The Surface Transportation Board (STB) has established its timetable to consider an application by Canadian National (NYSE:CNI) to place merger target Kansas City Southern (NYSE:KSU) in a voting trust, a key development in the Canadian railroad's planned $33 billion acquisition.

Canadian National last month outbid Canadian Pacific (NYSE:CP) for Kansas City Southern, but the deal must still pass regulatory scrutiny. The railroads expect a drawn-out process to win approval, and Canadian National hopes to use a trust to provide Kansas City Southern shareholders with their compensation prior to the deal winning approval.

A Canadian National train in a mountain pass.

Image source: Canadian National.

Canadian Pacific had already won approval for such a trust structure, but with Canadian National being much larger than either of the other two railroads, there is no guarantee its trust plan will be accepted. The STB rejected Canadian National's initial request, but allowed the railroad to reapply.

The STB is allowing public comments on the proposal through June 28, and granted Canadian National until July 6 to respond to comments.

Canadian National issued a statement saying, "we are happy with the timetable that the STB has set for reviewing our voting trust," and that it is confident that its voting trust will be approved.

Canadian National has argued that the Canadian Pacific trust approval should be a precedent that allows it to proceed as planned, but the U.S. Department of Justice has already weighed in, calling the trust a "mockery" of STB regulatory authority. The STB is likely to seriously consider comments from shippers and other railroad customers in making its decision.

It is wrong to conclude that if Canadian National's voting trust isn't approved it is unlikely to eventually win merger approval. However, the STB's decision on the trust and comments that come in over the next 20 days should provide insight into how big a challenge the railroad faces as it tries to buy Kansas City Southern.

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