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United States Tax Court
CORRECTED
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,
26220-08,
26222-08.
26219-08,
26221-08,
Filed December 4, 2023.
—————
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 01/03/24
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
merger did violate that provision, the merger was not
void. ...................................................................................... 102
[*3]
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
Michael Berwind & Carol Berwind
David Berwind & Jeanne Berwind
Duncan Warden & Gail Berwind Warden
Russell Shappy & Linda Berwind Shappy
Deficiency
$102,783
12,603
104,441
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 nongovernmental 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
Berwind Trust
David
Berwind Trust
Emery Berwind
Trust
Margaret
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
Figure 2
Corporate structure after interposition of BPSI between Berwind Corporation and
Colorcon, Inc., in 1983
[*14]
Graham Berwind Trust
and Graham Children
Trusts
David Berwind Trust
common
33,440 common
(83.6%)
common
Berwind
Corporation
120,000
preferred
plus note
BPSI
100 % common
Colorcon, Inc.
6,500 common
(16.4%)
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
Figure 3
Corporate structure after Berwind Corporation's redemption of the David Berwind
Trust's shares in 1985
[*16]
Graham Berwind Trust
and Graham Children
Trusts
David Berwind Trust
100% common
33,440 common
(83.6%)
Berwind
Corporation
120,000
preferred
plus note
BPSI
100% common
Colorcon, Inc.
6,500 common
(16.4%)
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
Trust
47.528%
Graham Children
Trusts
52.472%
David Berwind
Trust
Berwind Group
Berwind Group
Partners
Partners
100% common
Berwind
Corporation
83.6% common
120,000
preferred
plus note
BPSI
100% common
Colorcon, Inc.
16.4% common
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
Figure 5
Corporate structure after creation of ZYAC Holding and its purchase of Zymark in
1996
[*20]
Graham
Children
Trusts
Graham
Berwind
Trust
52.472%
47.528%
David Berwind
Trust
Berwind Group
Partners
100% common
83.6% common
100% common
Berwind
Corporation
100%
preferred
plus note
• 1,000 Series A
8.75% noncumulative
preferred (bought for
$10 million)
• $20 million note
BPSI
100% common
ZYAC Holding
Colorcon, Inc.
100% interest
Zymark
16.4% common
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
operations
$78,767,000
20 times net income from
operations minus 25%
minority discount
$51,534,000
1998 actual
1997 March forecast
15 times net income from
operations
$66,504,000
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
merger (BCL § 1922(c))
Board B approves plan of
merger (BCL § 1922(c))
Board A submits plan of
merger to shareholders for
vote (BCL § 1922(c))
Board B submits plan of
merger to shareholders for
vote (BCL § 1922(c))
Shareholders of A approve
plan of merger by vote
(BCL § 1924(a))
Shareholders of B approve
plan of merger by vote
(BCL § 1924(a))
Plan of merger considered
adopted by A
(BCL § 1924(a))
Plan of merger considered
adopted by B
(BCL § 1924(a))
Articles of merger executed
by A (BCL § 1926)
Articles of merger executed
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
Figure 7
Steps required for merger of corporations A and B (where A owns ≥ 80% of B)
[*33]
Plan of merger prepared
(BCL § 1922)
Board A approves plan of
merger (BCL § 1922(c))
Board B approves plan of
merger (BCL § 1922(c))
Board A submits plan of
merger to shareholders for
vote (BCL § 1922(c))
Submission to B’s shareholders
not required unless required by
bylaws (BCL § 1922(c))
Shareholders of A approve
plan of merger by vote
(BCL § 1924(a))
Approval by B’s shareholders
not required unless required by
bylaws
(BCL § 1924(b)(1)(ii))
Plan of merger considered
adopted by A
(BCL § 1924(a))
Plan of merger considered
adopted by B (BCL §1924(a))
Articles of merger executed
by A (BCL § 1926)
Execution of articles of merger
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-formmerger 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
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.
13
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
Figure 8
Dissenters-rights procedures for shareholders of a corporation that has adopted a
plan of merger without a shareholder vote
[*39]
Corporation sends shareholder
notice of adoption of plan of
merger with deadline for
depositing shares and demanding
payment (BCL § 1575(a))
Shareholder deposits
shares and demands
payment for shares
(BCL § 1575(a), (b))
Corporation remits to
shareholder its estimate
of value of shares
(BCL § 1577(c))
Shareholder may send
higher estimate to
corporation within 30
days (BCL § 1578(a))
Shareholder does not respond.
Shareholder forfeits right to receive
payment for shares (BCL § 1576(a))
Corporation notifies shareholder
of its share value; returns shares;
may make notation on returned
shares (BCL § 1577(d))
If shareholder does
not send higher
estimate, shareholder
entitled only to the
amount remitted
(BCL § 1578(b))
Shareholder may send
higher estimate of
value to corporation
within 30 days
(BCL § 1578(a))
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))
If shareholder does not
send higher estimate,
shareholder entitled to
only the amount of
corporation’s estimate
(BCL § 1578(b))
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”.
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).
17
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 shareholderderivative 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 shareholderderivative 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 squeezeout 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
Stock
Preferred
Stock
Preference
Stock
Preferential
Stock
David Berwind
Trust
16.4%
—
—
13.12%
Graham Berwind
—
—
—
2%
Berwind Group
Partners
83.6%
—
—
66.88%
—
100%
100%
18%
Shareholder
The Berwind Corp.
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
Figure 9
Corporate Structure on Dec. 14, 1999
[*45]
Graham
Berwind
Trust
Graham
Children
Trusts
47.528%
52.472%
Berwind Group
Partners
•83.6% common
•66.88% preferential
100%
common
Graham
Berwind
2% preferential
100% common
Berwind
Corporation
•1,000 Series A 8.75%
noncumulative
preferred (bought for
$10 million)
•$20 million note
•100% preferred
•100% preference
•18% preferential
•note
BPSI
100% common
ZYAC Holding
100% interest
Zymark
David Berwind
Trust
Colorcon, Inc.
•16.4%
common
•13.12%
preferential
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:
Shareholder
Common
Stock
Preferred
Stock
Preference
Stock
Preferential
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
Figure 10
Corporate structure after creation of BPSI Acquisition
[*47]
Graham
Berwind
Trust
Graham
Children
Trusts
52.472%
47.528%
Berwind Group
Partners
100%
stock
100%
stock
Graham
Berwind
53,200 common
(100%)
Berwind
Corporation
note
BPSI
Acquisition
•100% preferred
•100% preference
•84.88% preferential
•83.6% common
•1,000 Series A 8.75%
noncumulative
preferred
•$20 million note
ZYAC
Holding
BPSI
100% common
100%
Zymark
Colorcon, Inc.
David Berwind
Trust
2% preferential
•16.4%
common
•13.12%
preferential
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 squeezeout 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
I
BPSI (derivatively by
David Berwind Trust)
All
Pattern of racketeering
consisting of mail and wire fraud
in violation of 18 USC § 1962(c)
Monetary
damages
(trebled)
II
BPSI (derivatively by
David Berwind Trust)
All
Conspiracy to commit
racketeering, consisting of acts of
mail and wire fraud alleged in
count I, in violation of 18 USC
§ 1962(d)
Monetary
damages
(trebled)
III
BPSI (derivatively by
David Berwind Trust)
Directors of
BPSI
Usurpation of BPSI corporate
opportunity by BPSI directors,
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.
Monetary
damages
IV
BPSI (derivatively by
David Berwind Trust)
Directors of
BPSI
Breach of fiduciary duty by
having BPSI (1) provide equity
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.
Monetary
damages
V
BPSI (derivatively by
David Berwind Trust)
Berwind
Group
Partners;
Berwind
Corp.
Aiding and abetting the duty-ofloyalty breaches alleged in Count
IV.
Monetary
damages
VI
David Berwind Trust
Berwind
Group
Partners;
BPSI
Directors
Breach of fiduciary duty by
(1) attempting to squeeze out the
trust’s interest in BPSI to
deprive the trust of the value of
its interest and prevent the trust
from lodging a shareholderderivative suit against the BPSI
board, and (2) refusing to provide
the trust with financial
information about BPSI.
Equitable relief
to enjoin
Berwind Group
Partners and
BPSI directors
from taking
steps to affect
the minority
shareholders
interest of the
trust in BPSI.
Remedy sought
53
[*53]
Plaintiffs
Defendants
Type of claim
Remedy sought
VII
David Berwind Trust
Berwind
Group
Partners;
BPSI
Directors
Refusing to provide the trust
with financial information about
BPSI.
Equitable relief
to require
Berwind Group
Partners and
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
Group
Partners;
BPSI
Directors
Orchestrating squeeze-out
merger to prevent the trust from
seeking legal relief for the
alleged misappropriation of
corporate opportunity, misuse of
corporate assets, and breaches of
fiduciary duty and breaches of
trust.
Equitable relief
to rescind the
squeeze-out
merger and
grant trust an
interest in the
corporate entity
into which
BPSI has been
merged.
IX
David Berwind Trust
Berwind
Group
Partners;
BPSI
Directors
The defendants offered the trust
less than the fair value of its
interest in BPSI.
Demand for
statutory
appraisal under
BCL § 1571(a)
to receive the
fair value of the
trust’s interest
in BPSI.
X
David Berwind Trust
Graham
Berwind
and
McKenney
Graham Berwind and McKenney
breached their duties as trustees
of the trust by (1) usurping
corporate opportunities available
to BPSI for the benefit of
Berwind Group Partners and
Berwind Corporation, (2) using
assets of BPSI for the benefit of
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.
Monetary
damages; place
income from
alleged
breaches of
duty in a
constructive
trust
54
[*54]
Plaintiffs
Defendants
Type of claim
XI
David Berwind Trust
Graham
Berwind
Pattern of racketeering
consisting of mail and wire fraud
in violation of 18 USC § 1962(c)
Monetary
damages
(trebled)
XII
David Berwind Trust
All
defendants
Plan of merger not authorized
and did not comply with the
BCL. Also, sole purpose of plan
of merger was to deprive the
trust of standing to pursue the
Warden litigation.
Declaratory
judgment that
plan of merger
is null and void.
XIII
David Berwind Trust
Graham
Berwind
and
McKenney
Graham Berwind and McKenney
violated their duties as trustees
of the trust by directing the
defendants to refuse to provide
the trust with financial
information about BPSI and by
using the squeeze-out merger to
defraud the trust and deprive it
of the value of its BPSI shares,
and using the squeeze-out
merger to prevent the trust from
asserting the shareholderderivative claims in the amended
complaint.
Equitable claim
to enjoin
Graham
Berwind and
McKenney from
taking any
action to modify
the minority
shareholder
interest of the
trust in BPSI.
Remedy sought
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-quomaintenance 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
record.
trustee.
20 The supplement to the February 16, 2000 reply memorandum is not in the
21 The record does not reveal when Michael Berwind became the managing
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
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.
24
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]
Item
Walk Away
Would
Be
Happy
BPSI
Zymark
Subtotal
120
20
140
Claims
Subtotal
7
147
10
168
Interest on above
Subtotal
33
180
37
205
Fees and expenses
2
2
182
207
Total
1The amounts in the table are in millions.
133
25
158
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 shareholderderivative 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. at 116.
The Third Circuit addressed the holdings in part I of the District
Court opinion, which dismissed Counts X and XIII. Warden v.
McLelland, 288 F.3d at 110; Warden v. McLelland, 2001 WL 910934, at
*17–18. The Third Circuit rejected the District Court’s conclusion that
Graham Berwind and McKenney had resigned. Warden v. McLelland,
288 F.3d at 110. The Third Circuit reasoned that the plaintiffs’
allegation that they had not resigned must be accepted as true for
purposes of Fed. R. Civ. P. 12(b)(6). Warden v. McLelland, 288 F.3d at
110. The Third Circuit also held that the deed of trust of the David
Berwind Trust did not relieve Graham Berwind and McKenney of all
liability for breach of trust as trustees. Id. The Third Circuit concluded
that “we will reverse with respect to plaintiffs’ breach of trust claims
and leave the precise effect of the exculpatory provision for the District
Court to consider on remand.” Id.
Next the Third Circuit addressed what it called the “[r]emaining
claims.” It stated:
There are other arguments made by the parties. But many
of these seem to have been abandoned; others are clearly
ancillary to other arguments or other claims. These
remaining issues are best resolved by the District Court in
the context of its reexamination of the central issues in the
case. Accordingly, we will vacate the remainder of the
District Court’s opinion.
72
[*72] Id. These sentences were the expression of the Third Circuit’s
view of all portions of the District Court opinion not addressed
specifically in other portions of the Third Circuit opinion. These notspecifically-addressed portions of the District Court opinion were
apparently parts C.5, C.6, G, H, and J.
Finally the Third Circuit stated: “For the foregoing reasons, we
will reverse the dismissal under Federal Rule of Civil Procedure 12(b)(6)
and remand the case to the District Court for proceedings consistent
with this opinion.” Warden v. McLelland, 288 F.3d at 116.
On May 4, 2002, David Berwind sent a letter to Graham Berwind
in which he stated “we will commit whatever resources are needed to
ensure that the [David Berwind] Trust receives full and fair value for its
interest in the family business, if we decide to sell that interest.”
On October 10, 2002, Michael Berwind, as managing trustee of
the David Berwind Trust, sent an electronic memorandum to Pawson
and Russell Shappy regarding “BPSI Negotiation Trustee Authority.”
In the October 10, 2002 memo, Michael Berwind requested trustee
approval “to accept $150 million for the Trust’s position in BPSI &
Zymark and the claims associated with the 1999 complaint [before
interest and payment of our legal fees and other litigation expenses].”
(Brackets in original). The October 10, 2002 memo also stated:
[S]ufficient time has passed since December 1999 [when
Graham attempted to impose a squeeze out merger] for us
to determine BPSI’s value with price earnings valuation
calculations.
As detailed in the trustee authority worksheet -- the
requested $150 million trustee authority is reached in
large part by averaging a 27.5 price earnings multiple of
BPSI’s 2001 adjusted net income in a five-year weighted
average together with BPSI’s 2000 adjusted net income
unweighted. I believe that a 27.5 price earnings multiple
is a reasonable and prudent bottom line authority level.
(Brackets in original).
According to the October 10, 2002 memo, Michael Berwind
provided the trustee-authority worksheet “to help [the trustees]
understand how [he] arrived at $150 million.” The trustee authority
73
[*73] worksheet detailed “Would Be Happy” and “Walk Away” numbers.
The trustee-authority worksheet was as follows:
Valuation[1]
Walk Away
133
10
143
Would Be
Happy
148
16
164
Claims
Subtotal
7
150
10
174
Interest on [BPSI & Zymark]
Subtotal
24
175
44
218
2
2
Total
177
1The amounts in the table are in millions.
220
BPSI
Zymark
Subtotal
Item
Fees and expenses
On October 10, 2002, the David Berwind Trust trustees held a
special meeting. The minutes of the meeting show that four out of five
of the trustees voted to give Michael Berwind settlement authority as to
the Warden litigation and appraisal proceeding of $150 million plus
interest and expenses to expire on December 7, 2002.” The four trustees
voting in favor were David Berwind, Michael Berwind, Valerie Pawson,
and Linda Berwind Shappy. The fifth trustee, Gail Berwind Warden,
abstained from the vote.
In the present case, petitioners allege that Graham Berwind and
McKenney remained as trustees. We do not express a view on this
matter. See infra OPINION, Part I.D. In any event, the record indicates
that Graham Berwind and McKenney did not attend this meeting.
On October 16, 2002, coinciding with the deposition of attorney
Norman E. Donaghue that began that day in Philadelphia in the Warden
litigation, Pawson and Russell Shappy met with Graham Berwind and
McKenney (an officer of Berwind Corporation) to discuss settlement of
the consolidated Warden litigation and appraisal proceeding.
On October 17, 2002, in an email sent to Jes Lawson 28 and others,
Russell Shappy wrote: “After two days of discussions, we mutually
28 Jes Lawson was an investment banker advising the David Berwind Trust on
the current value of BPSI and Zymark.
74
[*74] walked away tonight from negotiations with Berwind. We
narrowed the gap from $105M to $35M!” The deposition continued on
October 18, 2002.
On October 21, 2002, Russell Shappy had a conversation with
David Berwind Trust attorney John Schmehl of Dilworth Paxson, LLP,
which included a discussion of, among other things, an “IRS imputed
tax.” Later that day, Pawson discussed with Russell Shappy the
contents of Shappy’s conversation with Schmehl. Later on October 21,
2002, Russell Shappy had a telephone call with McKenney during which
they discussed, among other things, McKenney’s investigation of a
“synthetical” interest rate and resuming settlement negotiations. Later
that day, Pawson discussed with Russell Shappy the contents of
Shappy’s conversation with McKenney.
On October 24, 2002, the parties to the Warden litigation and the
appraisal proceeding reached an oral settlement agreement. The oral
settlement agreement’s terms were memorialized in an October 26,
2002 settlement term sheet.
At a date undisclosed by the record, but no later than October 26,
2002, Berwind Group Partners was succeeded by Berwind Company,
LLC, a Delaware limited liability company. The first time the Berwind
Company, LLC, is mentioned in the record is October 26, 2002 (in the
settlement term sheet). For simplicity, we will refer to the Berwind
Company, LLC, by the name of its predecessor, Berwind Group
Partners.
On November 22, 2002, the Orphans’ Court in Montgomery
Count, Pennsylvania, held a conference with the parties to the Warden
litigation and the appraisal proceeding. During the conference, the
judge said that the Orphans’ Court did not need to see an independent
valuation.
On November 25, 2002, the parties to both the Warden litigation
and the appraisal proceeding entered into a written settlement
agreement (the settlement agreement). The settlement agreement
superseded the October 24, 2002 oral settlement agreement and the
October 26, 2002 settlement term sheet. BPSI was one of the parties to
the settlement agreement and it executed the agreement by signature
of its executive vice president.
The preamble to the settlement agreement stated that the David
Berwind Trust “has asserted that the Disputed Merger [defined as the
75
[*75] merger of BPSI Acquisition Corporation with, and into, BPSI] did
not comply with Pennsylvania law and is invalid and of no effect, and
has requested that the Disputed Merger be declared null and void as
part of the relief sought.” The preamble also stated BPSI “has asserted
that the Disputed Merger complied with Pennsylvania law and was
valid and effective as of December 16, 1999, and that on that date the
BPSI Shares 29 held by the [David Berwind] Trust were converted into
the right to receive the fair value of such shares.” The preamble also
recited that “as a precautionary matter and without prejudice to its
claim that the Disputed Merger was invalid, the [David Berwind] Trust
made demand upon BPSI for payment of the fair value of the BPSI
Shares pursuant to the dissenters rights provisions of Pennsylvania
law.” It also stated that Berwind Group Partners “owns all of the shares
of common stock of BPSI other than the BPSI Shares . . . the legal status
of which is an issue in the [Warden] Litigation.”
The settlement agreement set forth the terms and conditions
upon which the parties to the agreement agreed to (1) resolve their
respective claims in the Warden litigation and the appraisal proceeding
and (2) terminate the Warden litigation and the appraisal proceeding.
The settlement agreement required the David Berwind Trust, BPSI, and
the other defendants in the Warden litigation, to deliver various items
to the “Escrow Agent” 30 concurrently with the execution of the
settlement agreement:
•
The David Berwind Trust was required to deliver “stock
certificate No. C2, which constitutes the only stock certificate
of BPSI that the [David Berwind] Trust currently holds;”
•
The David Berwind Trust was to deliver general releases from
all presently serving trustees of the David Berwind Trust and
all current beneficiaries of the David Berwind Trust, as
releasors, in favor of BPSI and the defendants in the Warden
litigation (the David Berwind Trust general release);
•
BPSI was to deliver a general release from BPSI, and the
Graham Berwind Family Trust trustees and beneficiaries (the
Graham Berwind Family Trust release); and
29 The “BPSI Shares” were defined as the 6,560 shares of BPSI common stock
owned by the David Berwind Trust.
30 The “Escrow Agent” was defined in the settlement agreement as PNC Bank.
76
[*76] •
The David Berwind Trust, BPSI, and the defendants in the
Warden litigation other than BPSI were to deliver stipulations
of dismissal of the Warden litigation and the appraisal
proceeding.
The items to be delivered are collectively referred to as the “escrow
items.”
Paragraph 1(a)(i) of the settlement agreement provided that
“BPSI shall pay to the . . . [David Berwind] Trust the sum of . . .
$191,000,000 . . . in immediately available funds, which the [David
Berwind] Trust shall direct to be wired by BPSI directly to the Escrow
Account (as defined in the Escrow Agreement) for the benefit of the
[David Berwind] Trust.” The “Escrow Agreement” referred to in the
settlement agreement was a separate agreement which was signed by
the parties to the Warden litigation and the appraisal proceeding (as
well as by PNC bank as escrow agent) in conjunction with the settlement
agreement. We refer to it as the “escrow agreement”. The escrow
agreement defined the Escrow Account as “an escrow account at the
Escrow Agent in the name of David Berwind Trust Escrow Account”.
The escrow agreement defined the Escrow Agent as PNC Bank. We
refer to the Escrow Account as the “PNC escrow account.”
The settlement agreement defined the term “Settlement Amount”
to refer to the $191,000,000 amount required by paragraph 1(a)(i) to be
paid by BPSI to the David Berwind Trust. The settlement agreement
provided that the “Settlement Amount” (i.e., the $191,000,000) and the
escrow items had to be held “in escrow” and “not released” except in
accordance with the terms of the settlement agreement and the escrow
agreement. The settlement agreement required the David Berwind
Trust and the Graham Family Trusts to give written notice to PNC
Bank that the conditions to the escrow release have been satisfied, in
which event PNC Bank was required to “release the Settlement
Amount” and the escrow items. 31 This obligation of PNC Bank to
“release the Settlement Amount” was specified by the settlement
agreement to mean that “the Settlement Amount, together with all
interest earned thereon, shall be remitted by wire transfer to the [David
Berwind] Trust.” One of the conditions to the escrow release was that
the Orphans’ Court grant the petitions of both the David Berwind Trust
31 The settlement agreement allowed the David Berwind Trust and the
defendants in the Warden litigation to waive the conditions for the escrow fund release
through a written waiver.
77
[*77] and the Graham Family Trusts to approve the settlement
agreement. This condition related to paragraph 2(a) of the settlement
agreement, which required the David Berwind Trust and the Graham
Family Trusts to file petitions with the Orphans’ Court seeking approval
of the settlement agreement as to each respective trust. If the Orphans’
Court declined to approve the settlement agreement, the David Berwind
Trust and the defendants in the Warden litigation each had the option
to terminate the settlement agreement.
As explained above, paragraph 2(a) of the settlement agreement
required the David Berwind Trust and the Graham Family Trusts to file
petitions with the Orphans’ Court seeking the approval of the settlement
agreement as to each respective trust. The petition filed by the David
Berwind Trust with the Orphans’ Court had to “include a request that
the Orphans’ Court confirm the resignations of [Graham Berwind] and
. . . McKenney as trustees of the [David Berwind] trust, effective as of
June 26, 1997 and December 30, 1997, respectively.”
Paragraph 10 of the settlement agreement required the David
Berwind Trust to represent and warrant to BPSI that, as of November
25, 2002, “it owns the BPSI Stock Certificate, and any interest in BPSI
evidenced thereby, free and clear of any liens, security interests, pledges
or other encumbrances.”
As explained before, in conjunction with the settlement
agreement, the parties to the Warden litigation and the appraisal
proceeding signed an escrow agreement, dated as of November 25, 2002.
The “Settlement Amount” was defined by the escrow agreement as
$191,000,000 that BPSI had agreed to pay the David Berwind Trust
pursuant to the settlement agreement and which BPSI had wired to
PNC Bank. Under the escrow agreement, PNC Bank, as escrow agent,
“agreed to hold the Settlement Amount, together with any and all
investments and reinvestments thereof and any interest and other
income therefrom,” which amounts, in total, were defined as the “Escrow
Fund.” The escrow agreement required PNC Bank to invest the Escrow
Fund in accordance with the instructions of the David Berwind Trust.
The escrow agreement required PNC Bank to release the Escrow Fund
to the David Berwind Trust by wire transfer if it received a joint written
notice from the David Berwind Trust and BPSI that the conditions for
escrow release under the settlement agreement had been satisfied. The
escrow agreement required PNC Bank to release the Escrow Fund to
BPSI if it received a joint written notice from the David Berwind Trust
and BPSI that the settlement agreement had been terminated.
78
[*78] Attached to the escrow agreement was an unsigned 32 copy of the
David Berwind Trust general release which provided, in part, that:
In exchange for good and valuable consideration . . .
each of the undersigned [David Berwind] Trust Releasors
. . . hereby release and forever discharge the Releasees . . .
from any and all obligations, claims, debts, demands . . . of
any nature whatsoever in law or in equity . . . whether
based in tort, contract, statute, regulation, equitable
principles or any other theory of recovery, direct or indirect,
contingent or liquidated, or third party or derivative, which
they or any of them ever had . . . against the Releasees or
any of them . . . from the beginning of time to the date of
this General Release, including but not limited to, all
claims . . . arising from, relating to, or based upon any one
or more of the following:
A. The disputed December 16, 1999 merger of BPSI
Acquisition Corporation with and into BPSI;
B. The fair value of the shares of common stock of BPSI
owned by the [David Berwind] Trust prior to the
December 16, 1999 merger; and
C. The matters asserted or which could have been
asserted in the actions captioned Warden v.
McLelland, et al., Civil Action No. 99-CV-5797 and
Berwind Pharmaceutical Services, Inc. v. Warden, et
al., Civil Action No. 00-CV-1445, pending in the U.S.
District Court for the Eastern District of
Pennsylvania [i.e., the Warden litigation and the
appraisal action].
The “[David Berwind] Trust releasors” were defined to include all
trustees and beneficiaries of the David Berwind Trust, except for alleged
trustees Graham Berwind and McKenney. The “releasees” were defined
as Graham Berwind and his daughters, McKenney, and Morris.
Paragraph 5 of the settlement agreement required Berwind
Group Partners to make an additional cash payment to the David
32 Despite it being unsigned, none of the parties contend that the general
release was not binding.
79
[*79] Berwind Trust if BPSI or Zymark, or substantial assets of either
company, were sold within five years of the date of the settlement
agreement and if the sale price exceeded a specified amount. The
provisions governing an additional cash payment are summarized by
petitioners as follows:
Section 5(a) provided, in pertinent part, as follows:
In the event that at any time after the date of this
Agreement and prior to November 25, 2007 (the “Ride-up
Period”) there shall occur one or more of the following
events (each, a “Zymark Triggering Event”) . . . and, as a
result of any such Zymark Triggering Event, the Berwind
Affiliates shall receive in the aggregate a Zymark Net
Amount that exceeds the Zymark Base Amount for such
Zymark Triggering Event, The Berwind Corporation[33]
will make an additional cash payment (a “Ride-up
Payment”) to the DB Trust in an amount determined in
accordance with Annex I hereto, (the “Ride-up Annex”),
which shall be deemed incorporated in and made part of
this Agreement.
....
The ”Zymark Triggering Events” were, generally,
sales by ZYAC or Zymark to a third party of substantially
all of their assets, sales of all or substantially all of ZYAC’s
or Zymark’s common stock to a third party, or other similar
transactions resulting in a shift of ownership of
ZYAC/Zymark.
....
Paragraph 2 of the Ride-up Annex defined “Zymark
Base Amount,” in part, as the sum of $182,926,829 plus
13.2% annum interest from the date of the Settlement
Agreement to the closing of any Zymark Triggering Event,
compounded on each anniversary of the Settlement
Agreement.
33 Apparently a typographical error–the settlement agreement required the
Berwind Company, LLC, the successor to Berwind Group Partners, and which we refer
to as Berwind Group Partners, to make the ride-up payment, not Berwind Corporation.
80
[*80] . . . .
In addition, the DB Trust received rights from
[Berwind Group Partners] under Section 5(b) of the
Settlement Agreement to participate in any increase in the
value of BPSI if certain interests in BPSI were sold or
transferred within five years of the settlement date.
....
In the event that such interests in BPSI were so sold
or transferred, the DB Trust would share in the excess of
the “BPSI Net Amount” over the “BPSI Base Amount,”
which the Settlement Agreement defined, in part, as
$838,181,191 plus 13.2% per annum interest from the date
of the Settlement Agreement to the closing of any BPSI
Triggering Event, compounded on each anniversary of the
Settlement Agreement.
....
According to the Settlement Agreement, both the
Zymark Base Amount and the BPSI Base Amount were
based on “(A) a capital contribution of $47,473,874 made by
[Berwind Group Partners] to ZYAC on or immediately
prior to the date [of the settlement], the proceeds of which
have been paid to BPSI to repurchase the preferred stock
of ZYAC held by BPSI and to repay the note of ZYAC held
by BPSI, and (B) the payment of the Settlement Amount of
$191,000,000 by BPSI to the Escrow Agent for the benefit
of the DB Trust concurrently with the execution of this
agreement.”
Brackets in the excerpt above are in the original brief. References to
“ZYAC” are to ZYAC Holding. References to the “DB Trust” are to the
David Berwind Trust. References to the “Escrow Agent” are to PNC
Bank. The excerpt above is found in petitioners’ proposed findings of
fact. The IRS does not disagree with these particular proposed findings
of fact.
81
[*81] As explained above, paragraph 2(a) of the settlement agreement
required the David Berwind Trust and the Graham Family Trusts to file
petitions with the Orphans’ Court seeking the approval of the settlement
agreement as to each respective trust. The petition filed by the David
Berwind Trust with the Orphans’ Court had to “be supported by a
valuation report of an investment bank or other financial expert selected
by the [David Berwind] Trust regarding the value or range of values of
the interest and/or claim of the [David Berwind] Trust in and to BPSI
and ZYAC Holding . . . and its wholly owned subsidiary, Zymark.” The
David Berwind Trust was required to “ask the Orphans’ Court to avoid
making the valuation report part of the public record because of the
confidential information in the report regarding BPSI, ZYAC [Holding]
and Zymark.” The settlement agreement set forth the additional
following conditions for submitting the valuation report:
The valuation report may be submitted to the Orphans’
Court by the [David Berwind] Trust after the filing of its
Petition to approve this Agreement. The [David Berwind]
Trust shall endeavor to submit the valuation report to the
Orphans’ Court not later than December 6, 2002. The
[David Berwind] Trust shall provide a copy of the valuation
report to the CGB Family Trustees [trustees of the Graham
Family Trusts] for its [sic] review prior to submitting such
report to the Orphans’ Court.
The David Berwind Trust hired Curtis Financial Group, LLC
(Curtis), to create the valuation report and, under the settlement
agreement, the trust was responsible for paying the costs of the
valuation report. The parties to the Warden litigation and the appraisal
proceeding never agreed to the specific effective date on which the
valuation of BPSI, ZYAC Holding, and/or Zymark was to be determined
in Curtis’ report.
Paragraph 6(a) of the settlement agreement provided that:
Unless otherwise permitted by this Section 6(a), neither
BPSI nor the Defendants [i.e., the defendants in the
Warden litigation] shall provide to the [David Berwind]
Trust or file with the Internal Revenue Service or any other
taxing authorities any information returns with respect to
the Settlement Amount or the terms of the Settlement. In
the event that counsel to BPSI and the Defendants shall
conclude that such reporting is required by law, BPSI and
82
[*82] the Defendants shall give adequate prior written notice to
the [David Berwind] Trust and in any event not later than
January 15 of the year following the taxable year for which
reporting is required. The [David Berwind] Trust shall be
given an opportunity to respond and provide to BPSI and
the Defendants a contrary conclusion from its legal counsel
by January 31 of such year. If the parties cannot agree as
to whether the requirement shall apply, counsel to the
[David Berwind] Trust and counsel to BPSI and the
Defendants shall select an independent tax counsel to
render a final opinion, on or before February 20, which
shall be governed by a “more likely than not” standard, and
the parties shall follow such opinion. The cost of the
independent counsel shall be shared equally by the parties.
The defendants in the Warden litigation were Graham Berwind,
McKenney, Berwind Corporation, Berwind Group Partners, McLelland,
Byrne, Dulaney, Hamling, Kosnik, Karlson, and Cohn.
As explained earlier, the November 25, 2002 settlement
agreement required BPSI to transfer $191,000,000 to the PNC escrow
account; required PNC Bank to hold the $191,000,000 in escrow,
specifically in the PNC escrow account; and required PNC Bank to
transmit the $191,000,000, “along with interest thereon,” to the David
Berwind Trust. The parties have stipulated that on November 25, 2002,
BPSI deposited the $191,000,000 amount “in an escrow account.”
Furthermore, the parties stipulated that the deposited amount earned
$7,012 before the total of $191,007,012 was then transferred to the PNC
escrow account. The transmittal of the $7,012 of interest by BPSI to
PNC Bank, and the holding of the $7,012 of interest by PNC Bank was
not directly addressed by the settlement agreement. However, the
escrow agreement defined the “escrow fund” to consist of (1) the
$191,000,000 and (2) “any interest and other income therefrom” (and
thus, the $7,012 of interest). The escrow agreement required that the
escrow fund be held by PNC Bank in the PNC escrow account.
Furthermore, the escrow agreement required PNC Bank to release the
escrow fund if it received written notice from the David Berwind Trust
and BPSI stating that the conditions to the escrow release under the
settlement agreement have been satisfied. Furthermore, the escrow
agreement provided that the escrow fund (which was the $191,000,000
and “any interest and other income therefrom”) was to be released to the
David Berwind Trust by “wire transfer” of the “[s]ettlement [a]mount,
together with all interest earned thereon.” In summary, the escrow
83
[*83] agreement
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