1 

ECONOMIC ANALYSIS GROUP

DISCUSSION PAPER

The Strange Career of Independent Voting Trusts in U.S. Rail Mergers

by

Russell Pittman*

EAG 16-3 July 2016

EAG Discussion Papers are the primary vehicle used to disseminate research from 

economists in the Economic Analysis Group (EAG) of the Antitrust Division. These 

papers are intended to inform interested individuals and institutions of EAG's research 

program and to stimulate comment and criticism on economic issues related to antitrust 

policy and regulation. The Antitrust Division encourages independent research by its 

economists. The views expressed herein are entirely those of the authors and are not 

purported to reflect those of the United States Department of Justice. 

Information on the EAG research program and discussion paper series may be obtained 

from Russell Pittman, Director of Economic Research, Economic Analysis Group, 

Antitrust Division, U.S. Department of Justice, LSB 9004, Washington, DC 20530, or by 

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To obtain a complete list of titles or to request single copies of individual papers, please 

write to Regina Robinson at regina.robinson@usdoj.gov or call (202) 307-5794. In 

addition, recent papers are now available on the Department of Justice website at 

http://www.justice.gov/atr/public/eag/discussion-papers.html. 

 

* Director of Economic Research, Antitrust Division, U.S. Department of Justice; 

Visiting Professor, Kyiv School of Economics and New Economic School, Moscow. The 

author is grateful to Cecilia Cheng, Rui Huang, Wendy Liu, and Chris Sagers for helpful 

comments on an earlier draft; to Mary Thompson and her colleagues in the Antitrust 

Division Library for extensive assistance in tracking down old sources; and to his 

Division colleagues who worked together on the Division’s filing at the STB: Stephanie 

Beckett, Caroline Holland, Kara Kuritz, Robert Lepore, Kathleen O’Neill, and Nancy 

Rose. The views expressed are not purported to reflect the views of the Department of 

Justice.
2 

Abstract

Voting trust arrangements have a long history at both the Interstate Commerce 

Commission and the Surface Transportation Board as devices to protect the incentives of 

acquiring firms and maintain the independence of acquiring and target firms during the 

pendency of regulatory investigation of the merger proposal. However, they are not 

without problems. The STB argued in 2001 that as Class I railroads have become fewer 

and larger, it may be difficult to find alternative purchasers for the target firm if the STB 

turns down the proposal. The Antitrust Division argued in 2016 that joint stock 

ownership creates anticompetitive and/or otherwise undesirable incentives, even if the 

independence of the voting trustee is complete. On the other hand, the functions served 

by voting trusts in railroad mergers are served by merger termination fees and other 

contractual “lockup” mechanisms in other parts of the economy, without the same 

incentive problems as voting trusts. Thus voting trusts may no longer serve a useful 

function in railroad merger deliberations. 

Keywords: railroads, mergers, voting trusts, merger termination fees, merger lockup 

provisions 

JEL codes: L92, G34, D82, K23, N72 
3 

Introduction 

 In November 2015, the Canadian Pacific Railway Company (CP) made an 

unsolicited bid to acquire the Norfolk Southern Railway Company (NS). This was the 

first merger proposal among Class I railroads since the imposition by the Surface 

Transportation Board (STB) of increased scrutiny for such mergers announced in its 

Major Rail Consolidation Procedures decision of June 2001.1

 Over almost a century it 

had become standard practice in the U.S. railroad merger process for the acquiring 

company to be permitted to purchase the shares of the target upon announcement of the 

deal and then to place the shares in an independent voting trust during the pendency of 

the investigation of the proposal by the Interstate Commerce Commission (ICC) or STB. 

CP proposed a variant of this arrangement: rather than CP buying the shares of NS and 

placing them in an independent voting trust, CP would buy the shares of NS but then a) 

place its own shares in an independent voting trust, and b) immediately replace the CEO 

of NS with the CEO of CP. 

 The proposal quickly stirred up controversy in the railroad industry. In its Major 

Rail Consolidation Procedures decision, the STB had noted the increased concentration 

of the U.S. rail sector at the national level and expressed concerns both about further 

 

1 STB Ex Parte No. 482 (Sub-No. 1), decided June 7, 2001, decision service date June 11, 2001. The STB 

classifies railroads as Class I, II, or III according to their revenues; a railroad is defined as a Class I railroad if 

it has annual carrier operating revenues of $250 million or more in 1991 dollars. Currently there are 

seven North American class I railroads: Burlington Northern Santa Fe, Canadian National, Canadian 

Pacific, CSX, Kansas City Southern, Norfolk Southern, and Union Pacific. See U.S. Surface Transportation 

Board, FY 2015 Annual Report, 

https://www.stb.dot.gov/stb/docs/AnnualReports/Annual%20Report%202015.pdf, and U.S. Surface 

Transportation Board, Reporting Requirements for Positive Train Control Expenses and Investments, 

Docket No. EP 706, August 13, 2013, 

https://www.stb.dot.gov/decisions/readingroom.nsf/fc695db5bc7ebe2c852572b80040c45f/9e3bab823b

70ef9385257bc7004e9fad?OpenDocument. 
4 

mergers among class I railroads and about the use of independent voting trusts in such 

deals: 

[W]e believe that, with only a limited number of major railroads remaining, we 

must take a much more cautious approach to future voting trusts in order to 

preserve our ability to carry out our statutory responsibilities.2

NS declined to accept the CP merger offer and released a white paper from two former 

STB commissioners arguing that the STB would be unlikely to approve either this 

unusual voting trust arrangement or the merger transaction itself.3 Two of the largest 

Class I railroads, the Burlington Northern Santa Fe (BNSF) and the Union Pacific (UP), 

stated their opposition to the merger, arguing that, if approved, it would lead to further 

industry consolidation into a very small number of transcontinental railroads.4 When CP 

proceeded to file at the STB in March 2016 requesting approval of the proposed voting 

trust arrangement, the Antitrust Division of the Justice Department filed its own 

statement of opposition, as did many shippers and shippers’ groups.5

 Finally, in the face 

 

2 The Board also noted that “This approach is consistent with the view expressed by CSX at oral argument 

that, while voting trusts can serve some public purpose, they should not be used routinely, but rather 

should be available only for those rare occasions when their use would be beneficial.” Major Rail 

Consolidation Procedures at 19 and 240. 3 Norfolk Southern Corporation, “Norfolk Southern Releases White Paper from Former Surface 

Transportation Board Commissioners: Former Commissioners Francis Mulvey and Charles Nottingham 

Agree with the Norfolk Southern Board of Directors that the STB Would Be Highly Unlikely to Approve a 

Voting Trust or the Transaction Proposed by Canadian Pacific,” December 7, 2015, 

http://www.nscorp.com/content/nscorp/en/news/norfolksouthernreleaseswhitepaperfromformersurfacetransportatio.html. 4 Reynolds Hutchins, CP-NS merger would fuel biggest rail industry shake-up since Staggers Act, J. of 

COMMERCE, January 26, 2016, http://www.joc.com/rail-intermodal/class-i-railroads/canadian-pacificrailway/cp-ns-merger-would-fuel-biggest-rail-industry-shake-staggers-act 20160126.html. 5 “Reply of the United States Department of Justice” before the Surface Transportation Board, Canadian 

Pacific Railway Limited – Petition for Expedited Declaratory Order, Finance Docket No. 36004, April 8, 

2016, https://www.justice.gov/atr/file/839531/download. 
5 

of a wall of opposition, CP abandoned the proposal, seeing “no clear path to a friendly 

merger” with “the political and economic environment ... against us.”6

 A substantive investigation of the proposed merger by the STB would likely have 

led to multiple interesting and important debates. The combination would have been 

largely an “end-to-end” merger (where one merging railroad carries traffic from A to B, 

while the other railroad carries traffic from B to C) rather than a “parallel” merger (where 

both railroads carry traffic between A and B, though perhaps over very different routings 

and distances). The ICC and its successor the STB have traditionally found little likely 

harm to competition in end-to-end rail mergers.7

 This is despite the well established 

empirical finding that connecting railroads – that is, the partners in end-to-end mergers – 

often compete with each other for traffic traveling to or from their points of intersection. 

Two well documented examples are U.S. railroads competing to carry grain originating at 

common origins in the plains states to different domestic destinations for export and 

Mexican railroads competing to carry freight in both directions between Mexico City and 

different port cities.8

 

6 Jacquie McNish and Laura Stevens, Canadian Pacific Drops Efforts to Merger With Norfolk Southern, 

WALL ST. J., April 11, 2016, http://www.wsj.com/articles/canadian-pacific-drops-efforts-to-merge-withnorfolk-southern-1460375864. 7 See, for example, Russell Pittman, Railroads and Competition: The Santa Fe/Southern Pacific Merger 

Proposal, 39 J. INDUSTRIAL ECON. 25 (1990) and John E. Kwoka, Jr., and Lawrence J. White, Manifest 

Destiny? The Union Pacific and Southern Pacific Railroad Merger, in Kwoka and White, eds., THE 

ANTITRUST REVOLUTION: ECONOMICS, COMPETITION, AND POLICY (4th ed., 2004). 8

James M. MacDonald, Competition and Rail Rates for the Shipment of Corn, Soybeans, and Wheat, 18 

RAND J. ECON. 151 (1987); MacDonald, Railroad Deregulation, Innovation, and Competition: Effects of the 

Staggers Act on Grain Transportation, 37 J. LAW & ECON.63 (1989), 63-95; J. Campos, Lessons from 

railway reforms in Brazil and Mexico, 8 TRANSPORT POL. 85 (2001); Stephen Roop, Jeffery Warner, Felipe 

Zambrano, Roubabah Ismailova, and Dong-Hun Kang, THE IMPACT OF MEXICAN RAIL PRIVATIZATION ON 

THE TEXAS TRANSPORTATION SYSTEM (Texas Transportation Institute, February 2001), 

http://d2dtl5nnlpfr0r.cloudfront.net/tti.tamu.edu/documents/2128-2.pdf; International Transport Forum, 

PEER REVIEW OF RAILWAY FREIGHT DEVELOPMENT IN MEXICO (February 2014); Russell Pittman, Railways 

Restructuring and Ukrainian Economic Reform, 2 MAN & THE ECONOMY 87 (2015).
6 

In addition, there were as noted already concerns expressed about the increased 

concentration in the U.S. freight rail sector at the national level – from over two dozen 

Class I railroads in 1980 to fourteen in 1991 to seven today – and any further reduction 

was likely to raise policy issues in a number of areas beyond that of the loss of 

competition to existing shippers, including fears of the loss of competition for locating 

new industrial plants, the reduced number of firms engaged in innovation and 

experimentation, and the “too big to fail” phenomenon more often applied to financial 

markets.9

What was somewhat remarkable about this episode, however, was the attention 

devoted and controversy sparked by the independent voting trust proposal itself. As the 

CP noted and argued, independent voting trusts had been a standard part of U.S. freight 

railroad mergers for decades – CP calculated that the ICC and STB combined had 

accepted 144 out of the 144 proposed voting trust proposals placed before them between 

1980 and 2016.10 On the other hand, there had been no mergers among Class I railroads 

proposed – and thus no independent voting trusts between two Class I railroads created – 

since the strengthening of the scrutiny of such arrangements announced by the STB in 

2001. Furthermore, the novel aspects of this particular proposal – in particular the plan to 

immediately replace the CEO of the target with the incumbent CEO of the acquirer – 

raised concerns about the independence of NS during the pendency of an STB review.11

 

9 See, for example, Russell Pittman, The Economics of Railroad “Captive Shipper” Legislation, 62 ADMIN. 

LAW REV. 919, 934 (2010).

10 Canadian Pacific Railway, “CP-NS: A Comprehensive Approach to Regulatory Approval,” February 2016, 

http://www.cpr.ca/en/investors-site/Documents/Comprehensive-Approach-to-Regulatory-Approval.pdf. 11 Bill Stephens, Freight alliance questions CP’s voting trust proposal, TRAINS MAGAZINE, March 31, 2016, 

http://trn.trains.com/news/news-wire/2016/03/31--cp-voting-trust. 
7 

 More important, as it turned out, may have been the specific concerns brought to 

bear by the STB itself and the Antitrust Division of the Justice Department. The STB’s 

cautionary language in the Major Rail Consolidation Procedures decision laid particular 

emphasis not so much on general worries about railroad firm size and industry 

concentration as on the very concrete issue of the ability to find an alternative purchaser 

for a very large railroad enterprise if and when the STB turned down a rail merger 

proposal after the target’s shares had been placed in a voting trust. 

The Antitrust Division, on the other hand, attacked the fundamental incentive 

structures created by the very nature of independent voting trusts. The Division applied 

the logic of the analysis of partial ownership of one competitor by another to argue that, 

like such partial ownership arrangements in general, the use of an independent voting 

trust during the pendency of STB investigation of a merger proposal created incentives 

for the softening of competition between the two firms – even if the day-to-day 

management of one of the firms was shielded from direct influence by the existence of 

the trust. The Division further argued that even if the relationship between the firms was 

more vertical than horizontal – in this case, more end-to-end than parallel – the voting 

trust arrangement would provide incentives for relationship-specific investments in 

capital that would remain in place long after a possible negative regulatory decision. The 

arguments expressed by the Division were new ones in the context of STB merger 

proceedings, and may have been decisive in convincing CP not to proceed. 

 This paper examines the history of the institution of independent voting trusts in 

the US rail industry, addressing the seeming puzzle of their widespread and historic use 

in the rail industry vis-à-vis their general absence in the context of mergers in other 
8 

industries. I argue that independent voting trusts raise issues of potentially 

anticompetitive (or otherwise welfare harming) incentives during the pendency of 

regulatory review that seem not to be raised by alternative contractual mechanisms that 

acquirers and targets in other industries rely on to deal with the same issues of risk and 

incentives addressed by independent voting trusts in railroads. I conclude that 

independent voting trusts have probably outlived their usefulness in the STB merger 

review context.

Independent voting trusts and U.S. railroads 

The voting trust – the formal delegation by shareholders of control of a 

corporation to a separate group of trustees, independent in various ways of day-to-day 

influence by those shareholders – has a long history in the area of corporate control in the 

United States, especially but not exclusively in the railroad industry.12 In the second half 

of the nineteenth century, voting trusts were often set up as a tool of reorganization in 

connection with the bankruptcy of a railroad company, in order to assure debtors that the 

quality of management would be maintained during the recovery process. Two well 

documented early examples were the reorganization of the Pittsburgh, Fort Wayne and 

Chicago Railroad in 1859-6213 and the reorganization of the Philadelphia and Reading 

 

12 Much of the historical discussion here is derived from Simeon E. Baldwin, Voting-Trusts, 1 YALE L.J. 1 

(1891); Edward Sherwood Meade, The Reorganization of Railroads, 17 ANNALS AMER. ACAD. POL. AND 

SOCIAL SCIENCE 25 (1901); Stuart Daggett, RAILROAD REORGANIZATION (Harvard Economic Studies, v. iv) 

(1908, repr. 1967); Harry A. Cushing, VOTING TRUSTS: A CHAPTER IN RECENT CORPORATE HISTORY 

(1916); John Anton Leavitt, THE VOTING TRUST: A DEVICE FOR CORPORATE CONTROL (1941); James B. 

Eckert, Review of Leavitt, THE VOTING TRUST, 32 AMER. ECON. REV. 387 (1942); and John Warren Giles, Is 

the Voting Trust Agreement a “Dangerous Instrumentality”?, 3 CATHOLIC U. L. REV. 81 (1953). 13 See J.F.D. Lanier, Winslow, Lanier and Company, SKETCH LIFE OF J.F.D. LANIER (1870), excerpted in 

Alfred D. Chandler, Jr., THE RAILROADS: THE NATION’S FIRST BIG BUSINESS (1965). See also

PENNSYLVANIA COMPANY: CORPORATE HISTORY OF THE PITTSBURGH, FORT WAYNE AND CHICAGO 

RAILWAY COMPANY (1875), 

http://books.googleusercontent.com/books/content?req=AKW5QacOt9RbVxqTSl4KV4fuRH-K7-

qcp48HYgcwW2HOH6YSGR6qUVFWQNKyQ13loFho 0dlaONe YWxI2XztvsL6ddsmqOhCSGjyYXkkBRUeOqi
9 

Railway in 1887 and again in 1897.14 Eventually the voting trust became a standard 

component of the many railroad reorganizations undertaken by J.P. Morgan and others 

following the panic of 1893.15

There were critics, including most famously Adolf Berle and Gardiner Means, 

who expressed concern that voting trusts could be used by unscrupulous managers to 

insulate themselves from shareholder control – one example out of many business and 

financial arrangements that those authors believed separated ownership from control, to 

the detriment of management accountability and firm performance.

16 Simeon Baldwin

noted early on that there might be limits on the completeness with which shareholders 

should or legally could sign away their own rights of control.17 However, John Warren 

Giles noted that the ICC did not seem to share the concerns of either commentators or the 

Securities and Exchange Commission (SEC) about the loss of shareholder control, at 

least when trusts were utilized under carefully specified circumstances and for limited 

durations.18

 Early in the twentieth century, voting trusts began to be used, particularly in the 

railroad industry, for a new purpose: as a device for creating or maintaining the 

 

2tmQi1vGQURFu1N2AfHyttbjRsxJStFlWtpOHd9bexgLZ3k5iUjpxv2OT54TmAf8VIpOrKZgolIvqFf5M 4sWfG

NqsYyoBgrW-5ClkCF5xOTD2glLpXwyWBd7CIhV70ooqStGCVZHKtEEMQqY51-

AWFvy7g4LHLpe9LNvFtOAtmpGzjmWDrVMj740-nIUSQwxspXZGc. 14 See Jules Irwin Bogen, THE ANTHRACITE RAILROADS: A STUDY IN AMERICAN RAILROAD ENTERPRISE 

(1927), at 251, and N.S.B. Gras and Henrietta M. Larson, J. Pierpont Morgan, in CASEBOOK IN AMERICAN 

BUSINESS HISTORY (1939), excerpted in Chandler, ibid. 15 Charles H. Burr, Jr., The Validity of Voting Trust Provisions in Recent Railroad Reorganizations, 35 AMER. 

L. REG. AND REV. 413 (n.s., 1896); Arthur S. Dewing, The Purposes Achieved by Railroad Reorganization, 9 

AMER. ECON. REV. 277 (1919); Gras and Larson, ibid.; E.G. Campbell, THE REORGANIZATION OF THE 

AMERICAN RAILROAD SYSTEM, 1893-1900 (1938); Herbert E. Dougall, Review of Campbell (1938), 46 J. 

POLITICAL ECON. 420 (1938).

16 Adolf A. Berle, Jr., and Gardiner C. Means, THE MODERN CORPORATION AND PRIVATE PROPERTY 

(1932).

17 Baldwin, supra note 12. The issue was also raised by Charles Burr, supra note 15, and Harry Cushing, 

supra note 12. 18 Giles, supra note 12.
10

independence of two companies either until their independent ownership could be 

effected or during the pendency of regulatory review of a merger proposal. This 

regulatory application was presaged in one of the first major cases brought under Section 

2 of the Sherman Act19 – the section that prohibits the monopolization or attempted 

monopolization of a market – when the Department of Justice, in the person of Louis 

Brandeis, forced the J.P. Morgan interests that controlled the New York, New Haven & 

Hartford Railroad to divest themselves of the shares of both the Boston & Maine Railroad 

and of various local trolley companies in Connecticut and Rhode Island, in both instances 

requiring the creation of independent trusts to manage the operations of the companies 

until the eventual disposition of their shares.20

 The earliest use of independent voting trusts by the ICC as a way to separate the 

control of multiple railways during the pendency of a regulatory review seems to have 

been two cases involving the acquisition by the Baltimore and Ohio Railway Company 

(B&O) of the shares of its competitors. In 1929 the ICC found that the B&O’s 

acquisition of the stock of the Wheeling & Lake Erie Railway violated Section 7 of the 

Clayton Act21 – the section that addresses anticompetitive mergers and acquisitions – and 

ordered the B&O to divest itself of the stock. B&O’s sale of the stock to an independent 

trustee for purposes of eventual disposition on the stock market was found to resolve the 

problem: 

 

19 15 U.S.C. §2. 20 See, for example, William Z. Ripley, RAILROADS: FINANCE & ORGANIZATION (1915), at 571-74; Leavitt, 

supra note 12, at 93; John L. Weller, THE NEW HAVEN RAILROAD: ITS RISE AND FALL (1969), at 161-195; 

Thomas A. Barnaco, Brandeis, Choate and the Boston & Maine Merger Battle, 1908-1914, 3 MASS. LEGAL 

HIST. 125 (1997); and New Haven Road to Be Dissolved: Railroad’s Representatives Accept Arrangements 

Suggested by Attorney General McReynolds, SPARTANBURG HERALD, March 22, 1914, 

https://news.google.com/newspapers?nid=1876&dat=19140322&id=0k0sAAAAIBAJ&sjid=4skEAAAAIBAJ

&pg=6938,3824235&hl=en. 

21 15 U.S.C. §18.
11

The substantial effect of this trust agreement is to vest the title of the interdicted 

stock and the power of voting it in a person as trustee, independent of the present 

holders of the stock and of the other defendants, thus, in effect, accomplishing the 

result sought in the Clayton Act proceedings.22

 In the following year the B&O was found by the ICC to have again violated the Clayton 

Act by acquiring the stock of the Western Maryland Railway Company – in this case the 

focus was on the fact that they had done so without seeking advance approval from the 

ICC – and once again the placement of the shares in an independent voting trust was 

found to resolve the issue.23

At about the same time, the ICC began to address its mandate from the 

Transportation Act of 1920 to develop a “master plan” for the consolidation of U.S. 

railroads into a financially sound and competitive system.24 The ICC duly commissioned 

and published a proposed national railway system plan constructed by Harvard 

economics professor William Ripley and began holding hearings on its implementation. 

In its first extensive decision discussing implementation, the Commission referred several 

times, at worst neutrally and at least once seemingly approvingly, to the use of 

independent voting trusts as a device to maintain managerial and operational 

 

22 Interstate Commerce Commission v. Baltimore & Ohio Railroad Company, No. 21012, 152 I. C. C. 721 

(1929), 156 I. C. C. 607, 609 (1929).

23 Interstate Commerce Commission v. Baltimore & Ohio Railroad Company, No. 21032, 160 I. C. C. 785 

(1930), 183 I. C. C. 165 (1932).

24 See, e.g., Edgar J. Rich, The Transportation Act of 1920, 10 AMER. ECON. REV. 507 (1920); Lewis H. 

Haney, THE BUSINESS OF RAILWAY TRANSPORTATION (1924), Bliss Ansnes, Federal Regulation of Railroad 

Holding Companies, 32 COLUMBIA L. REV. 999 (1932); William Norris Leonard, RAILROAD 

CONSOLIDATION UNDER THE TRANSPORTATION ACT OF 1920 (1946, repr. 1968); Carl Helmetag, Jr., 

Railroad Mergers: The Accommodation of the Interstate Commerce Act and Antitrust Policies, 54 

VIRGINIA L. REV. 1493 (1968); James C. Johnson and Terry C. Whiteside, Professor Ripley Revisited: A 

Current Analysis of Railroad Mergers, 42 ICC PRACTITIONER’S J. 419 (1975); and Michael R. Crum and 

Benjamin Allen, U.S. Transportation Merger Policy: Evolution, Current Status, and Antitrust 

Considerations, 13 INT’L J. OF TRANSPORT ECON. 41 (1986).
12

independence among railroad companies with (for a time) common ownership. For 

example:

We cannot, therefore, give our approval to any application of the Pennsylvania 

Railroad Company designed and seeking to carry into effect any portion of so 

much of the proposed four-system plan [for New England] ... unless and until 

that railroad company either has divested itself of all stock held by it both directly 

in the New Haven and indirectly ... in the New Haven and the Boston & Maine, 

or has placed all such stock in the hands of independent trustees approved by us 

as in the public interest....25

At the same time, the Commission and Congress considered legislation that would 

have allowed the Commission to order divestitures of railroads controlled by railroad 

holding companies whose combinations of railroads was inconsistent with the Ripley 

plan, with the shares of divested roads to be placed in voting trusts to allow for their 

gradual sale into the depressed stock market.26

Broadly similar proposals for the use of independent voting trusts to maintain the 

independence of two railroad companies temporarily held in common ownership 

continued to be accepted or even ordered by the ICC in the forties,27 fifties,28 and 

 

25 Consolidation of Railroads: In the Matter of Consolidation of the Railway Properties of the United States 

into a Limited Number of Systems, No. 12964, 185 I. C. C. 403, 414 (1932). 26 Regulation of Railroad Holding Companies, Hearings on H.R. 9059 to amend section 5 of the Interstate 

Commerce Act, House Committee on Interstate and Foreign Commerce, February and March 1932.

27 Wabash Railroad Company Control, Finance Docket No. 13235, 247 I. C. C. 365 (1941); Chesapeake & 

Ohio Railway Company Purchase Etc., Finance Docket No. 14692, 261 I. C. C. 239 (1945). 28 Central of Georgia Railway Company Control, Finance Docket No. 19159, 295 I. C. C. 563 (1957); New 

York, Chicago & St. Louis Railroad Company Control, Finance Docket No. 17883, 295 I. C. C. 703 (1958).
13

sixties.

29 By the late fifties the Commission was treating such arrangements as standard 

operating procedure: 

Voting-trust agreements have long been accepted by the Commission as a means 

of effecting compliance with the law in connection with holdings of stock in one 

railroad by another and without which the continued ownership of the stock might 

be considered unlawful and contrary to the public interest.30

Similarly:

[This] trust agreement was drafted in terms obviously designed to meet the 

requirements for independent voting trusts heretofore approved and/or prescribed 

by the Commission in a number of proceedings involving the question of one 

carrier’s control of another where the object of the trust was to bar the beneficial 

owner of the securities from participation in the control, management, and 

operation of the issuing carrier.

31

When put to the test, the use of independent voting trusts for such purposes by the 

Commission – and later by the Surface Transportation Board – was upheld by the 

courts.32

 

29 Pennsylvania Railroad Company – Control – Lehigh Valley Railroad Company, Finance Docket No. 21459, 

317 I. C. C. 139 (1962); Norfolk and Western Railway Company and New York, Chicago and St. Louis 

Railroad Company – Merger, Etc., Finance Docket No. 21510, 324 I. C. C. 1 (1964); Chesapeake & Ohio 

Railway Company and Baltimore & Ohio Railroad Company – Control – Western Maryland Railway 

Company, Finance Docket No. 23178, 328 I. C. C. 684 (1967). 30 New York, Chicago & St. Louis Railroad Company Control, Finance Docket No. 17883, 295 I. C. C. 703, 

715 (1958).

31 Missouri Pacific Railroad Company – Control – Chicago & Eastern Illinois Railroad Company, Finance 

Docket No. 21755, 327 I. C. C. 279, 319-20 (1965). 32 Illinois Central Railroad v. United States, 263 F.Supp. 421 (1967); B.F. Goodrich Company v. Northwest 

Industries and Interstate Commerce Commission, 303 F.Supp. 53 (1969); City of Ottumwa v. Surface 

Transportation Board, 153 F.3d 879 (1998).
14

What’s wrong with independent voting trusts? 

 Figure 1 shows a schematic diagram of the voting trust arrangement proposed by 

CP in its bid to purchase NS. As is clear from the diagram, under such an arrangement a 

single “holding company” owns all the shares of both Company A and Company B but 

“controls” only Company B – Company A is controlled by the Independent Trustee. 

Figure 1. The Voting Trust. Source: Canadian Pacific Railway, “CP-NS: A Comprehensive Approach to 

Regulatory Approval,” February 2016.

 In the many decades of ICC and STB consideration of proposals for the creation 

of independent voting trusts to maintain the independent management and operation of 

two railroads whose shares had been placed in common ownership, the lion’s share of the 

attention by all participants was devoted to discussion of the precise terms of the 

contracts that set up the trusts: regulators and courts sought assurances that the trustees 

would be in fact independent of control or even influence from the acquiring company 

and its shareholders. For example:
15

The creation of voting trusts as a means of satisfying the provisions of section 5 

cannot be effective for that purpose unless and until we are satisfied that the trusts 

constitute an actual divestiture of control.33

 As noted above, in its Major Rail Consolidation Procedures decision of 2001, the 

STB expressed a newly heightened level of concern about the use of voting trusts in 

merger proceedings involving the class I railroads. However, the Board’s stated principal 

concern was not trustee independence but rather the ability of the acquiring firm to find 

an alternative buyer of the target firm assets in the event of eventual STB denial of the 

merger application:

[I]t is precisely the divestiture process that now concerns us. When the ICC 

denied the application in SF/SP, at least two Class I railroads – the Denver and 

Rio Grand Western Railroad and KCS – were actively involved in bidding for SP 

when it had to be divested from the voting trust into which its stock had been 

placed pending the application. In contrast, today there would likely be cases 

where there would be no remaining railroad bidders acceptable to us to buy the 

shares held in a voting trust if we were to deny a major control transaction or 

impose conditions that the applicants choose not to accept.34

 In this paper I focus on a different issue – as the Antitrust Division did in its filing 

before the STB in the CP/NS proceeding. Even assuming the effectiveness of the voting 

trust contract in effecting the complete independence of Company A from control or 

influence by Company B and its shareholders, under the voting trust arrangement 

 

33 Central of Georgia Railway Company Control, 295 I. C. C. 563, 576 (1957). See also Voting Trust Rules, 

44 FED. REG. 202, October 17, 1979, concerning the investigation by ICC staff as to “whether the voting 

trust effectively insulates the [applicant] from any violation of Commission policy against unauthorized 

acquisition of control of a regulated carrier.”

34 Major Rail Consolidation Procedures at 19, footnote omitted, emphasis in original.
16

outlined in Figure 1 Company B is controlled by shareholders who also own the shares of 

Company A. This raises competitive concerns that are quite familiar from the literature 

addressing the acquisition by a firm of shares of its competitor, sometimes termed

“horizontal shareholding”.35

 In particular, using standard railroad industry analysis, there are two broad ways 

in which the CP and the NS likely currently compete for traffic. The most obvious is 

what is called in the railroad industry “source competition”: competition for traffic 

originating and terminating at the points of intersection of the two railroads in and around 

Kansas City, Chicago, Detroit, Buffalo, and Albany. (See Figure 2.) CP and NS 

compete for traffic both originating at those points of intersection and terminating 

elsewhere (for example, grain headed out from Kansas City for export), and originating 

elsewhere and terminating at those points of intersection (for example, animal feed from 

a variety of origins competing for buyers in Kansas City). In addition, CP and NS 

compete with each other via “parallel competition” as parts of moves with different 

interline partners: traffic between Minneapolis and Atlanta, for example, could move via 

a CP/CSX routing or a BNSF/NS routing. 

 

35 See, for example, Robert J. Reynolds and Bruce R. Snapp, The Competitive Effects of Partial Equity 

Interests and Joint Ventures, 4 INT’L J. OF INDUSTRIAL ORG. 141 (1986); Joseph Farrell and Carl Shapiro, 

Asset ownership and market structure in oligopoly, 21 RAND J. OF ECON. 275 (1990); Einer Elhauge, 

Horizontal Shareholding, 129 HARVARD L. REV. 1267 (2016); Amrita Nain and Yan Wang, The Product 

Market Impact of Minority Stake Acquisitions, 62 MANAGEMENT SCI. (2016), forthcoming; and Miguel 

Antón, Florian Ederer, Mireia Giné, and Martin Schmalz, Common Ownership, Competition, and Top 

Management Incentives, working paper, July 1, 2016 (finding that “executives are paid less for own 

performance and more for rivals’ performance when the industry is more commonly owned”).
17

Figure 2. The CP and NS railroad systems.

As is well demonstrated in the literature examining the impact of the ownership of 

an equity interest in one firm by a firm with which it competes, if and when Company A 

and Company B are competing for the same business, the shareholders to whom 

Company B managers report will not want Company B to behave too aggressively vis-àvis Company A, because Company A’s losses are their losses too. 

But a corresponding logic applies to firms with vertical relationships. If and when 

Company A and Company B are cooperating for the same business – when traffic 

originating on the NS in Atlanta is traveling to a destination like Minneapolis that is 

served by CP but also by other railroads – the shareholders to whom Company B 

managers report will want the organization of interchange traffic to favor Company A 

rather than its competitors, all else equal, even if company A is not the most efficient 

partner for the traffic, because Company A’s gains are their gains too. These factors are 
18

especially important in an industry like railroads where investments may be both 

relationship-specific (that is, productive only in the context of cooperation between those 

two railroads) and extremely long lived, so that improvements in infrastructure that favor 

interlining between Company A and Company B will survive long past a possible 

regulatory decision that prohibits the merger and returns the two companies to 

independent ownership.36

Thus regardless of the effectiveness of the voting trust contract in insuring the 

independence of the management of the firm in the trust, the very fact of the purchase of 

that company’s stock and the combined ownership of the stock of the two firms creates 

incentives for behavior that may be anticompetitive or otherwise welfare-harming in the 

event of a decision to prohibit the merger.

What happens in other industries?

There is not a great deal of discussion in the historical record of the reasons 

behind the ICC’s apparent favoring of the voting trust mechanism beyond the simple and 

straightforward statements in the decisions quoted from above. Giles notes that

Quite in contrast with the extended expressions of opinion by Judges and text 

writers and members of the Securities and Exchange Commission as to the merits 

or dangers of voting trusts, we find a number of decisions by the Interstate 

Commerce Commission which either approve or disapprove of the employment of 

voting-trusts, but those decisions contain little editorial comment.37

 36 On relationship-specific investments in the railroad industry, see Russell Pittman, Specific Investments, 

Contracts, and Opportunism: The Evolution of Railroad Sidetrack Agreements, 34 J. LAW & ECON. 565 

(1991).

37 Giles, supra note 12.
19

As noted above, one rationale for the use of voting trusts in proposals to 

restructure the U.S. railroad system in the early 1930’s was the depressed nature of the 

stock market at the time, and the associated fear of the consequences of placing a large 

number of shares of particular railroads on the stock exchange at a single point in time.38 

With regard to railroad merger proceedings at the ICC, the closest we seem to get to a 

positive rationale for the use of voting trusts must be inferred from the language in a 

dissenting opinion from Commissioner Farrell in 1930:

In my opinion, ... [section 7 of the Clayton Act] should be so construed as to 

permit one carrier to purchase a controlling interest in the stock of another carrier 

and hold the stock as an investment with the hope and expectation that such 

investment may be used later for consolidation purposes if the consolidation is 

approved by us. If such a purchase can not be made until after the intent to 

purchase has been advertised by an application made to us, it seems to me that it 

can not be made at all as a practical matter, because such advertisement would 

result in such an increase in the price demanded for the stock to be purchased that 

the purchase would not be in the public interest.39

Commissioner Farrell refers to issues that are by now well addressed in the 

broader finance literature. In the context of a potential merger, the potential acquiring 

firm expends resources as it searches for possible targets and investigates both the 

internal workings of those firms and the potential synergies of combining itself with 

them. When the potential acquirer announces its plan, it reveals information to the 

market that it has acquired from the expenditure of these resources. Other investors may 

 38 See Regulation of Railroad Holding Companies, Hearings, supra note 26. 39 Interstate Commerce Commission v. Baltimore & Ohio Railroad Company, No. 21032, 160 I. C. C. 785, 

793 (1930), dissent of Commissioner Farrell.
20

free ride on this information to bid up the value of the stock of a target firm, and other 

potential acquirers may free ride on this information to make their own, competing 

merger proposals.40

One possible short-term outcome is the “winner’s curse”: the firm making the 

original announcement may win the bidding contest only if it is bidding more than the 

target is worth.

41 One possible longer-term outcome is that mergers that would have 

created synergies and so improved economic welfare do not take place, because the 

incentives for potential acquiring firms to expend the resources to find and merge with 

targets are reduced or eliminated by this free riding.

But this is not the only risk facing potential acquirers. There are a number of 

reasons that merger proposals may fail, including not only the appearance on the scene of 

competing acquirers but also rejection by boards of directors; delays, costs, and adverse 

decisions by antitrust or regulatory bodies; protectionist, uncooperative behavior by 

target firm management; and so on. Some of these are risks also faced by target firms as 

they consider and then enter into contracts with acquirers, and target firms face their own 

set of risks, including the loss of customers and employees following the merger 

announcement and, if a deal falls through, the market inference that the firm seeking to 

be the acquirer unearthed unfavorable information – what might be termed the “Miss 

Havisham effect”.

42 None of these risks are unique to the railroad industry. How are 

they addressed in industries that do not utilize independent voting trusts?

 40 See Richard S. Ruback, Assessing Competition in the Market for Corporate Acquisitions, 11 J. FIN. ECON. 

141 (1983) and Heath Price Tarbert, Merger Breakup Fees: A Critical Challenge to Anglo-American 

Corporate Law, 34 LAW & POLICY IN INTL. BUSINESS 627 (2003). 41 See generally R. Preston McAfee and John McMillan, Auctions and Bidding, 25 J. ECON. LIT. 699 (1987) 

and Richard H. Thaler, Anomalies: The Winner’s Curse, 2 J. ECON. PERSPECTIVES 191 (1988). 42 In a nod to the character who is left at the altar in Charles Dickens, GREAT EXPECTATIONS (1861).
21

In fact there are many contractual mechanisms designed exactly to address the 

allocation of these risks among the parties to a merger agreement. They include the 

following: 

• On the acquiring firm side, the inclusion of break-up fees to be paid by the target 

firm if it accepts an alternative bid has become a standard component of merger 

agreements, arguably required by fiduciary rules in order to maintain the option of 

the target firm’s directors and board to find the best deal for shareholders.43

• But break-up fees are not the only risk-allocation device available to acquiring 

firms. Other options – though apparently less frequently used – include stock 

lockups (giving the acquirer a call option on a specified number of shares in the 

target at a specified strike price), asset lockups (giving the acquirer a call option 

on certain assets of the target at a specified price), and, where permitted, no-shop 

provisions.44

• On the target firm side, the inclusion of break-up fees to be paid by the acquirer to 

the target in case the deal fails to go through – so-called “reverse termination 

fees” – has become increasingly common in recent years. These seem to have 

been mostly associated at first with private equity deals and the accompanying 

uncertainty regarding the ability of the acquirer to line up financing, but they have 

lately spread to the mainstream and arguably become more complex in structure 

 

43 See, e.g., John C. Coates, IV, and Guhan Subramanian, A Buy-Side Model of M&A Lockups: Theory and 

Evidence, 53 STANFORD L. REV. 307 (2000); Thomas W. Bates and Michael L. Lemmon, Breaking up is hard 

to do? An analysis of termination fee provisions and merger outcomes, 69 J. OF FINANCIAL ECON. 469 

(2003); Micah S. Officer, Termination fees in mergers and acquisition, 69 J. OF FINANCIAL ECON. 431 

(2003); and Brian J.M. Quinn, Optionality in Merger Agreements, 35 DELAWARE J. OF CORP. L. 789 (2010). 44 See, e.g., Coates and Subramanian, supra note 29, and Wolfgang Bessler, Colin Schneck, and Jan 

Zimmermann, Bidder contests in international mergers and acquisitions: The impact of toeholds, 

preemptive bidding, and termination fees, 42 INT’L. REV. OF FINANCIAL ANAL. 4 (2015).
22

as well.45 A notable recent example was the unsuccessful attempt by AT&T to 

purchase T-Mobile USA, which resulted in the payment by AT&T of a break-up 

fee to Deutsche Telekom, the parent firm of T-Mobile USA, of $3 billion in cash 

and a volume of cellular spectrum valued at at least $1 billion.46

• But reverse termination fees are not the only risk-allocation device available to 

target firms. Other options include “best efforts” and “hell or high water” clauses, 

obligations to litigate, specified divestiture obligations, “ticking fees” (increasing 

payments due to the target firm if closing recedes past a specified date), and 

termination dates.47

As a group, these tools are designed to allocate risks between acquirers and targets, in 

part in recognition of the sometimes lengthy time requirements imposed by deliberations 

of antitrust investigators, regulatory agencies, and courts. The use of investment voting 

trusts in the context of merger investigations at the ICC and STB was likely at least in 

part a response to the traditionally extended nature of such investigations and 

proceedings, but there are now statutory limitations on their duration.

48 In any case, 

 

45 See, e.g., Elizabeth Nowicki, Reverse Termination Fee Provisions in Acquisition Agreements, paper 

presented at the 3rd Annual Conference on Empirical Legal Studies, Cornell University (2008); Afra 

Afsharipour, Transforming the Allocation of Deal Risk Through Reverse Termination Fees, 63 VANDERBILT 

L. REV. 1161 (2010). (May 2016); and Steven Epstein, Mergers and Heightened Regulatory Risk, Harvard 

Law School Forum on Corporate Governance and Financial Regulation, May 5, 2016.

46 Michael J. de la Merced, T-Mobile and AT&T: What’s $2 Billion Among Friends?, N.Y. TIMES, December 

20, 2011, http://dealbook.nytimes.com/2011/12/20/att-and-t-mobile-whats-2-billion-amongfriends/?_r=0.

47 See, e.g., Darren S. Tucker and Kevin L. Yingling, Keeping the Engagement Ring: Apportioning Antitrust 

Risk with Reverse Breakup Fees, 22 ANTITRUST 70 (2008); Brian Burke and John Fedele, Think Again – 

Allocating Antitrust Risk in a Climate of Protracted Investigations, CPI ANTITRUST CHRON., May 2016 ; and 

Steven Epstein, Mergers and Heightened Regulatory Risk, Harvard Law School Forum on Corporate 

Governance and Financial Regulation, May 5, 2016.

48 With regard to a proposed merger between two Class I railroads, the STB is required to publish a notice 

of the opening of an investigation in the Federal Register within thirty days of the parties’ filing, to 

complete evidentiary proceedings within one year of the publication of the Federal Register notice, and to 

issue a decision within ninety days of the completion of evidentiary proceedings. 49 U.S.C. §11325.
23

investigations by the Antitrust Division, the Federal Trade Commission, the Federal 

Communications Commission, the Federal Energy Regulatory Commission, and the 

banking regulators – not to mention possible litigation – may be equally or even more

time-consuming. It is not at all clear why contractual provisions that have become 

standard in merger contracts throughout the economy cannot perform the same risk 

allocation function in the railroad industry. 

Conclusion 

 Voting trust arrangements have a long history at both the ICC and the STB as 

devices to protect the incentives of acquiring firms and to maintain the independence of 

acquiring and target firms during the pendency of Commission or Board investigation of 

the merits of the merger proposal. However, they are not without problems. As noted by 

the STB in 2001, as Class I railroads have become fewer and larger, it may be difficult to 

find alternative purchasers for the target firm if the STB turns down the proposal. As 

noted by the Antitrust Division in 2016, joint stock ownership creates anticompetitive 

and/or otherwise undesirable incentives, even if the independence of the voting trustee is 

complete.

 On the other hand, whatever legitimate functions voting trusts serve in railroad 

mergers are served by simple lockup agreements and other contractual provisions in other 

parts of the economy, without the same incentive problems as voting trusts. It is thus not 

clear that voting trusts still serve a useful function in the context of railroad merger 

deliberations.