A sample Canadian Pacific common share certificate form 1915.

1 November 2011

Could Note Derail CP Rail Plan?

Calgary Alberta - Could two small items attached to Note 20 of the annual report of Canadian Pacific Railway Ltd. threaten the plans of Pershing Square Capital Management LP for the country's second-largest rail company?
 
The items are two issues of Perpetual 4 percent Consolidated Debenture Stock (I). As of 30 Dec 2010, US$30.2-million and £5.6-million of the bonds were outstanding. The bonds were issued about 140 years ago, don't have a fixed term, don't trade that often, and when they do, trade below par value. The only real excitement is when CPR buys some of the bonds back in the market at irregular intervals. At the end of 2009, US$32-million and £6.4-million was outstanding.
 
But the bondholders, many of whom are not based in Canada, do have rights, a point acknowledged by a CP Rail spokesman, who said the bondholders have "certain rights in certain circumstances."
 
One investor, who owns some of the CPR perpetual debentures and requested anonymity, said the bonds have an unusual clause, namely "that no asset of CP Rail could be sold without the approval of those bondholders. They also had a term of perpetuity," said the investor, noting the bonds paid interest, at least initially, in gold coins. "The bonds have the right to block the sale of any major asset within CP Rail," because as bondholders, the investors didn't want the assets that underpinned their investment sold off. As a result, unless CP Rail makes an offer for all the bonds and then retires them, the bondholders hold sway.
 
Indeed, the debentures are outstanding because CP Rail "never got around to cleaning up the bonds." The bonds that paid 5 percent were the subject of a $125-million lawsuit launched in 1981, which CP Rail won, though, apparently, it was not entitled to keep the proceeds.
 
This isn't the first time a perpetual security issued by a company within CP Rail has been in the spotlight. Consider the Ontario & Quebec Railway, a company re-incorported in May 1881 and that, through the years, gave CP Rail a perpetual lease on its lands. Those leases, some of which were for 999 years, became the subject of lawsuits in the 1970s.
 
According to the website trainweb.org, four decades ago, Joseph Pope of the brokerage company Pope & Co. brought the O&Q matter to a head because CP Rail, which acquired most of the railway, "was doing as it pleased, something he felt was not right since there were other shareholders" entitled to a 6 percent interest, "that were being ignored and mistreated." Of particular concern was that CPR was selling off real estate in Toronto and "keeping all of the proceeds for itself."
 
In time (the shares were then trading at $72 a share) Pope and the Eaton Retirement Annuity Fund started a lawsuit, then Pope started another (the shares were then trading at $1,150) that went to trial in 1977. One year later, the ruling declared that "CPR had acted illegally in abandoning two stretches of rail line it had obtained on lease," a ruling that was estimated to cost $1 billion to $3 billion. The shares hit $2,500. CP Rail appealed and in late 1981 won, and the shares plunged in value. That ruling was confirmed by the Supreme Court in 1985. Thirteen years later, O&Q was in the news via a merger CPR was proposing. It then offered $650 per O&Q share but Pope wasn't selling. When the price was upped to $2,300, he accepted.
 
Barry Critchley.