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April 7, 1986

GEORGE H. KEYSER, Individually, as class representative on behalf of others similarly situated, and derivatively on behalf of Commonwealth National Financial Corporation, and WALTER W. SHEARER, Plaintiffs

The opinion of the court was delivered by: NEALON



 Plaintiff sought a preliminary injunction on December 19, 1985, seeking to stop the shareholder meeting scheduled for December 30, 1985. By agreement of the parties, the shareholder meeting took place and the preliminary injunction was formally denied January 9, 1986. See Document 14 of the Record. By Order dated March 14, 1986, this court granted leave to add an additional party plaintiff, Walter W. Shearer. All supporting and opposing briefs to the Motion of plaintiffs for Summary Judgment and Injunction and documents were filed under seal. The motion is now ripe for disposition.*For the reasons set forth below, plaintiffs' Motion for Summary Judgment will be denied.


 A detailed account of the factual background of the action is necessary for resolution of plaintiffs' motion. The record demonstrates that the parties substantially agree upon the relevant facts. The Statement of Material Facts submitted by both parties indicate that the material facts necessary to dispose of the motion are not in dispute. See Documents 23 and 37 of the Record.

 As a preliminary matter, the court notes that all reasonable inferences must be favorably attributed to defendant. This court may not resolve factual disputes on a motion for summary judgment; rather, based upon those genuine issues of material fact not in dispute, the court must determine whether plaintiffs have demonstrated that they are entitled to judgment as a matter of law.

 A. The Parties and Participants

 Commonwealth National Financial Corporation [Commonwealth] a one-bank holding company, is a Pennsylvania corporation headquartered in Harrisburg, Pennsylvania. Its only subsidiary is Commonwealth National Bank [CNB]. Commonwealth reported total consolidated assets of $1,409,854,000.00 as of September 30, 1985. Charles F. Merrill [Merrill] is President and Chief Executive Officer of both Commonwealth and CNB. Additionally, Merrill serves as director on the Boards of both corporations. The shares of Commonwealth are publicly traded on the National Market System of NASDAQ.

 Meridian Bancorp, Inc., [Meridian] a multi-bank holding company, is a Pennsylvania corporation, headquartered in Reading, Pennsylvania. Meridian's total consolidated assets as of December 31, 1984 were $5,494,282,000.00. Samuel A. McCullough [McCullough] is President and Chief Executive Officer of Meridian. Meridian's shares are also traded on the National Market System.

 Mellon Bank Corporation [Mellon], another multi-bank holding company, is also a Pennsylvania corporation whose shares are traded publicly on the New York Stock Exchange. On September 30, 1985, Mellon reported total consolidated assets of $31,868,045,000.00. David L. Martin [Martin] is a Senior Vice President in charge of Corporation Development at Mellon.

 B. Pre-Merger Events

 The following facts are either admitted or unchallenged. While there are some areas of disagreement, those facts disputed are not material for the purposes of the summary judgment motion presently before the court.

 The parties dispute just how long Meridian has wanted to acquire Commonwealth and for what period of time Mellon has been interested in merging with Commonwealth. It is unquestioned, however, that in late 1982, McCullough, acting as President of Meridian's predecessor bank-holding company American Bancorp, Inc., met with John R. Biechler, then Chief Executive Officer of Commonwealth, to discuss the possibility of a merger of the two companies. Biechler, apparently generally interested, sent McCullough a report entitled "An Analysis of Commonwealth National's Future Alternatives" [Danielson Report] prepared by Danielson Associates for Commonwealth. This report concluded that a merger with Meridian's predecessor was "almost a planner's dream" but that Mellon was also an excellent bank which should not be ruled out completely. Statement of Material Facts Not in Dispute, Document 23 of the Record at 8, para. 18 [Plaintiffs' Facts]; Defendants' Joint Statement in Response to Plaintiffs' Statement of Material Facts Not in Dispute and Supporting Exhibits, Document 37 of the Record at 3-4, para. 18 [Defendants' Facts]. McCullough and Biechler spoke on and off during 1983 up until the summer of 1983. It was during the summer of 1983 that McCullough and Meridian realized that discussions of merger possibilities would have to be held in abeyance after Biechler informed McCullough that Commonwealth was trying to determine a value for the bank. *fn1" It was not until September, 1984, that McCullough resumed his quest for Commonwealth. By this time, Merrill held the reins of control of Commonwealth and was informed by McCullough that Meridian was ready "to talk at any time." *fn2" Plaintiffs' Facts at para. 24; Defendants' Facts at para. 24. Meridian then began to accumulate Commonwealth stock. McCullough informed Merrill of the purchases, stating he (and Meridian) intended to purchase more, but not an amount exceeding 4.9%. After being advised of Meridian's continued interest in merger, Merrill replied that he would contact McCullough if and when the interest was mutual.

 On January 30, 1985, McCullough addressed and delivered a letter to Merrill; while McCullough characterizes this letter as an offer, Merrill disputes such a characterization. The purposes of the letter were "to congratulate [Merrill] on Commonwealth National's fine results for 1984 and, also, to continue discussions relating to a possible merger." Letter dated January 30, 1985 from McCullough to Merrill, Document 25 of the Record, Appendix 23 at 1. The contents *fn3" of this letter were the subject of an Executive Committee meeting of Commonwealth's directors on February 28, 1985. It was decided that CNB should retain investment banking expertise and on March 20, 1985, the Board of Directors of both Commonwealth and CNB voted to engage Goldman Sachs to evaluate the CNB situation. Goldman Sachs advised Commonwealth that it would be premature for Commonwealth to sell in the Spring of 1985 but that four prospective acquirers existed, or would exist: Mellon, Fidelcor, Pittsburgh National Corporation and Meridian. The Commonwealth Board discussed Goldman Sach's evaluation at great length on April 17, 1985 and resolved to remain independent because, inter alia, it had not fully realized its earnings potential which would make it more valuable as a potential merger partner. The Board resolved to inform McCullough of Commonwealth's decision. It also was concluded that McCullough should be advised that if Commonwealth were pressed, it would open up bidding to all other interested bank holding companies. Upon being so advised by telephone, McCullough expressed concern over rumors that Commonwealth was discussing merger with Mellon. Merrill responded that this was not true and that he would keep in touch. Plaintiffs' Facts at para. 34.

 During the summer, 1985, Commonwealth and Goldman Sachs worked upon a plan to raise equity capital for Commonwealth. It is conceded that Commonwealth was in need of additional capital, see Deposition of David Budd, Document 34 of the Record, Exhibit 3 at 45b, although plaintiffs speculate that this was a particularly large offering which might place Commonwealth out of the reach of many potential acquirer-banks, such as Meridian, which was only a medium-sized bank. Id. These discussions culminated in a preliminary prospectus being filed with the Securities and Exchange Commission [SEC] on September 10, 1985, covering the sale of 718,750 shares of common stock. By this time, Meridian and its financial advisor, Keefe Bruyette, notwithstanding Commonwealth's prior notice of its desire to remain independent, had decided to attempt again to engage Commonwealth in negotiations. *fn4"

 C. The September 12, 1985 Letter

 On September 12, 1985, *fn5" a letter was sent by Meridian to the Commonwealth Board of Directors and Goldman Sachs. It is hotly disputed by the parties whether this letter constituted an "offer" or if it was merely an "invitation to bid." *fn6" Plaintiffs' and Defendants' Facts at para. 42. According to plaintiffs' version, the letter constituted an offer by Meridian to purchase 100% of Commonwealth's common stock by exchanging it for Meridian common stock with an approximate value of $38.00 per share. This price, according to plaintiffs, represented a 45% premium over the $26.25 market bid for Commonwealth shares prior to the September 10th announcement of the 718,750 public shares offering and the $38.00 per share offering price was 1.6 times book value. Defendants, on the other hand, characterize the September 12th letter as an "invitation to bid" in which merger possibilities were again discussed and a price and other conditions, far from definite or firm, were proposed. See infra at n.21. All "proposals" in the letter, according to Commonwealth, were subject to further negotiation inasmuch as Meridian indicated willingness to negotiate further. The letter contained a number of categories of discussion: Proposed Financial Terms; Board Composition; Management; Effect on Community; Anti-Competitive Effects; and Conditions. Under Conditions, the letter provided that "consummation of the transaction will require the execution of a definitive agreement containing the usual representations, warranties, access [ i.e., due diligence] and other customary provisions, approval thereof by each of our respective Boards, the required affirmative vote of Commonwealth's and Meridian's shareholders, and required regulatory approvals." Appendix A at 4. The preceding terms, such as "other customary provisions," would appear to be prone to different interpretations but the record does not elucidate whether they are objectively determinable in bank merger transactions. As an additional condition, the Meridian letter noted that if Commonwealth completed its public offering, then "it will be necessary for Meridian to revise the terms of this offer downward to reflect the effects of such offering." Id.

 Regardless of how the letter is classified, the next day, Commonwealth discussed the letter's contents, among other things, with Goldman Sachs. Goldman Sachs, through Keefe Bruyette, requested that Meridian withdraw its "offer" because Commonwealth was still trying to remain independent. *fn7" On September 16, 1985, a notice was issued to Commonwealth's Executive Committee for a special meeting "to discuss an unsolicited merger offer" received from Meridian. Plaintiffs' and Defendants' Facts at para. 47.

 After a four-to-five hour meeting of the Commonwealth Executive Committee, the Committee resolved against entering into negotiations with Meridian based on the terms and conditions set forth in the September 12th letter; it was further resolved that Commonwealth senior management had authority to initiate discussions with Meridian and other potential merger partners for consideration by the Board. Document 26 of the Record, Appendix 43 at 3. A full Board meeting was held on September 18, 1985, at which the full Board adopted and passed the Executive Committee's resolutions. *fn8"

 McCullough expressed his disappointment upon being advised by Merrill of the Board's decisions that day. Merrill Deposition, Document 34 of the Record, Exhibit 9 at 221b. Nevertheless, the next day, September 19th, McCullough telephoned back to inform Merrill that Meridian intended to make public the September 12th "offer." That day, Meridian issued a press release indicating the terms of the letter, Commonwealth's rejection and that the "offer remained open." Plaintiffs' Facts at para. 55; see Press Release dated September 19, 1985, Document 35 of the Record at Exhibit 28. Commonwealth responded by issuing a press release of its own. See Document 26 of the Record, Exhibit 49.

 D. The September 25, 1985 Letter

 On September 25, 1985, a second letter was sent to Commonwealth. In the letter, Meridian reaffirmed the terms of the September 12th letter and further stated: "we are prepared to negotiate any aspect of Meridian's offer which led your Board to conclude that it is not in the 'best interest of the shareholders of Commonwealth, employees and the communities served by the bank.'" Plaintiffs' Facts at para. 58 (citing Document 26 of the Record, Appendix 50). As an explanation of intent, "Meridian and Keefe Bruyette intended that sentence to mean that all terms, including price, were open to negotiation." Plaintiffs' Facts at para. 59.

 E. Mellon Bank Enters

 While Mellon and Commonwealth had discussed generally merger possibilities as early as 1983, Mellon became active in this scenario after Meridian's public announcement. *fn9" After hearing of Meridian's "offer," Martin telephoned Merrill on September 12, 1985, to let him know that Mellon "could be helpful in case something happened." Facts at para. 62. When the two spoke again on September 19th, Merrill advised Martin that Commonwealth did not view Meridian's "proposal" as a friendly overture and that the Board was adamant about remaining independent. Martin stated that Mellon would be interested in a "stake-out" *fn10" in an attempt to help Merrill. Mellon, by offering its help to Commonwealth, at this point can be considered a potential "white knight." *fn11" The possibility of a stake-out was discussed by Merrill and Martin at greater lengths until September 27, 1985 when the feasibility of immediate merger was broached by Merrill. Plaintiff's Facts and Defendants' Facts at para. 68. While the litigants sharply dispute the depth and detail of the potential merger discussion, it is clear at least the subject was mentioned. It is unclear whether Meridian was aware of Mellon's entry into the picture at this point. Meanwhile, Meridian and Keefe Bruyette continued their quest of acquisition culminating in another letter addressed to the Commonwealth Board.

 F. September 30, 1985 Letter

 By letter dated September 30, 1985, sent to the Commonwealth Board from Meridian, Meridian amended the terms of the September 12th letter in an attempt to make the deal appear more attractive. Again, the parties sharply dispute whether the letter constituted an "offer" or another "invitation to negotiate." *fn12" The terms of the letter, *fn13" regardless of its characterization, discussed a purchase price of $39.00 per share and stated that Meridian was willing to negotiate any aspect of the "offer." It further added: "Please be advised that if you do not inform us, before the close of business on Friday, October 4, 1985 of your intent to negotiate with us, we intend to withdraw our September 12th offer (as amended by this letter)." Facts at para. 73 (citing Document 27 of the Record, Appendix 60). Commonwealth did not respond to this letter.

 The next day, October 1, 1985, Commonwealth issued a press release indicating Meridian had increased its unsolicited bid to $39.00 per share and that Merrill did not believe any significant changes had occurred warranting a change in Commonwealth's intent to remain independent. See Document 27 of the Record, Appendix 64. Meanwhile, Mellon with its financial advisor, Merrill Lynch, was still working on a plan for a stake-out between Mellon and Commonwealth. Late in the afternoon of October 1, 1985, Martin and Merrill Lynch met with Goldman Sachs regarding the details of a stake-out. At some point, Goldman Sachs, after private conference, asked if Mellon would consider an upfront merger instead of the stake-out. In response, Martin replied that he had been respecting Commonwealth's desire to remain independent but if given the opportunity Mellon would be more flexible in the structure of consideration than Meridian and would "go north" of $39.00 to be competitive.

 G. The Merger Weekend

 Martin called Merrill on Friday, October 4, 1985, (which was the deadline date set by Meridian) to formally express Mellon's interest in a merger with Commonwealth and to state that Martin believed after a due diligence review that Mellon would be able to go forward with a $40 - $42 per share merger. Later that afternoon, Merrill Lynch delivered a proposal term sheet to Goldman Sachs covering the proposed merger.

 The proposal included, inter alia, the $40 - $42 per share bid as well as a Stock Purchase Warrant allowing Mellon to purchase up to 24.9% of Commonwealth's common stock at $34.75 per share. *fn14" Additionally, the proposal provided that a definitive merger agreement was to be completed no later than Sunday evening, October 6, 1985. While merger discussions and negotiations continued through the weekend, an agreed-upon price had still not been reached by Monday. This, apparently, was a result of the weekend due diligence review by Mellon which had not revealed Commonwealth in as fiscally healthy position as had been anticipated. As a result, Mellon did a supplemental due diligence on Monday in order to justify a $40 per share offer. See e.g., Deposition of Richard Allen Sapp, Document 34 of the Record, Exhibit 11 at 294b. It was obvious, at this time, that Commonwealth's management was cooperating more with Mellon than it was with Meridian by allowing, e.g., a due diligence review.

 On Monday, October 7, 1985, Meridian issued a press release that "it [had] terminated and withdrawn its offer for Commonwealth National Financial Corporation." This was confirmed in a telephone conversation between counsel for Meridian and Commonwealth as well as by letter addressed to the Commonwealth Board. After consultation with Goldman Sachs representatives and Shuff and Merrill of Commonwealth, F. John Hagele, Esq., counsel for Commonwealth, initiated the telephone call to Meridian's outside counsel, Joseph Harenza. He advised Harenza that Commonwealth was holding a Board meeting the following morning and that it "would be in everyone's best interests if the [Meridian] offer remained outstanding, and that no public announcement be made of its withdrawal." Harenza responded that he thought it was too late because Meridian had initiated a public release withdrawing the offer and expressed concern about confusing the investment public. He added that he did not know if Meridian would be willing to stop it. In a second telephone conversation, Hagele was told by Harenza that the news release withdrawing the offer had already hit the wires but that Meridian would countermand its press release only if Commonwealth would accept the September 30th offer or would set a place and time for negotiations. Defendants further contend that Meridian advised it "would have to consider whether to reinstate the offer" and would "only withdraw the [press] release if [Commonwealth] management immediately commits to [Meridian] to recommend its offer to the board." Defendants' Facts at para. 98 (citing Deposition of F. John Hagele, Esq., Document 37 of the Record, Exhibit 22 at 209a-215a). *fn15" Hagele did not agree, nor did anyone else from Commonwealth, to Meridian's demand. Hagele's deposition testimony is accepted because it has not been challenged by plaintiffs by submitting a counter-affidavit of Harenza. The parties do agree that at no point during these conversations did Commonwealth inform Meridian of Mellon's offer. There is nothing in the record to show that the press release was ever rescinded nor was Meridian's "offer" formally reinstated. While the parties disagree as to whether Commonwealth bargained sufficiently for a high enough price, on Monday evening, October 7, 1985 Mellon offered a $40 per share price.

 H. Commonwealth's Board Meeting

 At 8:00 A.M. on Tuesday, October 8, 1985, the Board of Directors for Commonwealth met. According to defendants, presentations were made by Merrill, Goldman Sachs representatives and legal counsel. Copies of various documents were given to Board members to assist them in their deliberations. *fn16" In addition to the presentations discussed above, Merrill advised the Board that Meridian's September 30th "offer" had been withdrawn, although plaintiffs contend that no one informed the Board of the conversations between Hagele and Harenza relative to the conditions of a possible reinstatement of the offer. Instead, the focus of the meeting was directed to the conditions and terms of the Mellon offer. Major elements of the Mellon proposal which were discussed included: price per share; form of consideration; the manner in which shareholders would elect cash or share option; tax consequences to shareholders; legal structure of merger; Merrill's or another director's nomination to the Mellon Board; and various non-financial issues. *fn17" After presentations and discussions, the Board of Commonwealth directors voted to approve the Mellon proposal. *fn18" That same morning, the Executive Committee of the Board of Directors of Mellon also approved the merger. At a later date, November 25, 1985, proxy materials were mailed to Commonwealth shareholders. The proxy statement scheduled a special meeting on December 30, 1985 for the purpose of soliciting shareholder approval of the Mellon merger. The meeting took place with 70% of the eligible voting shareholders casting their votes. Of the 70% of the votes cast, 94% voted in favor of the merger. That date of merger has been set for Wednesday, April 2, 1986.

 III. Discussion

 Plaintiffs seek to enjoin consummation of the Mellon-Commonwealth merger. In support of this attempt, plaintiffs advance several arguments: first, that Commonwealth's failure to disclose Meridian's offers in the proxy statement violates § 14(a) of the Securities and Exchange Act inasmuch as Meridian's offers were material facts which defendants had a duty to disclose; second, that defendants misrepresented the background of the Mellon merger negotiations in the proxy statement thereby misleading shareholders; third, that defendants failed to disclose Commonwealth management's and the Board of Directors' conflict of interest in the Mellon merger; and fourth, that by executing the investment agreement and warrant, the Commonwealth directors breached their state law fiduciary duty to shareholders. On the basis of these arguments, plaintiffs argue ...

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