associated with those changes depends upon a number of variables, the applicants believe the potential operating cost reductions to approach $1 million.

In addition, transacting business with the MoPac system should be more convenient after consolidation. Shippers would deal with a single line on routing and rates, tracing, claims and settlements, and private car mileage. Merger should also improve car supply by increasing flexibility in the distribution of equipment.

Only one protestant has directly contested the claims of benefit and economy for the system. Bernard Silver, a minority MoPac shareholder, contends that MPC should not be entrusted with a national asset as important as MoPac, and that the alleged savings from merger are insignificant when compared to the potential for loss and destruction of the railroad. In response, the applicants aver that MoPac has made notable financial improvement under MPC's management and that, although the parent company realizes greater profit from nonrail activities than from its rail investment, MoPac has developed into a major class I railroad.

We do not believe that MPC's expansion from 92.35- to 100percent equity ownership of MoPac would materially increase the possibility of mismanagement by the parent. MPC has not previously demonstrated an inclination to drain assets or income from MoPac or otherwise impede MoPac's performance as a carrier, and indeed the railroad has displayed considerable improvement under the holding company's guidance. We conclude that the benefits realizable from merger are substantial and we shall consider each aspect of the proposal to determine whether it is consistent with the public interest and just and reasonable.

The 1974 recapitalization.-As we noted in our decision of May 9, 1978, setting the instant proceedings for handling under modified procedure, and as appears from the background discussion above, the Commission and the courts fully reviewed and approved the recapitalization which eliminated the separate classes of MoPac Common Stock. That matter is now res judicata. Our May 9, 1978, decision also made it clear that we cannot permit the holders of unexchanged class B stock to use our review of the instant proposals as a vehicle for reexamination of issues finally determined in previous proceedings, and that we will not entertain arguments. directed at the fairness or propriety of the prior recapitalization. Notwithstanding our admonitions, a number of holders of unexchanged class B stock filed statements seeking reconsideration of matters relating to the 1974 recapitalization. Napolean C. Gabriel

requests evaluation of his class B shares according to the plan of reorganization implemented in 1956, while William R. Wesson and Anne G. Wesson ask for reopening of the recapitalization proceeding to evaluate the MoPac properties and force settlement with dissident holders of unexchanged class B stock. John Charles Vaiani and Edith Virginia West charge that holders of unexchanged class B stock had no opportunity to vote on the instant merger as a class, and that MoPac's action in "translating" the votes was unfair and without authority.

We can only reiterate that these requests and contentions are not apposite to our consideration of the instant plan of merger. Certificates evidencing unexchanged shares of class B stock do not now represent stock ownership in MoPac but rather evidence the right to receive cash and certificates for the presently outstanding MoPac Common Stock, as provided in the prior recapitalization plan. Thus, regarding the proposal now before us, the rights of the holders of unexchanged class B stock coincide with the interests of other minority holders of MoPac Common Stock. No rights. cognizable in the instant proceedings attach to the unexchanged class B stock simply by reason of its not having been exchanged for the presently outstanding MoPac Common Stock.

Fairness to minority shareholders. Although the avowed purpose of the instant plan of merger is furtherance of MoPac's policy of continuing corporate simplification, management has gone beyond mere elimination of redundant corporate entities and has structured a plan to convert the publicly owned shares of MoPac into shares of MPC. By transforming MoPac from a majority owned to a wholly owned subsidiary, MPC would accomplish the more important underlying objective: facilitation of possible combinations with other railroads. Acquiring complete ownership of MoPac would place MPC in a much stronger position to negotiate consolidation of the railroad with an unrelated carrier since there would no longer be outstanding minority interests requiring separate accommodation. We have previously expressed our encouragement of rail rationalization through private industry initiatives rather than active government intervention, 21 and transactions anticipating accomplishment of that objective should similarly receive our support if consistent with the public interest.

See the Commission's proposed policy statement in Ex Parte No. 282 (Sub-No. 2). Railroad Consolidation Procedures, 43 F. R. 15753 (1978). See also Rail Services Planning Office. Rail Merger Study Final Report 33-35 (1978).

23

Apart from determining whether the proposal is consistent with the public interest, however, we must find whether the merger terms are, as to the shareholders, just and reasonable.22 In appraising a transaction affecting the rights of shareholders, we must insure protection for minority interests, especially where, as here, arm'slength bargaining is absent, or where management interests adverse to the minority have imposed the merger terms. With respect to the instant transaction, we must decide whether the offer of exchange would adequately compensate the minority MoPac shareholders for the surrender of their stock.

As indicated above, the Plan provides that each share of MoPac Common Stock held by minority interests would be converted into 0.95 share of MPC Common Stock. The boards of directors of MoPac and MPC selected the 0.95 conversion ratio after considering various factors bearing upon relative stock value and after viewing an analysis prepared by an investment banking firm. That analysis (Benham study) was conducted by Isabel H. Benham of Shearson Hayden Stone Inc. to develop data for the determination of an appropriate offer of exchange.

The Benham study compared earnings, relative book values, market prices, dividend records, and other characteristics of the two companies; appraised the effect of the exchange offer on MPC; and recommended as acceptable and fair a conversion ratio in the range 0.91-0.97. Restating the earnings of MoPac and MPC to determine the relative earnings contribution of each suggested ratios of 0.9130.923 based on consolidated after-tax earnings. 0.867-0.825 based on pretax earnings, and 0.864-0.871 based on after-tax cash earnings for the year 1976 and the then current estimate for 1977, respectively. The book value comparison, as of June 30, 1977, intimated an exchange ratio of 0.967. The Benham study considered a ratio of one to one or higher to be inequitable to MPC shareholders since their shares represented not only 92.35-percent equity ownership of MoPac but also 100-percent equity ownership of two other enterprises, Mississippi River Transmission Corporation and River Cement Company. On the other hand, the study concluded that the 1976 voluntary offer to MoPac shareholders of 0.9 MPC share for each MoPac share would make any lower ratio unacceptable to the remaining MoPac shareholders. Those determinations reduced the range of ratios under consideration to 0.913-0.967.

See Schwabacher v. United States, 334 U.S. 182, 198-99 (1948) and Stott v. United States, 166 F. Supp. 851, 859 (S.D.N.D. 1958).

"Missouri Pac. R. Co., Securities. 347 1.C.C. 377. 408 (1973).

"Schwabacher v. United States, 334 U.S. 182. 201 (1948).

To test the validity of the assessment Ms. Benham also noted the relationship of market prices during the previous year. In that period MoPac stock sold at prices from 78 to 96 percent of the price of MPC shares, using the quarterly highs and lows of each. Other characteristics of the two corporations, ratios of debt to property investment, return on property investment, and return on shareholders' equity, also supported an exchange ratio in the 0.910.97 range, and the dividend records of MoPac and MPC revealed that acceptance of an exchange offer in that range would provide substantial incremental income to MoPac shareholders without significantly affecting the payout ratio of MPC.

The applicants state that through the exchange the minority MoPac shareholders would not only gain in earning power and income return, but would also receive a more marketable stock, meaning increased flexibility and liquidity of investment. Contending that the Plan would not freeze the minority out of the railroad since the shareholders would continue to have a proprietary interest in MoPac through ownership of MPC stock, the applicants maintain that the minority would benefit by obtaining a more diversified investment which would nonetheless retain its railroad orientation. The applicants point out that MPC's other subsidiaries had higher percent earnings on total capital invested (10.3 percent in 1976 and 15.8 percent in 1977 for Mississippi River Transmission Corporation and 10.8 percent in 1976 and 11.4 percent in 1977 for River Cement Company) than MoPac (5.5 percent in 1976 and 8.0 percent in 1977).

In a verified statement in opposition, Bernard Silver asserts that the proposed merger would squeeze out minority shareholders and is unfair to the small investor, and that the applicants should have used "relative fair market value" or "relative replacement value" in developing the exchange ratio. In reply, the applicants reaffirm that the proposal should benefit the minority shareholders in a variety of ways. The applicants also argue that, for purposes of exchanging stock in a merger, the basic consideration in determining the value of an enterprise is the earning power which that enterprise would contribute to the consolidation, and that reproduction or replacement values are not proper criteria for evaluating exchange ratios.

The Commission has consistently found that the earning capacity of a railroad is the primary factor in determining the fairness of an

exchange offer." As noted above, the Benham study's comparison of 1976 and projected 1977 earnings for MoPac and MPC indicated a 0.825-0.923 range of acceptable exchange ratios. More detailed earnings comparisons conducted after 1977 results were in sustain the fairness of the 0.95 ratio to minority MoPac shareholders. The following tabulation outlines 1977 MoPac and MPC earnings and the pro forma earnings of MPC giving effect to the proposed exchange.

MoPac earnings per share

$8.08

MoPac earnings per share, excluding nonrecurring investment tax credits

6.47

MPC earnings per fully diluted share---

8.01

Pro forma MPC earnings assuming 100 percent ownership of MoPac:
Per fully diluted share

7.94

Fer fully diluted share, excluding purchase accounting adjustments 0.95 fully diluted pro forma MPC earnings ----

8.80

7.54

0.95 fully diluted pro forma MPC earnings, excluding purchase accounting adjustments--

8.36

Although the per share earnings of MoPac exceeded those of MPC in 1977, MoPac's earnings included $21.8 million of investment tax credit carryovers ($1.61 per share) generated in prior years. Deducting the one-time carryover places the two corporations on a comparable basis, revealing earnings of $6.47 per MoPac share versus $8.01 per fully diluted MPC share. Restating MPC earnings to give effect to the transaction and computing the earnings per proposed fractional share (0.95) reveals that, based on 1977 results, minority MoPac shareholders would receive stock earning 16.5 percent more than the stock they would surrender in the exchange ($7.54 versus $6.47).

Contrary to the implication in Mr. Silver's statement, the Benham study did not use relative book value as the major determinant of the exchange ratio, but rather as a secondary factor, a factor which

"See e.g., Missouri Pac. R. Co., Securities, 347 I.C.C. 377, 411, 413 (1973); Illinois Cent. Gulf R-Acquisition-G., M. & O. 338 I.C.C. 805, 816-17 (1971); affirmed sub nom. Missouri Pacific R. Co. v. United States, 346 F. Supp. 1193 (E.D. Mo. 1972); and Kansas City Southern Ry. Co. v. United States, 346 F. Supp. 1211 (W.D. Mo. 1972), affirmed, 409 U.S. 1094 (1973); Seaboard Air Line R. Co.-Merger-Atlantic Coast Line, 320 I.C.C. 122, 193 (1963), affirmed sub nom. Florida East Coast Ry. Co. v. United States, 259 F. Supp. 993 (M.D. Fla. 1966), affirmed, 386 U.S. 544 (1967); Erie R. Co. Merger, 312 I.C.C. 185, 188 (1960), appeal dismissed sub nom. Fried v. United States, 212 F. Supp. 886 (S.D.N.Y. 1963); Louisville & N. R. Co. Merger, 295 I.C.C. 457, 494 (1957), affirmed sub nom. Stott v. United States, 166 F. Supp. 851 (S.D.N.Y. 1958); and Boston & M. R. Securities Modification, 275 I.C.C. 397, 432-33, affirmed, 275 L.C.C. 527 (1950), modified. 275 I.C.C. 752 (1951).