SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
CLEARFIELD BANK & TRUST :
COMPANY, :
:
Plaintiff, :
:
PENN LAUREL FINANCIAL :
CORPORATION and CSB BANK, :
:
Intervening Plaintiffs, :
:
v. :Civil Action No. 99-180J
:
OMEGA FINANCIAL CORPORATION, :
:
Defendant. :
OPINION and ORDER
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D. BROOKS SMITH, District Judge
I. Introduction
In the instant case, this court gets a closeup view of the Darwinian
struggle that today animates most merger and acquisition activity in the
commercial banking field. Any merger brings to the fore the sometimes converging
and sometimes conflicting interests of target and suitor, shareholder and
incumbent management. This case is no exception. It presents a pending merger
with intervenor bank which plaintiff wishes to consummate and which defendant
hopes to defeat. Plaintiff charges that defendant has violated both federal
securities law and state banking law in its aggressive efforts to buy shares of
plaintiff's common stock directly from some of plaintiff's shareholders.
Plaintiff further contends that defendant's conduct warrants the grant of
injunctive relief. Meanwhile, a September 20 meeting of plaintiff's shareholders
looms,(1) at which the planned merger will be presented for approval. As appears
from the following, this court's ruling will have profound implications for the
market in plaintiff's shares, and for plaintiff and intervenor as on-going
entities.
Having conducted an evidentiary hearing on August 24 and 25, the following
constitute my findings of fact and conclusions of law.
II. Facts and Procedural History
Clearfield Bank & Trust Company ("Clearfield") is a Pennsylvania-chartered
bank and trust company that has served Clearfield County, Pennsylvania since
1902. Exh. P-1, at 1; exh. P-4, at 1. Clearfield conducts business through six
offices in Clearfield County, including its
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(1) The meeting, originally scheduled for September 8, was re-scheduled by
plaintiff after the evidentiary hearing was concluded because no
adjudication had yet been handed down.
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corporate office in the borough of Clearfield. Exh. P-4, at 1. "As of March
31, 1999, the bank had total assets of approximately $183.4 million...." Id.
CSB Bank ("CSB"), a Pennsylvania-chartered banking institution, also serves
Clearfield County. It conducts business through five offices, including its
corporate headquarters in Curwensville, Pennsylvania, a community located five
miles from the borough of Clearfield. Exh. P-4, at 2; test. of Butler.
Approximately four years ago, Clearfield entertained the possibility of merging
with CSB Bank and its parent, Penn Laurel Financial Corporation ("Penn Laurel"),
because neither institution could sustain adequate growth in the community
without a larger lending base. Test. of Butler. CSB is the only bank owned by
Penn Laurel, a registered bank holding company which, as of March 31, 1999, had
total assets of approximately $134.9 million. Exh. P-4, at 2.
CSB, in Clearfield's view, was a potential merger partner because it shared
Clearfield's conservative philosophy and commitment to the community, and
enjoyed a greater growth rate. The initial investigation into a merger agreement
between the companies did not lead to an agreement. Test. of Butler. The
possibility of a merger resurfaced two years later, in 1997, and a definitive
Agreement and Plan of Reorganization (hereafter referred to as the "Merger
Agreement") was executed on December 31, 1998 by Clearfield, CSB and Penn
Laurel. Exh. P-1, test. of Butler.
The Merger Agreement states that "Penn Laurel, CSB and Clearfield wish to
affiliate through a business combination to form a stronger, more effective
community financial institution." Exh. P-1, at 1. It explains that Clearfield
would merge with CSB and that the resulting bank would bear the name Penn Laurel
Bank & Trust. Id. Under the terms of the
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Merger Agreement, "each share of Clearfield Common Stock issued and outstanding"
immediately before the effective date of the merger would be "converted into and
become, without any action on the part of the holder thereof, the right to
receive .97 shares of Penn Laurel Common Stock." Id. ss.2.1(a) at 2. If the
merger transaction is not consummated by October 31, 1999, the Merger Agreement
automatically terminates, "unless extended, in writing, prior thereto." Id.
ss.9.1(d) at 49.
The merger was conditioned upon the approval of the Federal Reserve
Board, the Pennsylvania Department of Banking, and the Federal Deposit Insurance
Corporation, as well as the shareholders of Clearfield, CSB and Penn Laurel.
Exh. P-1, ss.8.1(a) at 40. The approval of this merger requires "66 2/3% of the
outstanding shares at Clearfield and 75% at Penn Laurel." Exh. P-4, at 3.
In addition to the necessary approval from the regulatory agencies and
the shareholders, the merger is also conditioned upon the transaction's
qualifying for a type of accounting treatment known as the "pooling of interest"
method. Exh. P-1, ss.8.2(d) at 44; exh. P-4, at 3. The proxy explains that, by
applying this accounting method, "we will treat the companies as if they had
always been combined for accounting and financial reporting purposes."2 Exh.
P-4, at
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(2) The pooling of interest accounting method is one of two generally accepted
methods to be used when two or more businesses combine. Anthony Phillips et al.,
Basic Accounting for Lawyers, ss.10.02, at 121 (4th ed. 1988). This method is
used when two enterprises combine their resources into a new
enterprise. Each of the participants is a part of the new enterprise;
the participants conduct business as a single enterprise after they
combine. Because there is no buyer, the assets and liabilities are
carried forward into the combined enterprise's financial statement at
their book values, so there are no new values for tax purposes. No
(continued...)
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4. Under this method, if the shareholders of "more than 10% of the outstanding
shares of Clearfield exercise dissenter's rights, the accounting conditions [for
the pooling of interest method] will not be met. If this occurs, the merger will
not be completed." Exh. P-4, at 3. The Merger Agreement, however, specifically
provides that the dissenting shareholders shall not exceed nine percent of the
issued and outstanding shares and acknowledges that dissenting shareholders will
be entitled to exercise their rights as provided under the law. Exh. P-1,
ss.8.1(i) at 42; ss.10.1 at 50.
If the merger is successful, "the former Clearfield shareholders will hold
approximately 61.03% of all outstanding Penn Laurel common stock and the current
Penn Laurel shareholders will hold approximately 38.97% of the combined entity."
Exh. P-4, at 2. From the perspective of the Clearfield board of directors, the
merger is beneficial because Clearfield will remain locally controlled and the
value of its stock should increase. Test. of Butler. In addition, the merged
entity would possess the largest market share of any bank in Clearfield County.
As a result, the merger should enable the resulting bank to contribute to growth
in the community while enhancing shareholder value. Exh. P-4, at 25; test. of
Butler, Wood, Downs.
The merger transaction agreed to among Clearfield, CSB and Penn Laurel was
the subject of a press release. Timothy Anonick, an investment banker who had
performed services
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(2) (...continued)
goodwill appears in the combined financial statements because there
has been no purchase.
Id. ss.10.02(a) at 122, see also Allegheny Energy, Inc. v. DQE, Inc., 171
F.3d 153, 156 n.4 (3d Cir. 1999). The conditions which must be met to qualify
for the pooling of interest method have been "interpreted very strictly by the
accounting profession[.]" Phillips, supra, ss.10.03, at 123. As a result,
accounting for business combinations by the pooling of interest method is "very
rare." Id.
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for Clearfield in the past, read the press release in January of this year and
was "confused" by the proposed merger because he understood that Clearfield was
not interested in merging with any other institution. Test. of Anonick. He
contacted Clearfield's then-President and CEO, Sherwood Moody, to offer his
consulting services. Moody declined, explaining that Ryan, Beck & Company,
another investment banking firm, had already been retained.
Anonick contacted Moody again in February to obtain further details about
the merger. He also accessed the Merger Agreement on the Internet in early
April. After reviewing the terms of the merger, Anonick concluded that the terms
of the transaction were not "that good" because the proposed deal was, in his
words, not a takeover but a "take-under" by a smaller bank. He contacted Moody
again--this time in April--to express his concerns. Upon learning from Moody
that some shareholders were unhappy with the terms of the merger, Anonick
decided to find out if any other banks would be interested in acquiring
Clearfield. In a conversation with Steve Martz, the chief operating officer of
Omega Financial Corporation ("Omega"), Anonick was advised to speak with David
Lee, Omega's CEO and Chairman.
Anonick met with Lee and Martz on April 27, 1999, and was later retained to
help Omega acquire Clearfield. Working with bankers from Omega, Anonick analyzed
Clearfield and arrived at a exchange price. With the assistance of counsel, he
then drafted a letter expressing Omega's interest in acquiring Clearfield. The
letter, signed by Lee and dated and delivered on Monday, May 10, 1999, informed
the Clearfield board of directors that Omega was aware of the merger transaction
with Penn Laurel and pointed out that "some of your shareholders have expressed
opposition to the Agreement." Exh. P-2. Lee's letter further
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advised that Omega was interested in a merger with Clearfield if the Penn Laurel
transaction was not completed. Although the letter carefully stated that it did
not "constitute an offer or a definitive agreement," it set forth the terms of
Omega's expression of interest. Those terms included, inter alia, that (1) Omega
would acquire all of the outstanding common stock of Clearfield for $65 per
share, (2) Clearfield would be merged into a newly formed, wholly owned
subsidiary of Omega whose name would be Clearfield Bank & Trust Company, (3)
Clearfield's current board of directors would be retained, with the addition of
one or two Omega directors, (4) one of Clearfield's existing directors would
join Omega's board of directors, and (5) all full-time "customer contact"
employees would be offered full-time employment. The letter concluded as
follows:
Our purpose in writing this letter is to make our interest clear in merging
with you if for any reason your current Agreement with Penn Laurel
Financial Corp. is terminated pursuant to its terms on October 31, 1999 or
earlier. We trust that you will comply with all of your legal obligations
under your current Agreement and Plan of Reorganization with Penn Laurel
Financial Corp. and CSB Bank. If our understanding of the facts is
incorrect in any material respect and you wish to clarify or correct our
understanding, please advise us.
Exh. P-2.
By contacting Moody, Anonick confirmed that the letter was actually
received by Clearfield's board of directors on May 10. At the end of the week,
Anonick telephoned Moody to determine if the Clearfield board had any questions
regarding Omega's expression of interest. Moody advised Anonick that he had been
advised by counsel not to speak with him.
Clearfield did not respond to Omega's letter of interest because the Merger
Agreement precluded negotiating with any other institution. Exh. P-1, ss.6.8.
Members of Clearfield's board of directors wanted to include Omega's expression
of interest in Clearfield's S-4
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prospectus to be filed with the Securities and Exchange Commission ("SEC"), but
deferred to the advice of Penn Laurel's counsel who advised that both Omega's
identity and the share price quoted should be excluded from the public filing
because Omega's letter was not an offer but simply an expression of interest.
What the filed S-4, dated August 2, 1999, did disclose was that the board had
received a May 10 letter "from an out-of-town bank indicating that the
out-of-town bank had an interest in acquiring the outstanding stock of
Clearfield." Exh. P-4, at 25. The S-4 further indicated that the board of
directors did not respond to the letter because: (1) it was only an indication
of interest and did not contain any binding commitment to acquire Clearfield
common stock; (2) the letter, by its terms, was not to be considered unless the
merger was unsuccessful; and (3) Clearfield did not want to breach its agreement
with Penn Laurel which prohibited discussing merger acquisitions with a third
party. Id. at 26.
Although dated August 2, 1999, the S-4 was available on EDGAR, a computer
database, in mid-July, when Anonick accessed it to review Clearfield's
disclosure of Omega's expression of interest. In the absence of a specific
disclosure identifying Omega's willingness to pay $65 per share should the
merger not be completed, Anonick decided to contact Jack Woolridge, one of the
disgruntled Clearfield shareholders identified by Moody back in April. Anonick
explained the terms of Omega's expression of interest to Woolridge, who said
that he had not previously heard them.
Woolridge, who owned approximately 6,000 shares and was responsible for
voting other shares held by family members, had numerous conversations with
Anonick during the last days of July. Anonick showed Woolridge a proposed
agreement which committed Omega to purchase Clearfield shares at $65 per share
from shareholders who committed to vote against
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the merger and to exercise their dissenters' rights, provided that (1) the
Clearfield-CSB-Penn Laurel merger was defeated, and (2) Omega successfully
negotiated a merger with Clearfield. Exh. D-B. Woolridge and another
shareholder, Attorney Mikesell, objected to the contingent nature of Omega's
initial draft agreement, and it was revised to eliminate the contingencies and
provide for the payment of $65 per share regardless of whether the Penn Laurel
transaction was successful or Omega succeeded in negotiating a future merger
with Clearfield. Exh. D-B, D-C, (Para.) 3. Thereafter, a meeting between
Woolridge and Anonick was arranged for Monday, August 2, 1999.
Woolridge suggested that Anonick reserve a meeting room at the Clearfield
Best Western so that Anonick could answer questions from shareholders. Anonick
and Woolridge arrived at the motel at approximately 1:00 p.m. and were met by 32
or 33 of Clearfield's shareholders. Anonick introduced himself and explained his
earlier relationship with Clearfield which had prompted his interest in the
pending merger. He revealed to those in attendance that he was now representing
Omega, and then reviewed some of the terms of Omega's May 10 letter of interest,
emphasizing the $65 per share price and the promise that Clearfield would retain
its name.
The overview of the terms of the May 10 letter was followed by a question
and answer period. At some point during the meeting, Anonick made available a
form Agreement on Omega letterhead, together with Omega's 1998 annual report,
1998 proxy and 1999 financial statements. The two-page Omega Agreement set forth
the following paragraphs:
1. The undersigned agrees to vote all shares of Clearfield Common Stock
which the undersigned owns or controls against the proposed merger of
Clearfield with CSB Bank, a subsidiary of Penn Laurel Financial Corp., and
to
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exercise dissenters right of appraisal with respect to the proposed merger
for all of the shares of Clearfield Common Stock designated below.
2. In the event that he [sic] proposed merger of Clearfield with CSB
Bank, a subsidiary of Penn Laurel Financial Corp. is terminated, Omega
agrees to promptly attempt to negotiate a merger transaction with the
Clearfield Board of Directors. The merger transaction would involve,
subject to regulatory approval, the merger of Clearfield into a newly
formed wholly owned Omega subsidiary, whose name would be changed to
Clearfield Bank & Trust Company. Subject to the provisions of paragraph
4 below, in the proposed merger the holders of Clearfield Common Stock
would receive $65 per share and each holder of Clearfield Common Stock
would have the option of either (a) Omega Common Stock or (b) cash or
(c) a combination of Omega Common Stock and cash. At least 51% and not
more than 75% of the total consideration must consist of Omega Common
Stock, with the balance payable in cash. Those holders of Clearfield
Common Stock who elected Omega Common Stock (either in whole or in
part) would receive the Omega Common Stock in a tax-free exchange for
federal income tax purposes.
3. Subject to the provisions of paragraph 4 below, Omega agrees to
purchase, and the undersigned agrees to sell, the shares of Clearfield
Common Stock designated below at the price of $65 per share, payable in
cash or by check, at such time as regulatory approval to complete such
purchase is obtained by Omega. In lieu of cash, the undersigned may
elect to receive Omega Common Stock at the time of the merger of
Clearfield with the Omega subsidiary, subject to the limitations set
forth in paragraph 2 and paragraph 4. The undersigned warrants and
represents to Omega that, upon completion of the purchase, Omega will
acquire good title to the shares designated below, free and clear of
all liens, claims and encumbrances of any nature whatsoever.
4. The Omega merger proposal set forth in paragraph 2 above, and the
obligations of Omega under paragraph 3 above, both assume that all the
information relating to Clearfield set forth in the Form S-4/A
(including the exhibits thereto) filed with the Securities and Exchange
Commission on July 16, 1999 by Penn Laurel Financial Corp. is true and
complete through the date of the purchase set forth in paragraph 3
above, and the proposed merger of Clearfield with the Omega subsidiary.
5. This Agreement constitutes the entire understanding of the parties
and may not be amended, supplemented, waived or terminated except by a
written instrument executed by both parties. This Agreement may be
executed in counterpart, each of which shall be deemed an original
against any party whose
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signature appears thereon. This Agreement shall be binding upon, and
inure to the benefit of, the parties hereto and their executors,
administrators, heirs, successors and assigns. Each party shall be
entitled to specific performance of the obligations of the other set
forth in this Agreement. The undersigned's offer contained herein shall
remain open until 12/31/99.
Exh. D-E.
Anonick's presentation lasted fifteen to twenty minutes. The shareholders
attending the August 2 meeting were invited to sign the Omega Agreement before
leaving, or to take copies with them. Some shareholders signed the agreements
and turned them in that day; others have since mailed signed agreements to
Omega. As of the date of the evidentiary hearing, shareholders holding 20.42% of
Clearfield common stock had executed the Omega Agreement. Dkt. no. 9, at 6.
Clearfield's board knew of Anonick's August 2 meeting with shareholders
because John McGrail, Clearfield's Vice President and Trust Officer, notified
the bank's new President and CEO, William Wood, that he would be attending.
McGrail believed his attendance was necessary to fulfill his fiduciary
obligation since Clearfield's trust department managed accounts which held
Clearfield shares. McGrail later provided Wood with an overview of the meeting
and a copy of the Omega Agreement. A member of Clearfield's board of directors,
George Beard, also attended the meeting.
A special meeting of the Clearfield board of directors was held in the wake
of Anonick's August 2 meeting. The board decided to send a letter to its
shareholders advising them of what the board considered to be misstatements in
the Omega Agreement. The Board also decided that it should now disclose to
shareholders that Omega was the "out-of-town-bank" which had expressed an
interest in Clearfield, and that the expression of interest
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contemplated a $65 per share price.
The letter issued by Clearfield's Board of Directors, dated August 9, 1999,
urged the shareholders in capitalized text "NOT TO SIGN THE AGREEMENT OR SEND IT
TO OMEGA." Exh. P-5. It suggested that the shareholders "consult an attorney
before considering any action on the agreement." Id. It further stated:
Paragraph 1 of the Omega agreement requires you to vote your shares
against Clearfield's merger with Penn Laurel and to exercise a dissenter's
right of appraisal. If you do so Omega is agreeing further on in the
agreement to purchase your shares (under certain conditions). We are
concerned that the agreement requires you to exercise dissenter's rights
(i.e. offer your shares for sale to Clearfield) and, under paragraph 3 of
the same agreement, to sell your shares to Omega. We don't see how you can
agree to do both. Omega doesn't explain how.
We understand that monetary penalties might be imposed under
Pennsylvania law on shareholders who exercise dissenter's rights in bad
faith or in a vexatious manner. We are concerned that such penalties could
be imposed on you if you tender your shares to Clearfield while
simultaneously agreeing to sell the shares to Omega.
Exh. P-5.
The letter also noted that Omega's agreement to purchase the stock was
conditioned upon receiving regulatory approval, pointing out that Omega failed
to reveal whether it had filed, or intended to file, for such approval. The
second page of the letter raised again the question of how a shareholder could
tender good title to Omega, asking: "What happens if the Clearfield/Penn Laurel
merger goes through? How can you give Omega title to your shares if the shares
are either (1) purchased by Clearfield because of your exercise of dissenting
shareholder rights or (2) exchanged for Penn Laurel stock?" Exh. P-5.
In fact, Omega had not yet applied to the Pennsylvania Department of
Banking for regulatory approval for its purchase of Clearfield's shares. Not
until a letter dated August 12, 1999, did Omega's counsel request approval from
the Department of Banking to execute the
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Omega Agreements which had already been signed by holders of approximately 17%
of the outstanding stock of Clearfield. Exh. I-A1. Omega also apprised the
Department that the Proxy Statement and Prospectus relative to the pending
merger transaction merely referred to Omega's May 10 letter of interest and
"failed to reflect the fact that Omega Financial Corporation...offered a price
of $65 per share in cash or Omega Common Stock (subject to certain limitations
and conditions) for a merger with a subsidiary of Omega Financial Corporation.
This price is more than $14 per share higher than the $50.44 offered in common
stock of Penn Laurel Financial Corp. (using closing sale prices on July 28,
1999)." Id. The letter included the following explanation of Omega's actions:
The decision by Anonick Financial Corporation, which is acting as an
investment advisor to Omega Financial Corporation, to solicit the enclosed
agreements from individual shareholders of Clearfield Bank & Trust Company
resulted in part from the unwillingness of Penn Laurel Financial Corp. and
Clearfield Bank & Trust Company to state the terms of the more favorable
offer from Omega Financial Corporation and allow the shareholders of
Clearfield Bank & Trust Company to make an informed decision on the
competing proposals.
Id.
Clearfield's letter to its shareholders urging them not to execute the
Omega Agreement was not its only response to the ongoing efforts of Anonick and
Omega. On Wednesday, August 11, 1999, Clearfield filed a four-count complaint
against Omega in this court, together with a motion for temporary restraining
order ("TRO"). Dkt. nos. 1, 2. The complaint alleges that Omega's May 10 letter
of interest constitutes a tender offer which included misstatements and
omissions of material fact in violation of ss.14(e) of the Securities and
Exchange Act of 1934 (hereinafter referred to as "the Act" or "the Williams
Act"), 15 U.S.C. ss.78n(e). It also
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asserted that Omega had violated ss.112(b) and (g) of the Pennsylvania Banking
Code ("the Banking Code") by failing to obtain written approval from the
Department of Banking before initiating efforts to acquire more than 10% of
Clearfield's stock and by "proposing to purchase the Clearfield stock by means
of oral communications and literature (including the Omega Offer) which include
misstatements and/or omissions of material fact . . . ." Dkt. no. 1, (Para.) 33
(citing 7 P.S. ss.112(b) and (g)). Finally, the complaint set forth state law
claims alleging tortious interference with Clearfield's relations with its
shareholders and with Penn Laurel. Injunctive relief was the sole remedy prayed
for in each count.
Clearfield's motion for temporary restraining order sought an injunction
ordering Omega to:
(a) refrain from proceeding with any tender offer to Clearfield
shareholders seeking the purchase of Clearfield shares, or from offering to
purchase Clearfield common stock or otherwise communicating with Clearfield
shareholders for the purpose of offering to purchase Clearfield stock,
prior to the shareholder vote on the proposed merger between Clearfield and
Penn Laurel Financial Corporation, [then] scheduled for September 8, 1999;
(b) withdraw any outstanding offers to purchase shares of Clearfield stock
until the shareholder vote on the proposed merger; and
(c) rescind any agreements with Clearfield shareholders to purchase shares
of Clearfield stock which involve or are related to the pledge of the
Clearfield shareholders to vote against the proposed merger between
Clearfield and Penn Laurel and/or to exercise dissenting shareholders right
of appraisal.
Dkt. no. 2, (Para.) 4. The motion for TRO was denied after argument conducted on
Tuesday, August 17, 1999. Dkt. no. 6.
The day before the hearing on the preliminary injunction hearing commenced,
Clearfield and Penn Laurel filed with the SEC a document entitled "Supplemental
Information to Shareholders." Exh. D-A. The supplement states:
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On Monday August 2, 1999, Omega Financial Corporation held a meeting to
which were invited over 30 selected shareholders of Clearfield. The
attendees represented about 13% of the outstanding shares of
Clearfield. At the meeting, an Omega representative handed out a form
and asked those in attendance to sign and return the form to Omega. The
form is an apparent tender offer for shares of Clearfield common stock.
Since the meeting, we understand that Omega has solicited more
Clearfield shareholders to execute the form and enter into an agreement
with Omega. For the reasons stated in this supplement, the board of
Directors of Clearfield urges its shareholders not to sign the Omega
agreement. The Clearfield Board of Directors sent a letter to its
shareholders on August 9, 1999, in response to Omega's attempts to
solicit Clearfield shareholders to sign the Omega agreement. A copy of
that letter is attached as Exhibit A. If you have not already read the
letter, we urge you to take a few minutes to read it now.
Id. the board commented that "the advantages of the Penn Laurel transaction are
disclosed in great detail in the proxy statement/prospectus and the Clearfield
Board of Directors continues to believe that the creation of a strong community
bank will benefit its shareholders, its customers and the community more than
the alternative of being acquired by a larger out-of-town institution." Id.
Penn Laurel and CSB sought to intervene in the instant proceeding,(3) dkt.
no. 10, and that motion was granted prior to the August 24 evidentiary hearing
on Clearfield's request for a preliminary injunction. During the hearing, the
parties stipulated that the "Pennsylvania Department of Banking has not yet
approved any acquisition of Clearfield stock by Omega." Stipulation #3. Wood,
Clearfield's new President and CEO, has acknowledged that regulatory approval
from the Pennsylvania Banking Department and the Federal Deposit Insurance
Corporation has yet to be granted for the Clearfield-CSB-Penn Laurel merger.
Such approval is expected prior to the shareholders' meeting. See also exh. P-4
at 59 (application for approval
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(3) Two individual shareholders joined in this motion to intervene. The motion
was denied as to these shareholders pursuant to Fed. R. Civ. P. 24(a) and
(b). Dkt. no. 10.
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from Pennsylvania Department of Banking filed July 8, 1999).
The preliminary injunction hearing concluded on August 25, and the parties
agreed to consolidation of that matter with trial on the merits, pursuant to
Fed. R. Civ. P. 65(a)(2).
On August 26, 1999, Omega directed a letter to the Clearfield shareholders
who had evinced an interest in selling their shares to Omega by signing the
two-page agreement earlier in the month.(4) The Omega letter advised, inter
allia, that it could not execute any of the two- page agreements until it
received approval from the Pennsylvania Department of Banking, and that such
approval could take "many months." Shareholders were advised that they were free
to withdraw their signed agreements within ten days of the letter if they "were
not aware of the necessity of such regulatory approvals or for any other
reason." The Omega letter also informed Clearfield shareholders of an
eventuality not addressed in the two-page agreement: "if the merger with Penn
Laurel becomes effective, the two page agreement would be null and void because
you would no longer be able to transfer title to your Clearfield shares to
Omega." Exh. D-F.
III. Clearfield's Claims
Clearfield contends that the Omega Agreement violates the antifraud
provisions of the Williams Act because it is "riddled with misrepresentations
and material omissions of fact which would mislead a shareholder" in deciding
how to vote on the merger transaction. Dkt. no. 15, at 9. The thrust of
Clearfield's argument is that the Omega Agreement is misleading because a
shareholder cannot both exercise his dissenter's rights and tender his stock to
Omega
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(4) At a case conference conducted in my chambers on September 3, all parties
agreed that the August 26, 1999 letter should be made part of the record
and marked as exh. D-F.
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in exchange for the $65 per share price. Clearfield argues that a shareholder's
exercise of dissenter's rights requires that he tender his stock to Clearfield
after the shareholder meeting, thereby precluding the shareholder from tendering
the stock to Omega. Clearfield also asserts that Omega's failure to reference in
its two-page agreement that it must obtain regulatory approval before purchasing
the Clearfield shares and the time factor involved in obtaining such approval
are material omissions.
In addition, Clearfield submits that the Omega Agreement is misleading
because: (1) it fails to identify at what point in time the Omega stock would be
valued should a merger be negotiated; (2) it does not address what would happen
if too many Clearfield shareholders opted to take cash in the event of a merger
with Omega; (3) it makes Omega's obligation to perform contingent on financial
information which is not current; (4) it does not discuss the possibility that
the rejection of the Penn Laurel merger may leave Clearfield without any
potential merger partner in the future; and, (5) it does not advise shareholders
that they may be subject to penalties for exercising their dissenters' rights in
bad faith or in a vexatious manner. Dkt. no. 15, at 9-11.
Penn Laurel and CSB join Clearfield in contending that the Omega Agreement
violates ss.14(e). They, too, focus upon dissenters' rights and the lack of
discussion regarding the need for regulatory approval. The agreement is also
misleading, according to Penn Laurel and CSB, because it: (1) asserts that
Clearfield will retain its name in the event of a merger; (2) fails to inform
shareholders that the receipt of cash would be a taxable event; (3) suggest that
Omega's proposal was superior to the planned Clearfield/Penn Laurel transaction;
(4) does not identify at what point in time Omega's stock would be valued in the
event of a merger; (5) fails to provide
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the shareholders with a fairness opinion regarding any Clearfield/Omega merger
that would be negotiated; (6) does not discuss the source of Omega stock to be
used for an exchange in the event of a merger; (7) does not apprise shareholders
of their potential liability for "claims of fraud or intentional interference
with contract"; (8) fails to disclose Anonick's success fee; and (9) does not
provide "[a]ll of the other information required by SEC's regulations
ss.240.14d- 100." Dkt. no. 17, at 14-21.
Omega denies that its agreement was misleading, and vigorously challenges
the applicability of the Williams Act to the instant case. Alternatively, Omega
argues that even if its two-page agreement was misleading, its August 26 letter
cured any deficiencies so that injunctive relief is not necessary. Moreover, it
asserts that scienter is required under ss.14(e) and that Clearfield and the
intervenors have failed to prove that Omega had the requisite state of mind to
warrant injunctive relief.
While the bulk of the parties' arguments address liability under the
federal securities laws, Clearfield, Penn Laurel and CSB contend that equitable
relief is equally warranted under the Pennsylvania Banking Code. 7 P.S. ss.112
(b) and (g). They claim that Omega violated the Code by seeking to acquire more
than ten percent of outstanding Clearfield shares without first having obtained
regulatory approval. For its part, Omega argues that it has not violated the law
because it has not signed any of the two-page documents, and because the
agreement is part of a merger proposal which is exempt from the Banking Code's
regulatory approval requirements. Dkt no. 16, at 24-25.
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IV. Applicability of the Williams Act
A. Are "unregulated tender offers" subject to Section 14(e)?
Omega argues first that, even if this Court concludes that its written
offer to shareholders constitutes a tender offer, the Act was not intended to
reach "privately negotiated intrastate agreements," dkt. no. 16, at 3, such as
the one at issue here. Moreover, Omega points out, there is no Third Circuit
authority holding that section 14(e) applies to transactions in unregistered
stock.
Omega's attempt to establish a public/private dichotomy in shareholder
trading upon which applicability of the Williams Act hinges is unsupported by
either caselaw or the plain language of the statute. And even in the absence of
Third Circuit precedent, the one circuit to speak directly to this issue has
rejected the position espoused here by Omega. In L.P. Acquisition Co. v. Tyson,
772 F.2d 201, 208 (6th Cir. 1985), the Sixth Circuit reasoned:
First, the plain language of the statute refers to "any tender offer."
Second, as the remaining subsections of 15 U.S.C. ss.78n demonstrate,
Congress clearly knew how to limit the applicability of legislation to a
particular class of tender offers when it so intended. Third, the
Securities and Exchange Commission, the agency with expertise in the area,
has found that "[t]he broad antifraud provisions of Section 14(e) are
applicable to any tender offer." Securities Act Release No. 6022 (February
5, 1979). Fourth, the Supreme Court has described 14(e) as "a general
antifraud provision," MITE, 457 U.S. at 633 n.8, and the Third Circuit has
found that "unlike the proxy regulations of section 14(a) and the
disclosure requirements of 14(d), the anti-fraud proscriptions contained in
section 14(e) apply to any class of security." E.H.I. of Florida, Inc. v.
Insurance Co. of North America, 652 F.2d 310, 315 (3d Cir. 1981).
The Sixth Circuit's analysis is thorough and persuasive. The rather cheeky
observation by the authors of a treatise cited by Omega that Congress' "omission
in ss.14(e) [of a registration requirement] was apparently inadvertent, " see 5
Louis Loss and Joel Seligman,
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Securities Regulation 2250 n.399 (3d ed. 1990), is too thin a reed upon
which to rest a convincing argument.
Although it may be the exception to apply the Williams Act to private
transactions of stock in small companies which have a limited number of
shareholders, "the caselaw clearly gives courts the discretion to apply the Act
if its protections are needed." Iavarone v. Raymond Keyes Associates, Inc., 733
F. Supp. 727, 733 (S.D.N.Y. 1990) (citations omitted). Here, neither the fact
that the agreement was privately negotiated nor the fact that it dealt with
unregistered stock removes the transaction from the reach of ss.14(e).
B. Is the Omega Agreement "Tender Offer"?
The parties agree that if the Omega Agreement does not constitute a "tender
offer," the protections of the Williams Act do not apply. The purpose of the Act
is clear:
The Williams Act [(amending the Exchange Act)]...was the congressional
response to the increased use of cash tender offers in corporate
acquisitions, a device that had "removed a substantial number of corporate
control contests from the reach of existing disclosure requirements of the
federal securities laws." The Williams Act filled this regulatory gap.
Edgar v. Mite Corp., 457 U.S. 624, 632 (1982) (citing Piper v. Chris-Craft
Indus. Inc., 430 U.S. 1, 22 (1977)). In Edgar, the Supreme Court observed that
there was no question that "Congress intended to protect investors" in enacting
the Williams Act, id. at 633, which insures "'that public shareholders who are
confronted by a cash tender offer for their stock will not be required to
respond without adequate information.'" Piper, 430 U.S. at 35 (quoting Rondeau
v. Mosinee Paper Corp., 422 U.S. 49, 58 (1975)). Yet Congress provided more than
just disclosure requirements in the Act. "Besides requiring disclosure and
providing specific benefits for tendering shareholders, the Williams Act also
contains a broad antifraud
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prohibition...." Id. at 24 (citing 15 U.S.C.ss.78n(e)).
While the purpose of the Act is clear, the type of transaction it seeks to
regulate does not lend itself to easy definition. "Neither the Williams Act nor
the SEC's regulations defines 'tender offer.'" Lerro v. Quaker Oats Co, 84 F.3d
239, 246 (7th Cir. 1996). Various courts have referred to this lack of statutory
guidance as each has struggled to decide whether or not the transaction
confronting it was indeed a "tender offer." See E.H.I. of Florida, Inc. v.
Insurance Co. of North America, 52 F.2d 310, 315 (3d Cir. 1981); Kahn v.
Virginia Retirement System, 783 F. Supp. 266, 269 (E.D. Va. 1992); In re Gen.
Motors Class E Stock Buyout Sec. Litig., 694 F. Supp. 1119, 1129 (D. Del. 1988);
Holstein v. UAL Corp., 662 F. Supp. 153, 155 (N.D. Ill. 1987). To quote Judge
Easterbrook, the term "has been frustratingly difficult to encapsulate." Lerro,
84 F.3d at 246. One district court established an eight-factor test for
determining what constitutes a tender offer. Wellman v. Dickinson, 475 F. Supp.
783 (S.D. N.Y. 1979), aff'd on other grounds, 682 F.2d 355 (2d Cir. 1982). The
factors are:
(1) active and widespread solicitation of public shareholders for the
shares of issuer; (2) solicitation made for a substantial percentage of the
issuer's stock; (3) offer to purchase made at a premium over the prevailing
market price; (4) terms of the offer are firm rather than negotiable; (5)
offer contingent on the tender of a fixed number of shares, often subject
to a fixed maximum number to be purchased; (6) offer open only a limited
period of time; (7) offeree subjected to pressure to sell his stock[; and,
(8)] public announcements of a purchasing program concerning the target
company precede or accompany rapid accumulation of large amounts of the
target company's securities.
475 F. Supp. at 823-24 (citing Hoover Co. v. Fuqua Corp., No. C79-106 2A,
1979 WL 1244, *4 (N.D. Ohio June 11, 1979), which set out the same test a month
earlier). The Second Circuit later refused to elevate this list to "a mandatory
'litmus test,'" reasoning that
in any given case of solicitation may constitute a tender offer even though
some
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of the eight factors are absent or, when many factors are present, the
solicitation may nevertheless not amount to a tender offer because the
missing factors outweigh those present.
Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 57 (2d Cir. 1985). The applicability
of the Williams Act, the court concluded, should be determined by looking to its
statutory purpose, that is, "whether the particular class of person affected
need the protection of the Act." Id. (citing SEC v. Ralston Purina Co., 346 U.S.
119 (1953)). Yet this seems, at first blush, more tautology than test.
Accordingly, the Hanson court found the eight factors "relevant for purposes of
determining whether a given solicitation amounts to a tender offer." 774 F.2d at
57. The court also declared that:
An offering to those who are shown to be able to fend for themselves is a
transaction "not involving any public offering." Similarly, since the
purpose of ss.14(d) is to protect the ill-informed solicitee, the question
of whether a solicitation constitutes a "tender offer" within the meaning
of ss.14(d) turns on whether, viewing the transaction in the light of the
totality of circumstances, there appears to be a likelihood that unless the
pre-acquisition filing strictures of that statue are followed there will be
a substantial risk that solicitees will lack information needed to make a
carefully considered appraisal of the proposal put before them.
Id. (citation and internal quotation marks omitted); see also Rand v.
Anaconda-Ericsson, Inc., 794 F.2d 843, 848 (2d Cir. 1986) (finding case
"directly controlled" by standard set forth in Hanson Trust). Other courts have
continued to recognize the Wellman eight-factor test in determining whether an
outsider's bid for control constitutes a tender offer. Pin v. Texaco, Inc. 793
F.2d 1448, 1454 (5th Cir. 1986) (taking both tests into account); Anago Inc. v.
Tecnol Medical Products, Inc., 792 F. Supp. 514, 516-17 (N.D. Tex. 1992)
(applying both the eight-factor test and the Hanson test); Weeden v.
Continental Health Affiliates, Inc. 713 F. Supp. 396 (N.D. Ga. 1989).
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In examining the totality of the circumstances in this case to determine if
there has been a tender offer, Clearfield, CSB and Penn Laurel contend that the
Omega Agreement made available to the shareholders during the August 2 meeting
contains various misrepresentations and omissions. There is no claim that
Omega's May 10 letter of interest to Clearfield's board runs afoul of ss.14(e).
I begin by addressing the factors set forth in Wellman. I consider the
first factor, whether there was active and widespread solicitation of public
shareholders for the shares of the issuer, to weigh slightly on the side of a
tender offer. Omega initially transmitted a confidential letter of interest to
Clearfield's board in May 1999. Neither Omega nor its agent, Anonick, were
active until Clearfield's filing with the SEC failed to disclose both the fact
that the letter of interest received from an "out-of-town bank" was from Omega,
headquartered in the borough of State College in contiguous Centre County, and
that the proposed price per share was $65.00. This led to the Omega Agreement
being drafted and to Anonick's contact with Woolridge. Woolridge was interested
in the details and encouraged Anonick to be available to answer questions from
other shareholders when he was in Clearfield on August 2, 1999. I find, however,
that Anonick needed little encouragement. I do not credit that portion of his
testimony which attributes entirely to Woolridge's efforts the attendance of
over thirty shareholders at the August 2 meeting. While Anonick's actions were
not widespread, they were geared to insure that more than a handful of
shareholders were aware of Omega's interest. His solicitation was not limited to
those in attendance, but extended to other Clearfield shareholders who would be
provided with the extra copies of the Omega agreement, annual report, proxy and
financial statements which Anonick provided. Cf. Anago, 792 F. Supp. at 516
(outsider's
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contact of only four preferred shareholders and approximately ten shareholders
out of a total of eighty to ninety shareholders did not establish active or
widespread solicitation).
Omega's solicitations resulted in shareholders of slightly more than 20% of
Clearfield's stock executing the Omega Agreement and returning it to Omega. This
is a substantial percentage of the stock under the second Wellman factor,
particularly in light of the provision in the merger agreement that the exercise
of dissenter's rights by only 9% of the shares would derail the merger. This
factor is also suggestive of a tender offer.
There can be little doubt that the $65 share price constituted a premium
over Clearfield's book value of $30.00 per share and over its July 28, 1999
market value of $50.44 per share. See exh. P-4, at 1; exh. I-A3, at 2; see also
Hanson Trust, 774 F.2d at 58 (observing that SEC's proposed definition of a
premium is that price "is $2.00 per share or 5% above market price").
Nor can there be serious dispute that the $65 share price was firm. The
evidence demonstrated that Anonick's negotiations with Woolridge and Mikesell,
who did not appear from the evidence to have been authorized to act on behalf of
any other shareholders, pertained solely to the contingent nature of the right
to receive $65 per share after the conclusion of the shareholder meeting. It
does not appear that price--the most important term in the offer--was
negotiable. Iavarone v. Raymond Keyes Assoc., Inc., 733 F. Supp. 727, 733
(S.D.N.Y. 1990) ("offer price is firm").
The contingency of the tender on a fixed number of shares must also be
weighed on the "tender offer" side of the scale. Omega's promise to pay $65 per
share was not only contingent on obtaining enough dissenters to "kill the deal,"
but also on successfully negotiating a merger
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agreement with Clearfield. Whatever doubt may have existed on this point
following Lee's testimony was removed once Omega distributed its August 26
letter to Clearfield shareholders.
The period of time during which the offer was open, the sixth Wellman
factor, weighs against Omega's bid being deemed a tender offer. Although the
offer was open for a "limited time" because it required the shareholder to
accept it by the then-scheduled September 8 shareholder meeting, that date was
more than a month away. Moreover, the time afforded shareholders to consider
Omega's offer was the same period of time afforded to all shareholders to digest
the information about the merger which was detailed in the August 2 proxy
statement/prospectus. Cf. SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945,
951 (9th Cir.1985) (offer was open during the pendency of the competing bid).
There is no evidence before this court that Omega pressured or coerced
Clearfield shareholders to sell their stock. While Anonick met with Woolridge
and then with a group of shareholders, he did not imply that they must sign the
Omega Agreement at that instant or lose the premium being offered. Whatever
pressure may have been felt existed only because of the disparity between the
cash value of the two transactions. In other words, the only pressures exerted
upon shareholders to commit to Omega's Agreement were a function of ordinary
market forces. Hanson Trust, 774 F.2d at 58 ("sellers were not 'pressured' to
sell...by any conduct that the Williams Act was designed to alleviate, but by
the forces of the market place"); Carter Hawley Hale Stores, 760 F.2d at 952
(pressure of the market place was not the type of pressure the tender offer
regulations were designed to prohibit). This is not the sort of pressure the
Williams Act was designed to prohibit.
The eighth Wellman factor is not applicable since there were no public
announcements
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by any party.
This case points up the difficulties of applying the Wellman-Hanson test,
which essentially amounts to one of loosely guided discretion. Although it seems
odd to think of "discretion" when determining whether a proposed transaction
falls inside or outside the Williams Act, it is not, upon close examination, as
strange as it first appears. When, as here, the almost endless variety and
novelty of takeover proposals makes it impracticable to "formulat[e] a rule of
decision for the matter in issue[,]" the trial judge must necessarily have some
degree of judicial "choice" if he or she is to reach a just result and fulfill
the congressional mandate of protecting the shareholder. See Ruggero J.
Aldisert, The Judicial Process 763 (1976) (quoting Maurice Rosenberg, Judicial
Discretion of the Trial Court, Viewed From Above, 22 Syracuse L. Rev. 635
(1971)). In essence, this is what the Second Circuit means when it holds that an
offer is a tender offer by reference to "whether the particular class of persons
affected need the protection of the [Williams] Act." Hanson Trust, 774 F.2d at
57. Rather than elevating a tautology to the status of a legal test, this is
simply a recognition that, as in the case of obscenity that cannot be defined
but is immediately identified when seen, see Jacobellis v. Ohio, 378 U.S. 184,
197 (1964) (Stewart, J., concurring), some evaluations can only be made under a
"totality of the circumstances" methodology. However intellectually unsatisfying
that may be, no court has managed to develop a better alternative, and I can
discern none.
Accordingly, in this case it is appropriate to supplement the Wellman
factors, which preponderate in favor of finding a tender offer, with an
examination of the alleged misstatements and omissions at issue. If they are
major in character, then investors are more
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likely to have been misled by them and pressured to make an ill-advised
decision, which means that those investors are more likely to "need the
protection" of the Williams Act as contemplated by the Second Circuit in Hanson
Trust, 774 F.2d at 57. One the other hand, if the alleged misrepresentations and
omissions were minor, that conclusion would militate against finding a tender
offer, Thus, I will also consider the question of materiality; as will be
evident from the discussion infra, I conclude that Omega's omissions were
material. Combining that conclusions with the above Wellman analysis, it is
evident that Omega's proposal constituted a tender offer.
V. Did the Omega Agreement Violate Section 14(e) of the Williams Act?
A. Elements of a Section 14(e) Claim
The elements of a ss. 14(e) claim are not set forth specifically in the
caselaw. As will be pointed out below, see infra ss.V(C), ss.14(e) was modeled
after the antifraud provisions of ss.10(b) and Rule 10b-5. Screiber v.
Burlington Northern, Inc., 472 U.S. 1, 10 (1985). Consistent with the ss.10(b)
jurisprudence and the language of the statue, I conclude that a plaintiff
seeking a permanent injunction must prove that the defendant (1) made
misstatements or omissions, (2) of material fact, (3) with scienter, (4) in
connection with a tender offer. See 15 U.S.C. ss.78n(e); In re Phillips
Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir. 1989); Chris-Craft Indus.
Inc. v. Piper Aircraft Corp., 480 F.2d 341, 362 (2d Cir. 1973). It is
plaintiff's burden to proven all of the foregoing by a preponderance of the
evidence. Ronson Corp. v. Liquifin Aktiengesellschaft, 370 F.2d 597, 602
(D.N.J.), aff'd, 497 F.2d 394 (3d Cir. 1974); see also Herman & MacLean v.
Huddleston, 459 U.S. 375 (1983) (holding preponderance of the evidence standard
is applicable in a ss.10(b) claim).
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B. Materiality
Section 14(e) of the Williams Act provides, in relevant part:
It shall be unlawful for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements made, in the light of the circumstances under which they are
made, not misleading, or to engage in any fraudulent, deceptive or
manipulative acts or practices, in connection with any tender offer or
request or invitation for tenders, or any solicitation of security holders
in opposition to or in favor of any such offer, request or invitation.
15 U.S.C. ss.78n(e). The plain language of this provision proscribes three
types of conduct: (1) the making of untrue statements of material fact; (2) the
omission of material facts which are necessary to make the statements made not
misleading; and (3) engaging in fraudulent, deceptive or manipulative acts or
practices. Id. After carefully scrutinizing the Omega Agreement in light of the
allegations of plaintiff and intervenors, I conclude that the document is devoid
of any untrue statements of material fact, and that it does not otherwise
constitute a fraudulent, deceptive or manipulative act or practice. What I must
consider, then, is whether Omega omitted any materials fact from the two-page
agreement.
In TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), the
Supreme Court defined materiality for purposes of the antifraud provisions of
the proxy rules promulgated by the SEC under the Securities Exchange Act of
1934. It declared that the
standard of materiality that we think best comports with the policies of
Rule 14a-9 is as follows: An omitted fact is material if there is a
substantial likelihood that a reasonable shareholder would consider it
important in deciding how to vote....It does not require proof of a
substantial likelihood that disclosure of the omitted fact would have
caused the reasonable investor to change his vote. What the standard does
contemplate is a showing of a substantial likelihood that, under all the
circumstances, the omitted fact would have assumed actual significance in
the deliberations of the reasonable shareholder. Put another way, there
must be a substantial likelihood that the
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disclosure of the omitted fact would have been viewed by the reasonable
investor as having significantly altered the "total mix" of information
made available.
TSC, 426 U.S. at 449. In Staffin v. Greensberg, 672 F.2d 1196 (3d Cir.
1982), the Third Circuit adopted the materiality test enunciated in TSC "as the
governing test for an action based on Section 14(e) of the Act." Id. at 1205
n.10; see also Flynn v. Bass Bros. Enter., Inc. 744 F.2d 978, 985 (3d Cir.
1984).
Clearfield, CSB and Penn Laurel contend that one of the material omissions
in the Omega Agreement relates to the exercise of dissenters' rights. The
agreement requires the shareholders to oppose the merger and exercise her
dissenter's rights in exchange for receiving $65 per share for her Clearfield
stock. To exercise those dissenter's rights, a shareholder must give notice to
Clearfield before the shareholder meeting. After the shareholder meeting,
Clearfield must notify the dissenter to tender her shares of stock so that
Clearfield may redeem them at "fair value." To fully exercise dissenter's
rights, as contemplated by the Omega Agreement, the dissenter would have to
tender her shares to Clearfield after receiving the redemption notice.
Obviously, then, if a shareholder fully exercises her dissenter's rights,
that same shareholder cannot also tender the shares to Omega for $65 per share.
Conspicuously absent from the Omega Agreement is any advise to shareholders that
they cannot both exercise their dissenters' rights and sell their shares to
Omega. As a result, a Clearfield shareholder might reasonably conclude after
reading the Agreement that she will be able to sell her shares to Omega for the
$65 premium price as long as she opposes the merger and notifies Clearfield
before the shareholder meeting of the exercise of dissenter's rights. Such an
impression, as
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made clear in Omega's August 26 letter, would be plainly wrong.
In an effort to obtain the $65 share price, a shareholder may execute the
Omega Agreement, notify Clearfield that she is exercising her dissenter's rights
and oppose the merger and yet never obtain the premium price Omega "offered."
Such information would unquestionably have significance to a shareholder in
deciding how to respond to both Omega's offer and the planned merger which is to
be voted on at the shareholder meeting. There can be little doubt that this
omission "significantly alter[s] the 'total mix' of information made
available[]" to the reasonable investor. TSC Indus., 426 U.S. at 449.
Omega also did not disclose in the August 2 Agreement whether it had
applied for the regulatory approval which must be obtained before it can
purchase the dissenting shareholder's stock, nor did Omega mention the time
required to obtain such approval. According to Omega's August 26 letter, the
necessary regulatory approval may take months, and indeed may still be pending
at the end of the year. As a result, it is unlikely that Omega will be able to
purchase the dissenting shareholders' stock "as expeditiously as its Offer
suggests is possible." Polaroid Corp. v. Disney, 862 F.2d 987, 1005 (3d
Cir.1988). As the Third Circuit concluded in Polaroid, a "reasonable shareholder
would consider this possibility of delay...to be important in deciding how to
respond to the tender offer." Id.
Omega contends that its August 26 letter cured these deficiencies. While
that may be true with respect to the issue of regulatory approval, the letter
still fails to explain whether a dissenting shareholder will be able to receive
the $65 share price if the merge is defeated. Moreover, it concludes with the
misleading instruction that "[i]f you believe that Omega's offer is superior,
you must vote against the merger (or at least not vote for it) and filed [sic]
the
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enclosed Notice of Intention to Demand Payment with Clearfield...." Exh. D-F
(emphasis added).
I conclude that the two-page Omega Agreement contained omissions which a
reasonable Clearfield shareholder would consider important in deciding how to
vote and whether to exercise dissenters' rights in connection with the proposed
merger. Those omissions were, therefore, material. Because it appears that there
is a substantial likelihood that Clearfield shareholders will be misled by those
omissions, I further conclude, as stated supra, at 26-27 that those shareholders
are "persons affected [who] need the protection of the Act," Hanson, 774 F.2d at
57, and that the omissions occurred in connection with a tender offer.
C. Scienter
Another question that remains is whether scienter is required in a
proceeding for injunctive relief under ss.14(e) of the Act. Clearfield contends
that it need not prove scienter, relying upon Polaroid Corp. v. Disney, 862 F.2d
at 1005-06. Dkt. no. 15, at 13. Omega argues that scienter is required and that
Clearfield has failed to present any evidence to establish this element. Dkt.
no. 16, at 12-13.
The Third Circuit has yet to address whether a plaintiff seeking a
permanent injunction under ss.14(e) must prove scienter. Clearfield is correct
that the Third Circuit did not require proof of scienter when it directed the
issuance of a preliminary injunction in Polaroid, a case involving a tender
offer which contained a material omission. 862 F.2d at 1005-06. In fact, the
Polaroid opinion does not discuss scienter at all. This does not, however,
amount to a sub silentio holding by that court that scienter need not be
established to warrant injunctive relief on the merits. Without controlling
Third Circuit authority, I must look to the decisions of other
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courts to resolve this issue.
In determining whether scienter is a necessary element of a ss.14(e)
claim, I again look to the language of the statue:
It shall be unlawful for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements made, in the light of the circumstances under which they are
made, not misleading, or to engage in any fraudulent, deceptive or
manipulative acts or practices, in connection with any tender offer....
15 U.S.C. ss.78n(e). This language was "modeled on the antifraud provisions of
ss. 10(b) of the Act and Rule 10b-5[.]"(5) Schreiber v. Burlington Northern,
Inc., 472 U.S. at 10, see also Chris Craft Indus., Inc. v. Piper Aircraft Corp.,
480 F.2d at 362 (noting that the "proscription of ss.14(e) is virtually
identical to that of Rule 10b-5"); Smallwood v. Pearl Brewing Co., 489 F.2d
- --------
(5) Section 10(b) provides, in relevant part:
It shall be unlawful for any person, directly or indirectly,...
(b) To use or employ, in connection with the purchase of or sale of
any security registered on a national securities exchange or any security
not so registered, any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may prescribe
as necessary or appropriate in the public interest or for the protection of
investors.
15 U.S.C. ss.78j(b). Rule 10b-5 provides:
It shall be unlawful for any person, directly or indirectly, by the use of
any means or instrumentality of interstate commerce, or of the mails or of
any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice or course of business which operates or
would operate as a fraud or deceit upon any person, in connection with the
purchase or sale of any security.
17 C.F.R. ss.240.10b-5.
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579, 605 (5th Cir. 1974) (joining Second Circuit's conclusion that "the
analysis under Section 14(e) and Rule 10b-5 is identical"). It is well-settled
that scienter is a necessary element of a claim under ss.10(b) and Rule 10b-5.
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). For that reason, I conclude
that scienter is also a necessary element of an action under ss.14(e) and will
follow the principles governing scienter applied in a claim under ss.10(b) and
Rule 10b-5. See Chris-Craft Indus., 480 F.2d at 362; accord Adams v. Standard
Knitting Mills, Inc., 623 F.2d 422, 431 (6th Cir. 1980) (observing language of
Williams Act demonstrates that scienter under 10(b) is an element of 14(e));
Smallwood, 489 F.2d at 605; see also Connecticut Nat'l Bank v. Fluor Corp., 808
F.2d 957 (2d Cir. 1987) ("well-settled in this Circuit that scienter is a
necessary element of a claim for damages under 14(e)"); Indiana Nat'l Bank v.
Mobil Oil Corp., 578 F.2d 180, 184 n.8 (7th Cir. 1978) (acknowledging, without
determining, that conclusion that scienter is required in ss.14(e) claim is
reasonable); Lowenschuss v. Kane, 520 F.2d 255 (2d Cir. 1975). But see Pryor v.
United States Steel Corp., 591 F. Supp. 942, 955 n.19 (S.D.N.Y. 1984)
(recognizing that "analogy drawn between Rule 10b-5 and ss.14(e) is, with
respect to the issue of scienter, somewhat imperfect" in light of similarity of
ss. 14(e) to ss.17(a)(2) which does not require scienter), aff'd in part and
rev'd in part on other grounds, 794 F.2d 52 (2d Cir. 1986).
In Ernst & Ernst, 425 U.S. at 199, the Supreme Court declared that the
language of ss.10(b) "connotes intentional or willful conduct designed to
deceive or defraud investors...." It concluded "that ss.10(b) was addressed to
practices that involve some element of scienter and cannot be read to impose
liability for negligent conduct alone." Id. at 201. Rule 10b-5's scope was "no
more expansive" than ss.10(b) in the Court's view and it refused "to extend the
scope
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of the statute to negligent conduct." Id. at 214.
Scienter was defined in Ernst & Ernst as "a mental state embracing intent
to deceive, manipulate or defraud." 425 U.S. at 193 n.12. In In re Phillips
Petroleum Sec. Litig., 881 F.2d at 1244, the Third Circuit acknowledged the
Supreme Court's definition of scienter and reiterated its own previous holding
"that recklessness on the part of a defendant meets the scienter requirement of
Section 10(b) and Rule 10-b5."(6) "recklessness, in turn, is defined as 'an
extreme departure from the standards of ordinary care...which presents a danger
of misleading...that is either known to the defendant or is so obvious that the
actor must be aware of it.'" Id. (quoting Healey v. Catalyst Recovery, Inc., 616
F.2d 641, 649 (3d Cir. 1980)). Although the Private Securities Litigation Reform
Act of 1995 established a uniform pleading standard for scienter, see 15 U.S.C.
ss. 78u-4, "recklessness...remains a sufficient basis for liability." In re
Advanta Corp. Sec. Litig., 180 F.3d 525, 534-35 (3d Cir. 1999).
In this case, both Lee (Omega's CEO) and Anonick were aware that the
planned merger could not be consummated if the dissenting shareholders exceeded
nine percent of the issued and outstanding stock. After reviewing Clearfield's
S-4 in mid-July and finding that it failed to reveal either Omega's identity or
the $65 share price, Anonick and Omega personnel drafted an agreement to present
to Clearfield shareholders in an effort to "kill the deal." In that effort, they
had the assistance of counsel.
Omega's strategy hinged entirely on the successful invocation by Clearfield
- --------
(6) The Supreme Court in Ernst &Ernst did not address "the question whether, in
some circumstances, reckless behavior is sufficient for civil liability
under ss.10(b) and Rule 10b-5." 425 U.S. at 193 n.12.
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shareholders of their dissenters' rights. With that focus, the very first
provision of the agreement required the shareholder to vote against the proposed
merger and to exercise the dissenter's right of appraisal. The agreement was
silent regarding the procedure to be employed, even though the exercise of
dissenters' rights requires adherence to a complex statutory scheme with which
the average small investor would be unfamiliar. See 7 Pa.C.S.A.
ss. 1222, 1607; 15 Pa.C.S.A. ss. 1571-1580.
To be sure, a description of dissenters' rights would have made Omega's
offer less attractive because it would have explained that a dissenting
shareholder must tender his shares to Clearfield, thereby precluding that
shareholder from selling his shares to Omega. It was left to Clearfield to
advise its shareholders that the Omega agreement was misleading because of this
inconsistency. And in the wake of the August 9 letter from Clearfield's board
urging shareholders not to sign the agreement, Omega did nothing to amend or
clarify its August 2 references to dissenters' rights. Yet one day after the
evidentiary hearing on the request for injunction concluded, Omega advised the
shareholders who had executed the agreement that is had learned from its
"attorneys...that if the merger with Penn Laurel becomes effective, the two page
agreement would be null and void because you would no longer be able to transfer
title to your Clearfield shares to Omega...." Exh. D-F.
Omega's silence following Clearfield's August 9 letter accusing it of
misleading Clearfield's shareholders is indefensible, especially in light of its
August 26 "clarification." I can only conclude that the complete explanation of
dissenter's rights omitted from the August 2 agreement was, if not intentional,
at least reckless.
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VI. Pennsylvania Banking Code Claims
Plaintiff's contention that Omega violated ss.112 of the Banking Code need
detain me only briefly. That section provides, inter alia, that no person may
acquire or propose to acquire more than ten percent of the shares of a banking
institution without prior approval of the Department of Banking. 7 P.S.
ss.112(b). It further contains an antifraud provision which prohibits
misstatements and omissions in connection with any such acquisition. 7 P.S.
ss.112(g). Private rights of action are authorized under the statute, Sheridan
v. Weinberger, 767 F. Supp. 92, 93 (M.D. Pa. 1991), and a court may issue
appropriate injunctive relief, Heritage Fin. Servs. Corp. v. Commonwealth
Bancshares Corp., 43 Pa. D. &. C.3d 622, 629-30 (C.P. Dauphin Co. 1985).
Here, there is no dispute that Omega sought to, and did, acquire tenders
for more than ten percent of Clearfield Bank's stock. Nor is there any dispute
that Omega did not even seek, much less receive, Department approval for its
proposed acquisition until after this litigation was instituted, and that
approval has still not been received as of the present time. Thus, no other
conclusion can be drawn but that Omega violated ss.112.
Seeking to avoid this result, Omega makes several arguments, all of them
unavailing. First, it contends that the two-page agreement is nothing more than
the shareholder's offer to Omega to sell stock for $65 per share, noting that
Omega has not executed a single such agreement. This is true, so far as it goes,
but the fact remains that, but for Omega's solicitation of the shareholders,
there would have been no such agreements circulated at all. Putting the
formalities of offer and acceptance under contract law aside, it is still
obvious that Omega proposed to acquire more than ten percent of the Clearfield
shares.
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Second, Omega argues that its proposal to acquire Clearfield shares was
pursuant to its plan to effectuate a merger with Clearfield, a merger which
itself will require regulatory approval. Thus, it asserts that the $65 proposal
is exempt under 7 P.S. ss.112(i)(ii) (exempting acquisitions and proposals in
the context of a merger that requires Department of Banking approval). This
argument confuses Omega's hoped-for outcome--an eventual merger with
Clearfield--with Omega's immediate goal--obtaining enough dissenting shareholder
votes to torpedo the Penn Laurel merger. A transaction is not a merger merely
because its proponent wishes it to be; were that the case, virtually any hostile
acquirer could claim the exemption of ss.112(i) and the entire legislative
purpose of ss.112(b)--requiring regulatory approval before shares are
acquired--would be eviscerated.
Accordingly, I conclude that Omega has violated ss.112(b). Because whether
it has violated the antifraud provisions of ss.112(g) turns on the same
analysis applicable to the ss.14(e) federal claim, I must also conclude that
Omega has also violated ss.112(g).
VII. Injunctive Relief
A prayer for injunctive relief in a suit under ss.14(e) requires that the
plaintiff establish not only a violation of the statue, but also "irreparable
harm and the other usual prerequisites for injunctive relief." Rondeau v.
Mosinee Paper Corp., 422 U.S. 49, 65 (1975). In Rondeau, the Supreme Court
concluded that injunctive relief in a ss.13(d) claim under the Williams Act
could not stand in the absence of irreparable harm. The Court also reiterated
its earlier holding in Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970),
that "the questions of liability and relief are separate in private actions
under the securities laws, and that the latter is to be determined according to
traditional principles." Rondeau, 422 U.S. at 64.
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Having concluded that Clearfield has actually succeeded on the merits of
its claims under the Williams Act and the Banking Code, I turn to the question
of whether it has also met its burden of showing the prerequisites for
injunctive relief. Irreparable harm in this case concerns harm to Clearfield's
shareholders. Polaroid, 862 F.2d at 1006. In Polaroid, the Third Circuit
concluded that Polaroid had met its burden of showing irreparable harm,
reasoning that
[t]the theory of the Act is that shareholders are unable to protect their
interests fully in making these decisions if the tender offeror fails to
provide all material information regarding the offer. Irreparable harm
arises because of the difficulty of proving money damages in a suit based
upon material misrepresentations by the tender offeror. While Congress has
determined that accurate disclosure is important to shareholders, it would
often be impossible for shareholders to prove that on the facts of their
particular tender offer accurate disclosure would have affected their
decision making in a particular way with concomitant quantifiable monetary
loss. The inadequacy of a remedy at law and the importance that Congress
has attached to accurate disclosure of material information establishes
irreparable harm.
Id. I find Polaroid's reasoning directly on point in this case and conclude
that Clearfield has established the existence of irreparable harm.
The likelihood of harm to other interested persons by the grant of denial
of injunctive relief is not applicable here. Clearfield has raised the interest
of its shareholders and there is no evidence that any other party would be
significantly harmed by the grant or denial of an injunction, except to the
extent that Clearfield, CSB and Penn Laurel, as separate entities, may be harmed
by the loss of a unique business opportunity. The interests of management and
the competing bidders, however, are of minimal significance in determining the
relief to be granted. As the Supreme Court observed in Edgar v. MITE Corp., 457
U.S. at 633, the Williams Act was enacted to protect investors and "it is also
crystal clear that a major aspect of the effort to protect the investor was to
avoid favoring either management or the takeover bidder." To that
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end, the Act embodies a "policy of evenhandedness" consistent with Congress's
"conviction that neither side in the contest should be extended additional
advantages vis-a-vis the investor, who if furnished with adequate information
would be in a position to make his own informed choice." Id. at 633-34
(citations and internal quotation marks omitted).
In determining whether the issuance of an injunction would be in the public
interest, the Polaroid decision is again instructive. There, the court observed
that the "decision that Congress made in passing the Williams Act...was that
notwithstanding any benefits of takeovers, they were not in the public interest
if effected through tender offers containing material misrepresentations." 862
F.2d at 1006. Likewise, a takeover effected through a tender offer containing a
material nondisclosure is not in the public interest.
I conclude that Clearfield has satisfied its burden of demonstrating that
injunctive relief is warranted because the shareholders will be irreparably
harmed if such relief is not granted and such relief will not harm other parties
or contravene the interest of the public.
In determining what relief should be ordered, I am guided by the Supreme
Court's observations in Edgar v. MITE Corp. that "Congress sought to protect the
investor not only by furnishing him with the necessary information but also by
withholding from management or the bidder any undue advantage that could
frustrate the exercise of an informed choice." 457 U.S. at 634. Accordingly, the
relief must not only apprise the shareholder of the information which Omega
failed to disclose in its offer, but also afford sufficient time before the
shareholder meeting so that shareholders may carefully consider the competing
proposals. Dissemination of the Summary and Conclusion section of this opinion
and a postponement of the shareholder meeting are therefore appropriate.
Furthermore, to remove any undue advantage to Omega
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from the existence of the executed Agreements, the executed agreements must be
rescinded and returned to the signatory shareholders to remove any
misconceptions that they will be entitled to receive $65 per share from Omega if
they oppose the merger and exercise their dissenter's rights. The parties must
not seek any advantage by selectively quoting from this opinion or by otherwise
commenting upon or characterizing holdings contained therein in communications
with Clearfield shareholders. Finally, Omega must be enjoined, consistent with
state law, from acquiring or seeking to acquire more than ten percent of
Clearfield's common stock in the absence of approval from the Pennsylvania
Department of Banking.
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VIII. Summary and Conclusion
----------------------
Clearfield Bank & Trust Company has sued Omega Financial Corporation
alleging that it violated federal securities laws, specifically the Williams
Act, by making a tender offer to some of Clearfield's shareholders which
contained material omissions. The purpose of the Williams Act is to protect
investors by furnishing them with the information needed to make a carefully
considered appraisal of the tender offer before them. To accomplish this
purpose, the Williams Act requires the disclosure of certain basic facts to
shareholders to enable them to make an informed decision.
I have concluded that an Agreement distributed by Omega to some
shareholders on August 2, 1999 in an effort to purchase Clearfield shares was
indeed a tender offer, and that it contained a material omission because it
failed to explain that shareholders could not both oppose the merger among
Clearfield, CSB Bank and Penn Laurel Financial Corporation by exercising
dissenters' rights and also sell their stock to Omega for $65 per share.
Accordingly, Omega has violated section 14(e) of the Williams Act. To remedy
this violation, I am ordering the postponement of the scheduled shareholder
meeting, the rescission of all Agreements executed by Clearfield shareholders
and their return by Omega, and the distribution to Clearfield's shareholders of
this Summary and Conclusion section of my opinion.
Although I have concluded that equitable relief is appropriate because of a
material omission in the tender offer for which Omega is responsible,
Clearfield's August 9 letter to its shareholders is problematic as well. While
helpful in pointing out the omissions contained in Omega's tender offer, it also
included the suggestion that shareholders might be assessed certain costs and
fees for the "bad faith" or "vexatious" exercise of their right to dissent.
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Shareholders, however, have the right to vote on the merger and to exercise
their dissenters' rights as they deem appropriate, and this court concludes that
Clearfield's warning was intended to chill the exercise of those rights.
My resolution of this lawsuit is based on federal law and "[i]n no way
should . . . be taken as approval or disapproval of the tender offer, or of the
wisdom of acceptance or rejection by the shareholders" of the proposed
Clearfield-CSB-Penn Laurel merger transaction. Ronson Corp. v. Liquifin
Aktiengesellschaft, 497 F.2d 394, 395 (3d Cir. 1974). Whether the merger
transaction becomes effective is a matter best left to the marketplace and the
judgment of Clearfield's shareholders.
An appropriate order follows.
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O R D E R
---------
AND NOW, this 10th day of September, 1999, consistent with the foregoing
Opinion, it is hereby
ORDERED AND DIRECTED that:
1. The Clearfield Bank & Trust shareholder meeting scheduled for Monday,
September 20, 1999, is postponed to Monday, September 27, 1999 or such later
date as the Clearfield Bank & Trust board of directors shall establish.
2. All Omega Agreements which have been executed by Clearfield Bank & Trust
shareholders are hereby voided. Omega Financial Corporation shall forthwith
return, by first class mail, the original of each executed agreement to the
signatory shareholder, together with the caption page of the accompanying
Opinion, the Summary and Conclusion (pages 41 and 42), and this Order. All five
pages from the opinion and order should be stapled together as a single
document. This mailing shall include no other enclosure.
3. Clearfield Bank & Trust shall forthwith provide notice to its
shareholders that the shareholder meeting scheduled for Monday, September 20,
1999 has been postponed and advising them of the re-scheduled date. The caption
page of the accompanying Opinion, the Summary and Conclusion (pages 41 and 42),
and this Order shall be stapled together as a single document and shall
accompany that notice. Omega Financial Corporation shall be assessed the
reasonable costs associated with the provision of this notice and shall pay the
invoice for the same within thirty days of receipt. This mailing shall include
no other enclosure.
4. Clearfield Bank & Trust and Omega Financial Corporation are enjoined,
until 72 hours have elapsed since their respective mailings described in
paragraphs 2 and 3, from commenting
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upon or otherwise characterizing this adjudication in any communication to
Clearfield shareholders. This shall not preclude either party from communicating
to any person its intention to appeal from this order.
5. Clearfield Bank & Trust shall provide any of its shareholders who request it,
either orally or in writing, a photocopy of this Opinion. The costs associated
with providing a photocopy of this Opinion to any shareholder so requesting it
shall be borne by the party to which the request has been made.
6. Omega Financial Corporation is enjoined from acquiring or proposing to
acquire more than ten percent of Clearfield Bank & Trust's common stock in the
absence of approval from the Pennsylvania Department of Banking.
BY THE COURT,
/s/ D. Brooks Smith
-----------------------------
D. Brooks Smith
United States District Judge
cc: All counsel of record
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