CAUTION: We have been advised that fraudulent emails with a modified domain name have been sent by a source purporting to be from Aird & Berlis LLP. These communications are not legitimate and are not from Aird & Berlis LLP. Disregard any such emails and do not engage with the sender or the email in any way. Please report the attempted fraud by contacting the Canadian Anti-Fraud Centre and by emailing Aird & Berlis LLP at help@airdberlis.com.

Back to all publications
Nov 9, 2021

Will 100-Year Old Debentures Derail the Canadian Pacific Acquisition of Kansas City Southern?

By John D. Andrew

Canadian Pacific’s (“CP”) pending acquisition of Kansas City Southern (“KCS”) again raises the last remaining historic anomaly and unresolved issue in CP’s capital structure which negatively impacts or constrains CP’s financing and corporate actions and could become an impediment to completing the transaction.

CP’s 4% perpetual consolidated debenture stock (“CDS”) is an antiquated security issued between 1893 and 1932. The CDS constitutes a first charge over all of CP’s railway assets. The USD denominated CDS features a gold payment clause (based on a gold price of $20/ounce) that, if enforceable now or in the future, makes the CDS worth exponentially more than its principal value.

Although there is only about C$40M outstanding, the CDS adversely affects the KCS acquisition in a number of ways:

  1. The first charge on the all the rail assets prevents CP from offering senior security for both its current debt and the estimated $8.3B in additional funding necessary to complete the KCS transaction.
  2.  
  3. The gold payment clause represents a significant unquantified liability and risk which is likely unacceptable to KCS shareholders and which they should not be asked to assume.
  4.  
  5. The CDS limits CP’s ability to undertake certain corporate restructurings it would otherwise implement to fully integrate and take maximum advantage of the KCS acquisition.
  6.  
  7. The ongoing costs of maintaining and supporting a small, obsolete class of securities are an unnecessary expense. 
  8.  

The continuing existence of the CDS and the risks/disadvantages it represents to CP’s financing and corporate objectives can be eliminated if the CDS is fully retracted through a Plan of Arrangement pursuant to Section 192 of the Canada Business Corporations Act. CP needs to take this step to modernize its balance sheet and remove these legacy issues in advance of the KCS transaction.

To learn more about this fascinating issue, read our full CP information and discussion paper.

Areas of Expertise

Related Publications

Publications Article
Excess Claims Fees to Be Introduced Into Canada’s Patent Regime By Tony Sabeta, B.Eng. Nov 25, 2021 The Canadian patent regime has always been unique and flexible. However, many of these unique asp... The Canadian patent regime has always been unique and flexible. However, many of these unique aspects are disappearing in order to bring Canada’s patent regime into procedural harmony with the practice in other jurisdictions.
Publications Article
Emerging Case Law Regarding the Enforcement of Vaccination Policies By Alex Kagan and Jessica Schissler Nov 23, 2021 In this article, we summarize several recent decisions which provide guidance regarding how court... In this article, we summarize several recent decisions which provide guidance regarding how courts and arbitrators will assess the complex issue of workplace vaccination policies.
Publications Article
City of Toronto Introduces Inclusionary Zoning Framework By Eileen P. K. Costello, Sidonia J. Tomasella, Maggie Bassani, Meaghan Barrett and John Pappas Nov 10, 2021 The City of Toronto approved its new inclusionary zoning framework on November 9, 2021. Council a... The City of Toronto approved its new inclusionary zoning framework on November 9, 2021. Council adopted the official plan amendment and passed the zoning by-law amendment that will permit the City to require a percentage of all new development within delineated Protected Major Transit Station Are...