Hostile Bid Tests Conrail's Defenses

Many corporate law experts say there is no doubt that Philadelphia-based Conrail Inc.'s merger agreement contains some of the most aggressive provisions ever used to prevent a hostile takeover.

But even those who would benefit from a legal overturning of the provisions are not optimistic that they will give way to Norfolk Southern Corp.'s assault when the case is taken up next week by the 3rd Circuit Court of Appeals in Philadelphia.

That's because the strong fiduciary duty provision in Pennsylvania law is unlike those in many other states in that it prevents company boards from having to accept a purchase offer from an interested buyer simply because it is a higher price.

"In Pennsylvania the legislature has spoken," said Alan H. Molod, a partner at Wolf, Block, Schorr and Solis-Cohen in Philadelphia who is following the case for arbitrageurs.

Three elements of CSX Corp.'s $9.4 billion two-tiered bid for Conrail have so far resulted in a stalemate between Conrail, its intended acquirer CSX and hostile bidder Norfolk Southern of Norfolk, Va. which has offered more than $10 billion for the railroad. They include:

A provision known as a "no-shop" clause which prevents Conrail and Richmond, Va.-based CSX from even considering any takeover proposal with a third party until Dec. 31, 1998.

A lock-up option which is believed to depress the price of the stock below the $115 in cash offered by Norfolk Southern by giving CSX the option to exercise the purchase of more than $15.9 million shares of Conrail stock at $92.50 a share.

A $300 million break-up fee if the Conrail-CSX merger agreement doesn't go forward after a competing takeover proposal is made for Conrail.

Many believe that the unusually strong antitakeover language in Pennsylvania's Business Corporation Law will make it possible for Conrail's defenses to withstand the challenge.

That doesn't mean that the obstacles are not unusual.

Mark A. Morton, a senior associate with the law firm...