Canadian National Railway Co.’s proposal to buy Kansas City Southern will be judged under stricter rules adopted in 2001, the industry’s U.S. overseer said Monday, mapping the path to the first major rail merger in more than 20 years.

The Surface Transportation Board also denied Canadian National’s initial request to use a voting trust for the transaction, saying the petition was incomplete because it referred to a merger agreement that wasn’t provided.

The merger rules for Canadian National’s US$30 billion bid are different from how the STB plans to handle a competing US$25 billion proposal from smaller Canadian Pacific Railway Ltd. The STB said Canadian Pacific’s merger proposal falls under the older, less strict rules because it would “result in the fewest overlapping routes” and its voting trust was already approved.

Canadian National’s proposed offer “poses issues that the current merger rules were designed to address, namely the potential competitive impacts of a merged entity with some degree of overlapping routes and presently existing direct competition,” the STB said in the decision posted on its website Monday.

Kanasas City Southern shares fell on news of the STB ruling and ended down 3.9 per cent to US$297.04 at the close of regular trading in New York. Canadian Pacific also dropped, down 3.3 per cent on the day, while Canadian National erased earlier losses to trade up 0.7 per cent in Toronto.

Kansas City Southern last week said it deemed Canadian National’s offer superior and gave Canadian Pacific until May 21 to improve its offer.

The “ruling against a voting trust and for tougher merger rules to be applied in Canadian National’s proposed acquisition of Kansas City Southern will make a deal more complicated but not impossible to complete,” said Lee Klaskow, an analyst with Bloomberg Intelligence.

‘Cautious approach’

The agency tightened its merger oversight in 2001, declaring that tie-ups must be in the public interest instead of the standard applied in most earlier deals: that the combination simply not hurt competition. The STB devised the stricter test after halting a tie-up between Canadian National and BNSF Railway in 2000, ending a 20-year M&A frenzy that left only seven large railroads in the U.S. and Canada.

Canadian National said it plans to submit again its request for a voting trust, which would allow Kansas City Southern shareholders to be paid even as the two railroads continue to operate separately while final regulatory approval is pending. Kansas City Southern said that’s a requirement for the US$30 billion deal. The STB said in its Monday ruling it will “take a more cautious approach” for Canadian National’s voting trust, which will have to meet the public-interest standard.

In a statement, Canadian National called it a “procedural decision” that was “based solely upon the fact that a merger agreement for the combination between CN and KCS was not yet available to be filed with the board.”

Canadian Pacific and Kansas City Southern reached a merger agreement in March, with the Calgary-based company paying US$275 a share in cash and stock. Canadian National topped that amount last month.

The two Canadian railroads are vying to be the first company to link tracks through their country, the U.S. and Mexico as a single railroad. Kansas City Southern, the smallest of the seven large U.S. and Canadian railroads, gets about half of its revenue from Mexico