David George-Cosh

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A major Canadian National Railway Co. shareholder is calling on the railroad to abandon its US$30-billion deal to buy Kansas City Southern after U.S. regulators denied its request to use a voting trust for the transaction.

TCI Fund Management Ltd., a London-based hedge fund led by billionaire manager Christopher Hohn that owns roughly three per cent of CN Rail, said it is "negligent and hugely irresponsible" for the railroad's board to commit $2 billion on whether the U.S. Surface Transportation Board (STB) will approve a voting trust for its US$30-billion deal to buy Kansas City Southern.

On Monday, the STB deemed CN Rail's proposed voting trust agreement as incomplete and said that current merger rules set in 2001 will be used by the regulator to determine if the deal will proceed.

"The STB is sending a clear signal and the CN board has a duty to listen. The risk that the voting trust is not approved is too great to ignore," according to the TCI letter sent to CN Rail Chair Robert Pace on Tuesday. The letter was signed by Hohn and Ben Walker, a partner at the firm.

If CN Rail's board ignores TCI's recommendation to abandon its offer for Kansas City Southern, and the trust is not approved – resulting in the loss of $2 billion -- the firm said it "would expect the immediate resignation of [Pace] and the CEO."

TCI doesn't own any shares of Kansas City Southern. A company official verified the letter's authenticity to BNN Bloomberg.

CN Rail said in a statement following the STB's directive that it intends to submit another request to use a voting trust for the deal. That would allow Kansas City Southern shareholders to get paid while the railroad can operate separately to CN Rail and await final regulatory approval for the deal. The railroad renegotiated its merger agreement with Kansas City Southern and filed it with the STB earlier on Tuesday.

TCI said CN Rail is making an "extremely reckless" $2-billion bet that the STB will rule in favour of the railroad despite its "tougher stance" on voting trusts. It adds that even if the voting trust is granted to CN Rail, the company could be faced with an "$18 billion liability" if the deal is ultimately not approved and the trust needs to dispose of Kansas City Southern.

"If the deal is not approved by the STB, CN would be a forced seller of KCS so it is quite possible that CN could face a loss in excess of $18 billion," the letter states. "This would almost wipe out CN’s entire shareholders’ equity that it has taken over 100 years to accumulate. It could also seriously jeopardise the future of the company."

Mathieu Gaudreault, a CN Rail spokesperson, said in an email the railroad "regularly engages with and welcomes constructive input from its shareholders​."

"We are continuing to engage with the STB and remain confident that our voting trust will be approved," Gaudreault said. "Following the voting trust approval, we firmly believe we have a clear path to completion of our transaction. Any minimal post-transaction overlap can be readily resolved, and CN is committed to proposing the appropriate remedies.”

Canadian Pacific Railway Ltd., which offered to buy Kansas City Southern for US$25 billion, has until 5pm ET on Thursday to improve its deal for the U.S. railroad. The STB stated earlier that CP Rail's proposal for Kansas City Southern will be evaluated under the 2001 merger rules and that the railroad would be allowed to use a voting trust for its bid.