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EXHIBIT 5
IN THE COURT OF COMMON PLEAS OF ERIE COUNTY, PENNSYLVANIA
ORPHAN'S COURT DIVISION
TRUST OF HENRY ORTH HIRT, SETTLOR
TRUST UNDER AGREEMENT RESTATED DECEMBER 22, 1980
WITH RESPECT TO SUSAN HIRT HAGEN
NO. 100-1998
AND
TRUST OF HENRY ORTH HIRT, SETTLOR
TRUST UNDER AGREEMENT RESTATED DECEMBER 22, 1980
WITH RESPECT TO F. W. HIRT
NO. 101-1998
IN THE COURT OF COMMON PLEAS
OF ERIE COUNTY, PENNSYLVANIA
CIVIL DIVISION
NO. 10902 OF 2000
SUSAN HIRT HAGEN
v.
ERIE INDEMNITY COMPANY
In the interest of judicial economy, consolidated herein are several
matters filed under each of the above docket numbers. Specifically, addressed
within is Susan Hirt Hagen's Motion for Preliminary Injunction (and the
accompanying Petitions to Intervene); two separate Petitions for a Preliminary
Injunction filed by F. W. Hirt as well as the Petition of F. W. Hirt to Enjoin
Susan Hirt Hagen and Bankers Trust Company from breaching a fiduciary duty and
wasting trust assets.
Upon consideration of the pleadings and briefs, evidence adduced at
hearings held April 3, 2000 and April 20, 2000, oral argument and applicable law
(including legislative history or the lack thereof), the following Findings of
Fact and Conclusions of Law are hereby entered.
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FINDINGS OF FACT
1. Erie Indemnity Company (hereinafter the "Company") is a Pennsylvania
corporation serving as the attorney-in-fact for the Erie Insurance Exchange (the
"Exchange"). The principal business activity of the Company is the management of
the Exchange.
2. The Company was founded by H. O. Hirt in 1925. The Company has two
classes of common stock registered under the Securities Exchange Act of 1934.
The Company's Class A common stock is publicly traded on NASDAQ; this stock does
not have voting rights. Instead, voting rights are vested in the Company's Class
B common stock, which stock is not traded publicly.
3. Over the course of his lifetime, H. O. Hirt acquired 76.22 percent
of the Company's Class B voting common stock. H. O. Hirt placed the Class B
stock in a trust which became irrevocable upon his death on June 13, 1982.
4. The H. O. Hirt Trusts (hereinafter the "Trusts") are actually two
separate but equal Trusts, each for the benefit of his two children.
Specifically, 38.11 percent of the Class B stock was placed in a trust for the
benefit of H. O. Hirt's son, F. W. Hirt and a like amount placed in a trust for
H. O. Hirt's daughter, Susan Hirt Hagen. Each of these trusts operate under the
same terms, including management by three co-trustees. The co-trustees consist
of F. W. Hirt and Susan Hirt Hagen as individual trustees and Bankers Trust as
corporate trustee. It takes a majority vote of the three co-trustees for action
to be taken on behalf of either Trust.
5. Susan Hirt Hagen, in addition to being the beneficial owner of Class
B stock through her father's Trust, separately owns twelve shares of voting
Class B common stock of the Company.
6. Laurel A. Hirt is the daughter of F. W. Hirt, granddaughter of H. O.
Hirt and a beneficiary under the H. O. Hirt trust created for her father.
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7. F. W. Hirt has been a member of the Board of Directors of the
Company since 1965 and continues to have a distinguished career as Chairman of
the Board of the Company. Susan Hirt Hagen likewise has a lengthy history of
service to the Company, having been a member of the Board of Directors since
1980.
8. On August 16, 1999, the Board of Directors of the Company amended
the by-laws to provide, inter alia, certain time frames for a shareholder to
submit to the Nominating Committee any nomination(s) for director(s) to the
Board.
9. The annual meeting of the Board of Directors of the Company is
scheduled for April 25, 2000. In compliance with the Company's by-laws as
amended August 16, 1999, Susan Hirt Hagen, by a letter dated December 29, 1999
to Jan Van Gorder, Executive Vice President, Secretary and General Counsel of
the Company, tendered the nomination of eleven individuals for positions as
directors to the Board.
Additionally, Susan Hirt Hagen timely filed a Schedule 13(d) with the
Securities and Exchange Commission stating her intention to nominate an
alternative slate of directors for election at the annual meeting on April 25,
2000. An amended Schedule 13(d) was subsequently filed identifying the eleven
candidates tendered by Susan Hirt Hagen.
10. Susan Hirt Hagen stated her intention in the above documents to
personally appear at the annual meeting and nominate her candidates for election
to the Board if the Nominating Committee did not do so.
11. Consistent with this statement, Susan Hirt Hagen, in her capacity
as a Director, appeared at a duly-constituted meeting of the Board of Directors
on March 7, 2000 and presented a resolution asking the Board to recognize her
ability as an owner of Class B stock to nominate a Board candidate at the annual
meeting. The Board voted to table the Hagen resolution. A poll was then taken,
with ten Board members taking the position that all nominations must come
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through the Nominating Committee; one Board member made no comment and one Board
member stated his opinion that the poll was a waste of time.
12. A special Board meeting of the Company's Directors was held on
March 14, 2000, to hear the report of the Nominating Committee. During the
meeting, the Board voted twelve to one, with Susan Hirt Hagen the lone
dissenting vote, to defeat the Hagen resolution to allow her as an owner of
voting shares of Class B stock to nominate a director to the Board of Directors.
The Board also voted (12-1 with Hagen dissenting) to accept the
recommendation of the Nominating Committee to reduce the Board from thirteen to
twelve directors and to propose for election all incumbent Board members, except
Susan Hirt Hagen.
13. Subsequently, Susan Hirt Hagen filed a complaint seeking injunctive
and declaratory relief to allow her as an owner of Class B stock to nominate a
candidate for director of the Company.
14. Petitions to Intervene have been filed on behalf of the H. O. Hirt
Trusts, F. W. Hirt (limited to opposing the intervention of the H. O. Hirt
Trusts) and Laurel A. Hirt.
15. On April 3, 2000, a hearing was held on the Motion for Preliminary
Injunction as filed by Susan Hirt Hagen. Prior to the hearing, F. W. Hirt filed
a Petition for Preliminary Injunction seeking to enjoin the H. O. Hirt Trustees
from participating in this action. While it is almost unprecedented for a party
to file a complaint in the morning and have a hearing that same day, the hearing
held April 3, 2000 included a record developed for F. W. Hirt's Petition for an
injunction since it involved the same set of operative facts.
16. On April 17, 2000, F. W. Hirt launched a two-prong attack by
seeking to enjoin the H. O. Hirt Trustees from "breaching fiduciary duties" and
asking for an injunction to preclude the Trustees from nominating a candidate
for director at the April 25, 2000 meeting or
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voting for any candidate nominated by any entity other than the Nominating
Committee. An evidentiary hearing was held on these Petitions on April 20, 2000.
CONCLUSIONS OF LAW
1. The rights of an owner of voting share(s) of stock in a corporation
inherently include the right to nominate a candidate for director of the
corporation. There is no law in Pennsylvania divesting the owner of voting
shares of the substantive right to nominate a candidate for a board
directorship.
2. Section 1405(c)(4) of the Pennsylvania Insurance Holding Company Act
does not limit nor prohibit an owner of voting shares of stock in an insurance
holding company from nominating a candidate to the board of directors. See 40
P.S. Section 991.1405(c)(4). Nor does Section 1405(c)(4) create an exclusive
mechanism via the Nominating Committee for the nomination of director
candidates.
Instead, Section 1405(c)(4) simply provides a method of independently
assessing appropriate candidates for directorships and communicating to the
voting shareholders the views of the Board and/or management. The recommendation
of the Nominating Committee is not binding on voting shareholders, who remain
free to nominate other candidates. Ultimately it is up to the shareholders, as
owners of the company, to determine who should be on the board of directors.
To accept the argument of Erie Indemnity Company means the real or
actual Board election occurs in the Nominating Committee because the Committee
would control the names submitted for election. Hence, the Board could be
self-perpetuating as the Nominating Committee is not obligated to accept any
nomination(s) from any voting shareholder. In this scenario, not only is there
no accountability of the Nominating Committee to the voting shareholders, but
the result is tantamount to a Communist election in which there is only one
slate of candidates available to voters.
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Further, if the Trustees of the H. O. Hirt Trusts, as owners of over 76
percent of the voting stock, do not agree with the nominations from the
Nominating Committee, the Trustees have no other choice(s). If the Trustee
choose to abstain from voting, then a small minority of shareholders determine
the entire control of the Company. If all voting shareholders rejected the slate
tendered by the Nominating Committee, then the Company is in a state of anarchy.
Each of these scenarios is an absurd result not intended by the legislature in
enacting Section l405(c)(4).
Setting aside the personal agendas of every party in this litigation,
if there existed a substantive policy disagreement between the voting
shareholders and the board of directors, under the Company's interpretation of
Section 1405(c)(4), the owners of the Company would have little or no ability
to change the directors of the Company. While the Company and F. W. Hirt have
gone to great lengths to disparage Susan Hirt Hagen as an unworthy controlling
stockholder, the same analysis applies equally to a board of directors who pose
a threat to the health of the Company.(1) Historically, there has always been a
remedy for an owner of a company to remove detrimental director(s). Section
1405(c)(4) does not usurp the fundamental and traditional power of an owner to
remove a director by nominating a director whose interests align with that of
the owner. Otherwise there would be little meaning or value to the ownership of
voting shares of stock because such shareholders are mere rubber stamps for the
Nominating Committee.
The language of Section 1405(c)(4) and its legislative history is
important for what it does not say. If the legislature intended to provide the
Nominating Committee with the exclusive power to nominate a director, the
legislature would have stated so in the statute. The absence of the use of the
word exclusive is glaring and consistent with the legislative history. If in
fact the Insurance Holding Company Act created a special breed of corporate
entity as the Company argues, and in so doing took the unusual and perhaps
unconstitutional step of abrogating a voting
--------
(1) Under no circumstances is the Court expressing an opinion about the
performance of the current Board of Directors of the Company.
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shareholders substantive property right to nominate a director, the legislative
history should have reflected such an intent.
Section 1405(c)(3) of the Insurance Holding Act provides that not less
than one-third of the directors of an insurance holding company and members of
each committee be comprised of an independent person (meaning the person cannot
be an officer, employee or a controlling shareholder). See 40 P.S. Section
991.1405(c)(3). Logically then, the statute allows the remaining two-thirds of
the Board or a committee to consist of officers, employees and/or controlling
shareholders. As such, the law clearly envisions a controlling shareholder
having an opportunity to serve as a director of an insurance holding company.
However, under the Company's interpretation, the controlling shareholder could
never become a director if the Nominating Committee opposed it.
In conclusion, this Court finds that any owner of Class B common stock
of Erie Indemnity Company is entitled to nominate a candidate for director to
the Board of Directors at any annual meeting of the Company (assuming compliance
with valid by-laws).
3. The Court was not asked, nor is any opinion rendered, on the
validity of the by-laws of the Company as enacted August 16, 1999. However, to
the extent the Company argues its by-laws preclude an owner of voting shares
from nominating a director candidate at the annual meeting, the argument is
without legal merit. An insurance holding company cannot through its by-laws
appropriate or eliminate a substantive property right of a voting shareholder to
nominate a director candidate.
4. Susan Hirt Hagen, because of her timely filing of Schedule 13(d)
submissions with the Security Exchange Commission and her letter of December 29,
1999 to the Company, has complied with the by-laws of the Company as enacted
August 16, 1999. Accordingly, Susan Hirt Hagen is entitled to tender the
nomination of a candidate or candidates for directorship(s) at the annual
meeting of the Company on April 25, 2000 or any adjournment thereof.
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5. Susan Hirt Hagen has met all of the requirements for a preliminary
injunction to issue. She has made a strong showing on the merits in light of
this Court's interpretation of Section 1405(c)(4). She will also suffer
irreparable harm since the Company intends to deny her sole opportunity to
nominate a director to the Board. As a matter of law, the Company cannot deny
Hagen her substantive right to nominate a director.
The issuance of an injunction does not substantially harm any other
party, including the Company. As a publicly-traded company, there is an annual
risk the voting shareholders will replace or remove directors with whom the
shareholders are dissatisfied. Accordingly, the only available remedy is to let
the injunction issue.
6. As owners of 76.22 shares of the voting Class B common stock of Erie
Indemnity Company, the Trusts have a vital interest in the outcome of this
litigation and are therefore entitled to intervene. As a direct beneficiary of
her father's Trust, Laurel A. Hirt has a vital interest in the outcome of this
litigation and is therefore entitled to intervene. Likewise, F. W. Hirt has a
basis to intervene.
7. It is black-letter law that a trustee has a fiduciary obligation to
act in the best interest of the trust. In the case sub judice, the sole asset of
the H. O. Hirt Trusts is 76.22 percent of the Class B common voting stock of the
Company. Unquestionably, the Trustees have a duty to protect and preserve this
Trust corpus.
The position of F. W. Hirt that Bankers Trust and Susan Hirt Hagen have
breached a fiduciary obligation by voting to intervene in this litigation and
assert the right of the Trusts to nominate a director is untenable. The argument
of F. W. Hirt is perhaps understandable if he is wearing his hat as Chairman of
the Board of the Company; it is however, unacceptable when he is wearing his hat
as a Trustee of the H. O. Hirt Trusts.
Unfortunately, F. W. Hirt, who by reputation is a kind, humble and
generous man, is seemingly blinded by his animosity towards his sister or his
loyalty to present management
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and/or the Board. There is no plausible reason, other than possibly to save the
Trusts the cost of litigation, for a Trustee not to take the action as asserted
by Bankers Trust and Susan Hirt Hagen. For a Trustee to sit idly by and allow
the loss of a substantive right to nominate a director to the sole asset of the
Trusts, with the inevitable diminution in value of the Trust corpus, is
incomprehensible. The position of F. W. Hirt certainly places at risk not only
his future ability to change directors of the Company, but it also handcuffs the
ability of future beneficiaries under the Trusts to do so.
Accordingly, Bankers Trust and Susan Hirt Hagen have not breached a
fiduciary duty nor wasted the assets of the Trusts in seeking to participate in
the declaration of the right of the Trusts to nominate a director for the
Company.
BY THE COURT:
/s/ William R. Cunningham
-------------------------------
WILLIAM R. CUNNINGHAM
President Judge
Date: April 24, 2000
-------------------------
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IN THE COURT OF COMMON PLEAS OF ERIE COUNTY, PENNSYLVANIA
ORPHAN'S COURT DIVISION
TRUST OF HENRY ORTH HIRT, SETTLOR
TRUST UNDER AGREEMENT RESTATED DECEMBER 22, 1980
WITH RESPECT TO SUSAN HIRT HAGEN
NO. 100-1998
AND
TRUST OF HENRY ORTH HIRT, SETTLOR
TRUST UNDER AGREEMENT RESTATED DECEMBER 22, 1980
WITH RESPECT TO F. W. HIRT
NO. 101-1998
IN THE COURT OF COMMON PLEAS
OF ERIE COUNTY, PENNSYLVANIA
CIVIL DIVISION
NO. 10902 OF 2000
SUSAN HIRT HAGEN
v.
ERIE INDEMNITY COMPANY
ORDER
AND NOW to-wit this 24th day of April 2000, based on the foregoing
Findings of Fact and Conclusions of Law, the following Order is hereby entered:
1. The Petition of the Trustees of the H. O. Hirt Trust to intervene is
GRANTED. The Petition of F. W. Hirt to intervene is hereby GRANTED as is the
Petition of Laurel A. Hirt.
2. The request for a Preliminary Injunction filed by Susan Hirt Hagen
at Docket Number 10902-2000 is hereby GRANTED such that Erie Indemnity Company,
through its Directors and Officers, is enjoined from prohibiting Susan Hirt
Hagen from nominating a candidate or candidates for director to the Board of
Directors of Erie Indemnity Company at the annual meeting on April 25, 2000 or
any adjournment thereof. Susan Hirt Hagen shall post bond in the amount of
$5,000.00.
3. The Petitions for Preliminary Injunctions filed by F. W. Hirt are
hereby DENIED as without a basis in fact or law.
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4. The Petition of F. W. Hirt to Enjoin Susan Hirt Hagen and Bankers
Trust from breaching a fiduciary duty is hereby DENIED as without a basis in law
or fact.
BY THE COURT:
/s/ William R. Cunningham
----------------------------------
WILLIAM R. CUNNINGHAM
President Judge
cc: All counsel
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