Petition for Writ of Certiorari — Wheeler v. Interstate Commerce Commission

Office Suoreme Court, U.S.

3 4 ; 6 3 3 kFiLED

| 7 18 1984

No. oc

L. STEVAS,

CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

EDWARD K. WHEELER,

Petitioner,

Ve

INTERSTATE COMMERCE COMMISSION,

UNITED STATES OF AMERICA

and

UNION PACIFIC CORPORATION, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA

RICHARD H. STREETER

1729 H Street, N.W.

Washington, D.C. 20006

(202) 337-6500

Attorney for

Edward K. Wheeler

ETAT PANTIE AP IOTLS: II: NL CELT ELIE aE TTT ETE BE DT TE

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTION PRESENTED

Whether the Interstate Commerce Commission in ap-

proving the merger of The Western Pacific Railroad Com-

pany into a wholly-owned subsidiary of the Union Pacific

Corporation satisfied its duty, recognized by this Court

in Schwabacher v. United States, 334 U.S. 182 (1948),

to protect the interests of the minority shareholders of

The Western Pacific Railroad Company and to insure

that the merger terms are just and reasonable.

(i)

ii

PARTIES IN THE COURT BELOW

American Train Dispatchers Association

Atchison, Topeka & Santa Fe Railway Company

Brotherhood of Maintenance of Way Empioyees

Brotherhood of Railway & Airline Clerks

Brotherhood of Railway Signalmen

Chicago & North Western Transportation Company

Denver & Rio Grande Western Railroad Company

International Association of Machinists &

Aerospace Workers

Interstate Commerce Commission

Kansas City Southern Railway Company

Louisiana & Arkansas Railway Company

Missouri Pacific Corporation

Missouri Pacific Railroad Company

Pacific Raii System, Inc.

St. Louis Southwestern Railway Company

Southern Pacific Transportation Company

Union Pacific Corporation

Union Pacific Railroad Company

United States of America

United Transportation Union

The Western Pacific Railroad Company

Edward K. Wheeler

a

TABLE OF CONTENTS

Page

QUESTION PRESENTED .........0...00...... i

PARTIES IN THE COURT BELOW. ............................. ii

ESE I SC a 1

RT a OE Re aN TO 2

STATUTORY PROVISIONS INVOLVED ...........00.0...... 2

SLATEMENT OF THE CASE ...............-..........cccc......... 2

Ns udsilnineehdeaincin 2

B. Proceedings Before the Interstate Commerce

Ta ee SRC 3

C. Proceedings Before the Court of Appeals ........... 5

REASONS FOR GRANTING THE WRIT .................... 6

I. THE DECISIONS BELOW CONFLICT WITH

PRIOR DECISIONS OF THIS COURT AND

DEPRIVE PETITIONER OF JUST AND

REASONABLE COMPENSATION FOR HIS

ITI aestcalcccniensinaghitnensthannainntinnninactidnenintAdnibion 6

II. THE COMMISSION’S DECISION IS AN UN-

EXPLAINED DEPARTURE FROM PRIOR

CNRS EE a 12

Se aha inden snsneivedicnnisinnahitinbsineiiabehnnestiani 14

(iii)

iv

TABLE OF AUTHORITIES

CASES: Page

Atchison, T. & S. F. Ry. Co. v. Wichita Board of

TE, Gh re CIEE cactncsceeinn 12

Erie R. Co. Merger, 312 I1.C.C. 185 (1960) ........... 8

Florida East Coast Ry. Co. Reorganization, 282

Re 14

Great Northern Pac.—Merger—Great Northern,

Se Ce I EET scan tgcncinomiecndcrensicisaantcchiccnacen 9

Louisville & N. R. Co. Merger, 295 I.C.C. 457

fs SSRIS OL Nee SA EN Ie? SRNR CL UnEERUS CE aT 8,14

Mills v. Electric Auto-Lite Co., 552 F.2d 1239 (7th

Cir. 1977), cert. denied, 434 U.S. 922 (1977)...... 8

New Haven Inclusion Cases, 399 U.S. 392 (1970).. 10

Norfolk & W. Ry. Co. Merger, 307 I.C.C. 401

ia ca 14

Norfolk & W. Ry. Co. and New York C. & St. L. R.

Co. Merger, 330 I.C.C. 780 (1967) ...................... 14

Northern Lines Merger Cases, 396 U.S. 491

kN REPS aR EE Ra Pee ee 6, 10

Pennsylvania R. Co.—Merger—New York Central

pe Re 8 Cot ee fC) 5 a oenneeE 9

Pere Marquette Ry. Co. Merger, 267 1.C.C. 207

FREER Eee REN RI er One EEN 9

Schwabacher v. United States, 334 U.S. 182

(1948) ...... ‘cuatulabpiciatatadieaiaaheeslices i, 1, 3, 6-7, 11, 12, 18, 14

Seaboard Air Line R. Co.—Merger—Atlantic

Coast Line, 320 I.C.C. 122 (19638) .................. 8,9

Seaboard World Airlines, Inc. v. Tiger Intern.,

Inc., 600 F.2d 355 (2nd Cir. 1979) .................... 8

Secretary of Agriculture v. United States, 347 U.S.

a al as iceeinctn nen sneisanibneneniene 12

Southern Pac. Transportation Co. v. I.C.C., 736

oe Bs ley | a een 1, 5, 6, 8, 9

Tri-Continental Corp. v. Battye, 74 A.2d 71 (Del.

I: MII ecole dacciateeeneibiadacmeadanrciliadabiaiichinamiteitiiinn 10

Union Pacific Corporation, Pacific Rail System,

Inc., and Union Pacific Railroad Company—Con-

trol—Missouri Pacific ; Corporation and Missouri

Pacific R. Co., 366 I.C.C. 459 (1982) -..... 1, 3, 4, 5, 9, 12,

13, 14

V

TABLE OF AUTHORITIES—Continued

Page

Weinberger v. UOP, Inc., 457 A.2d 701 (Del. Supr.

RII esgic a Recetas Sea ote ert Be ae sk | 10

MISCELLANEOUS:

Valuation of Dissenters’ Stock under Appraisal

Statutes, 79 Harv. L. Rev. 1453 (1966)

IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

No.

EDWARD K. WHEELER,

Petitioner,

We

INTERSTATE COMMERCE COMMISSION,

UNITED STATES OF AMERICA

and

UNION PACIFIC CORPORATION, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA

OPINIONS BELOW

The opinion of the Interstate Commerce Commission

in Finance Docket No. 30,000, Union Pacific Corporation,

Pacific Rail System, Inc., and Union Pacijic Railroad

Company—Control—Missouri Pacific Corporation and

Missouri Pacific Railroad Company and embraced cases

is reported at 366 I.C.C. 459. It is reproduced at pp. 39a-

615a of the separately bound appendix to petitions for

certiorari (“App.”). The opinion of the Court of Ap-

peals denying consolidated petitions for review of that

proceeding is reported at 736 F.2d 708, and is repro-

duced at App. la-38a.

2

JURISDICTION

The decision of the Court of Appeals was issued on

May 22, 1984 and timely petitions for rehearing were

denied on July 20, 1984. This Court has jurisdiction

under 28 U.S.C. § 1254(1). The Court of Appeals had

jurisdiction under 28 U.S.C. § 2321 and § 2342(5).

STa TUTORY PROVISIONS INVOLVED

This case involves the Interstate Commerce Act

(“ICA”), 49 U.S.C. §§ 11843 and 11344. The pertinent

provisions are reproduced at App. 639a and 641la.

STATEMENT OF THE CASE

This petition arises out of a finding by the Interstate

Commerce Commission (hereinafter “ICC” or “Commis-

sion”) that the price offered by a wholly-owned sub-

sidiary of the Union Pacific Corporation ‘hereinafter

“UP”), for the outstanding shares of The Western Pacific

Railroad Company (hereinafter “WP”), pursuant to an

agreement for merger, was fair and reasonable. As we

discuss hereinafter, the Commission’s methedology dis-

regarded a significant portion of the value of the WP

shareholders’ contribution to the merged company and

deprived them of just and reasonable compensation for

their holdings contrary te the principles embodied in

Schwabacher v. United Staies, 334 U.S. 184 (1948).

Furthermore, the novel analytical approach adopted by

the Commission for use in this case, but which it specifi-

eally refused to “prescribe . . . for general use in eval-

uating the fairness of terms to shareholders” is arbi-

trary and capricious and an unexplained and impermis-

sible departure from prior norms.

A. Background

Immediately following the divestiture of WP and its

subsidiaries by Western Pacific Industries in early 1979,

UP, through a subsidiary, purchased approximately 10%

of the outstanding Class A common shares of WP on

the open market. Later in the fall of 1979, UP, in order

to realize its longstanding strategic objective to gain

direct access to the San Francisco Bay area and north-

ern California, inquired whether the WP was for sale.

Upon receiving an affirmative response, the railroads

conducted further intermittent discussions. These dis-

cussions culminated in a meeting held in New York City

on the afternoon of January 18, 1980. During the course

of that afternoon, the price to be paid by UP for all out-

standing WP shares was decided. This figure, which was

based solely on WP’s “stand alone” value, did not take

into consideration either the current value of WP’s real

estate or the merger benefits that would result by virtue

of the merger. Following approval on January 22 by the

UP Executive Committee and by the WP Board of Di-

rectors, UP mailed to the remaining WP shareholders its

tender offer which required the tendering of all shares by

March 3, 1980.

B. Proceedings Before the Interstate Commerce Commission

Following the filing of appropriate applications by the

railroads seeking the approval of the ICC under the

Interstate Commerce Act, 49 U.S.C. § 11343, oral hear-

ings were held. Petitioner and other dissenting share-

holders appeared and actively contested the $20.00 per

share price being offered by UP for their shares. There-

after. the ICC issued its decision entitled Union Paci,’c

Corporation, Pacific Rail System, Inc., and Union Pacific

Railroad Company—Control—Missouri Pacific Corpora-

tion and Missouri Pacific Railroad Company, 366 I.C.C.

459 (1982) (App. 39a-615a). After acknowledging its re-

sponsibility under Schwabacher v. United States, supra,

334 U.S. at 201 “to see that the interests of the minority

stockholders are protected and that the overall proposal

is just and reasonable to those stockholders,” the Com-

mission further noted its “duty to see that the minority

interests are protected, especially in the absence of arms’

4

length bargaining or where terms have been imposed by

management interests adverse to any class of stock-

holders.” 266 I.C.C. at 685 (App. at 301a).

Having articulated the above principles, the ICC an-

nounced its intention to utilize the capitalization of earn-

ings method to determine the value of stock. After dis-

claiming the significance of equity or book value in the

absence of a railroad’s liquidation or nationalization, the

ICC tersely stated that “land values are of little or no

significance in determining the value of stock” 366 I.C.C.

at 636 (App. at 302a) and that “the rights of stockhold-

ers and the value of their respective stock is to be meas-

ured by earnings power.” 366 I.C.C. at 336 (App. at

308a).

Upon announcing that the terms of the UP/WP trans-

action “are just and reasonable” and that it had con-

cluded “that the $20 per share offer falls within a

reasonable range of values’ (id.) for WP stock to

be acquired by UP, the ICC began a series of computa-

tions to reflect how it had reached its ultimate conclu-

sion, in the course of which, the Commission initially

found that WP could be expected to “have a market

value of about $67 per share when the merger benefits

have been fully realized.” 366 I.C.C. at 638 (App. at

304a). It then discounted the $67 per share value for

a period of five years to arrive at “a present value at

time of consummation of $38 per share.” 366 I.C.C. at

638 (App. at 305a).

The Commission then introduced an entirely new con-

cept which it characterized as the “merger premium”

and proceeded to manipulate ‘he value further down-

ward. As explained by the ICC, the “merger premium”

was the difference in the market value of WP stock

immediately prior to UP’s tender offer and the present

value which the Commission, after discounting, had

found to be $38 per share. The Commission next al-

located a variable share of the “merger premium” to the

WP shareholders, and concluded that the resulting

—=

5

amounts, when added to the market value of the WP

stock before the tender offer, would yield a range of rea-

sonable prices from $16.85 per share to $26.25 per share.

Since $20 per share falls within that range, the Commission

concluded that $20 per share was fair and reasonable.

Without further explanation of the facts which neces-

sitated use of the curious series of calculations detailed

above, the Commission noted that its analysis of the UP

offer “is based on the specific facts presented in this

proceeding. We do not prescribe this analytical ap-

proach for general use in evaluating the fairness of

terms to shareholders.” [Emphasis added} 366 I.C.C. at

638 (App. at 306a).

C. Proceedings Before the Court of Appeals

Timely petitions for review of the ICC’s decision were

subsequently filed in the Court below by Wheeler and

a number of other parties.’ In petitioning for review,

Wheeler did not ask the court to set aside the Commis-

sion’s approval of the consolidation. Rather, he only

requested the court to “remand the question of the valua-

tion of WP stock back t» the Commission for further

consideration.” 736 F.2d t 726 (App. at 36a).

The Court of Appeals, after concluding “that the Com-

mission’s methodology of valuation is reasonable and that

its conclusions are supported by substantial evidence”

(id.) briefly considered certain of petitioner’s specific

complaints. Focusing on the Commission’s treatment of

“the merger premium,” the court concluded that “the

Commission explicitly took into account the enhanced

value of WP stock as a result of the consolidation.” (Jd.)

1 Wheeler’s petition was consolidated by the court with various

other petitions filed by competing railroads and rail labor unions.

Following the filing of briefs and oral argument, the court issued

its per curiam opinion in which it affirmed the Commission’s deci-

sion in all but one respect. See Southern Pac. Transportation Co.

v. 1.C.C., 7386 F.2d 708 (D.C. Cir. 1984), (App. la-38a).

6

The lower court did not address Wheeler’s contention

that the Commission’s action in this regard was an un-

explained departure from a long line of Commission

precedents and had no basis in the record. The lower

court further found that there had been arms’ length

negotiations between WP and UP and that the Commis-

sion had not simply relied on the judgments of WP’s

financial experts, but had “found that the $20 per share

price for WP stock was fair on the basis of its own inde-

pendent analysis.” 736 F.2d at 726 (App. at 36a-37a).

Finally, the lower court, while observing that the

Commission’s discussion of the issue “is unduly con-

densed” 736 F.2d at 726 (App. at 37a), sustained the

ICC’s refusal to consider the current market value of

WP’s industrial land holdings. Once again the court did

not address the issue of whether the Commission’s action

was an unexplained departure from prior norms as

Wheeler contended.

REASONS FOR GRANTING THE WRIT

I. THE DECISIONS BELOW CONFLICT WITH PRIOR

DECISIONS OF THIS COURT AND DEPRIVE PETI-

TIONER OF JUST AND REASONABLE COMPEN-

SATION FOR HIS PROPERTY.

In Schwabacher v. United States, 334 U.S. 182 (1948),

the Court, in construing the predecessors to Sections

11344 and 11346, held that appraisal rights granted by

state law do not survive a merger agreement approved

by the ICC as just and reasonable. Noting that “such

rights are, as a matter of federal law, accorded recogni-

tion in the obligation of the Commission not to approve

any plan which is not just and reasonable” (id. at 201),

the Court admonished the Commission, in making its de-

termination, to consider those rights “to the extent that

they may affect intrinsic or market values.” (Jd.) As

later explained in Northern Lines Merger Cases, 396 U.S.

491, 522 (1970), Schwabacher “requires that the value of

pt Al ine Sa *

7

a shareholder’s contribution to a merger be determined in

accord with the ‘current worth’ of his equity.” Judged by

these standards, the Commission’s analysis, which admit-

tedly disregarded the evidence of record concerning the

current value of non-transportation lands owned by the

WP, is faulty and has resulted in WP shareholders being

deprived of just and reasonable compensation reflective of

the true value of their contribution to the merged com-

pany.

The magnitude of the Commission’s error is demon-

strated by comparing the total price that UP paid with

the total value of the shareholders’ contribution. For

slightly less than $28 million, UP acquired a Class

I railroad with transportation properties conservatively

valued in excess of $100 million, current cash and other

assets of $75.9 million, and industrial land and non-

operating properties with an admitted approximate value

of $137 million dollars.2 When WP’s liabilities totalling

$150.5 million are subtracted from the value of WP’s

non-transportation assets alone, it is transparent that UP

obtained all of WP’s rail transportation properties (track

and operating equipment) for nothing, free of charge,

and simultaneously obtained a windfall of non-rail assets

currently worth in excess of $60 million.

2 As revealed in the May 2, 1983 Notice of Special Meeting of

Shareholders, after UP acquired most of WP’s stock in early 1980,

the Company sold 929 acres of WP’s industrial land having a book

value of $1,455,000 and realized a net pre-tax profit of $44,546,000.

As of March 31, 1983, WP owned an additional 1,508 acres of in-

dustrial and 6,116 acres of non-operating land. As was admitted in

the Notice, 450 of the above acres have been appraised and “the

current market value of all of such appraised property is sub-

stantially greater than its book value and could be in the range of

approximately $25 million.” In addition, the market value of the

remaining non-appraised industrial property and non-operating

property was likewise estimated to be “substantially greater than

its book value and could be in the range of approximately $65

million.”

8

As explained by the lower court, the I.C.C., in deter-

mining the value of the WP’s stock, rejected considera-

tion of the market value of WP’s industrial landholdings,

and determined that the value of WP’s “stock can best

be measured by WP’s earning power, as reflected by per-

formance in the stock market” (736 F.2d at 726 (App.

at 37a). The Commission’s analysis, which the lower

3In affirming the Commission’s reliance on earning power as

reflected by stock market performance to measure the value of

WP stock, the Court of Appeals relied on Seaboard World Air-

lines, Inc. v. Tiger Intern. Inc., 600 F.2d 355, 361-62 (2nd Cir.

1979); and Mills v. Electric Auto-Lite Co., 552 F.2d 1239, 1247-

1249 (7th Cir. 1977), cert. denied, 434 U.S. 922 (1977). These

cases embody the principle, as stated in Seaboard, that “when mar-

ket value [of stock] is available and reliable, other factors should

not be utilized in determining whether the terms of a merger [are}

fair.” (600 F.2d at 361). This principle clashes with the Commis-

sion’s consistent holdings and practice that market prices, though

proper for consideration, are not to be given dominant weight.

See Louisville & N. R. Co. Merger, 295 I.C.C. 457, 498 (1957) ; Erie

R. Co. Merger, 312 I.C.C. 185, 236 (1960) ; and Seaboard Air Line

R. Co.—Merger—Atlantic Coast Line, 320 I.C.C. 122, 193 (1963).

Hence the cases relied upon by the court to provide a justification

for the Commission’s reliance on the market place are inapposite.

In any event, both decisions recognize that compelling reasons

may exist to depart from the general rule where stock market

prices are not predicated on a reliable market which reflects the

full gamut of information about the company being traded. It is

submitted that the instant situation presents several compelling

reasons that would justify such a departure. First, the market was

wholly unaware of the current market value of WP’s industrial

lands during the brief period WP was sold either over-the-counter

or on the American Exchange. It was only after the release of the

proxy material of May 2, 1983, that the current market value of

those lands was disclosed. And, as was acknowledged during the

eourse of the hearing before the ICC, the WP’s real estate was not

even taken into consideration by UP in establishing its $20.00 per

share offer. Second, the market price of WP stock was depressed

by the decision of WP management to eliminate dividends and to

write down the value of all WP assets immediately following the

divestiture from Western Pacific Industries.

9

court recognized to be “unduly condensed” (736 F.2d at

727 App. at 37a), consists of the wholly unsupported,

conclusory statements that “land values are of little or

no significance in determining the value of stock” and

are to be considered, along with equity or book value,

“only in the event of a railroad’s liquidation or national-

ization.” [Emphasis added.] See 366 I.C.C. at 636

(App. at 302a).*

By depriving the WP shareholders of any compensa-

tion for the $137,911,000 of land not used in the opera-

tion of the railroad but which was transferred to UP, the

Commission failed to protect the stockholders’ interests

and denied them the equivalent of what they were de-

prived of. While the perfunctory analysis by the Com-

mission may be permissible in some instances, it clearly

is unacceptable where the Commission is charged with

insuring that a minority shareholder receives the “cur-

rent worth” of his equity.

It is further submitted that the Commission’s decision

is an abrupt, unexplained departure from its own past,

consistent consideration of industrial land values in eval-

uating stock exchange ratios in previous rail merger pro-

ceedings. See Seaboard Air Line R. Co.—Merger—Atlan-

tic Coast Line, 320 I.C.C. 122, 190 (1963) ; Great North-

ern Pac.—Merger—Great Northern, 331 I.C.C. 228, 253-

260 (1967); Pennsylvania R. Co.—Merger—New York

Central R. Co., 331 1.C.C. 643, 679 (1967); Pere Mar-

quette Ry. Co. Merger, 267 I.C.C. 207, 241 (1947). Fur-

thermore, this Court has recognized the necessity for the

Commission to consider the value of industrial land hold-

* The Commission’s further gratuitous observation that “[e]ven

assuming that a railroad may be liquidated at some future date,

the chances of stockholders recovering book value of their stock are

minimal because stockholders very rarely recover book value on

liquidation” is belied by the UP’s experiences since acquiring the

WP shares. See Note 2, supra.

10

ings in establishing stock exchange ratios. See Northern

Lines Merger Cases, supra, 396 U.S. at 516-522; New

Haven Inclusion Cases, 399 U.S. 392 (1970).5

Lastly, it should be noted that consideration of the

current market value of WP’s industrial lands would be

consistent with the standards governing appraisal rights

under Delaware law which, were it not for Schwabacher,

would control.? In Weinberger v. UOP, Inc., 457 A.2d

701 (Del. Supr. 1983), the Delaware Supreme Court re-

cently announced that henceforth the fair value cf a

stockholder’s proportionate interest in a going concern is

to be determined by taking “into account all relevant fac-

tors.” In adopting this standard, the Delaware Court

cited with approval its earlier statement in T7i-Continen-

tal Corp. v. Battye, 74 A.2d 71, 72 (Del. Supr. 1950) :

The basic concept of value under the appraisal stat-

ute is that the stockholder is entitled to be paid for

that which has been taken from him, viz., his pro-

portionate interest in a going concern. By value of

5 The primary distinction between the instant case and those

referred to above is that the stock exchange ratios in those other

cases had been the subject of extensive studies and negotiations

which lasted several months. As reflected in the Northern Lines

decision, 396 U.S. at 516-518, the negotiations concerning the stock

exchange ratios between the Great Northern and the Northern

Pacific centered to a large extent on the value to be attributed to

the Northern Pacific’s natural resource properties and ultimately

led to concessions by both roads concerning the exchange ratios. In

the instant case, the negotiations lasted but one afternoon and, as

noted above, never focused on the value of the WP’s industrial

properties.

®UP has agreed not to object if the minority shareholders de-

mand appraisal of their shares under Delaware law, and has agreed

to pay any appraised value to be determined under Delaware law.

However, as noted in the May 2, 1983 “Notice of Special Meeting

of Shareholders,” “there can be no assurance that a Delaware court

will not, on its own initiative, determine that Schwabacher denies

it jurisdiction over an appraisal proceeding commenced in connec-

tion with the merger... .”

11

the stockholder’s proportionate interest in the corpo-

rate enterprise is meant the true or intrinsic value of

his stock which has been taken by the merger. In

determining what figure represents this true or in-

trinsic value, the appraiser and the courts must

take into consideration all factors and elements

which reasonably might enter into the fixing of

value. Thus, market value, asset value, dividends,

earning prospects, the nature of the enterprise and

any other facts which were known or which could

be ascertained as of the date of merger and which

throw any light on future prospects of the merged

corporation are not only pertinent to an inquiry as

to the value of the dissenting stockholders’ interest,

but must be considered by the agency fixing the

value. [Emphasis added by the Court in original. ]

We submit that the above statement, which is wholly

consistent with the Schwabacher objective, numely that

“each class of stockholder receives an equivalent of what

it turns in,” would require at a minimum the considera-

tion of the current market value of the WP industrial

lands.’ Given the non-operational nature of these indus-

7 The Court’s attention is also invited to the remarks of one

commentator concerning “elements of valuation” in situations in-

volving the valuation of dissenters’ stock in an ongoing concern.

In rejecting a simple reliance on earnings and market value, the

author has explained :

Asset value is also criticized as a “liquidation” yardstick [foot-

note omitted] inappropriate because minority stockholders

typically have invested for dividend income or stock apprecia-

tion and rarely expect to share in the physical assets. Never-

theless, the significance of assets cannot be disregarded. It

would be unrealistic to suppose that a company with no earn-

ings, for whose stock there is no measurable market price, is

worthless if it has substantial net assets. Moreover, physical

appraisal and revaluation of assets—inventories, for example

—may uncover values unsuspected by the market. It is not

enough to depend on earnings and market value, because data

may be incomplete and results can be affected by actions of the

12

trial lands, it is particularly important that the ICC’s

failure to consider the market value of WP’s industrial

lands be corrected and the minority shareholders receive

the economic equivalent of what they turned in. Other-

wise, this Court’s decision in Schwabacher may well pre-

vent the WP shareholders from seeking an appraisal un-

der Delaware law with respect to land which has no

“continued use . . . in the public calling” of interstate

rail transportation.

II. THE COMMISSION’S DECISION IS AN UNEX-

PLAINED DEPARTURE FROM PRIOR NORMS.

In affirming the ICC’s decision, the lower court failed

to address petitioner’s contention that the Commission,

without any explanation, had departed from its prior

norms in several respects and had thereby deprived the

minority shareholders of just and reasonable compensa-

tion for their shares. That the Commission fashioned a

unique “analytical” approach to valuation is not open to

question. This was admitted by the Commission when it

disclaimed its methodology with the bare assertion that

“Tw]e do not prescribe this analytical approach for gen-

eral use in evaluating the fairness of terms to sharehold-

ers.” 366 I.C.C. 638 (App. 306a). Having adopted

a special methodology, it was incumbent upon the Com-

mission to explain the underlying reasons or specific facts

which compelled the adoption of the new standards for

use only in this case. Secretary of Agriculture v. United

States, 347 U.S. 645, 653 (1954); Atchison, T. & S.F.

Ry. Co. v. Wichita Board of Trade, 412 U.S. 800, 808

(1973). The Commission did not even try to satisfy

this requirement.

majority or by extraneous pressures. A more reliable result

can be reached by comparing at least these three major ele-

ments. Note, Valuation of Dissenters’ Stock Under Appraisal

Statutes, 79 Harv.L.Rev. 1453, 1457 (1966).

13

As reflected in the cases previously referenced,’ the

Commission’s conclusory refusal to consider the value of

WP’s industrial lands is contrary to well-established

Commission precedent in fashioning stock exchange ratios

in merger proceedings. In affirming the Commission, the

lower court erroneously avoided this issue with the state-

ment that “[i]t is true that the Commission’s discussion

of this issue is unduly condensed.”

The Commission deviated without explanation from a

prior norm in one other major respect. Although the

Commission properly recognized that “the capitalization

of earnings method to determine present and prospective

worth is a reasonably conventional and generally accepted

method for determining the value of stock” 366 [.C.C. at

636 (App. at 301la), it failed to adhere to its cus-

tomary application of this method. Instead, after capital-

izing WP’s projected earnings and concluding that $38.00,

after discounting, represented the “present value of the

stock giving effect to the merger benefits,” 366 I.C.C. at

638 (App. at 305a), the ICC introduced its novel

“merger premium analysis” which resulted in a double

discounting of merger benefits and the Commission’s find-

ing the minority shareholders to be entitled to only a

fraction of the value of the stock which they are being

forced to relinquish. We submit that this adjustment is

contrary to the Schwabacher requirement that it is the

value the stockholder “is contributing to the merger that

is to be made good.”

8 See, supra, p. 9.

® A thorough review of past Commission cases will not reveal a

single instance where the Commission has ever adopted this, or a

reasonably similar standard, in order to adjust “the present value

of a shareholder’s stock” which, under Schwabacher, the stock-

holder is entitled to receive.

10 The Commission’s adjustment is demonstrably in error. The

Commission ignored the fact that Applicants’ financial studies pro-

jecting net income included an allocation by UP of merger benefits

between UP and WP. As a result of this allocation of the merger

14

CONCLUSION

For the foregoing reasons, this Petition for a Writ of

Certiorari should be granted.

Respectfully submitted,

RICHARD H. STREETER

1729 H Street, N.W.

Washington, D.C. 20006

(202) 337-6500

Attorney for

Edward K. Wheeler

benefits, both UP’s and WP’s projected earnings following the

merger reflected the merger benefits by each railroad. The Com-

mission’s analysis fails, however, to recognize this prior allocation

by UP of a portion of the merger benefits. By adjusting the value

of WP stock to reflect “only” the benefits contributed by WP, the

Commission erroneously credited UP with a windfall allocation of

the benefits—those UP claimed for itself as well as a substantial

portion of those which UP had previously recognized should be

allocated to WP.

Since the projected net income of UP and WP, which underlies

the Commission’s finding that WP stock is worth $38.00 per share,

was based upon the traditional 50-50 allocation of benefits which

the Commission has consistently used in prior mergers, the Com-

mission’s stripping from WP of its share of the merger benefits

unreasonably resulted in a substantial understatement of the value

of the WP stock.

The Commission’s arbitrary reduction of between 10% to 50%

of the merger benefits assigned to WP by UP, 366 I.C.C. at 638

(App. at 305a-306a), is an unexplained departure from prior

cases. Where friendly mergers between applicants, as here, have

previously occurred, the Commission has consistently allocated the

future benefits and future system savings equally between the

merger partners. See Seaboard Air Line R. Co.—Merger—Atlantic

Coast Line, supra 320 I.C.C. at 192; Florida East Coast Ry. Co.

Reorganization, 282 I.C.C. 81, 159 (1951); Louisville & N. R. Co.

Merger, supra 295 I.C.C. at 497 (1957); Norfolk & W. Ry. Co.

Merger, 307 I.C.C. 401, 430 (1959) ; and Norfolk & W. Ry. Co. and

New York, C. & St. L. R. Co. Merger, 330 I.C.C. 780, 801 (1967).

In the absence of a reasoned explanation, the ICC should be re-

quired to adhere to the same standards that it has traditionally

imposed.

A a rt RE ES eal Oe