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June 30, 1987

George H. Keyser and Walter Shearer, individually, as class representatives on behalf of others similarly situated, and derivatively on behalf of Commonwealth National Financial Corp., Plaintiffs
Commonwealth National Financial Corporation, et al., Defendants

The opinion of the court was delivered by: NEALON


 Presently before the court *fn1" is defendants' Motion for Summary Judgment. All briefs having been filed and oral argument completed as of March 30, 1987, the motion is ripe for disposition. Plaintiffs allege various inadequacies in proxy material used to solicit a merger between Commonwealth National Financial Corporation (Commonwealth) and Mellon Bank Corporation (Mellon) in violation of §§ 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(a). In addition, plaintiffs maintain that Commonwealth's Board of Directors (Board) breached their fiduciary duty of care owed to Commonwealth's shareholders under Pennsylvania law by ultimately approving a merger with Mellon. For the reasons set forth below, defendants' Motion for Summary Judgment will be denied as to the alleged adequacy of the proxy statement in failing to mention Meridian's proposals under Rule 14a-9, denied as to the § 10(b) claim, granted as to the Rule 14a-9 claim as it pertains to the alleged failure to correctly set forth the background of the Mellon merger and the failure to disclose purported conflicts of interest of Commonwealth's management and directors and denied as to the claim that the Board breached its fiduciary duty under state law by approving the Mellon merger. *fn2"

 Plaintiffs, shareholders in Commonwealth, instituted this action alleging that defendants mailed false and misleading proxy materials soliciting shareholder approval of a proposed merger in violation of section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa and state law. Specifically, plaintiffs allege violations of §§ 10(b) and 14(a) of the 1934 Act, 15 U.S.C. §§ 78j(b), 78n(a) and rules and regulations promulgated under these sections. Named defendants are Commonwealth, Mellon and individual members of the Board of Directors of Commonwealth. Plaintiffs also allege that the Commonwealth directors violated the fiduciary duty owed to their shareholders under Pennsylvania law when they ultimately approved a merger with Mellon by executing an investment and warrant agreement granting Mellon a lock-up option *fn3" without adequately informing themselves and failing to maximize the price that could have been obtained for Commonwealth in such a merger transaction. In a forty-five (45) page Memorandum and Order the court denied plaintiffs' Motion for Summary Judgment on April 7, 1986. In that Memorandum and Order, the court analyzed in detail the factual background of the case as it then existed. For purposes of this motion, the court will concentrate on the factual record as it has developed since April 7, 1986. Indeed, as will be apparent, a good deal of the factual background set forth in the April 7th Opinion remains unchanged.


 In examining the present factual background, the court must construe the facts in a light most favorable to plaintiffs. The court cannot resolve conflicting factual contentions on this Motion for Summary Judgment, and defendants' motion should be granted only if defendants have established that no material facts are in dispute and that they are entitled to judgment as a matter of law.

 Initially, the court recognizes that by stipulation dated August 19, 1986, the parties resolved their discovery disputes. As plaintiffs maintain, many documents have now been produced which were not available to this court when it issued its earlier Memorandum and Order on April 7, 1986. In any event, the present record reveals the following.

 Since 1982 Meridian Bancorp. Inc. (Meridian) has been interested in acquiring Commonwealth, although Commonwealth was not interested at the time as it desired either to remain independent or to try and improve its value for a future merger. Nonetheless, on January 30, 1985, Meridian made an affirmative overture to Commonwealth by a letter from Meridian's President Samuel A. McCullough (McCullough) suggesting discussions relative to a possible merger. Commonwealth's Executive Committee considered the letter and decided to obtain investment banking advice by retaining Goldman, Sachs & Company (Goldman Sachs) for the purpose of evaluating the options available to Commonwealth. Goldman Sachs advised that it would be premature to merge with any prospective acquirers and Commonwealth's Board, after an in depth discussion at its April 17, 1985 meeting, resolved to remain independent until it became a more valuable merger partner. In the summer of 1985, Commonwealth decided to raise capital equity and on September 10, 1985, filed a preliminary prospectus with the Securities and Exchange Commission for the sale of 718,750 shares of common stock. Although having been advised of Commonwealth's desire to remain independent, on September 12, 1985, Meridian sent a letter to Commonwealth and Goldman Sachs outlining a proposal to purchase all of Commonwealth's stock by exchanging it for Meridian common stock with an approximate value of $ 38.00 per share.

 Commonwealth discussed Meridian's September 12th letter with Goldman Sachs on Friday, September 13, 1985. Thereafter, between September 12th and September 17th, Goldman Sachs requested Meridian to withdraw the letter as Commonwealth had decided to remain independent. A special meeting of Commonwealth's Executive Committee was held on the evening of September 17, 1985. The Executive Committee resolved against entering into negotiations with Meridian based on the September 12th letter after deliberating for four (4) hours. The full Board of Directors adopted this resolution on September 18, 1985 after a presentation by Goldman Sachs. On September 19, 1985, Meridian issued a press release containing the terms of the letter, Commonwealth's rejection thereof and the assertion that the "offer remained open."

 Subsequently, by letter dated September 25, 1985, Meridian reaffirmed terms contained in the September 12th letter while indicating that said terms were open to negotiation. Additionally, Mellon became active in this scenario after Meridian's press release concerning the September 12th letter. David L. Martin (Martin), Senior Vice President in charge of Corporation Development at Mellon, discussed the possibility of a stake-out *fn4" with Charles F. Merrill (Merrill), Chief Executive Officer of Commonwealth, until September 27, 1985 when the subject of merger between Mellon and Commonwealth arose.

 Specifically, Martin telephoned Merrill on September 12, 1985, to inform Merrill that Mellon could be helpful "in case something happened." It appears that Martin heard "rumors" that Commonwealth was going to receive an offer. In fact, in its prior ruling, the court noted that Martin telephoned Merrill "after hearing of Meridian's 'offer.'" On September 19, 1985, Merrill advised Martin that Commonwealth did not view Meridian's proposal as a friendly overture and that Commonwealth desired to remain independent. Martin discussed a stake-out and this possibility was explored until September 27, 1985, when Merrill and Martin began to discuss merger. Merrill, after speaking with Goldman Sachs, asked Martin if Mellon was interested in immediate merger. Martin stated that Mellon recognized Commonwealth's desire to remain independent, but Martin conveyed Mellon's willingness to compete with other potential merger partners to Merrill. See Document 42 of the Record, Consolidated Statement of Material Facts Not in Dispute at 27-28. Although Martin attempted to discuss Mellon's objectives concerning merger in general, Merrill did not want to speak about the interests of management in a Mellon merger. Id. at 28.

 Meridian, by letter dated September 30, 1985 to the Commonwealth Board, amended the terms of the September 12th letter to include a price of thirty-nine (39) dollars a share, while again asserting that any items were subject to negotiation. Importantly for purposes of the present motion, the letter stated "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 12 offer (as amended by this letter)." On October 1, 1985, Commonwealth issued its own press release again expressing its intent to remain independent.

 At this point, viz October 1, 1985, Commonwealth and Mellon had superficially discussed the possibility of merger on September 27, 1985. Indeed, Mellon continued to work on a plan for a stake-out between Mellon and Commonwealth with its financial advisor Merrill, Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) between September 23, 1985 and October 4, 1985. On Tuesday, October 1, 1985, Martin and Mellon's investment firm Merrill Lynch met with Goldman Sachs at approximately 5:30 P.M. At some point on October 1st, Goldman Sachs asked if Mellon would consider an up-front merger rather than a stake-out. *fn5"

 Accordingly, despite the October 1st press release expressing Commonwealth's desire to remain independent, the subject of merger, previously discussed between Merrill and Martin, again was raised by Goldman Sachs later in the day on October 1st. In addition, during this time period, the proposed stake-out was still being discussed. The next series of pertinent events began three (3) days later on Friday, October 4, 1985.

 Martin called Merrill on the afternoon of October 4, 1985 to formally express Mellon's interest in merging with Commonwealth. Merrill Lynch delivered a proposed term sheet to Goldman Sachs in the late afternoon on October 4, 1985 covering the proposed merger. The term sheet included a possible bid in the range of forty (40) to forty-two (42) dollars per share, as well as a Stock Purchase Warrant. In addition, the term sheet stated that the due diligence review was to be completed no later than Sunday, October 6, 1985. Consequently, at the close of business on October 4th, a definite agreement with Mellon had not been reached.

 By October 6th, all negotiations apparently including the due diligence review, except with respect to price, had been completed. Document 42 of the Record at 37. Martin spoke to Richard Allen Sapp (Sapp) of Goldman Sachs on Sunday evening, October 6th. Sapp inquired as to the price Mellon was considering. Martin responded that he thought forty (40) dollars, although Commonwealth's earning potential would have to be discussed in more detail. Sapp responded somewhat negatively to this price. Id. at 38. Thus, even as late as October 6, 1985, no agreement on price had been reached between Commonwealth and Mellon.

 The deposition testimony of Geoffrey Shuff (Shuff), in-house counsel for Commonwealth, reveals that Shuff contacted members of Commonwealth's Board by telephone around midnight on October 6, 1985 to schedule a Board meeting for Tuesday, October 8th. See Document 42 of the Record at 38-39. In a press release issued by Commonwealth on October 1, 1985, in response to Meridian's September 30, 1985 letter, Merrill is quoted as saying "the matter will be brought formally to the attention of Commonwealth's Board in due course." Document 35 of the Record, Tab 32 at 661b. Apparently, as of October 2, 1985, a Board meeting had not yet been scheduled. Sapp indicated in his deposition that Commonwealth desired Mellon's response to Commonwealth's merger proposal by October 4th because "we wanted to schedule a directors meeting for Monday to discuss the state of the world." Document 34 of the Record, Tab 11 at 281b. As Sapp commented, "we were really planning on having a board meeting Monday morning to discuss the state of affairs and wanted as much information as we could have to make recommendations by the close of business." Id. When questioned as to what he meant by the "state of affairs," Sapp agreed that Meridian's proposal was included along with other possibilities that had been discussed. Id. On October 4th, Gregory Sutliff (Sutliff), a Board member, in a tape recorded conversation with F. John Hagele, Esquire, Commonwealth's counsel, indicates that he, Sutliff, was aware of the Monday, October 7 Board meeting. Document 87 of the Record, Tab 32. As to what would be discussed at this meeting, Hagele told Sutliff "without going into identities the third alternative is that another opportunity is on the table." Id. at 3. The other two (2) alternatives presumably were either (1) entering into negotiations with Meridian or (2) not negotiating with Meridian. In his deposition, Shuff stated that he did not believe that the notice of the meeting scheduled for October 7th contained any reference to Mellon. Document 36 of the Record, Tab 61 at 1098b. The court's review of the record does not disclose the contents of the notice given the Board setting up the October 7 meeting. In any event, Mellon apparently was not mentioned in the notice of the October 7th meeting. The following colloquy occurred at Shuff's deposition:

Q. Was there a time after the first notice that you gave of the meeting that you gave a second notice of the purpose of the October 7 Monday meeting?
A. I don't believe so.
Q. When did you first give notice that the meeting was not going to be held on October 7 but was to be held on October 8?
A. I believe it was around midnight on Sunday, October 6.
Q. What did you tell the members of the board as to the reasons for the change and/or as to the purpose of the meeting?
A. Again, I don't recall specifically what might have been said in those conversations. Generally that the options and alternatives which I had previously mentioned to them in my phone call were not in a condition to be discussed on Monday, but we believed that they would be in such a condition on Tuesday and that therefore the meeting was postponed from that Monday, October 7 until Tuesday, October 8.

 Id. at 1098b-1099b. In response to the question of whether Shuff notified the Board prior to their "walking in" to the October 8 meeting that they would be considering a Mellon proposal, he stated "[I] personally did not notify to the best of my recollection any board member that a Mellon proposal or offer would be discussed at the October 8 board meeting." Document 27 of the Record, Tab 72 at 52. In this regard, the deposition testimony provides:

Q. When to your knowledge was the first time that a board member other than the management members that were involved in negotiating the terms of this agreement had access to the agreement itself?
A. To my knowledge, that would have been at or about the commencement of the meeting on October 8.


 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 by letter addressed to the Commonwealth Board. Consequently, at this point, while there was a Board meeting scheduled for October 8th, Meridian had withdrawn its "offer" and no agreement on price had been reached with Mellon. The record discloses that Commonwealth was unsure of Mellon's offering price until Monday evening October 7, 1985. The following discussion occurred at Merrill's deposition:

Q. What time Monday night did you have the price that you felt was what Mellon was going to offer?
A. Seven to 7:15.

 Document 36 of the Record, Tab 53 at 940b.

 Because Mellon's offering price was not set, F. John Hagele, Esq., counsel for Commonwealth, initiated a telephone call to Meridian's outside counsel, Joseph Harenza, at 8:35 A.M. on October 7th for the purpose of requesting Meridian not to withdraw its "offer" prior to Commonwealth's October 8th meeting. Undoubtedly, the telephone conversations on October 7, 1985, between Hagele and Harenza are a critical element of the instant factual background. In the court's April 7th Memorandum, it was noted that Hagele's deposition testimony was accepted as true because there were no counter affidavits submitted by Harenza. After renewed discovery, plaintiffs have submitted an affidavit of Joseph M. Harenza. See Document 70 of the Record at Exhibit 1.

 In his affidavit, Harenza states that Hagele telephoned him on the morning of October 7, 1985. As Harenza recalls:

Mr. Hagele telephoned me during the morning of October 7 and said that the purpose of his call was to determine if Meridian had published a withdrawal. In this first telephone conversation with Mr. Hagele on October 7, 1985, I told Mr. Hagele that I was aware that a public announcement indicating withdrawal had been prepared, but I was not yet aware whether it had been publicly released. I said that I would check to see if the withdrawal had been published to the wire services, and that I would communicate the result of my inquiry to him. I then ascertained that Meridian's announcement of its withdrawal had already been publicly released.

 Id. at para. 6. In addition, Harenza avers:

When I spoke to Mr. Hagele for the second time later that morning, I communicated this fact to him. Mr. Hagele asked if Meridian would consider reinstituting its offer. I asked why Commonwealth had not called me with this request on Friday or over the weekend. Mr. Hagele did not respond to this question. I then advised Mr. Hagele, following my own communications with Mr. McCullough, Meridian's Chief Executive Officer, who was present during this second telephone conversation, that Meridian was willing to reinstate such offer but was concerned about confusing and misleading the investing public by announcing a withdrawal and shortly thereafter a reinstatement without sufficient reason. I then stated that Meridian would publicly reinstate its offer and risk misleading and confusing the investing public only if it had reason to believe that Meridian had a chance to acquire Commonwealth or that Commonwealth would at least talk to Meridian. I then stated more specifically to Mr. Hagele that Meridian could justify this risk only if either of the following two events occurred: (1) Commonwealth's management agreed to propose Meridian's offer to its Board for approval; or (2) Commonwealth agreed to set a time and place for negotiations with Meridian. I also added that Meridian was prepared to sit down and negotiate, at any time or place (including immediately, if necessary, in Philadelphia or Harrisburg), a possible combination and that Meridian was willing to negotiate any terms of its offer, including price, which Commonwealth's management found not acceptable. I considered this a reinstitution of the Meridian offer, subject only to some indication that Commonwealth would talk to us. Mr. Hagele advised that he had no Board authority to consent to either of these alternatives, and rejected both of them. I did not advise Mr. Hagele that Meridian would only 'consider' reinstating its $ 39.00 offer if Commonwealth met one of the above two alternatives or that a management recommendation of the Meridian proposal to the Commonwealth Board was the sole condition to a Meridian reinstatement, with no other alternative.

 Id. at para. 7 (emphasis added).

 The primary difference between Hagele's account of the telephone conversations, see Document 51 of the Record at 16-17, and Harenza's version is the fact that Harenza denies modifying the initial conditions to reinstate the "offer." *fn6" Specifically, as will be discussed infra, Harenza denies stating that Meridian would rescind the press release only if Commonwealth immediately committed to recommend Meridian's "offer" to the Board. Significantly, however, Harenza does not deny that Meridian's "offer" was withdrawn. Harenza acknowledges that he considered the Meridiam "offer" reinstituted subject only to some indication that Commonwealth would agree to talk to Meridian. As Hagele advised Harenza, however, he could not agree to commit Commonwealth to negotiations. Document 37 of the Record, Tab 22 at 210a; Document 51 of the Record at 17 n.15. Hagele testified at his deposition on this point:

Certainly we had no authority to accept the offer and certainly I believed it was in everyone's best interest if we had the Meridian proposal before the board on Tuesday morning. I think technically, of course, we could have sat down and negotiated with Meridian without board authority, but at that point we were not prepared to do so.

 Document 37 of the Record, Tab 22 at 210a.

 The record demonstrates that Commonwealth, through Hagele, asked that the Meridian offer remain outstanding for the Board's October 8, 1985, meeting. Richard Sapp of Goldman Sachs stated at his deposition, "so, there was a contact made to Meridian to tell them we are considering -- we will have a board meeting, we at that time will consider your proposal, please, we would like you not to withdraw it." Document 36 of the Record, Tab 52 at 927b. When questioned about conversations apparently between Merrill, Goldman Sachs and Hagele concerning whether or not a call should be made to Meridian, Sapp stated:

Over the weekend we were very much engaged in discussing the position with Mellon and getting the Mellon work done.
Late on Sunday night we had a discussion that that call should be made because we were very much concerned that Mellon would not be in a position to tell us anything that would be attractive to us, and we therefore took the position that Mellon *fn7" had an offer that we could talk about with the board, and the board, after knowing what the Meridian offer was and discussing it, knowing what happened at the other bank holding companies in the state, could make a decision to direct management to take action accordingly.

 Document 36 of the Record, Tab 52 at 928b-929b. Admittedly, Harenza neither acknowledges nor denies that Hagele advised him of Commonwealth's desire to present Meridian's proposal to the Board, but in a consolidated statement of facts submitted by plaintiffs, it is acknowledged that Hagele, inter alia, requested that the "offer" remain open. See Document 42 of the Record at 39.

 Commonwealth's Board of Directors met on Tuesday, October 8, 1985 at 8:00 A.M. and proceeded to discuss the Mellon proposal. The Directors were informed that Meridian's "offer" had been withdrawn, but it was recognized that Meridian was still there to talk to. Document 99 of the Record at 8 and 23. The thrust of the meeting, however, was to evaluate and decide on Mellon's existing proposal concerning merger. It appears that the vote approving the merger with Mellon occurred at 9:48 A.M., while adjournment was delayed until approximately 11:00 A.M. See Document 51 of the Record at 19 n.18. The parties have not submitted any further evidence contradicting this assumption. Of course, the directors had met previously on September 18, 1985 and extensively discussed Meridian's September 12th letter.

 The Commonwealth Board approved the merger on October 8th as did the Executive Committee of Mellon's Board of Directors on the same morning. Proxy materials were mailed to Commonwealth's shareholders on November 25, 1985. Of seventy percent (70 %) of eligible shareholders voting, ninety-four percent (94 %) voted in favor of the merger.


 Defendants claim that based on the undisputed facts set forth in this court's April 7th Memorandum and Order, they are entitled to judgment as a matter of law. The court's factual findings were based on the record as it then existed, as they must have been for purposes of that Motion for Summary Judgment. The court agrees with plaintiffs that additional evidence creating material factual disputes has been presented.

 The parties concede that the following legal issues exist: (1) Was the Meridian "offer" a material fact that Commonwealth had to disclose in its proxy statement? and (2) Did the Commonwealth Board of Directors breach its fiduciary duty of care to the shareholders by approving the merger with Mellon? Factually, the principal issues may be categorized as follows: (a) Was the Meridian "offer" withdrawn? Specifically, what effect did the Hagele/Harenza conversation of October 7, 1985 have on the status of the "offer"? (b) Even if the "offer" was withdrawn, was Meridian's existence as a willing suitor ready to negotiate merger, coupled with the fact of past "offers" from Meridian, a material fact requiring disclosure? (c) Did the Board members make an informed business decision? In this regard, to what extent could the Board rely on advice of Goldman Sachs and Commonwealth's management? (d) Did the Board breach its duty to the shareholders by failing to maximize price before granting Mellon a lock-up? Specifically, is the Board liable for not attempting to negotiate a higher price with Meridian or Mellon before approving the merger with Mellon? The court finds that sufficient factual disputes exist precluding summary judgment on the above-mentioned legal issues.


 Proxy Statement

 The factual disputes concerning the Section 14(a) *fn8" and Rule 14a-9 *fn9" issues center around the materiality of Meridian's "offers" to merge. In this regard, the court must examine para. 23 of defendants' Statement of the Material Facts As to Which There Is No Genuine Issue To Be Tried and para. 23 of plaintiffs' Statement in Response to Defendants' Statement of the Material Facts As To Which There Is No Genuine Issue To Be Tried. In defendants' Statement they aver:

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, ...

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