Russell Shappy, Jr. & Linda B. Shappy

United States Tax Court

T.C. Memo. 2023-146

CHARLES G. BERWIND TRUST FOR DAVID M. BERWIND, DAVID

M. BERWIND, D. MICHAEL BERWIND, JR.; GAIL B. WARDEN,

LINDA B. SHAPPY AND VALERIE L. PAWSON,

TRUSTEES, ET AL., 1

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket Nos. 26218-08, 26219-08, Filed December 4, 2023.

26220-08, 26221-08,

26222-08.

—————

John William Schmehl, Thomas S. Biemer, Marc Alan Feller, and

Benjamin S. Bolas, for petitioners.

Philip S. Yarberough and John Anthony Guarnieri, for respondent.

CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION ..................... 4

FINDINGS OF FACT .............................................................................. 7

1. In 1963, Charles G. Berwind, Sr., established trusts to hold

the stock of Berwind Corporation for his four children. .............. 7

1 Cases of the following petitioners are consolidated herewith: Duncan Warden

and Gail Warden, Docket No. 26219-08; Russell Shappy, Jr., and Linda B. Shappy,

Docket No. 26220-08; David M. Berwind and Jeanne M. Berwind, Docket No. 26221-08;

and D. Michael Berwind, Jr., and Carol R. Berwind, Docket No. 26222-08.

Served 12/04/23

2

[*2]

2. Under the control of Charles G. Berwind, Sr.’s son, Graham

Berwind, Berwind Corporation redeemed all of the shares

of the trusts for daughters Margaret and Emery and half

the shares owned by the trust for son David. .............................. 9

3. In 1978, Berwind Corporation bought Colorcon, Inc. ................ 10

4. In 1983, BPSI was added to the corporate structure above

Colorcon, Inc. ............................................................................... 11

5. In 1985, Berwind Corporation redeemed the remaining

shares owned by the David Berwind Trust. ............................... 15

6. BPSI changed its articles of incorporation to authorize

preference stock and preferential stock...................................... 17

7. The Graham Berwind Trust and the Graham Children

Trusts consolidated their shares of Berwind Corporation

and the common stock of BPSI; BPSI’s articles of

incorporation were corrected to add terms regarding its

preference and preferential stock. .............................................. 17

8. Under Pennsylvania law regarding short-form mergers, a

parent corporation may merge with its 80%-owned

subsidiary without a vote by the subsidiary’s other

shareholders; however, these shareholders have the right

to demand the fair market value of their sares. ........................ 26

9. In December 1999, a short-form merger was formalized

between BPSI and its newly formed parent corporation,

but this merger was challenged by the David Berwind

Trust, which also asserted its right to receive the fair

market value of its BPSI shares. ................................................ 40

OPINION ................................................................................................ 96

I. On December 16, 1999, there was a “sale or exchange” of

the David Berwind Trust’s shares of BPSI common stock

within the meaning of section 483. ............................................. 99

A. The plan of merger between BPSI Acquisition and BPSI

did not violate BCL § 1922(a)(3); even if the plan of

3

[*3] merger did violate that provision, the merger was not

void. ...................................................................................... 102

1. The plan of merger complied with BCL § 1922(a)(3). ... 102

2. Even if the plan of merger violated BCL § 1922(a)(3),

the merger was not void. ................................................ 104

B. The merger of BPSI Acquisition and BPSI did not

violate BPSI’s articles of incorporation. .............................. 107

C. The remedies of the plaintiffs in the Warden litigation

would not have been limited to the dissenters-rights

provisions had the merger been tainted with fraud or

fundamental unfairness. However, petitioners do not

ask us to determine that the merger was so tainted. ......... 108

D. Count XIII of the amended complaint in the Warden

litigation should not be treated as failing to state a

claim on the grounds that the Graham Berwind and

McKenney’s resignations as trustees of the David

Berwind Trust were effective. ............................................. 110

E. Application of the origin-of-the-claim test does not lead

to the conclusion that the sale or exchange occurred on

November 25, 2002. ............................................................. 113

F. Lyeth v. Hoey does not require us to determine the tax

consequences of the payment by BPSI to the David

Berwind Trust for the Trust’s BPSI common stock as if

the plaintiffs in the Warden litigation had successfully

enjoined the merger between BPSI Acquisition and

BPSI. ..................................................................................... 117

G. The 2002 settlement agreement did not provide that the

merger was rescinded or that the merger was void............ 118

H. Merely because the David Berwind Trust’s holding

period of BPSI common stock would have included the

period from December 16, 1999, to November 25, 2002,

for purposes of section 1231 of the Internal Revenue

Code of 1954, does not mean that the sale or exhange of

the trust’s BPSI common stock did not occur on

December 16, 1999, for purposes of section 483. ................ 120

4

[*4]

I. That the sale or exchange of the David Berwind Trust’s

BPSI common stock occurred on December 16, 1999, is

not inconsistent with Megargel v. Commissioner, 3 T.C.

238 (1944), and cases following it. ....................................... 125

J. That the sale or exchange of the David Berwind Trust’s

BPSI common stock occurred on December 16, 1999, is

not inconsistent with Victor E. Gidwitz Family Tr. v.

Commissioner, 61 T.C. 664 (1974). ..................................... 129

K. That the sale or exchange of the BPSI common stock of

the David Berwind Trust occurred on December 16,

1999 is not inconsistent with judicial interpretations of

section 163(a). ...................................................................... 131

II. The plan of merger was the contract for the sale or

exchange of the David Berwind Trust’s BPSI shares. ............. 135

III. The payment from BPSI to the David Berwind Trust for its

BPSI common stock was “under” the plan of merger even if

the David Berwind Trust did not voluntarily contract to

receive the payment as part of the plan of merger. ................. 136

IV. The payment made by BPSI to the David Berwind Trust

for the trust’s BPSI shares was a $191,257,353 payment

that was made on December 31, 2002. ..................................... 138

V. Conclusion ................................................................................. 140

MEMORANDUM FINDINGS OF FACT AND OPINION

MORRISON, Judge: Respondent (hereinafter the IRS) mailed a

notice of deficiency to the Charles D. Berwind Trust for David M.

Berwind. We refer to this trust as the “David Berwind Trust”. The

notice of deficiency mailed to the David Berwind Trust reflected a

determination that $31,096,783 of the David Berwind Trust’s income for

the 2002 taxable year constituted imputed interest that had been

improperly reported as capital gain on the trust’s Form 1041, U.S.

Income Tax Return for Estates & Trusts. The notice of deficiency stated

that the deficiency was $5,363,331.

5

[*5] The David Berwind Trust had four beneficiaries, each of whom

filed a joint return for 2002 with their respective spouses. The

beneficiaries and their respective spouses were:

• David McMichael Berwind (David Berwind) and Jeanne M.

Berwind,

• David McMichael Berwind, Jr. (Michael Berwind) and Carol

R. Berwind,

• Duncan Warden and Gail Berwind Warden, and

• Russell Shappy, Jr. and Linda Berwind Shappy.

(Michael Berwind, Gail Berwind Warden, and Linda Berwind Shappy

are the children of David Berwind.) The IRS also mailed notices of

deficiency to the beneficiaries and their respective spouses, determining

deficiencies in their income taxes for 2002. The notices mailed to the

beneficiaries and their respective spouses determined that, as a result

of the adjustment to the David Berwind Trust’s income reflected in the

notice of deficiency mailed to the David Berwind Trust, each beneficiary

received taxable distributions from the David Berwind Trust during the

2002 tax year in excess of the amounts reported on their respective

Forms 1040, U.S. Individual Income Tax Return. The notices of

deficiency mailed to the beneficiaries and their respective spouses

determined income-tax deficiencies in the following amounts for the

2002 tax year:

Taxpayer Deficiency

Michael Berwind & Carol Berwind $102,783

David Berwind & Jeanne Berwind 12,603

Duncan Warden & Gail Berwind Warden 104,441

Russell Shappy & Linda Berwind Shappy 108,375

On October 28, 2008, a timely Petition was filed as to the notice

of deficiency that had been mailed to the David Berwind Trust. The

Petition was signed by (1) an attorney for the trust and (2) the trustees

of the trust in their capacity as trustees. The Petition named as non-

governmental parties in the caption (1) the David Berwind Trust,

(2) David Berwind (as trustee), (3) Michael Berwind (as trustee), (4) Gail

Berwind Warden (as trustee), (5) Linda Berwind Shappy (as trustee),

and (6) Valerie Pawson (as trustee). The David Berwind Trust’s

principal office was in Massachusetts and its trust situs was in the state

of Pennsylvania by virtue of the state residence of the settlor when the

6

[*6] trust was founded. The states in which the trustees resided were

as follows: David Berwind (Florida), Michael Berwind (Massachusetts),

Gail Berwind Warden (Massachusetts), Linda Berwind Shappy

(Massachusetts), and Pawson (unknown). We do not take a position on

whether the trust is the petitioner or whether instead the trustees of the

trust are the petitioners.

On October 28, 2008, timely petitions were filed by the four

beneficiaries of the David Berwind Trust (and their respective spouses)

as to their four respective notices of deficiency. When Michael and Carol

Berwind filed their Petition, they resided in Massachusetts. When

David and Jeanne Berwind filed their Petition, they resided in Florida.

When Duncan Warden and Gail Berwind Warden filed their Petition,

they resided in Massachusetts. When Russell Shappy and Linda

Berwind Shappy filed their Petition, they resided in Massachusetts.

The Court has jurisdiction under section 6213(a). 2 We assigned

five separate docket numbers to reflect that five separate notices of

deficiency were challenged in the Petitions. The Court later

consolidated the five cases.

The issues in the case concern the tax treatment of a settlement

payment received by the David Berwind Trust to resolve a lawsuit

challenging a squeeze-out merger designed to extinguish its 16.4%

common stock interest in Berwind Pharmaceutical Services, Inc. (BPSI),

a lawsuit that also included an appraisal action to (a) determine the

value of the interest and (b) require BPSI to pay that value to the David

Berwind Trust. The amount of the payment, and the date it was

received by the David Berwind Trust, are matters in dispute in the

present case.

On December 14, 1999, the David Berwind Trust had owned

16.4% of the common stock of BPSI. On December 16, 1999, BPSI filed

with the Pennsylvania Department of State articles of merger providing

that it merged with its majority shareholder, BPSI Acquisition

Corporation (BPSI Acquisition), and that its common stock was

cancelled. On November 25, 2002, BPSI and other defendants agreed to

settle the lawsuit. On November 25, 2002, BPSI transferred

$191,000,000 to an escrow account for the benefit of the David Berwind

2 Unless otherwise indicated, all references to sections are to the Internal

Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references

are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant

times, and Rule references are to the Tax Court Rules of Practice and Procedure.

7

[*7] Trust. On November 26, 2002, $191,007,012.05 was transferred

from the escrow account to an escrow account with PNC. On December

31, 2002, $191,257,353 was released from the PNC escrow account to

the David Berwind Trust. We hold:

I. The sale or exchange of the David Berwind Trust’s shares

of BPSI common stock occurred on December 16, 1999, not

November 25, 2002.

II. The sale or exchange was pursuant to a contract.

III. The payment from BPSI to the David Berwind Trust for its

BPSI common stock was “under” the plan of merger even if

the David Berwind Trust did not voluntarily contract to

receive the payment as part of the plan of merger.

IV. The payment by BPSI to the David Berwind Trust for the

Trust’s shares was a $191,257,353 payment on December

31, 2002, not a $191,000,000 payment on November 25,

2002.

FINDINGS OF FACT

The Court adopts the stipulations of fact entered into by the

parties. Most of these stipulations are stated here. We also state other

findings of fact that are not found in the stipulations.

1. In 1963, Charles G. Berwind, Sr., established trusts to hold the stock

of Berwind Corporation for his four children.

Founded in 1883, Berwind Corporation was a closely held

business that was engaged in coal mining. In the 1960s, Berwind

Corporation began to diversify its holdings by investing in other

industries such as pharmaceutical and health science.

In 1963, Charles G. Berwind, Sr., established four trusts, one for

each of his four children. His children were (1) David Berwind,

(2) Charles G. Berwind, Jr., referred to here as Graham Berwind,

(3) Emery Berwind, and (4) Margaret Berwind. Each child was the

primary beneficiary of the respective trust. Each trust was named for

the respective child beneficiary: the David Berwind Trust, the Graham

Berwind Trust, the Emery Berwind Trust, and the Margaret Berwind

Trust. To each trust, Charles G. Berwind, Sr., transferred shares of

Berwind Corporation. The Graham Berwind Trust received 53,200

8

[*8] shares; each of the other children’s trusts received only 45,600. The

reason for the disparity was that Charles G. Berwind, Sr., intended that

Graham Berwind should be the one among his children who would

eventually run Berwind Corporation. Graham Berwind had already

been working for Berwind Corporation when the children’s trusts were

created. By contrast, David Berwind took a career path outside the

company, becoming the headmaster of a boys’ school.

The table below shows the ownership of Berwind Corporation by

the children’s trusts when the trusts were created:

Shares of Berwind Corp. held by the trusts for the benefit of

the children of Charles G. Berwind, Sr.

Graham David Emery Berwind Margaret

Berwind Trust Berwind Trust Trust Berwind

Trust

53,200 45,600 45,600 45,600

The David Berwind Trust had three trustees when it was created:

(1) David Berwind, (2) Graham Berwind, and (3) a lawyer named Albert

Gilmer. The table below shows these initial trustees:

Trustees of the David Berwind Trust

David Berwind

Graham Berwind

Albert Gilmer, attorney

Paragraph 11.G of the David Berwind Trust’s deed of trust

provides that “[a]ny individual trustee may resign at any time without

court approval, so long as he or she has executed the instrument referred

to in paragraph [11.]A.” Paragraph 11.A provides that “each trustee,

upon assuming office, shall execute a written acceptance of trusteeship

and shall also lodge with the other trustees within a reasonable time an

instrument designating two or more individuals as a succession of

successor trustees, to serve in the event that he or she ceases to act . . . .”

The deed of trust also contains the following provision: “The fact that

any trustees may be interested in Berwind Corporation or any of its

subsidiaries as director, stockholder, manager, agent or employee shall

not constitute an adverse or conflicting interest, and the acts of such

trustee shall be judged as if he had no interest in the Corporation.”

9

[*9] 2. Under the control of Charles G. Berwind, Sr.’s son, Graham

Berwind, Berwind Corporation redeemed all of the shares of the

trusts for daughters Margaret and Emery and half the shares

owned by the trust for son David.

Charles G. Berwind, Sr., died in 1972. Graham Berwind then

assumed day-to-day control of Berwind Corporation. He sought to

consolidate the ownership of Berwind Corporation by directing the

corporation to repurchase its outstanding common stock.

In 1972, Berwind Corporation redeemed the shares of its common

stock owned by the Margaret Berwind Trust and the Emery Berwind

Trust, which by that time were the only owners of Berwind Corporation

common stock other than the Graham Berwind Trust and the David

Berwind Trust. After these 1972 redemptions, the ownership of

Berwind Corporation common stock was as follows:

Ownership of Berwind Corp. common stock

Graham Berwind Trust David Berwind Trust

53,200 45,600

In 1976, Berwind Corporation redeemed half of the shares of

common stock owned by the David Berwind Trust. After this 1976

redemption, the ownership of Berwind Corporation common stock was

as follows:

Ownership of Berwind Corp. common stock

Graham Berwind Trust David Berwind Trust

53,200 22,800

From this point until 1985, there is no information in the record

about changes in the ownership of the common stock shares of Berwind

Corporation held by the Graham Berwind Trust, the David Berwind

Trust, and other owners. 3

3 As explained infra FINDINGS OF FACT, Part 5, in 1985 Berwind

Corporation redeemed all of the shares of its common stock owned by the David

Berwind Trust (which by then totaled 21,132). At the time of this redemption, the

Graham Berwind Trust and the Graham Children Trusts (terms which are defined

infra FINDINGS OF FACT, Part 4) owned 104,078 shares.

10

[*10] 3. In 1978, Berwind Corporation bought Colorcon, Inc.

In 1978, Berwind Corporation bought all the shares of Colorcon,

Inc. Colorcon, Inc., was in the business of applying color coatings to

pharmaceutical tablets. The corporate structure thus became:

Figure 1

Corporate structure after Berwind Corporation bought Colorcon, Inc., in 1978

Graham Berwind Trust David Berwind Trust

common common

Berwind

Corporation

100%

Colorcon, Inc.

In December 1979, Gilmer resigned as a trustee of the David

Berwind Trust. He appointed Thomas Morris, Jr., a partner at the law

firm of Dechert, Price, and Rhoads LLP, as his successor trustee. Thus,

the trustees were:

Trustees of the David Berwind Trust

David Berwind

Graham Berwind

Thomas Morris, Jr., attorney

11

[*11] 4. In 1983, BPSI was added to the corporate structure above

Colorcon, Inc.

In 1983, BPSI was formed. 4 BPSI issued 16.4% of its common

stock (6,500 shares) to the David Berwind Trust. It issued the

remaining 83.6% of its common stock (33,440 shares) to four new trusts

that Graham had established for the benefit of his children. The four

new trusts are referred to here as the “Graham Children Trusts”.

When BPSI was formed, it was also authorized to issue (but did

not immediately issue) shares of preferred stock with par value of $50

per share. BPSI’s articles of incorporation contained the following

provisions governing the redemption of preferred stock:

The Company [BPSI], by action of its Board of

Directors, subject to the terms and conditions upon which

shares of any particular series are subject to redemption,

may redeem the whole or any part of . . . the [p]referred

[s]tock, at any time or from time to time, by paying in cash

the redemption price for the shares . . . fixed therefor as

herein provided, together with accrued but unpaid

dividends to the date fixed for such redemption. Notice of

every such redemption (pursuant to a sinking fund

requirement or otherwise) shall be given at least thirty (30)

days and not more than ninety (90) days prior to the date

fixed for such redemption by hand delivery or first class

mail, to the holders of record of the shares of the [p]referred

[s]tock so to be redeemed, at their respective addresses as

the same shall appear on the books of the Company. . . .

The Board of Directors shall have full power and authority,

subject to the limitations and provisions herein contained,

to prescribe the manner in which and the terms and

conditions upon which the shares of the [p]referred [s]tock

shall be redeemed from time to time. If such notice of

redemption shall have been duly given and if on or before

the redemption date specified in such notice all funds

necessary for such redemption shall have been set aside by

the Company, separate and apart from its other funds, in

trust for the account of the holders of the shares of

[p]referred [s]tock to be redeemed, so as to be and continue

4 The corporation was initially named Pharmaceutical Specialties Corporation,

but in 1985 its name was changed to Berwind Pharmaceutical Services, Inc.

12

[*12] to be available therefor, then, notwithstanding that any

certificate for shares of [p]referred [s]tock so called for

redemption shall not have been surrendered for

cancellation, from and after the date fixed for such

redemption, the shares represented thereby shall no longer

be deemed outstanding, the right to receive dividends

thereon shall cease to accrue and all rights with respect to

such shares so called for redemption shall forthwith on

such redemption date cease and terminate, except only the

right of the holders thereof to receive, out of the funds so

set aside in trust, the amount payable upon the redemption

thereof, without interest.

BPSI’s articles of incorporation also contained the following

provision requiring consent of the majority of the preferred stockholders

to a merger:

So long as any shares of the [p]referred [s]tock are

outstanding:

....

(B) the [c]ompany [i.e., BPSI] shall not,

without the consent (given by vote at a meeting called for

that purpose) of the holders of at least a majority of the

total number of shares of the [p]referred [s]tock . . . then

outstanding, merge . . . with any other corporation unless:

(a)(i) the agreement of merger . . . shall

provide that all authorized shares and all outstanding

shares of the [p]referred [s]tock shall continue,

respectively, to be authorized and outstanding after such

merger . . . and (ii) the corporation resulting from such

merger . . . would not have after such merger . . . any

authorized class of shares ranking prior to or on a parity

with the [p]referred [s]tock as to either assets or dividends,

except the same number of shares of the same par value (or

shares having the same aggregate par value, or an

aggregate stated value equal to the aggregate of the par

value) with the same rights and preferences as the

authorized shares of the [c]ompany immediately preceding

such merger . . . ; or

13

[*13] (b)(i) the agreement of merger . . . shall

provide for the conversion of all shares of the [p]referred

[s]tock into an equal number of shares of a class of capital

stock (hereinafter called the “[c]onversion [s]tock”) of the

resulting corporation of the same par value (or shares

having the same aggregate par value, or an aggregate

stated value equal to the aggregate of the par value) and

having comparable rights and preferences (allowing for

differences of form and minor substance) as the shares of

the . . . resulting corporation would not have after such

merger . . . any authorized class of shares prior to or on a

parity with the [c]onversion [s]tock as to either assets or

dividends, except the same number of shares of the same

par value (or shares having the same aggregate par value,

or an aggregate stated value equal to the aggregate of the

par value) with the same rights and preferences as the

authorized shares of the [c]ompany immediately preceding

such merger . . . .

In 1983, Berwind Corporation sold the common stock of Colorcon,

Inc., to BPSI. In exchange for the Colorcon, Inc. stock, BPSI transferred

to Berwind Corporation 120,000 shares of BPSI preferred stock and a

note. The corporate structure thus became:

14

[*14] Figure 2

Corporate structure after interposition of BPSI between Berwind Corporation and

Colorcon, Inc., in 1983

Graham Berwind Trust

and Graham Children David Berwind Trust

Trusts

common common

Berwind

33,440 common Corporation 6,500 common

(83.6%) (16.4%)

120,000

preferred

plus note

BPSI

100 % common

Colorcon, Inc.

15

[*15] 5. In 1985, Berwind Corporation redeemed the remaining shares

owned by the David Berwind Trust.

In 1985, Berwind Corporation redeemed the remaining 21,132

shares of its common stock owned by the David Berwind Trust. This did

not affect the ownership of BPSI stock. 5 The corporate structure thus

was:

5 Immediately before this redemption, the David Berwind Trust owned 21,132

shares. The Graham Berwind Trust and the Graham Children Trusts owned 109,078

shares.

16

[*16] Figure 3

Corporate structure after Berwind Corporation's redemption of the David Berwind

Trust's shares in 1985

Graham Berwind Trust

and Graham Children David Berwind Trust

Trusts

100% common

33,440 common 6,500 common

(83.6%) (16.4%)

Berwind

Corporation

120,000

preferred

plus note

BPSI

100% common

Colorcon, Inc.

17

[*17] 6. BPSI changed its articles of incorporation to authorize

preference stock and preferential stock.

On October 31, 1989, BPSI amended its articles of incorporation

to authorize 3,480,000 shares of preference stock with a $1.00 par value

and 600,000 shares of preferential stock with a $1.00 par value. 6

7. The Graham Berwind Trust and the Graham Children Trusts

consolidated their shares of Berwind Corporation and the common

stock of BPSI; BPSI’s articles of incorporation were corrected to add

terms regarding its preference and preferential stock.

In 1990, the Graham Berwind Trust and the Graham Children

Trusts contributed their BPSI common stock to Berwind Group

Partners, a general partnership that was owned by these trusts. The

Graham Berwind Trust held a 47.528% interest in the partnership; each

of the four Graham Children Trusts held a 13.118% interest. Following

the contributions, Berwind Group Partners owned 83.6% of BPSI’s

common stock.

The Graham Berwind Trust and the Graham Children Trusts

also transferred their shares in Berwind Corporation to Berwind Group

Partners. The date of this transfer is not clear from the record. For

purposes of discussion, we assume the transfer took place in 1990. After

the transfer, the corporate structure thus was:

6 The record does not contain information about who owned these shares

during the period from October 31, 1989, to December 14, 1999. By December 14, 1999,

all shares of BPSI preference stock would be owned by Berwind Corporation. By

December 14, 1999, the shares of BPSI preferential stock would be owned by the David

Berwind Trust (13.12%), Graham Berwind (2%), Berwind Group Partners (66.88%),

and Berwind Corporation (18%).

18

[*18] Figure 4

Corporate structure after interposition of Berwind Group Partners

Graham Berwind Graham Children

Trust Trusts

47.528% 52.472%

David Berwind

Trust

Berwind Group

Berwind Group

Partners

Partners

100% common 16.4% common

Berwind

Corporation

83.6% common

120,000

preferred

plus note

BPSI

100% common

Colorcon, Inc.

19

[*19] In 1993, Graham Berwind, on behalf of Berwind Group Partners,

offered to buy the David Berwind Trust’s stock in BPSI for $29 million.

The David Berwind Trust did not accept the offer.

In 1994, three of David Berwind’s children—Michael Berwind,

Linda Berwind Shappy, and Gail Berwind Warden—were approved as

additional trustees of the David Berwind Trust. This brought the total

number of trustees of that trust to six. The trustees at this point were:

Trustees of the David Berwind Trust

David Berwind

Graham Berwind

Tom Morris, Jr., attorney

Michael Berwind

Linda Berwind Shappy

Gail Berwind Warden

In 1996, Berwind Group Partners formed ZYAC Holding

Corporation (ZYAC Holding) to acquire from a third party all the

outstanding shares of Zymark Corporation (Zymark), a company which

performed pharmaceutical testing. To finance ZYAC Holding’s purchase

of Zymark stock, BPSI loaned $20 million to ZYAC Holding in exchange

for a note that bore interest at the prime rate. Sometime in 1996, ZYAC

Holding succeeded in acquiring a 100% interest in Zymark from the

third party. In September 1996, in connection with ZYAC Holding’s

acquisition of Zymark, BPSI acquired 1,000 shares of ZYAC Holding

Series A 8.75% noncumulative preferred stock for $10 million. 7 BPSI

never acquired any of the ZYAC Holding common stock. At all times,

the common stock of ZYAC Holding was owned by Berwind Group

Partners. Zymark continued as an operating business after its

acquisition by ZYAC Holding. The corporate structure at this point was

as follows:

7 The record does not reveal if BPSI acquired the preferred stock from ZYAC

Holding or from Zymark.

20

[*20] Figure 5

Corporate structure after creation of ZYAC Holding and its purchase of Zymark in

1996

Graham Graham

Berwind Children

Trust Trusts

47.528% 52.472%

David Berwind

Trust

Berwind Group

Partners

100% common 83.6% common 100% common 16.4% common

Berwind

Corporation

100%

preferred

plus note

• 1,000 Series A BPSI

8.75% noncumulative

preferred (bought for

$10 million)

• $20 million note

100% common

ZYAC Holding

Colorcon, Inc.

100% interest

Zymark

21

[*21] In the summer of 1997, Graham Berwind, on behalf of Berwind

Group Partners, offered $53.5 million for the David Berwind Trust’s

shares of BPSI. The David Berwind Trust made a counterproposal to

sell its shares at a significantly higher price, but Berwind Group

Partners did not respond favorably to this proposal.

On June 26, 1997, Graham Berwind signed a document entitled

“Designation of Successor Trustee” stating: “I hereby designate . . .

Bruce J. McKenney . . . to succeed me as trustee [of the David Berwind

Trust].” On the same day, Graham Berwind and McKenney signed a

document in which Graham Berwind stated that he “resigns as a

trustee” of the David Berwind Trust “effective only upon acceptance of

trusteeship by the successor trustee previously designated” and

McKenney stated that he “hereby accepts appointment as a successor

trustee” of the David Berwind Trust. On the same day, McKenney

signed another document, entitled “Designation of Successor Trustee,”

stating: “I hereby designate . . . [Graham Berwind] to succeed me as

trustee” of the David Berwind Trust.

On October 28, 1997, the semiannual meeting of the trustees of

the David Berwind Trust was held in Philadelphia. The meeting

minutes stated that “[d]uring the summer, a decision was made to move

the administration of the trust” from (a) Berwind Corporation in

Philadelphia to (b) Boston. The meeting minutes stated: “As part of this,

[Graham Berwind] resigned as trustee . . . .” The minutes stated that

Russell Shappy and Gail Berwind Warden would take over the

accounting function and handle it in Massachusetts.

On December 30, 1997, McKenney signed a document entitled

“Resignation as Trustee” stating that he “resigns as a trustee” of the

David Berwind Trust “effective immediately.”

On December 2, 1998, Michael Berwind sent a memorandum to

David Berwind, Linda Berwind Shappy, and Gail Berwind Warden. The

memorandum, entitled “BPSI Valuation”, stated that “Berwind”

(probably meaning Berwind Corporation or Berwind Group Partners)

had made various offers to buy the BPSI stock owned by the David

Berwind Trust. The memorandum explained that the David Berwind

Trust was in the process of supplying data to Merrill Lynch to “obtain

an independent valuation” (of the BPSI stock). The memorandum also

explained that “our stated objective” is “to gain liquidity by selling our

shares in BPSI at a price on the lower end of fair.”

22

[*22] On July 27, 1999, Merrill Lynch prepared a report to the David

Berwind Trust stating that the value of the trust’s 16.4% interest in

BPSI was in the range of $68.2 to $93.3 million.

On August 11, 1999, Edward Kosnik, the President and Chief

Operating Officer of Berwind Corporation and a member of BPSI’s board

of directors, sent a letter to the David Berwind Trust. The letter stated

that over the last few years BPSI had been negotiating with the David

Berwind Trust for BPSI to redeem the trust’s shares in BPSI. The letter

stated that the redemption would be in the interests of the trust by

allowing it to “diversify its holdings and liquefy a deep minority equity

investment.” The letter further stated:

We very much would like to negotiate a mutually

satisfactory purchase/sale, but we are prepared to start a

process that will result in our ownership of 100% of BPSI

at a price to be determined by us and our financial advisors.

This will be a costly, time-consuming and legalistic process

that we would prefer to avoid, but one that we are prepared

to undertake, if necessary. . . . [I]f we don’t hear from you

by September 7, 1999, we will start down our path with the

intention of completing a transaction by year end.

On August 30, 1999, as part of its internal discussions of the value

of the David Berwind Trust’s interest in BPSI stock, BPSI sent to its

counsel, Howard Meyers of Morgan Lewis & Bockius, three possible

valuations of the interest. These valuations were:

Source of valuation Valuation method Value

1999 budget 15 times net income from $78,767,000

operations

1998 actual 15 times net income from $66,504,000

operations

1997 March forecast 20 times net income from $51,534,000

operations minus 25%

minority discount

The parties in the present case do not take a position on how

exactly these valuations take into account (1) the value of BPSI’s

preferred stock interest in ZYAC Holding, (2) the value of the note issued

by ZYAC Holding to BPSI, or (3) the earnings of Zymark.

23

[*23] By October 27, 1999, the David Berwind Trust had retained

Justin Klein of the Ballard Spahr law firm to represent it with respect

to the acquisition by BPSI of the trust’s shares of BPSI.

On October 27, 1999, Michael Berwind wrote a memorandum to

Klein, Russell Shappy, and Pawson stating that for the “David Berwind

Family” the “current minimum acceptable base value” of “BPSI” was

$135 million before any “[a]djustment[ ]” for “Zyac Holding Company.”

The $135 million amount was purportedly based on a “[m]ultiple of

earnings” of “27.5.”

On November 5, 1999, BPSI filed with the Pennsylvania

Department of State a statement of correction to its articles of

incorporation. The statement of correction added provisions governing

the redemption of preference stock. The added provisions were similar

to the provisions governing the redemption of preferred stock in the

articles of incorporation of BPSI, quoted in FINDINGS OF FACT, Part

4, supra. The provisions in the statement of correction were:

The Company [BPSI], by action of its Board of Directors,

subject to the terms and conditions upon which shares of

any particular series are subject to redemption, may

redeem the whole or any part of . . . the [p]reference [s]tock,

at any time or from time to time, by paying in cash the

redemption price for the shares . . . fixed therefor as herein

provided, together with accrued but unpaid dividends to

the date fixed for such redemption. Notice of every such

redemption shall be given at least thirty (30) days and not

more than ninety (90) days prior to the date fixed for such

redemption by hand delivery or first class mail, to the

holders of record of the shares of the [p]reference [s]tock so

to be redeemed, at their respective addresses as the same

shall appear on the books of the Company . . . The Board of

Directors shall have full power and authority, subject to

the limitations and provisions herein contained, to

prescribe the manner in which and the terms and

conditions upon which the shares of the [p]reference [s]tock

shall be redeemed from time to time. If such notice of

redemption shall have been duly given and if on or before

the redemption date specified in such notice all funds

necessary for such redemption shall have been set aside by

the Company, separate and apart from its other funds, in

trust for the account of the holders of the shares of

24

[*24] [p]reference [s]tock to be redeemed, so as to be and

continue to be available therefor, then, notwithstanding

that any certificate for shares of [p]reference [s]tock so

called for redemption shall not have been surrendered for

cancellation, from and after the date fixed for such

redemption, the shares represented thereby shall no longer

be deemed outstanding, the right to receive dividends

thereon shall cease to accrue and all rights with respect to

such shares so called for redemption shall forthwith on

such redemption date cease and terminate, except only the

right of the holders thereof to receive, out of the funds so

set aside in trust, the amount payable upon the redemption

thereof, without interest.

On November 5, 1999, BPSI filed with the Pennsylvania

Department of State a statement of correction to its articles of

incorporation. The statement of correction added provisions governing

the redemption of preferential stock. The added provisions were similar

to the provisions governing the redemption of preferred stock in the

articles of incorporation of BPSI quoted in FINDINGS OF FACT, Part 4,

supra. The provisions in the statement of correction were:

The Company [BPSI], by action of its Board of Directors,

subject to the terms and conditions upon which shares of

any particular series are subject to redemption, may

redeem the whole or any part of . . . the [p]referential

[s]tock, at any time or from time to time, by paying in cash

the redemption price for the shares . . . fixed therefor as

herein provided, together with accrued but unpaid

dividends to the date fixed for such redemption. Notice of

every such redemption shall be given at least thirty (30)

days and not more than ninety (90) days prior to the date

fixed for such redemption by hand delivery or first class

mail, to the holders of record of the shares of the

[p]referential [s]tock so to be redeemed, at their respective

addresses as the same shall appear on the books of the

Company . . . The Board of Directors shall have full power

and authority, subject to the limitations and provisions

herein contained, to prescribe the manner in which and the

terms and conditions upon which the shares of the

[p]referential [s]tock shall be redeemed from time to time.

If such notice of redemption shall have been duly given and

if on or before the redemption date specified in such notice

25

[*25] all funds necessary for such redemption shall have been set

aside by the Company, separate and apart from its other

funds, in trust for the account of the holders of the shares

of [p]referential [s]tock to be redeemed, so as to be and

continue to be available therefor, then, notwithstanding

that any certificate for shares of [p]referential [s]tock so

called for redemption shall not have been surrendered for

cancellation, from and after the date fixed for such

redemption, the shares represented thereby shall no longer

be deemed outstanding, the right to receive dividends

thereon shall cease to accrue and all rights with respect to

such shares so called for redemption shall forthwith on

such redemption date cease and terminate, except only the

right of the holders thereof to receive, out of the funds so

set aside in trust, the amount payable upon the redemption

thereof, without interest.

On November 18, 1999, Klein (counsel to the David Berwind

Trust) sent a letter to Meyers (counsel to BPSI) transmitting proposed

confidentiality agreements under which the David Berwind Trust’s

advisors would be prohibited from disclosing financial information about

BPSI. The purpose of the confidentiality agreements was to facilitate

the disclosure of BPSI financial information to the David Berwind

Trust’s advisors so the trust could negotiate the sale of its shares of

BPSI. Klein’s letter enclosed a “draft time table for this transaction.”

Klein’s letter stated that the draft timetable was based on a November

15, 1999 telephone conversation between Klein and Meyers. 8 The letter

stated: “We would also reiterate our request that you agree that BPSI

will not take action to consummate a merger prior to January 31, 2000

and to notify our clients at least ten days in advance of such merger. We

would, of course agree that during the time prior to such notice, our

clients would not initiate any legal process.” The letter stated that

enclosed with the letter was “an agreement embodying these terms.”

However, the record does not contain a copy of the agreement. Nor does

the record contain a copy of the proposed confidentiality agreements or

the draft timetable.

On November 19, 1999, Meyers responded to Klein’s letter.

Meyers enclosed “a letter agreement that I have been authorized to

execute on behalf of Berwind Group Partners and Berwind

8 Besides the November 18, 1999 letter from Klein, there is little in the record

about the November 15, 1999 telephone conversation.

26

[*26] Pharmaceutical Services, Inc.” Meyers stated that the proposed

confidentiality agreements that Klein had enclosed with his letter were

unacceptable but asked Klein to call him promptly to discuss the “proper

form” of the confidentiality agreements. The proposed agreement

attached to Meyers’ letter provided that BPSI would not take any action

to institute a merger until January 31, 2000. The proposed agreement

would bar the David Berwind Trust from instituting any legal

proceeding prior to January 31, 2000. The proposed agreement stated

that Berwind Group Partners and BPSI desired to work with the David

Berwind Trust to strike a “mutually acceptable agreement for the

acquisition of the [BPSI] stock owned by the Trust.” The proposed

agreement contained a time schedule for negotiating the acquisition

agreement. Under the time schedule, a final agreement would be

executed on or before January 31, 2000. The proposed agreement

contained a signature line that permitted Klein to accept it on behalf of

the David Berwind Trust. The proposed agreement was never executed.

8. Under Pennsylvania law regarding short-form mergers, a parent

corporation may merge with its 80%-owned subsidiary without a vote

by the subsidiary’s other shareholders; however, these shareholders

have the right to demand the fair market value of their shares.

The David Berwind Trust correctly anticipated that BPSI would

attempt to eliminate its BPSI shares through a short-form merger.

The mechanics of a short-form merger under Pennsylvania law,

and the remedies available to a dissenting shareholder, are discussed

below.

The provisions governing a short-form merger are in the

Pennsylvania Business Corporation Law of 1988. Hereafter we refer to

the Pennsylvania Business Corporation Law of 1988 as the BCL. The

BCL consists of §§ 1101 to 4162 of title 15 of Pennsylvania’s

Consolidated Statutes. 15 Pa. Cons. Stat. § 1101 (West 1995). When we

cite to a provision of the BCL we give the particular section of title 15 of

Pennsylvania’s Consolidated Statutes to which the provision

corresponds. The provisions of the BCL to which we refer are in the

version of the BCL enacted by the General Association Act of 1988, 1988

Pa. Laws 1444, as amended by the GAA Amendments Act of 1990, 1990

Pa. Laws 834, and as amended by the GAA Amendments Act of 1992,

1992 Pa. Laws 1333, but before any amendments by the GAA

Amendments Act of 2001, 2001 Pa. Laws 418, and before subsequent

amendments. One notable set of subsequent amendments was made by

27

[*27] the Association of Transactions Act, 2014 Pa. Laws 2640. The act

repealed, reorganized, and modified the provisions in BCL §§ 1921–1966

and codified them in the BCL with new section numbers. See BCL

§ 1101(a). BCL § 1921(a) provides that two corporations may, “in the

manner provided” in subchapter C of the BCL (i.e., §§ 1921 to 1932 of

the BCL), be merged into one of the corporations, which is referred to as

the “surviving corporation”. BCL § 1921(a). The provisions in

subchapter C of the BCL set forth five steps for effecting a merger

between two corporations:

BCL § 1922(a) A plan of merger must be prepared.

BCL § 1922(c) The plan of merger must be approved by each

corporation’s board of directors and submitted

to the shareholders of each corporation for a

shareholder vote.

BCL § 1924 The plan of merger must be adopted by the

shareholders of each corporation by a

majority vote.

BCL § 1926 Articles of merger must be executed by each

corporation.

BCL § 1927 The articles of merger must be filed.

We now discuss these steps in detail.

BCL § 1922(a) requires that “[a] plan of merger . . . shall be

prepared” (in the event of a merger). The plan of merger must set forth

the terms and conditions of the merger. BCL § 1922(a)(1). The plan of

the merger also must set forth the changes, if any, that would be made

in the articles of incorporation of the surviving corporation. BCL

§ 1922(a)(2)(i). The plan of the merger also must set forth

[t]he manner and basis of converting the shares of each

corporation into shares or other securities or obligations of

the surviving . . . corporation, as the case may be, and, if

any of the shares of any of the corporations that are parties

to the merger . . . are not to be converted solely into shares

or other securities or obligations of the surviving . . .

corporation, the shares or other securities or obligations of

any other person or cash, property or rights that the

28

[*28] holders of such shares are to receive in exchange for, or

upon conversion of, such shares . . . .

BCL § 1922(a)(3).

BCL § 1922(c) provides that “[e]very merger . . . shall be proposed

in the case of each . . . corporation by the adoption by the board of

directors of a resolution approving the plan of merger.” The same

subsection further provides that “the board of directors shall direct that

the plan [of merger] be submitted to a vote of the shareholders entitled

to vote” unless approval of the shareholders is unnecessary under

subchapter C of the BCL (i.e., §§ 1921 to 1932 of the BCL).

BCL § 1924(a) and (b) requires a plan of merger be adopted by

each merging corporation and specifies how the plan of merger is

adopted:

(a) General rule.—The plan of merger . . . shall be

adopted upon receiving . . . a majority of the votes cast by

all shareholders entitled to vote thereon of each . . .

corporation[] that is a party to the merger . . . and, if any

class or series of shares is entitled to vote thereon as a class

. . . a majority of the votes cast in each class vote . . . . A

proposed plan of merger . . . shall not be deemed to have

been adopted by the corporation unless it has also been

approved by the board of directors, regardless of the fact

that the board has directed or suffered the submission of

the plan to the shareholders for action.

(b) Adoption by board of directors.—

(1) Unless otherwise required by its bylaws, a

plan of merger . . . shall not require the approval of the

shareholders of a . . . corporation if:

....

(ii) immediately prior to the adoption of

the plan and at all times thereafter prior to its

effective date, another corporation that is a party to

the merger . . . owns directly or indirectly 80% or

more of the outstanding shares of each class of the

corporation; or . . .

....

(3) If a merger . . . of a subsidiary corporation

with a parent corporation is effected pursuant to

paragraph (1)(ii), the plan of merger . . . shall be deemed

adopted by the subsidiary corporation when it has been

29

[*29] adopted by the board of the parent corporation and

execution of articles of merger . . . by the subsidiary

corporation shall not be necessary.

The exception found in BCL § 1924(b)(1)(ii) applies if the parent

corporation owns 80% of each class of shares of the subsidiary. When

BCL § 1924(b)(1)(ii) was originally enacted by the General Association

Act of 1988, Act No. 1988-177, the relevant percentage was 90%. 1988

Pa. Laws 1444, at 1566. The percentage was changed to 80% by the

GAA Amendments Act of 1992, 1992 Pa. Laws 1333, at 1343, 1372,

effective 60 days after December 18, 1992. It is this percentage

threshold that governs the short-form merger by BPSI.

The effect of BCL § 1924(b)(1)(ii) is that for a parent to merge with

its 80%-owned subsidiary, there is no requirement that the merger be

approved by the shareholders of the subsidiary absent such a

requirement in the subsidiary’s bylaws. Furthermore, BCL

§ 1924(b)(1)(ii) and (iii) has been interpreted by some commentators to

mean that such a merger need not be approved by (1) the board of

directors of the subsidiary or (2) the shareholders of the parent. Rafael

A. Porrata-Dorias, Jr., The Proposed Pennsylvania Business

Corporation Law: A Horse Designed By Committee, 59 Temple L.Q. 437,

449 (1986) (“Finally, the New BCL provides that a parent corporation

that owns ninety percent or more of the stock of a subsidiary, directly or

indirectly, may merge with the subsidiary without the approval either

of the shareholders of the parent corporation, or of the board of directors

or shareholders of the subsidiary. [fn: New BCL Section

1924(b)(1)(ii).]”); Vincent F. Garrity, Jr. & Sandra A. Ballard, What the

General Practitioner Should Know About Pennsylvania’s New Business

Corporation Law, 61 Pa. Bar Ass’n Q. 23, 24 (Jan. 1990) (“SHORT

FORM MERGERS. The 1988 BCL authorizes a parent corporation’s

board to effect a merger with a 90%-owned subsidiary without obtaining

the approval of the subsidiary’s board or the parent’s shareholders,

similar to current Delaware law (§ 1924(b)).”) 9 Cautious practitioners

9 The parties have stipulated that under a short-form merger a “shareholder

vote” is not required, but it is unclear whether the stipulation is referring to a vote of

the shareholders of the subsidiary or a vote of the shareholders of both the parent and

the subsidiary. Here is the text of the stipulation:

The BCL provided that, generally, a corporate merger was to be

adopted by the affirmative vote of a majority of the shareholders

entitled to such a vote. See BCL section 1924(a). However, the BCL

also provided a procedure often referred to as a “short-form-merger,”

30

[*30] might have advised their clients to secure both types of approvals

anyway. 10

A merger governed by BCL § 1924(b)(1)(ii) is referred to as a

“short-form merger.” Warden v. McLelland, 288 F.3d 105, 116 (3d Cir.

2002).

BCL § 1926 provides that “[u]pon the adoption of the plan of

merger . . . by the corporations desiring to merge”, each corporation must

execute articles of merger except as provided in BCL § 1924(b)(3). The

articles of merger must set forth (1) the plan of merger, (2) the effective

date of the plan of merger (if the plan of merger is to be effective on a

specified date), and (3) certain other information. Id.

BCL § 1928 provides that “[u]pon the filing of the articles of

merger . . . in the Department of State or upon the effective date

specified in the plan of merger . . ., whichever is later, the merger . . .

shall be effective.”

BCL § 1929 provides that “[u]pon the merger . . . becoming

effective”, the two corporations that are parties to the merger will be a

single corporation that is the corporation designated in the plan of

merger as the surviving corporation and the existence of the other

corporation shall cease.

Figure 6 illustrates the steps necessary to effectuate a merger of

corporations A and B when neither corporation owns 80% of the shares

of the other.

by which the board of directors of a parent corporation owning 80

percent or more of the outstanding shares of each class of stock of a

corporation (the “merging corporation”) could adopt a plan of merger

and potentially eliminate a minority shareholders’ interest in the

merging corporation without a shareholder vote. See BCL section

1924(b).

10 In 2001, BCL § 1924(b)(3) was amended to expressly provide that if a merger

is effected pursuant to BCL § 1924(b)(1)(ii), “approval of the plan by the board of

directors of the subsidiary corporation . . . shall not be necessary.” GAA Amendments

Act of 2001, P.L. 418, No. 34, § 3. The amendment was effective 60 days after June 22,

2001.

31

[*31] Figure 6

Steps required for merger of corporations A and B

Plan of merger prepared

(BCL § 1922)

Board A approves plan of Board B approves plan of

merger (BCL § 1922(c)) merger (BCL § 1922(c))

Board A submits plan of Board B submits plan of

merger to shareholders for merger to shareholders for

vote (BCL § 1922(c)) vote (BCL § 1922(c))

Shareholders of A approve Shareholders of B approve

plan of merger by vote plan of merger by vote

(BCL § 1924(a)) (BCL § 1924(a))

Plan of merger considered Plan of merger considered

adopted by A adopted by B

(BCL § 1924(a)) (BCL § 1924(a))

Articles of merger executed Articles of merger executed

by A (BCL § 1926) by B (BCL § 1926)

Articles of merger filed with Secretary

of State (BCL § 1927)

Merger is effective on date specified in

plan of merger

(BCL § 1928)

32

[*32] When A owns 80% of the shares of B, a merger of the two

corporations is a short-form merger governed by BCL § 1924(b)(1)(ii).

Figure 7 illustrates the steps necessary to effectuate a merger of A and

B when A owns 80% of the shares of B.

33

[*33] Figure 7

Steps required for merger of corporations A and B (where A owns ≥ 80% of B)

Plan of merger prepared

(BCL § 1922)

Board A approves plan of Board B approves plan of

merger (BCL § 1922(c)) merger (BCL § 1922(c))

Board A submits plan of Submission to B’s shareholders

merger to shareholders for not required unless required by

vote (BCL § 1922(c)) bylaws (BCL § 1922(c))

Shareholders of A approve Approval by B’s shareholders

plan of merger by vote not required unless required by

(BCL § 1924(a)) bylaws

(BCL § 1924(b)(1)(ii))

Plan of merger considered Plan of merger considered

adopted by A adopted by B (BCL §1924(a))

(BCL § 1924(a))

Articles of merger executed Execution of articles of merger

by A (BCL § 1926) by B not required

(BCL § 1924(b)(3))

Articles of merger filed with

Secretary of State (BCL § 1927)

Merger is effective on date specified

in plan of merger

(BCL § 1928)

34

[*34] Figure 7 assumes that the plan of merger must be approved by the

board of directors of B and by the shareholders of A. However, as

discussed earlier, some commentators believe that approvals by the

board of directors of the subsidiary and by the shareholders of the parent

are unnecessary. Because both such approvals were made of the merger

at issue in the present case, we need not decide if they were necessary.

On a parallel track with the procedures for merging two

corporations discussed so far, there are provisions for dissenters rights

set forth in BCL §§ 1571 through 1580.

BCL § 1571(a) provides that “any shareholder of a . . . corporation

shall have the right to dissent from, and to obtain payment of the fair

value of his shares in the event of, any corporate action, or to otherwise

obtain fair value for his shares, where this part [BCL §§ 1101–4162]

expressly provides that a shareholder shall have the rights and remedies

provided in this subchapter [BCL §§ 1571–1580].” One of the provisions

of “this part” (BCL §§ 1101–4162) is BCL § 1930(a).

BCL § 1930(a) provides that “[i]f any shareholder of a . . .

corporation that is to be a party to a merger . . . objects to the plan of

merger . . . and complies with the provisions of Subchapter D of Chapter

15 [§§ 1571–1580 of the BCL] (relating to dissenters rights), the

shareholder shall be entitled to the rights and remedies of dissenting

shareholders therein provided, if any.” See also BCL § 1571(a) (second

sentence) (giving 13 examples from “this part” (15 Pa. Stat. and Cons.

Stat. Ann. §§ 501–7701 (West 1995 & 2012 Cum. Ann. Pocket Pt.)) of

provisions granting a shareholder the rights and remedies provided in

subchapter D of chapter 15 of the BCL (BCL §§ 1571–1580); one of the

13 examples is BCL § 1930). Therefore, a shareholder of a corporation

that merges with another corporation has the rights and remedies set

forth in §§ 1571–1580 of the BCL. BCL §§ 1571–1580, which we

summarize in relevant part here, employ the term “dissenter” to mean

a “shareholder . . . who is entitled to and does assert dissenters rights

under this subchapter [BCL §§ 1571–1580] and who has performed

every act required up to the time involved for the assertion of those

rights.”

BCL § 1574 provides that if the proposed corporate action of the

type that must be approved by a vote at a shareholder meeting (such as

a long-form merger), the shareholder wishing to receive payment for

shares must (1) before the vote, file with the corporation a written notice

of intention to demand payment of the fair value of shares if the

35

[*35] proposed action is effectuated and (2) refrain from voting in favor

of the proposed corporate action. The corporation must send a notice to

demand payment to all shareholders who filed the notice of intention to

demand payment and who refrained from voting in favor of the proposed

corporation action. BCL § 1575(a). BCL § 1575(a) provides that if the

proposed corporate action is to be taken without a vote of the

shareholders (such as a plan of merger governed by the short-form-

merger provision of BCL § 1924(b)(1)(ii) as to the subsidiary’s

shareholders), the corporation must send the notice to demand payment

(which must be accompanied by a notice that the corporation action was

adopted) to “all shareholders who are entitled to dissent and demand

payment of the fair market value of their shares.”

For both types of proposed actions (i.e., those that require a vote

of the shareholders and those that don’t) the notice to demand payment

must “[s]tate where and when a demand for payment must be sent and

certificates for certificated shares must be deposited in order to obtain

payment.” BCL § 1575(a). The deadline for demanding payment and

depositing shares set forth in the notice to demand payment must be 30

days or more after the mailing date of the notice to demand payment.

BCL § 1575(b). BCL § 1576(a) provides that a “shareholder who fails to

timely demand payment, or fails . . . to timely deposit certificates, as

required by a notice pursuant to section 1575 (relating to notice to

demand payment) shall not have any right under this subchapter [BCL

§§ 1571–1580] to receive payment of the fair value of his shares.” 11

BCL § 1577(c) provides that “[p]romptly after effectuation of the

proposed corporate action [such as a merger, see BCL § 1571(a), 1930(a)]

or upon timely receipt of demand for payment if the corporate action has

already been effectuated, the corporation shall either remit to dissenters

who have made demand and . . . have deposited their [share] certificates

the amount that the corporation estimates to be the fair value of the

shares, or give written notice that no remittance under this section will

be made.” 12 Under BCL § 1577(c)(1), (2), and (3), respectively, the

remittance, or the notice of no remittance, as the case may be, must be

accompanied by (1) the corporation’s latest financial statements, (2) a

11 Such a shareholder “shall retain all other rights of a shareholder until those

rights are modified by effectuation of the proposed corporate action.” BCL § 1576(c).

12 BCL § 1577(a) provides that if the corporation fails to effectuate the

“proposed corporate action” (such as a merger) within 60 days from the deadline for

demanding payment and depositing shares, then it must return the deposited shares

to the dissenting shareholder.

36

[*36] statement of the corporation’s estimate of the value of the

shares, 13 and (3) a notice of the right of the dissenter to demand

supplemental payment. Additionally, if the corporation notifies the

dissenting shareholders that it will not make a remittance, it (1) must

return the deposited shares and (2) “may make a notation” on the share

certificate that the shareholder had demanded payment. BCL § 1577(d).

BCL § 1578(a) provides that if the corporation remits payment of its

estimate of the value of the dissenter’s shares, or if the corporation

notifies the dissenting shareholder it will not remit payment and states

its estimate of the value of the shares, and the dissenting shareholder

believes the amount estimated or remitted is less than the value of the

shares, the dissenting shareholder may send to the corporation his or

her own estimate of the value of the shares, “which shall be deemed a

demand for payment of the amount or the deficiency.” If the dissenting

shareholder does not send the corporation such a dissenters estimate,

he or she is entitled only to the corporation’s remittance or estimate of

value. BCL § 1578(b). 14 BCL § 1579(a) provides that, within 60 days of

the later of (1) effectuation of the proposed corporate action, (2) timely

receipt of any demands for payment, or (3) the timely receipt of any

dissenter’s estimates pursuant to BCL § 1578(a), if the demand for

payment remained unsettled, the corporation may file an application for

relief in the Pennsylvania Court of Common Pleas requesting “in the

name of the corporation” that the fair value of the shares be determined

by the court. In such an appraisal proceeding, the Pennsylvania Court

of Common Pleas may appoint an appraiser to take evidence and to

13 When, under BCL § 1577(c), the corporation remits payment to the

shareholders, the amount of that remittance is to be equal to the corporation’s estimate

of the fair value of the shares. Thus, in those instances in which the corporation

chooses to remit to dissenters the amount the corporation estimates to be the fair value

of the shares, BCL § 1577(c)(2) somewhat redundantly requires the corporation to

include with the remittance a statement of the corporation’s estimate of the fair value

of the shares.

14 The legislative history explains the process as follows:

A dissenter to whom the corporation has made payment (or who has

been offered payment) must make his supplemental demand within 30

days after receipt of the payment (or offer of payment) in order to

permit the corporation to make an early decision on initiating

appraisal proceedings. If he fails to do so, he loses the right to demand

additional payment.

Amended Committee Comment—1990, as printed in 15 Pa. Cons. Stat. Ann. § 1578

(1995).

37

[*37] recommend a value. BCL § 1579(c). The dissenting shareholder 15

is entitled to “recover the amount by which the fair value of his shares

is found to exceed the amount, if any, previously remitted, plus interest.”

BCL § 1579(d). For this purpose, “interest” is defined in BCL § 1572 as

follows:

Interest from the effective date of the corporate action until

the date of payment at such rate as is fair and equitable

under all the circumstances, taking into account all

relevant factors, including the average rate currently paid

by the corporation on its principal bank loans.

If the corporation fails to file an application for relief within the 60-day

period specified by BCL § 1579(a), any dissenting shareholder who had

made an as-yet-unsettled demand for payment for shares may file an

application for relief on behalf of the corporation within 30 days after

the expiration of the 60-day period. BCL § 1579(e). BCL § 1579(e)

provides: “If a dissenter does not file an application within the 30-day

period, each dissenter entitled to file an application shall be paid the

corporation’s estimate of the fair value of the shares and no more, and

may bring an action to recover any amount not previously remitted.”

BCL § 1105 limits the rights of a minority shareholder whose

shares are or would be eliminated by a merger. It provides:

A shareholder of a business corporation shall not have any

right to obtain, in the absence of fraud or fundamental

unfairness, an injunction against any proposed plan . . .

authorized under any provision of this subpart [BCL §§

1101–4162], nor any right to claim the right to valuation

and payment of the fair value of his shares because of the

plan . . . except that he may dissent and claim such

payment if and to the extent provided in Subchapter D of

Chapter 15 (relating to dissenters rights) [BCL §§ 1571–

1580] where this subpart [BCL §§ 1101–4162] expressly

provides that dissenting shareholders shall have the rights

and remedies provided in that subchapter. Absent fraud

or fundamental unfairness, the rights and remedies so

provided shall be exclusive. Structuring a plan or

transaction for the purpose or with the effect of eliminating

15 All dissenters whose demands had not been settled are joined to the

proceeding. BCL § 1579(b).

38

[*38] or avoiding the application of dissenters rights is not fraud

or fundamental unfairness within the meaning of this

section.

BCL § 1105 refers to a “proposed plan . . . authorized under any provision

of this subpart.” This term includes a plan of merger. This is because

the provisions of “this subpart”, i.e., BCL §§ 1101–4162, include (1) BCL

§ 1921(a), which authorizes the merger of two corporations, and (2) BCL

§ 1922, which requires a plan of merger to be prepared. Thus BCL

§ 1105 limits the rights of a minority shareholder in a merger.

The dissenters-rights procedure for a corporation that has

adopted a plan of merger without the requirement of a shareholder vote

is illustrated as follows:

39

[*39] Figure 8

Dissenters-rights procedures for shareholders of a corporation that has adopted a

plan of merger without a shareholder vote

Corporation sends shareholder

notice of adoption of plan of

merger with deadline for

depositing shares and demanding

payment (BCL § 1575(a))

Shareholder deposits Shareholder does not respond.

shares and demands Shareholder forfeits right to receive

payment for shares payment for shares (BCL § 1576(a))

(BCL § 1575(a), (b))

Corporation remits to Corporation notifies shareholder

shareholder its estimate of its share value; returns shares;

of value of shares may make notation on returned

(BCL § 1577(c)) shares (BCL § 1577(d))

Shareholder may send If shareholder does Shareholder may send If shareholder does not

higher estimate to not send higher higher estimate of send higher estimate,

corporation within 30 estimate, shareholder value to corporation shareholder entitled to

days (BCL § 1578(a)) entitled only to the within 30 days only the amount of

amount remitted (BCL § 1578(a)) corporation’s estimate

(BCL § 1578(b)) (BCL § 1578(b))

If after 60 days any shareholder’s

demand for payment remains

unsettled, the corporation may

file suit in Pennsylvania Court of

Common Pleas to determine value

of shares

(BCL § 1579(a))

40

[*40] 9. In December 1999, a short-form merger was formalized

between BPSI and its newly formed parent corporation, but

this merger was challenged by the David Berwind Trust, which

also asserted its right to receive the fair market value of its

BPSI shares.

On November 22, 1999, four trustees of the David Berwind Trust

filed a Complaint for Equitable and Legal Relief in the U.S. District

Court for the Eastern District of Pennsylvania. The four trustees were

Gail Berwind Warden, Linda Berwind Shappy, Michael Berwind, and

David Berwind. The action was captioned Gail B. Warden, et al. v. M. B.

McLelland et al., Civil Action No. 99-CV-5797 (E.D. Pa. 1999). We refer

to this action as the “Warden litigation.” 16

The action was brought on behalf of the David Berwind Trust and

derivatively on behalf of BPSI. 17 The defendants were (1) eight present

or former directors of BPSI (including Graham Berwind), 18 (2) Berwind

Corporation, (3) Berwind Group Partners, (4) Graham Berwind (in his

capacity as alleged trustee of the David Berwind Trust), and

(5) McKenney (in his capacity as alleged trustee of the David Berwind

Trust). In the complaint, the plaintiffs alleged that the resignations of

both Graham Berwind and McKenney as trustees of the David Berwind

Trust were invalid because neither Graham nor McKenney named two

or more successor trustees (as required by the David Berwind Trust deed

of trust). Based on this alleged invalidity of their resignations, the

David Berwind Trust argued Graham Berwind and McKenney were still

16 Gail Berwind Warden, the lead plaintiff, was a daughter of David Berwind

and one of the trustees of the David Berwind Trust. As discussed later, the Warden

litigation would later be consolidated with another action we will refer to as the

“appraisal proceeding”.

17 The David Berwind Trust was a shareholder in BPSI, and therefore its

trustees were entitled to bring shareholder-derivative claims on behalf of BPSI.

Counts I through V were shareholder-derivative claims. A shareholder-derivative

claim is a “corporate claim that a shareholder may assert only derivatively on behalf

of the corporation.” Deborah A. DeMott, Shareholder Deriv. Actions L. & Prac. § 2:2

(2022–2023). The claim is property of the corporation. Id. (“Claims or causes of action

that constitute property of the corporation do not belong to its shareholders

individually; nor do corporate claims become the property of the shareholder who acts

as plaintiff in a derivative action . . . [I]n virtually all instances, any judgment

recovered in the action and any settlement amount go to the corporation rather than

to the plaintiff or other individual stockholders.”) (Footnotes omitted).

18 The present or former directors of BPSI named as defendants were Michael

B. McLelland, John J. Byrne, Jr., J.S. Dulaney, James L. Hamling, Edward F. Kosnik,

Lawrence C. Karlson, Robert M. Cohn, and Graham Berwind.

41

[*41] trustees of the David Berwind Trust at the time the merger took

place and that they breached a fiduciary duty owed to the David

Berwind Trust by attempting to have the David Berwind Trust sell its

stock to BPSI.

The complaint alleged ten different claims designated as “counts”.

Count I alleged that the defendants engaged in a pattern of

activity constituting mail and wire fraud and that this pattern was a

racketeering offense under 18 U.S.C. § 1962(c). Count I specifically

referred to seven separate communications from the defendants that

allegedly constituted mail and wire fraud. For example, Count I alleged

that the August 11, 1999 letter from Kosnik to David Berwind was

fraudulent. Count I was a shareholder-derivative claim. Count I sought

treble damages.

Count II alleged the defendants engaged in a conspiracy to

commit racketeering under 18 U.S.C. § 1962(d) as to the same conduct

alleged in Count I. Count II was a shareholder-derivative claim. Count

II sought treble damages.

Count III alleged that the BPSI board of directors usurped a

corporate opportunity of BPSI by allowing BPSI assets to purchase

equity interests in Zymark to be held by Berwind Group Partners and

Berwind Corporation. This claim was a shareholder-derivative claim for

monetary damages.

Count IV was a claim that BPSI’s board of directors violated their

fiduciary duty to BPSI through the following actions: (1) causing BPSI

to provide equity financing and loan collateral to Berwind Aviation,

which was allegedly “a holding entity for jet aircraft used substantially

by [Graham] Berwind and his family for personal travel,” (2) causing

BPSI to pay excess amounts, including management fees, to Berwind

Corporation, and (3) causing BPSI to make loans to Berwind Group

Partners and Berwind Corporation at below market interest rates. This

claim was a shareholder-derivative claim for monetary damages.

Count V was a claim that Berwind Group Partners and Berwind

Corporation aided and abetted the breach of fiduciary duty of loyalty by

the BPSI board of directors alleged in Count IV. This was a shareholder-

derivative claim for monetary damages.

Count VI was a claim for equitable relief to enjoin Berwind Group

Partners and the BPSI board of directors from taking steps to affect the

42

[*42] David Berwind Trust’s minority shareholder interest in BPSI or

the standing of the David Berwind Trust to assert the shareholder-

derivative claims in the complaint. The relief was requested to remedy

the Berwind Group Partners and BPSI board of directors’ alleged

violation of their fiduciary obligations to the David Berwind Trust as a

shareholder in BPSI. In particular, Count VI alleged that that they

refused to provide the David Berwind Trust with information concerning

BPSI’s operations and assets sufficient to form a fair valuation of the

minority interest in BPSI, and are using the squeeze-out merger to

defraud the David Berwind Trust, deprive it of the value of its BPSI

shares, and prevent it from asserting the shareholder-derivative claims

in the complaint.

Count VII was a claim for equitable relief to require Berwind

Partners and the BPSI board of directors to provide an accounting of,

and information on, the operations and management of BPSI from

January 1, 1985.

Count VIII was a claim for equitable relief to rescind the squeeze-

out merger and grant David Berwind Trust an interest in “the corporate

entity into which BPSI or its assets has been merged.” The factual

theory underlying Count VIII was that the purpose of the squeeze-out

merger was to “prevent the David Berwind Trust from seeking legal

relief for the misappropriation of corporate opportunities, the misuse of

corporate assets, and breaches of fiduciary duty and breaches of trust

alleged herein.” The claim was brought against Berwind Group

Partners and the BPSI directors. Because the squeeze-out merger had

not yet occurred when this complaint was filed, Count VIII was

premature.

Count IX was a claim invoking the David Berwind Trust’s right

to a statutory appraisal under BCL § 1571(a) to receive the value of the

Davd Berwind Trust’s interest in BPSI. Because the squeeze-out

merger had not yet occurred when this complaint was filed, Count IX

was premature.

Count X was a claim that Graham Berwind and McKenney

breached their duties as trustees of the David Berwind Trust to

administer the trust solely in the interest of the beneficiaries. Count X

alleged that the resignations of Graham Berwind and McKenney as

trustees of the trust were ineffective. Count X alleged that there were

four types of conduct by which Graham Berwind and McKenney

breached their duties as trustees: (1) “usurping corporate opportunities

43

[*43] available to BPSI for the benefit of Berwind [Group] Partners,

Berwind [Corporation], and/or affiliates thereof,” (2) “using the assets of

BPSI for the benefit of Berwind [Group] Partners, Berwind

[Corporation], and/or affiliates thereof,” (3) “approving and/or ratifying

the squeeze-out merger of the interest of the David Berwind Trust in

BPSI,” and (4) “causing the interest of the David Berwind Trust in BPSI

to be eliminated for less than fair price.” This was a claim for monetary

damages. Also, the claim requested that the income from the alleged

breaches of duty be placed in a constructive trust.

During November and December of 1999, Berwind Group

Partners and Berwind Corporation took steps that were intended to

consolidate BPSI’s ownership entirely in Berwind Group Partners

through a short-form merger under BCL § 1924(b)(1)(ii).

In November 1999, BPSI’s counsel, Morgan Lewis, & Bockius, on

behalf of BPSI, retained Duff & Phelps “to determine the current fair

value of the common stock of [BPSI].” The resulting report, dated

December 15, 1999, stated that Duff & Phelps was an “independent

financial advisor.” The Duff & Phelps’ valuation report provided an

“Equity Value Range” of “$485,000,000 – $510,000,000” for BPSI and

the report provided a “valuation opinion” of $505,000,000 for BPSI’s

common stock, of which the David Berwind Trust held 16.4% as of

November 1999.

On December 10, 1999, Morris resigned as a trustee of the David

Berwind Trust. Pawson was designated to replace him. On December

28, 1999, Pawson accepted the appointment.

As of December 14, 1999, BPSI had four types of stock

outstanding: common, preferred stock, preference stock, and

preferential stock.

As of December 14, 1999, the David Berwind Trust owned 16.4%

of BPSI’s common stock while Berwind Group Partners owned the

remaining 83.6%. Berwind Corporation owned 100% of BPSI’s

outstanding shares of preferred stock (120,000 shares) and preference

stock (3,474,936 shares). Berwind Corporation owned 108,000 shares of

preferential stock, which was 18% of that class. Berwind Group

Partners owned 401,280 shares of preferential stock, which was 66.88%

of that class. Berwind Group Partners and Berwind Corporation owned,

collectively, 84.88% of BPSI’s preferential stock. The David Berwind

44

[*44] Trust and Graham Berwind owned 13.12% (78,720 shares) and 2%

(12,000 shares) of the preferential stock, respectively.

As of December 14, 1999, the percentage ownership of BPSI’s four

classes of stock was as follows:

Common Preferred Preference Preferential

Shareholder Stock Stock Stock Stock

David Berwind

Trust 16.4% — — 13.12%

Graham Berwind — — — 2%

Berwind Group 83.6% — — 66.88%

Partners

The Berwind Corp. — 100% 100% 18%

The record does not clarify when the owners of the preference

stock and preferential stock acquired their interests in these classes of

stock.

The corporate structure at this point (December 14, 1999) was as

follows:

45

[*45] Figure 9

Corporate Structure on Dec. 14, 1999

Graham Graham Graham David Berwind

Berwind Children Berwind Trust

Trust Trusts

47.528% 52.472% 2% preferential •16.4%

common

•13.12%

preferential

Berwind Group

Partners

100% common

•83.6% common

•66.88% preferential

100%

common Berwind

Corporation

•100% preferred

•100% preference

•1,000 Series A 8.75% •18% preferential

noncumulative •note

preferred (bought for

$10 million)

•$20 million note

BPSI

100% common

ZYAC Holding Colorcon, Inc.

100% interest

Zymark

46

[*46] On December 15, 1999, Berwind Group Partners formed BPSI

Acquisition with Berwind Group Partners as its sole shareholder.

On December 15, 1999, Berwind Group Partners and Berwind

Corporation transferred all of their shares of BPSI stock to BPSI

Acquisition through the following transfers:

• Berwind Group Partners contributed all of its BPSI common

and preferential stock to BPSI Acquisition; and

• Berwind Corporation transferred all of its BPSI preferred,

preference, and preferential stock to BPSI Acquisition in

exchange for notes.

After these transfers, the percentage ownership of BPSI’s four classes of

stock was as follows:

Common Preferred Preference Preferential

Shareholder Stock Stock Stock Stock

David Berwind Trust 16.4% — — 13.12%

Graham Berwind — — — 2%

BPSI Acquisition 83.6% 100% 100% 84.88%

The corporate structure thus looked like this:

47

[*47] Figure 10

Corporate structure after creation of BPSI Acquisition

Graham Graham

Berwind Children

Trust Trusts

52.472%

47.528%

Graham David Berwind

Berwind Trust

Berwind Group

Partners 53,200 common

(100%)

100%

stock 2% preferential •16.4%

Berwind common

Corporation •13.12%

preferential

100%

stock note

BPSI

Acquisition

•100% preferred

•100% preference

•84.88% preferential

•83.6% common

•1,000 Series A 8.75% BPSI

noncumulative

preferred

•$20 million note

ZYAC 100% common

Holding

100%

Zymark Colorcon, Inc.

48

[*48] On December 15, 1999, BPSI issued redemption notices to the

holders of its outstanding preferred, preference, and preferential stock.

The notices called for the redemption of their shares on January 15,

2000, a date referred to by the notices as the “redemption date.” The

notices stated that the redemption price was equal to (a) a fixed price

per share ($50 for preferred, $1 for preference, and $1 for preferential)

plus (b) “accrued but unpaid dividends to the [r]edemption [d]ate.” The

redemption notices stated that BPSI had deposited with First Union

National Bank a sum sufficient to pay the redemption price, with

irrevocable instructions to pay the redemption price to the holders upon

surrender of their stock certificates. The redemption notices stated that

as “a result of such action” 19 the shares of the preferred stock, preference

stock, and preferential stock, respectively, “shall no longer be

outstanding as provided in Section 1758(d) of the Pennsylvania

Business Corporation Law.” BCL § 1758(d) provides:

Unless otherwise provided in the articles, redeemable

shares that have been called for redemption shall not be

entitled to vote on any matter and shall not be deemed

outstanding shares after written notice has been mailed to

holders thereof that the shares have been called for

redemption and that a sum sufficient to redeem the shares

has been deposited with a specified financial institution

with irrevocable instruction and authority to pay the

redemption price to the holders of the shares on the

redemption date, in the case of uncertificated shares, or

upon surrender of certificates therefore in the case of

certificated shares, and the sum has been so deposited.

As explained above, BPSI’s articles of incorporation contain provisions

regarding the effect of redemption notices. FINDINGS OF FACT, Parts

4 (preferred stock) & 7 (preference and preferential stock), supra.

On December 15, 1999, a plan of merger of BPSI Acquisition into

BPSI, with BPSI as the surviving corporation, was approved by the

following entities:

• BPSI Acquisition’s board of directors;

19 The term “such action” apparently meant (1) mailing the redemption notices

and (2) making the deposits.

49

[*49] • BPSI Acquisition’s sole shareholder, Berwind Group Partners;

and

• BPSI’s board of directors.

The plan of merger was not submitted to the common shareholders of

BPSI for their approval because the merger was intended and

structured as a short-form merger under BCL § 1924(b).

The plan of merger contained the following statement about

BPSI’s preferred, preference, and preferential stock:

Berwind Pharmaceutical has previously issued notices of

redemption for the outstanding shares of the . . . [p]referred

stock, the . . . [p]reference stock, and the . . . [p]referential

stock and deposited a sum sufficient to pay the redemption

price in a financial institution with . . . instructions to pay

the redemption price to the holders thereof upon surrender

of the certificates therefor. Therefore, the [stock is] no

longer deemed outstanding, and [has] no rights with

respect to the transactions contemplated by this

Agreement and Plan of Merger.

(The plan of merger was self-titled “Agreement and Plan of

Merger.” The stipulation refers to the document as the “plan of

merger.”)

The plan of merger provided that when the articles of merger are

filed, the David Berwind Trust’s BPSI common stock “shall be converted

into the right to receive” a subordinated promissory note from BPSI in

the principal amount of $82,820,000 ($12,625 for each of its 6,560

shares), with all principal and 10% interest (compounded annually)

payable at December 31, 2001, and no payments due before that date.

The note was to be “subordinate and junior in right of payment . . . to all

existing and future indebtedness of the Company [BPSI], including . . .

trade payables.” The note was to be nonnegotiable: it would obligate

BPSI to make payment specifically to the David Berwind Trust. The

plan of merger also acknowledged that the David Berwind Trust had

“dissenters rights” under Pennsylvania law “to dissent from the Merger

and to obtain payment of the fair value of [its] shares . . . .”

The plan of merger provided that all shares of BPSI common stock

owned by BPSI Acquisition “shall be cancelled.”

50

[*50] The plan of merger provided that each share of BPSI Acquisition

common stock (all of which were held by Berwind Group Partners) shall

be converted into one share of common stock of BPSI.

The plan of merger was executed by one officer from BPSI and

one officer from BPSI Acquisition. The David Berwind Trust did not

execute the plan of merger and had no vote regarding its approval. The

David Berwind Trust contested the validity of the merger in the Warden

litigation.

On December 16, 1999, BPSI filed articles of merger with the

Secretary of State of Pennsylvania. The articles of merger stated that

BPSI had merged with BPSI Acquisition and that the surviving

corporation was BPSI. The articles of merger stated that the plan of

merger had been adopted by (1) BPSI Acquisition’s board of directors

through written consent of all board members, (2) BPSI Acquisition’s

sole shareholder (i.e., Berwind Group Partners) by written consent, and

(3) BPSI’s board of directors by written consent of all board members.

The plan of merger of BPSI Acquisition into BPSI, with BPSI as the

surviving corporation, was attached to (and incorporated into) the

articles of merger. The articles of merger stated that “[t]he plan of

merger shall be effective upon filing these Articles of Merger in the

Department of State.”

As explained before, the plan of merger of BPSI Acquisition into

BPSI provided that the David Berwind Trust’s common stock in BPSI

would be converted into an $82.82 million note from BPSI. Because the

David Berwind Trust contested the validity of the disputed merger and

because (as described later) it demanded cash payment for its BPSI

stock on January 26, 2000, the note was never issued to the David

Berwind Trust, and no payments were made with respect to the note.

The only payment received by the David Berwind Trust from BPSI on

or after December 16, 1999, was the redemption payment for its

preferential stock (which the David Berwind Trust received on April 4,

2000) and the payment received by the David Berwind Trust in late 2002

under the settlement agreement that is described later.

On or around December 17, 1999, BPSI issued to the David

Berwind Trust a notice to demand payment under BCL § 1575(a). The

notice to demand payment stated that to receive payment for its BPSI

common shares the trust must send a demand for payment to BPSI on

or before January 31, 2000, accompanied by the share certificates.

51

[*51] On January 4, 2000, the plaintiffs in the Warden litigation filed

an amended complaint with thirteen counts (the amended complaint).

The first ten counts in the amended complaint were essentially

the same as the ten counts in the original complaint. Counts XI, XII,

and XIII were new.

Count XI alleged that Graham Berwind engaged in a pattern of

activity constituting mail and wire fraud and that this pattern

constituted a racketeering offense under 18 U.S.C. § 1962. In particular,

Count XI alleged that Graham Berwind “orchestrated a series of

transactions designed to deprive the David Berwind Trust of the fair

value of its interest in BPSI, and to prevent the David Berwind Trust

from seeking redress for the breaches of fiduciary duty alleged herein.”

The claim was for treble damages. Unlike the other RICO claims in

Counts I and II, Count XI was a direct claim (i.e., it was not a

shareholder-derivative claim).

Count XII sought a declaratory judgment that the disputed

merger was void because it did not comply with the BCL and because it

was intended to deprive the David Berwind Trust of standing to pursue

the shareholder-derivative claims in the amended complaint.

Count XIII was a claim for equitable relief seeking to enjoin the

defendants from taking steps to affect the David Berwind Trust’s

minority shareholder interest in BPSI or the standing of the David

Berwind Trust to assert the shareholder-derivative claims in the

amended complaint. The relief was requested as a remedy for Graham

Berwind’s and McKenney’s alleged violation of their fiduciary

obligations as trustees of the David Berwind Trust. In particular, Count

XIII alleged that Graham Berwind and McKenney directed the

defendants to refuse to provide the David Berwind Trust with

information concerning BPSI’s operations and assets sufficient to form

a fair valuation of the minority interest in BPSI, are using the squeeze-

out merger to defraud the David Berwind Trust and deprive it of the

value of its BPSI shares, and used the squeeze-out merger to block the

David Berwind Trust from asserting the shareholder-derivative claims

in the amended complaint.

Below is a summary of the complaint and the amended complaint

in the Warden litigation:

52

[*52] Plaintiffs Defendants Type of claim Remedy sought

I BPSI (derivatively by All Pattern of racketeering Monetary

David Berwind Trust) consisting of mail and wire fraud damages

in violation of 18 USC § 1962(c) (trebled)

II BPSI (derivatively by All Conspiracy to commit Monetary

David Berwind Trust) racketeering, consisting of acts of damages

mail and wire fraud alleged in (trebled)

count I, in violation of 18 USC

§ 1962(d)

III BPSI (derivatively by Directors of Usurpation of BPSI corporate Monetary

David Berwind Trust) BPSI opportunity by BPSI directors, damages

specifically, by using BPSI assets

to buy equity interests in Zymark

to be held by Berwind Group

Partners and Berwind Corp.

Original complaint was the same

but used the word “diversion”

rather than usurpation.

IV BPSI (derivatively by Directors of Breach of fiduciary duty by Monetary

David Berwind Trust) BPSI having BPSI (1) provide equity damages

financing and loan collateral to

Berwind Aviation; (2) pay excess

management fees to Berwind

Corp.; (3) forego profits to make

BPSI minority shares less

valuable to reduce price to paid

for them in squeeze-out merger;

(4) make loans to Berwind Group

Partners and Berwind Corp. at

below market interest rates.

V BPSI (derivatively by Berwind Aiding and abetting the duty-of- Monetary

David Berwind Trust) Group loyalty breaches alleged in Count damages

Partners; IV.

Berwind

Corp.

VI David Berwind Trust Berwind Breach of fiduciary duty by Equitable relief

Group (1) attempting to squeeze out the to enjoin

Partners; trust’s interest in BPSI to Berwind Group

BPSI deprive the trust of the value of Partners and

Directors its interest and prevent the trust BPSI directors

from lodging a shareholder- from taking

derivative suit against the BPSI steps to affect

board, and (2) refusing to provide the minority

the trust with financial shareholders

information about BPSI. interest of the

trust in BPSI.

53

[*53] Plaintiffs Defendants Type of claim Remedy sought

VII David Berwind Trust Berwind Refusing to provide the trust Equitable relief

Group with financial information about to require

Partners; BPSI. Berwind Group

BPSI Partners and

Directors BPSI directors

to provide an

accounting of,

and information

on, the

operation and

management of

BPSI from

1/1/1985.

VIII David Berwind Trust Berwind Orchestrating squeeze-out Equitable relief

Group merger to prevent the trust from to rescind the

Partners; seeking legal relief for the squeeze-out

BPSI alleged misappropriation of merger and

Directors corporate opportunity, misuse of grant trust an

corporate assets, and breaches of interest in the

fiduciary duty and breaches of corporate entity

trust. into which

BPSI has been

merged.

IX David Berwind Trust Berwind The defendants offered the trust Demand for

Group less than the fair value of its statutory

Partners; interest in BPSI. appraisal under

BPSI BCL § 1571(a)

Directors to receive the

fair value of the

trust’s interest

in BPSI.

X David Berwind Trust Graham Graham Berwind and McKenney Monetary

Berwind breached their duties as trustees damages; place

and of the trust by (1) usurping income from

McKenney corporate opportunities available alleged

to BPSI for the benefit of breaches of

Berwind Group Partners and duty in a

Berwind Corporation, (2) using constructive

assets of BPSI for the benefit of trust

Berwind Group Partners and

Berwind Corporation,

(3) approving the squeeze-out

merger to eliminate the trust’s

interest in BPSI, (4) causing the

interest to be eliminated at less

than a fair price.

54

[*54] Plaintiffs Defendants Type of claim Remedy sought

XI David Berwind Trust Graham Pattern of racketeering Monetary

Berwind consisting of mail and wire fraud damages

in violation of 18 USC § 1962(c) (trebled)

XII David Berwind Trust All Plan of merger not authorized Declaratory

defendants and did not comply with the judgment that

BCL. Also, sole purpose of plan plan of merger

of merger was to deprive the is null and void.

trust of standing to pursue the

Warden litigation.

XIII David Berwind Trust Graham Graham Berwind and McKenney Equitable claim

Berwind violated their duties as trustees to enjoin

and of the trust by directing the Graham

McKenney defendants to refuse to provide Berwind and

the trust with financial McKenney from

information about BPSI and by taking any

using the squeeze-out merger to action to modify

defraud the trust and deprive it the minority

of the value of its BPSI shares, shareholder

and using the squeeze-out interest of the

merger to prevent the trust from trust in BPSI.

asserting the shareholder-

derivative claims in the amended

complaint.

On January 13, 2000, the defendants in the Warden litigation

filed (1) a motion to dismiss the amended complaint pursuant to Fed. R.

Civ. P. 12(b)(6) and (2) a memorandum of law in support of the motion.

One of the reasons given in the memorandum of law was as follows:

[P]laintiffs have no right to demand any of the forms of

equitable relief that they seek: injunction, accounting or

rescission. Because the merger has now been

consummated . . ., Pennsylvania law now limits plaintiffs

to their remedies under the appraisal statute. Accordingly,

Counts VI through VIII should be dismissed.

The motion and memorandum of law sought dismissal of all

counts in the amended complaint, not just Counts VI through VIII (the

counts mentioned in the excerpt above). However, the motion and

memorandum of law did not seek to dismiss the appraisal proceeding.

On January 13, 2000, the plaintiffs in the Warden litigation filed

a motion for a temporary restraining order and a preliminary injunction.

A copy of this filing is not in the record of the present case.

55

[*55] On January 13, 2000, the parties in the Warden litigation entered

into a stipulation to maintain the status quo with respect to BPSI’s

capital and corporate structure until January 18, 2000. On June 1,

2000, the parties to the Warden litigation extended the status-quo-

maintenance date from (1) January 18, 2000, to (2) 30 days after the

resolution of BPSI’s motion to dismiss the Warden litigation.

On January 26, 2000, the David Berwind Trust exercised its

dissenters rights under the BCL §§ 1571–1580 by sending to BPSI a

demand for payment and returning its common stock certificate to BPSI,

as required by BCL § 1575(a). In a cover letter transmitting a copy of

the demand for payment, the David Berwind Trust’s attorney (Steven L.

Friedman of the law firm of Dilworth Paxon) made the following

statement:

As you know, we have taken the position on behalf

of the [David Berwind] Trust that the purported merger did

not comply with Pennsylvania law and is invalid and of no

effect. The [David Berwind] Trust is submitting the

Demand for Payment pursuant to Section 1575 of the

Pennsylvania Business Corporation Law as a

precautionary measure. However, the Demand for

Payment shall not be construed as an acknowledgment by

the [David Berwind] Trust that the purported merger was

valid or effective (which it clearly was not) or operate as a

waiver of any claims or rights that the [David Berwind]

Trust may have in connection with the purported merger,

including, without limitation, any of the claims asserted by

the [David Berwind] Trust in the above-referenced

litigation.

On January 28, 2000, the defendants in the Warden litigation

filed a memorandum of law in opposition to the January 13, 2000 motion

for a temporary restraining order and a preliminary injunction.

On January 28, 2000, the plaintiffs in the Warden litigation filed

a memorandum of law in opposition to the defendants’ motion to dismiss

the amended complaint. In the memorandum, the plaintiffs argued that

the disputed merger was invalid because, the plaintiffs asserted, the

plan of merger did not comply with § 1922(a) of the BCL by allegedly

failing to provide terms for the manner and basis of converting the

outstanding preferred stock, preference stock, or preferential stock,

56

[*56] which the plaintiffs asserted were still outstanding under BPSI’s

articles of incorporation, into other shares or other consideration.

On February 4, 2000, the plaintiffs in the Warden litigation filed

a memorandum of law in reply to defendants’ opposition to plaintiffs’

motion for a temporary restraining order and a preliminary injunction.

On or about February 4, 2000, BPSI sent the David Berwind

Trust a notice responding to the trust’s January 26, 2000 demand for

payment. The notice stated that BPSI would not make a remittance.

The notice stated that BPSI estimated that the fair value of the trust’s

shares of BPSI was $82,820,000. The notice also stated that BPSI had

the right to make another demand for payment under BCL § 1578(a)

(allowing dissenter who receives a notice of non-remittance to send to

the corporation the dissenter’s estimate of fair value). The notice also

included BPSI’s audited financial statement for the calendar year 1998

and unaudited interim financial statement for the 12-month period

ending September 30, 1999. Pursuant to BCL § 1577(d), BPSI returned

to David Berwind Trust its BPSI common stock certificate, on which

BPSI made the following notation:

THE SHARES REPRESENTED BY THIS CERTIFICATE

ARE THE SUBJECT OF A NOTICE TO DEMAND

PAYMENT UNDER THE DISSENTERS RIGHTS

PROVISIONS OF THE PENNSYLVANIA BUSINESS

CORPORATION LAW, 15 P.C.S. § 1575 ET SEQ., AND

MAY ONLY BE TRANSFERRED, ASSIGNED, PLEDGED

OR HYPOTHECATED SUBJECT TO SUCH

PROVISIONS.

On February 16, 2000, the defendants in the Warden litigation

filed a reply memorandum in support of their motion to dismiss the

amended complaint. In the reply memorandum, the defendants in the

Warden litigation argued that the disputed merger was valid because,

they asserted, the plan of merger provided terms for the manner and

basis of converting the preferred, preference, and preferential stock into

other shares or other consideration by acknowledging that such stock

had been called for redemption and that sufficient funds were deposited

with a financial institution with irrevocable instructions to pay on the

redemption date.

In early 2000, the David Berwind Trust hired Howard, Lawson &

Co, LLC (Howard Lawson), to assist it in providing its estimate of value

57

[*57] to perfect its appraisal rights. Howard Lawson issued a valuation

report to the David Berwind Trust on February 23, 2000 (the 2/23/2000

valuation report). The 2/23/2000 valuation report, which relied, in part,

on BPSI’s unaudited financial results for the 12 months ended

September 30, 1999, as adjusted by Howard Lawson, estimated the

value of David Berwind Trust’s interest in BPSI and Zymark combined

at a range between $165 million and $204 million and recommended

that the David Berwind Trust use $190 million as its estimate, stating

“[I]t is best to lead with an aggressive, but supportable estimate at this

time.” This amount included the value of a 16.4% equity interest in

Zymark, which is $40 million of this estimate, because the David

Berwind Trust maintained that Zymark was a corporate opportunity of

BPSI usurped by Graham Berwind. The 2/23/2000 valuation report

explained that its conclusions were tentative: “The process of adjusting

BPSI’s financials is imperfect and requires numerous assumptions.

Because of the lack of meaningful financial information, the

assumptions are likely to be significantly modified after discovery.”

On March 3, 2000, the David Berwind Trust sent BPSI a notice of

estimate of fair value of its BPSI shares pursuant to BCL § 1578(a). In

the notice, the David Berwind Trust stated that its “estimate of the fair

value of the shares is $190,000,000.” In the cover letter to the notice,

the David Berwind Trust’s attorney (Roger Wood of Dilworth Paxon)

wrote that the David Berwind Trust was preserving its position that the

disputed merger was “invalid and ineffective” and that BPSI “failed to

provide financial and other information that the Trust and its advisers

need to properly value the Company and its shares.” The letter stated

that the David Berwind Trust “is complying with the dissenters rights

provisions of the Pennsylvania Business Corporation Law as a

precautionary measure.”

On March 14, 2000, BPSI filed a statutory appraisal action in the

Court of Common Pleas of Philadelphia County, captioned Berwind

Pharmaceutical Services, Inc. v. Warden, et al., to seek a judicial

determination of the fair value of the BPSI shares on December 16,

1999, pursuant to BCL § 1579. We refer to this action as the “appraisal

proceeding”.

On March 20, 2000, the appraisal proceeding was removed to

federal court and consolidated with the Warden litigation.

On April 4, 2000, the David Berwind Trust received the

redemption payment for its preferential stock.

58

[*58] On April 25, 2000, the District Court granted the motion by the

defendants in the Warden litigation to dismiss the amended complaint

under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which

relief can be granted. The only explanation given by the District Court

for the dismissal was as follows: “The Court approves and adopts [the

January 13, 2000 motion to dismiss the amended complaint filed by the

defendants in the Warden litigation and the February 16, 2000 reply

memorandum filed by the defendants in support of their motion to

dismiss the amended complaint, as supplemented] which collectively set

forth the legal authority which is dispositive of [p]laintiff’s cause of

action.” See Warden v. McLelland, 288 F.3d 105, 109 (3d Cir. 2002). 20

In June 2000, the parties to the Warden litigation and appraisal

proceeding agreed to a mediation process in an effort to resolve the

claims set forth by each party in the two actions.

In November 2000, the David Berwind Trust (through its counsel)

obtained a second appraisal from Howard Lawson, which valued a 16.4%

interest in BPSI and Zymark as of December 16, 1999. Howard Lawson

created the report “in [c]onnection with [a]nalysis of [i]nterests [o]wned

by the [David Berwind] Trust” and for use in mediation discussions

between the David Berwind Trust and BPSI. In preparing the report,

Howard Lawson reviewed financial statements and forecasts of BPSI

and Zymark and interviewed managers of BPSI and Zymark. The report

concluded that the David Berwind Trust’s interest in BPSI and Zymark

(as if it were a subsidiary of BPSI) as of December 16, 1999, had a value

of $177.8 million (based on enterprise values of $900 million for BPSI

and $184 million for Zymark), but the “inclusion of acquisition activity

in the case of BPSI” would increase the value of the David Berwind

Trust’s interest to $218.8 million in the aggregate.

On January 26, 2001, the David Berwind Trust’s trustees met to

discuss prospective settlement negotiations for the Warden litigation

and the appraisal proceeding. At the meeting, Michael Berwind, as

managing trustee, 21 recommended that (1) $148 million should be the

David Berwind Trust’s “walk away” number below which the David

Berwind Trust would opt to continue litigation and (2) $188 million was

“what we want.” At the meeting, Michael Berwind explained to the

20 The supplement to the February 16, 2000 reply memorandum is not in the

record.

21 The record does not reveal when Michael Berwind became the managing

trustee.

59

[*59] trustees that (1) a 30 multiple of 1999 BPSI earnings resulted in

a value of approximately $143 million, (2) removing the implied minority

discount in “CGB/BPSI’s $82.8 million offer” brought CGB/BPSI’s

number to $96 million, (3) interest, fees, and expenses were “really

nonnegotiable,” and (4) to “avoid the continued litigation pain and

potential downside litigation risk . . . the walk away number should

contain certain discounts.” 22 Michael Berwind calculated the “walk

away” amount by adding (1) a $132 million principal amount and

(2) interest at a 10% annual rate accruing over 13 months. Michael

Berwind calculated the $188 million “what we want” amount by adding

(1) a $168 million principal amount and (2) interest at a 10% annual rate

accruing over 13 months. After discussing the matter, David Berwind,

Michael Berwind, Linda Berwind Shappy, and Pawson agreed that the

trust’s “walk away” amount should be $158 million. Gail Berwind

Warden, who was not able to attend the trustee meeting, also agreed to

that number.

On January 26, 2001, Michael Berwind wrote and sent a

memorandum to Klein, copying Russell Shappy and Pawson, describing

Klein’s settlement authority in the mediation process for the period from

“January 30 through February 15, 2001.” We refer to this as the

“1/26/2001 Michael Berwind memo.” The 1/26/2001 Michael Berwind

memo stated that the David Berwind Trust “would like to receive $188

million dollars to settle the two lawsuits [i.e., the Warden litigation and

the appraisal proceeding].” The 1/26/2001 Michael Berwind memo

described the David Berwind Trust’s “walk away number,” at which the

trustees opt to continue the litigation, as $165 million dollars. While the

1/26/2001 Michael Berwind memo contains no reference to interest, in a

memo dated January 31, 2002, Michael Berwind wrote to Pawson and

Russell Shappy that the $165 million calculation “included interest at

10 percent for 13 months.” The 1/26/2001 Michael Berwind memo also

stated that “[t]he [David Berwind] Trust remains willing to acquire

100% of BPSI and Zymark at the same price the Trust is asking to

receive (however the Trust would not be willing to agree to subsection b

above [compensation to the seller if a transaction occurs prior to

December 31, 2006] as it would require that flexibility in order to finance

the 83.6% transaction).” On or about January 26, 2001, Michael

Berwind also provided to Justin Klein a one-page spreadsheet similar to

that in the two-page document “Thoughts on Mediation Compromise.”

22 “CGB” refers to Charles Graham Berwind, Jr., who we refer to as Graham

Berwind. The $82.8 million offer refers to BPSI’s February 4, 2000 notice that BPSI

estimated that the value of the David Berwind Trust’s shares in BPSI was $82,820,000.

60

[*60] We refer to the one-page spreadsheet as “Michael Berwind’s

second 1/26/2001 mediation compromise spreadsheet”. On Michael

Berwind’s second 1/26/2001 mediation compromise spreadsheet, he

included $18 million for “Interest on BPSI & Zymark” in the desired

$188 million settlement number and $16 million for “Interest on BPSI

& Zymark” in the $165 million “walk away” number. Michael Berwind’s

second 1/26/2001 mediation compromise spreadsheet also contained a

table entitled “After-Tax Analysis,” which contained a column entitled

“After-Tax Proceeds . . . Assuming 100% of Settlement is Treated as

Stock Sale Proceeds.”

On January 31, 2001, Justin provided Meyers with a spreadsheet

that Meyers faxed to McKenney on the same day. The spreadsheet

compared (1) the David Berwind Trust’s position regarding the value of

its BPSI interest and the Warden litigation claims to (2) BPSI’s assigned

value for such items. In the spreadsheet, the David Berwind Trust

attributed $177.616 million to BPSI and Zymark before the line for

“Claims” and $19.242 million to “Interest on BPSI & Zymark.” The

numbers on the spreadsheet were derived from Michael Berwind’s

second 1/26/2001 mediation compromise spreadsheet.

On January 31, 2001, Klein sent a fax to Russell Shappy and

Pawson, transmitting two undated one-page documents prepared by

BPSI and respectively titled “Settlement Proposal” and a “Comparison

of Valuations.” The settlement-proposal document contained a

settlement offer from BPSI of $96,514,000 next to which was a

handwritten notation made by Klein that states “102 w/ interest . . .

5.66% interest rate.” We interpret this fax to mean that on January 31,

2001, BPSI had made a settlement offer, which was communicated by

the settlement-proposal document, under which BPSI would pay the

David Berwind Trust $96,514,000, brought up to $102,000,000 with

interest.

On February 9, 2001, Klein met with Meyers to discuss

settlement of the Warden litigation and the appraisal proceeding.

During or around the time of this meeting, Klein made a settlement offer

of $188 million to Meyers. The parties to the Warden litigation and the

appraisal proceeding were unable to reach a settlement during 2001.

On February 23, 2001, the U.S. Court of Appeals for the Third

Circuit vacated the District Court’s dismissal of the amended complaint

in the Warden litigation, and remanded the case to the District Court

“for it to set forth, in a reasoned opinion, the relevant facts, legal

61

[*61] principles, and authorities that support its decision.” The Third

Circuit order stated “we maintain jurisdiction over this case and hold

this appeal in abeyance, pending our receipt of the reasoned opinion

from the District Court.”

On August 8, 2001, the District Court issued an opinion on

remand dismissing the amended complaint claims in the Warden

litigation under Fed. R. Civ. P. 12(b)(6). Warden v. McLelland, 2001 WL

910934 (E.D. Pa.).

In part B of its opinion, 23 the District Court held that counts I–V

should be dismissed because they were shareholder-derivative claims

that did not meet the “demand” requirement that they be submitted to

the board of directors of BPSI. Id. at *2–5. The District Court explained

that for a shareholder-derivative claim to be heard by a court, the

shareholder must first make written demand upon the board of directors

of the corporation, unless the shareholder (1) shows that irreparable

injury to the corporation would occur if the shareholder had made the

demand before the commencement of the action and (2) made the

demand promptly after the commencement of the action. Id. at *3. The

District Court stated that no demand on the board of directors of BPSI

had been made before the amended complaint was filed. Id. at *4.

Furthermore, the District Court stated that the plaintiffs did not make

any demand on the BPSI board of directors even after the action was

commenced. Id. The District Court held that even though the amended

complaint had alleged that BPSI would suffer irreparable harm if

demand had been made before commencement of the suit, it had failed

to “show with any degree of specificity how, when or why BPSI would be

irreparably harmed if a demand were required to be made or what the

irreparable harm would be.” Id.

In parts C.1, C.2, C.3, and C.4 of its opinion, the District Court

held that the RICO claims (which were Counts I, II, and XI) were not

pled with particularity and should be dismissed. Id. at *4–10. The

District Court identified the following four defects in the RICO claims:

(1) the amended complaint did not “allege the RICO predicate acts with

particularity,” (2) the amended complaint did not sufficiently plead “any

injury that flowed from the purported predicate acts,” (3) the amended

complaint failed to plead a pattern of racketeering activity because the

alleged predicate acts did not pose a “threat of continued criminal

23 This is part II.B of the District Court’s opinion, but we omit the “II” when

referring to this subpart and other subparts of part II of the District Court opinion.

62

[*62] activity,” and (4) the amended complaint did not allege the

plaintiffs “relied upon any alleged predicate acts by the defendants.” Id.

In part C.5 of its opinion, the District Court held that the RICO

claims in Counts I and II should be dismissed against four former

directors of BPSI (Byrnes, Dulaney, Karlson, and Cohn) because these

people were not directors in BPSI in December 1998. Id. at *11.

December 1998 was when the fraudulent communications allegedly

began, according to the amended complaint. Id. at *5, *8.

In part C.6 of its opinion, the District Court held that Count XI,

the RICO aiding-and-abetting claim against Graham Berwind, should

be dismissed because it was brought as a direct claim and should have

been brought as a shareholder-derivative claim. Id. at *11.

Part D of the District Court opinion held that Count III, and

portions of Count IV and V, were barred by the two-year statute of

limitations regarding claims of breach of fiduciary duty by BPSI

directors. Id. at *11–12. The District Court opinion held that Count III

in its entirety was time barred. Id. This was because, according to the

District Court, Count III alleged that the BPSI board of directors

breached its duties to BPSI shareholders by allowing the Zymark

acquisition to occur without BPSI being the owner of Zymark. Id. at *12.

The Zymark acquisition allegedly was consummated on September 3,

1996. Id. However, the original complaint was not filed until November

22, 1999, more than two years later. Id. The District Court also held

that portions of Count IV and Count V (aiding and abetting for breach

of fiduciary duty) were time barred because Count IV alleged conduct

that began in approximately 1992 or in the mid-1990s. Id. The original

complaint was filed more than two years later, on November 22, 1999.

Id.

In part E of the opinion, the District Court held that Counts VI

(injunction against merger), VII (accounting), and VIII (rescission of

merger) should be dismissed. Id. at *12–13. In the District Court’s view,

these claims were precluded by BCL § 1105 and In re Jones & Laughlin

Steel Corp., 488 Pa. 524, 412 A.2d 1099 (1980). Warden v. McLelland,

2001 WL 910934, at *12–13. The District Court stated:

The BCL expressly provides that appraisal rights shall be

the exclusive remedy for the dissenting shareholder. 15

Pa.C.S.A. § 1105. While Section 1105 does allow a

dissenting shareholder to challenge a merger on the

63

[*63] limited basis of fraud or fundamental unfairness, Jones &

Laughlin made clear that once the merger has been

completed, the appraisal statute provides the only remedy.

Moreover, nothing in the BCL allows a dissenting

shareholder to obtain an accounting or to rescind a merger.

Id. at *13.

In part F of the opinion, the District Court held that Counts VI

(injunction against merger) and XIII (rescission of merger) should be

dismissed because the plaintiffs failed to show they would be irreparably

harmed if they did not prevail on these equitable claims. Id. at *13–14.

The District Court explained that the “claim [was] based upon

inadequate price” and that such “claim [was] compensable by money

damages.” Id. at *15. Also significant, explained the District Court, was

that the amended complaint “acknowledges that the minority interest

has been converted into the right to receive a note for almost $83 million

in an amount equal to $12,625 per share.” Id.

In part G of the opinion, the District Court held that Count IX

(right to statutory appraisal) should be dismissed. Id. at *15–16. The

District Court gave five reasons why Count IX did not state a valid

claim. First, the District Court held that the David Berwind Trust had

failed to timely demand payment for its shares and timely deposit share

certificates as required by BCL §§ 1575 and 1576. Warden v. McLelland,

2001 WL 910934, at *15–16. 24 Second, the District Court held that the

David Berwind Trust failed to provide its own estimate of the value of

its interest in BPSI as required by BCL § 1578(a) and (b). Warden v.

McLelland, 2001 WL 910934, at *15–16. 25 Third, the District Court held

that under BCL § 1579(a), the David Berwind Trust’s appraisal action

was premature. Warden v. McLelland, 2001 WL 910934, at *15–16. The

District Court explained that the David Berwind Trust was barred from

commencing an appraisal action until the 60-day window of BCL

§ 1597(a) had expired. Warden v. McLelland, 2001 WL 910934, at *16.

Fourth, the District Court held that an appraisal action under BCL

§ 1579(a) could be commenced only in the Pennsylvania Court of

24 However, as we have explained, the David Berwind Trust demanded

payment for its shares and returned its common stock certificate to BPSI on January

26, 2000. The deadline for doing so was five days later, on January 31, 2000.

25 However, as we have explained, the David Berwind Trust sent BPSI a notice

of its estimate of the fair value of its BPSI shares pursuant to BCL § 1578(a) on March

3, 2000. The estimate was $190,000,000.

64

[*64] Common Pleas. Warden v. McLelland, 2001 WL 910934, at *16.

Thus, by filing suit in the District Court, the plaintiffs filed suit in the

“wrong court.” Id. Fifth, the District Court held that the named

defendants were the “wrong parties” to an appraisal proceeding because

“nothing in the appraisal statute [BCL § 1579(e)] allows plaintiffs to

bring a claim against the directors or majority shareholder” and because

BCL § 1579(e) “directs that an appraisal proceeding be brought ‘in the

name of the corporation.’” Warden v. McLelland, 2001 WL 910934,

at *16.

In part H of the opinion, the District Court held that Counts VI,

VII, VIII, IX, XI, and XII should be dismissed as to the present and

former directors of BPSI. Id. at *16–17. The District Court observed

that Counts VI, VII, VIII, and IX asserted direct claims against the

present and former BPSI directors (although they also went against

Berwind Group Partners). Id. at *17. The District Court also observed

that Count XI was a claim against Graham Berwind in his capacity as a

director of BPSI. Id. at *17. The Court also observed that Count XII

was a declaratory judgment claim against all defendants, including the

present and former directors of BPSI. Id. at *17. The District Court

held that these counts, to the extent they went against present and

former directors of BPSI, were direct claims barred by BCL § 1717

(which provides that the duties of the directors are solely to the

corporation and which, the District Court explained, “may not be

enforced directly by a shareholder.”). Warden v. McLelland, 2001 WL

910934, at *16–17. Recall that in part C.6 of the District Court opinion,

the District Court had also explained why Count IX was an

impermissible direct claim by a shareholder against a BPSI director,

Graham Berwind. Id. at *11. The legal reasoning in part C.6 is similar

to that in part H, although different authorities are cited in part C.6.

For example, part C.6 did not rely on BCL § 1717. But setting aside the

difference in authorities, part H is redundant with part C.6 as to

Count IX.

In part I of the opinion, the District Court held that Counts X and

XIII should be dismissed. Warden v. McLelland, 2001 WL 910934, at

*17–18. Counts X and XIII alleged that Graham Berwind and

McKenney engaged in a breach of trust as trustees of the David Berwind

Trust. In terms of remedy, Count X sought monetary damages against

Graham Berwind and McKenney. Count XIII sought an injunction. As

an initial matter, the District Court interpreted Count XIII to have been

brought not against all defendants, but only against Graham Berwind

and McKenney: “Count XIII is somewhat ambiguous in that it appears

65

[*65] to be brought against [Graham Berwind] and . . . McKenney . . . ,

but it then asks for relief against all defendants. . . . For purposes of this

motion to dismiss, defendants [sic: the District Court] will treat Count

XIII as attempting to state a claim against the two individuals because

nothing in the allegations of Count XIII would support an injunction

against all defendants.” Id. at *17 n.10. The reasons that Counts X and

XIII should be dismissed, according to the District Court, were threefold.

First, the District Court held that Graham Berwind and McKenney had

resigned as trustees of the David Berwind Trust. Id. at *17. The District

Court held that any failure by them to appoint their successors as part

of their resignation process “would have been mere surplusage” because

“there were already five trustees.” Id. The District Court also stated

that the plaintiffs “had no interest in any successor trustees because the

purpose of the resignations was to separate the brothers’ interests” and

that the plaintiffs would not have “welcomed” anyone affiliated with

Graham Berwind and McKenney as additional trustees. Id. Second, the

District Court held that the plaintiffs could not hold both Graham

Berwind and McKenney liable as trustees because McKenney only

became a trustee when Graham Berwind resigned as trustee. Id. at *18.

Third, the District Court held that liability could not be imposed on

Graham Berwind and McKenney based on any “purported conflict of

interest” because the deed of trust of the David Berwind Trust provided

as follows: “The fact that any trustee may be interested in Berwind

Corporation or any of its subsidiaries as director, stockholder, manager,

agent or employee shall not constitute an adverse or conflicting interest,

and the acts of such trustee shall be judged as if he has no interest in

the Corporation.” Id.

Part J of the District Court opinion held that Count XII (seeking

a declaratory judgment that the merger was void) should be dismissed.

Id. at *17. The District Court held that even though the amended

complaint alleged that the “merger did not comply with the BCL”, in

actuality the merger “was specifically contemplated and authorized by

the BCL” and “defendants’ actions with respect to the merger were

proper.” Id. at *18. The District Court also held that a claim for

declaratory judgment, standing alone, is not a valid claim because to

seek declaratory judgment is only to name the relief sought, not the legal

theory upon which relief is predicated. Id.

In accordance with its August 8, 2001 opinion (which we have

summarized above), the District Court again granted the motion of the

defendants in the Warden litigation to dismiss the amended complaint

66

[*66] under Fed. R. Civ. P. 12(b)(6). Warden v. McLelland, 2001 WL

910934, at *19.

On January 18, 2002, the Third Circuit heard oral argument

regarding the appeal of the dismissal of the Warden litigation. 26

During 2002, Pawson and Russell Shappy, the latter as the

financial manager of the David Berwind Trust, conducted settlement

negotiations on behalf of the David Berwind Trust.

On January 26, 2002, Michael Berwind sent a memorandum to

Russell Shappy, with copies to the David Berwind Trust trustees (except

for alleged trustees Graham Berwind and McKenney), addressing what

he stated was Russell Shappy’s “settlement authority” as to

“[m]ediation” for the period ending May 1, 2002. The memorandum

stated that (1) the David Berwind Trust’s desire was to receive a

settlement of $168 million dollars “before interest, fees, and expenses;”

(2) the David Berwind Trust’s “walk away number” at which the trustees

would opt to continue the litigation was “$147 million dollars before

interest, fees, and expenses;” and (3) there were several conditions on

the potential settlement with BPSI. Condition “a” was that

“Graham/BPSI/etc. must either remove all tax consequences to the

Trust that result from the December 16, 1999 merger and the

$82,800,000 [$82,820,000] Note or must pay those tax consequences.”

Condition “b” was that “[i]f BPSI goes public or is sold prior to December

31, 2004, the Trust should receive its proportionate share of any profit.”

The memorandum also stated that “[t]he [David Berwind] Trust

remains willing to acquire 100% of BPSI and Zymark at the same price

the Trust is asking to receive (however the Trust would not be willing to

agree to subsection b above as it would require that flexibility in order

to finance the 83.6% transaction).”

On January 31, 2002, Michael Berwind sent a memorandum to

Pawson and Russell Shappy entitled “BPSI - Negotiation Strategy”. In

the memorandum, after setting forth numerous considerations and

strategies, including continuing the litigation, Michael Berwind

explained his “thoughts on our post-3d Circuit Court hearing

negotiation strategy” as follows: “I would agree to the present value of

26 Recall that in its February 23, 2001 order, the Third Circuit had stated “we

maintain jurisdiction over this case and hold this appeal in abeyance, pending our

receipt of the reasoned opinion from the District Court.” Thus, as of January 18, 2002,

the Third Circuit still had jurisdiction over the case consisting of the Warden litigation

and the appraisal proceeding.

67

[*67] $147,000,000 as of December 15, 1999 with interest at 10% for

BPSI and 6% for all claims including Zymark from December 15th, 1999

plus fees and expenses.” The memorandum characterized this

$147,000,000 amount as reflecting the “walk away” position. A

spreadsheet embedded in the memorandum explained that the total

settlement to the David Berwind Trust was $182,000,000, when interest

was included. The spreadsheet also calculated that a “Would Be Happy”

settlement amount would be $207,000,000, including interest. The

spreadsheet was as follows:

Valuation[1]

Would

Be

Item Walk Away

Happy

BPSI 120 133

Zymark 20 25

Subtotal 140 158

Claims 7 10

Subtotal 147 168

Interest on above 33 37

Subtotal 180 205

Fees and expenses 2 2

Total 182 207

1The amounts in the table are in millions.

On February 16, 2002, Michael Berwind wrote and sent a draft

memorandum to Russell Shappy (and a copy to Pawson). In the draft

memorandum, Michael Berwind provided his views regarding how to

respond to “Potential Difficult Questions from Bruce McKenney,”

including the following:

1. Does the David Berwind family want to sell its stock in BPSI?

a. Prior to the onset of hostilities by Graham Berwind in August of

1999, the answer had been an unqualified “no”.

b. Post August 1999 -- the answer has become a qualified “yes”. The

David Berwind family is willing to sell its stock in BPSI to Graham

Berwind if:

i. Fair value can be established/agreed-upon and a control

premium paid by Graham [Berwind] to obtain what he

desires.

68

[*68] ii. Graham [Berwind] is going to continue to distinguish

between active and inactive stockholders with respect to

liquidity.

iii. Graham [Berwind] is going to continue to withhold

pertinent financial information from inactive

stockholders.

iv. Majority stockholders could someday in the future again

initiate a forced liquidation by a minority stockholder.

Page 2 of Michael Berwind’s February 16, 2002 draft memo stated: “We

are prepared to either (1) determine a price for BPSI stock, or

(2) determine whether we are a buyer or a seller at a price determined

by Graham [Berwind].”

On April 30, 2002, the Third Circuit reversed the dismissal under

Fed R. Civ. P. 12(b)(6) and issued an opinion.

The Third Circuit addressed the question of whether Counts I–V

should be dismissed because those claims failed the “demand”

requirement that as shareholder-derivative claims they first had to be

submitted to the board of directors of BPSI. Warden v. McLelland, 288

F.3d 105, 110–14 (3d Cir. 2002). The Third Circuit held that the

amended complaint sufficiently alleged that BPSI would have been

irreparably harmed had the demand been made to the board of directors

of BPSI. Id. at 111. The Third Circuit explained that it could be inferred

from the amended complaint that had the David Berwind Trust made

the demand of the BPSI board, BPSI would have responded by executing

the squeeze out-merger, that the squeeze-out merger would have

removed the David Berwind Trust as a shareholder, and that therefore

the David Berwind Trust would not have standing to file its shareholder-

derivative claims. Id. The Third Circuit next held that the David

Berwind Trust’s failure to make the demand after the squeeze-out

merger was excusable. Id. at 111–12. After the squeeze-out merger, the

David Berwind Trust was “[n]o longer a shareholder” and was “no longer

in a position to make demand on the board—by no fault of its own”. Id.

at 112. In summary, the Third Circuit opinion rejected the analysis in

part B of the District Court opinion. Warden v. McLelland, 2001 WL

910934, at *2–5. 27

27 The Third Circuit also discussed the question of whether the demand

requirement should be superseded by section 7.01(d) of the ALI Principles. Warden v.

69

[*69] The Third Circuit addressed the holdings in parts C.1, C.2, C3,

and C.4 of the District Court opinion dismissing the RICO claims (i.e.,

Counts I, II, and XI) for failure to allege predicate acts with

particularity, establish a causal connection between predicate acts with

injury, establish sufficient continuity to constitute a pattern, and

establish reliance. Warden v. McLelland, 2001 WL 910934, at *4–10

(E.D. Pa.). The Third Circuit did not dispose of the issue, observing only

that the complaint “does provide a reasonably clear overall picture of

what has been alleged.” Warden v. McLelland, 288 F.3d at 114. The

Third Circuit held:

We believe this issue, along with the other RICO pleading

issues, is best resolved by reexamination of the sufficiency

of the complaint by the District Court. We are confident

the District Court will permit plaintiffs to amend their

complaint, if appropriate . . . . The District Court will be

able to consider these issues in light of any amendments it

permits, something we are in no position to do.

Id. at 114–15. It appears that by “the other RICO pleading issues” the

Third Circuit was referring to part C.5 of the District Court opinion

(dismissing Counts I and II against BPSI directors who were not

directors in December 1998) and part C.6 of the District Court opinion

(dismissing Count XI against Graham Berwind because it was brought

as a direct claim). See 2001 WL 910934, at *5, *8, *11 (E.D. Pa.).

The Third Circuit addressed the holding in part D of the District

Court opinion that Count III, and portions of Count IV and V, were

barred by the two-year statute of limitations on lawsuits for breach of

fiduciary duty. Warden v. McLelland, 288 F.3d at 115, vacating Warden

v. Mclelland, 2001 WL 910934, at *11–12. The Third Circuit explained

that on appeal the plaintiffs contended that even though some of the

events occurred more than two years before they brought suit, “the

statute of limitations should be tolled because defendants fraudulently

McLelland, 288 F.3d at 112. The Third Circuit stated that “this case would seem to be

a good candidate” for application of section 7.01(d) of the ALI Principles. Warden v.

McLelland, 288 F.3d at 112. However, the Third Circuit did not make a dispositive

ruling with respect to the issue of the effect of section 7.01(d) of the ALI Principles.

Warden v. McLelland, 288 F.3d at 114. The Third Circuit observed that the parties in

the Warden litigation did not brief the issue extensively and there may be uncertainty

as to the appropriateness of applying section 7.01(d) of the ALI Principles to the case.

Warden v. McLelland, 288 F.3d at 114. Therefore, the Third Circuit “left [this issue]

. . . unresolved at this point” and directed the District Court, on remand, to “consider

this issue if it proves to be necessary.” Id.

70

[*70] concealed information necessary for recognizing these claims.”

Warden v. McLelland, 288 F.3d at 115. The Third Circuit also explained

that the defendants had countered that “plaintiffs have failed to meet

specific requirements for pleading such tolling.” The Third Circuit did

not resolve the equitable-tolling issue, explaining “[t]hese matters are

better addressed by the District Court in light of any amendments to the

pleadings.” Id.

The Third Circuit addressed the holdings in part E of the District

Court opinion, which dismissed Counts VI, VII, and VIII. Warden v.

McLelland, 288 F.3d at 115; Warden v. McLelland, 2001 WL 910934, at

*12–13. The Third Circuit held that the District Court erred in relying

on In re Jones & Laughlin Steep Corp., 488 Pa. 524, 412 A.2d 1099

(1980). Warden v. McLelland, 288 F.3d at 115. The Third Circuit

explained that Jones & Laughlin concerned equitable relief sought after

the merger had occurred, but the plaintiffs in Warden v. McLelland filed

suit before the merger. Warden v. McLelland, 288 F.3d at 115.

The Third Circuit addressed part F of the District Court opinion,

which dismissed Counts VI and XIII. Warden v. McLelland, 288 F.3d at

115; Warden v. McLelland, 2001 WL 910934, at *13–14. The Third

Circuit held that under In re Jones & Laughlin Steep Corp., 412 A.2d at

1103, a shareholder challenging a merger need not show irreparable

harm to enjoin a merger, only that the merger is “fraught with fraud or

fundamental unfairness.” Warden, 288 F.3d at 115 (quoting In re Jones

& Laughlin Steep Corp., 412 A.2d at 1103). The Third Circuit stated:

“To the extent defendants contend that plaintiffs have insufficiently

pled fraud or fundamental unfairness, we leave this matter to the

District Court in the first instance.” Id.

Relatedly, the Third Circuit addressed an argument by the

defendants in the Warden litigation that Glassman v. Unocol

Exploration Corp., 777 A.2d 242, 248 (Del. 2001), compels the conclusion

that in a short-form merger, the dissenting shareholder seeking

equitable remedies must prove fraud or illegality. Warden v. McLelland,

288 F.3d at 115–16. In a passage heavily relied on by petitioners, the

Third Circuit stated that even if the legal principle asserted by the

defendants in the Warden case was generally correct, the principle

might not govern the case because of its “special features”:

Nevertheless, we note this case has special features that

may require that it be treated differently from standard

short-form merger cases. This is not simply a dispute

71

[*71] between a majority and a minority shareholder in a

corporation. Here the majority shareholder [BPSI] was

allegedly controlled by Graham Berwind, who was also an

alleged trustee of the David Berwind Trust. And Berwind

company [footnote omitted] stock was the central holding

of the Trust as set up by Charles Berwind. Thus, Graham

Berwind’s duty to the trust was not simply that owed by a

majority shareholder to a minority shareholder, but also a

duty owed directly to a trust designed to hold equity in the

family business. In these circumstances, the argument in

favor of equitable remedies would appear to take on a

different character from that of a case focused only on a

short-term merger. The resolution of these matters is best

reserved for the District Court at this juncture.

Id.

This text is long and has been trimmed here. Open the source document for the complete record.