The U.S. Surface Transportation Board (STB) has dealt a blow to Canadian National Railway's (CNI -0.36%) effort to acquire Kansas City Southern (KSU), ruling that the suitor's application to create a voting trust to help streamline the deal is incomplete, and determining any consideration of the proposed deal would be done under a tough set of merger rules.

Canadian National last month launched a surprise $33.6 billion takeover effort for Kansas City Southern, looking to upend an agreement between the American rail line and Canadian Pacific Railway (CP 0.34%). Last week, Kansas City Southern's board officially determined that Canadian National's offer was superior to Canadian Pacific's $30 billion agreement, seemingly putting Canadian National in the lead to win the bidding war.

A Kansas City Southern train on the rails.

Image source: Kansas City Southern.

But antitrust concerns could tip the scale to Canadian Pacific's advantage. The STB has already granted Canadian Pacific permission to set up a trust that would allow for Kansas City Southern shareholders to get paid even before the deal wins approval, eliminating a lot of the uncertainty. The STB has also said that due to Canadian Pacific and Kansas City Southern both being smaller railroads, they would have to prove only that their deal doesn't harm competition.

Canadian National, by contrast, will have its bid judged under a higher standard that requires it to prove its proposal will be good for shipping customers. If there is any good news for Canadian National in the STB ruling, it is that the railroad can file a new motion on the trust structure without prejudice.

The ruling comes days after the U.S. Department of Justice said the Canadian National bid poses greater risk to competition than the Canadian Pacific bid.

Canadian National has argued that its deal is beneficial for shipping customers, and has expressed confidence that it will eventually win approval. But the regulator skepticism, coupled with some risk that absent a trust, Kansas City Southern shareholders could be left waiting for more than a year to see how the regulatory review works out, could mean Canadian Pacific's bid is deemed more attractive even if the company fails to top the Canadian National offer price.