commission. Of these, only MoPac and Kansas City Southern have opposed the merger in court.

The Hearing Examiner filed his 219 page Recommended Report and Order in June, 1970. After exceptions thereto were filed, the ICC heard oral argument on February 17, 1971, and filed its Report and Order on December 28, 1971. The Chicago & North Western joined MoPac and Kansas City Southern in seeking reconsideration of the Order. Accordingly, the Commission, on January 31, 1972, stayed its order, then on March 6, 1972, denied reconsideration and reaffirmed the order authorizing the merger.

In deciding whether the merger met the dispositive statutory command that it be in the public interest, the Commission found first that the economies it would allow Central and Gulf to effect would produce a new increase in pre-tax income of $12 million, as well as producing faster and cheaper service for shippers and consumers.

Secondly, as to the anticompetitive effects of the merger, the Commission found that three, small intrastate carriers could not survive the merger, and on their requests ordered that they be included in Central Gulf. But, as to the other carriers, the ICC found the business to be diverted from each would be negligible, and that ample competition from carriers by rail and other modes would remain. 338 I.C.C. at 877. Specifically, the Commission determined that MoPac would lose only 0.56% of its general operating revenue, a sum which MoPac concedes would not be sufficient to make this merger not in the public interest.

Finally, and these in effect are the conclusions which MoPac contests, the Commission determined (1) that it need not complete the separately docketed control investigation because, it held, the voting trusts and divestiture agreement, (which it made conditions to the merger) insulated Central Gulf from such control; and (2) that ten years was an appropriate period for divestiture in order to prevent economic dislocation from a large forced-sale.

Accordingly, the ICC entered an order approving the merger with the following conditions: (1) the inclusion of the three railroads mentioned above; (2) divestiture by UP of its trusteed stock in Industries over a 10-year period; (3) prohibition of the trustees from selling any of the stock to UP, its parent Union Pacific Corporation, Brown Brothers Harriman, the Harriman family, or the successors, assigns or associates, etc., of any of them; (4) inclusion in UP’s quarterly reports of a progress statement on the divestiture; (5) a report to the ICC after each Industries shareholders meeting of how the trusteed stock was voted; (6) a report to the ICC on how Mr. Hord or his successor voted as a director; (7) direction to Industries to reveal to the Commission the amount of its outstanding stock owned by UP Railroad, UP Corporation, Brown Brothers Harriman, members of the Harriman family, “and their associates, affiliates, representatives, successors, assigns and/or heirs. . . .,” 338 ICC at 873; and (8) retention of jurisdiction by the ICC for five years to deal with any problems which may arise from the

merger, and “to resolve the issues regarding the alleged common control of applicants and [UP] . . . and to take such measures, including . remedial steps deemed necessary for this transaction to remain in the public interest. . . .” Id.

IV. MOPAC’S CONTENTIONS

The essential question the ICC must determine under § 5(2) in each merger application is whether the merger is in the public interest. And, of course, “it is not the role of this Court to arrive at its own determination of the public interest on the facts of this case. Our appellate function in administrative cases is limited to considering whether the announced grounds for the agency decision comport with the applicable legal principles. SEC v. Chenery Corp., [318 U.S. 80, 87-88, 63 S.Ct. 454, 459-460, 87 L.Ed. 626] . . .” Port of Portland v. United States, 408 U.S. 811, 92 S.Ct. 2513, 33 L.Ed.2d 723 (1972). However, one of the legal principles applicable here is that the ICC cannot merely conclude a merger is in the public interest while refusing to investigate a facet of it which may affect its impact on the public interest. Id. It is on this point that MoPac has joined issue.

Specifically, MoPac contends that until the Commission ascertains whether UP has power to control Industries it cannot decide whether this merger is in the public interest or whether the 10-year period for divestiture adequately protects MoPac. MoPac agrees with the ICC that an independent Central Gulf would divert only-negligible traffic from MoPac. Hence, counsel informed us at oral argument that the “Missouri Pacific’s position in this complaint is that we have no objection whatsoever to the merger itself. .” Transcript at 3. But MoPac contends a Central Gulf controlled by UP would divert business amounting to 40% of MoPac’s post-tax net income and thereby jeopardize MoPac’s competitive position contrary to the public interest. Similarly, MoPac contends that allowing UP ten years to dispose of its Industries stock gives UP ten years to profit by diverting traffic to Central Gulf, and MoPac contends the ICC cannot merely conclude that ten years is necessary to effect divestiture without economic dislocation but must conduct a formal inquiry into the period necessary to accomplish that purpose.

Accordingly, the narrow issue raised by this complaint is whether the ICC acted within legal limits in approving this merger without completing the investigation of the alleged § 5(4) violation and in allowing UP ten years to divest itself of its Industries stock without conducting a hearing to ascertain whether complete divestiture should be a condition precedent to the merger.

V.

In considering MoPac’s contentions, our touchstone must be that the national transportation policy articulated by Congress favors railroad mergers. Indeed, such mergers are, “upon approval by the Commission, . immunized from the operation of the anti-trust laws . . . ,” Northern Lines Merger Cases, 396 U.S. 491, 508, 90 S.Ct. 708, 716, 24 L.Ed.2d 700 (1970); although the “curtailment of competition” is a factor to be considered in determining whether a proposed merger is in the public interest and will “assist in effectuating the over-all transportation policy.” McLean Trucking Co. v. United States, 321 U.S. 67, 87, 64 S.Ct. 370, 381, 88 L.Ed. 544 (1944). See especially, Northern Lines Merger Cases, 396 U. S. at 506-514, 90 S.Ct. 708, 24 L.Ed.2d 700. However, as set out above, the ICC must consider all facets of the merger relevant to the public interest. This, of course, is what MoPac contends the ICC failed to do here, but we do not agree and therefore decline to disturb the order.

In contending that the ICC must complete the separately docketed control investigation before approving the merger, MoPac by necessity contends that investigation is the only way to determine both whether such control exists and, if so, whether it renders this merger not in the public interest. That contention is incorrect for three reasons.

First, the control complaint simply alleges that UP has violated § 5(4) by acquiring control of Central without obtaining the approval of the ICC. Control itself is neither sinister nor illegal if properly approved. What must be shown is that the alleged control by UP renders this merger not in the public interest.

Second, MoPac attempts to make such a showing by saying that UP will be induced by its beneficial ownership of 10% of Industries to divert to Central Gulf enormous amounts of traffic it would otherwise route over MoPac. But this is the second fallacy of MoPac’s argument. If the evil MoPac sees is diversion resulting from UP’s beneficial ownership of stock, then it is irrelevant whether the § 5(4) investigation will show that UP has control of Industries through historical ties and subtle influences. The extent of UP’s beneficial ownership is already known and presumably was a factor in the ICC’s expert prediction that the traffic to be diverted from MoPac will be negligible.

Third, even if it is control rather than beneficial ownership that is important, we agree with the ICC that the voting trusts have effectively insulated Industries from direct control by UP. Indeed that is precisely what the Commission and the courts held when it was Central contesting the effectiveness of trusts created by MoPac. See Missouri Pac. R. R. Co.—Control—Chicago, & E. I. R. R. Co., 327 I.C.C. 279, 319-21 (1965), sustained sub nom. Illinois Cent. R. R. Co. v. United States, 263 F.Supp. 421 (N.D.Ill.1966), aff’d per curiam, 385 U.S. 457, 87 S.Ct. 612, 17 L.Ed.2d 509 (1967). Furthermore, we attach considerable significance to the conditions the Commission appended to its order which will provide ample information of any attempt by UP to exercise indirect control of Industries and which retain jurisdiction for remedial action in that event. These conditions lead us to believe that the Commission would, as it should, act expeditiously in the event UP engaged in any of the practices which are of so much concern to MoPac.

In sum, we hold it is not necessary in this case to complete the control investigation before approving the merger. The only adverse consequence MoPac envisions is diversion of traffic, but it explains that diversion results not from control but from beneficial ownership of stock. Since the extent of UP’s holdings was known when the Commission made its diversion estimates, we cannot say those estimates rest upon insubstantial evidence. Similarly, since, as MoPac concedes, the rate of diversion estimated by the Commission is negligible, we see no harm that can result from allowing UP ten years in which to divest its stock. Accordingly, we do not believe the order approving the merger is vitiated by the ICC’s failure to ascertain if ten years is necessary to effect divestiture without economic dislocation.

“The function of the reviewing court is limited to ascertaining. whether there is warrant in the law and the facts for what the Commission has done. Unless in some specific respect there has been prejudicial departure from requirements of the law . the reviewing court is without authority to intervene.”

United States v. Pierce Auto Freight Lines, Inc., 327 U.S. 515, 536, 66 S.Ct. 687, 698, 90 L.Ed. 821 (1946). We find no prejudicial departure from the law in the decision to allow ten years for the ordered divestiture.

There being insufficient reason to disturb the order of the ICC approving this merger, the complaint is dismissed, and the temporary restraining order heretofore issued is ordered dissolved.

APPENDIX

. The basis of Kansas City Southern’s objection to the merger order was the refusal of the ICC to condition the merger upon purchase and lease of certain track-age by KCS from Central Gulf,

. MoPac’s suspicions of UP control