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.
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).
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.
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.
After presentations and discussions, the Board of Commonwealth directors voted to approve the Mellon proposal.
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.
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 that they are entitled to summary judgment as a matter of law and a permanent injunction halting consummation of the Commonwealth-Mellon merger scheduled for April 2, 1986. Each argument will be addressed seriatim. **
A. Failure to Disclose Meridian Offers
Plaintiffs contend that the proxy material soliciting approval of the Commonwealth merger failed to disclose Meridian's offers and thus is a violation under Section 14(a)
and Rule 14a-9.
The proxy material contains the following statement:
After another Pennsylvania bank holding company, on September 19, 1985, made a public proposal to negotiate the purchase of all the outstanding shares of Commonwealth Common Stock, Mellon again approached Commonwealth with an expression of interest.