ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA
Before Gibbons and Hunter, Circuit Judges, and Meanor,*fn* District Judge.
In this appeal we consider the limits, if any, imposed by law on a commercial bank which wishes to advance funds to one client in order to facilitate that client's takeover of another of the bank's clients. The appeal is taken from a preliminary injunction prohibiting appellant Chemical Bank (Chemical) from participating in a loan to Talley Industries, Inc., and TW Corporation, its wholly owned subsidiary, (Talley), the proceeds of which were to be used for the purchase by Talley of the outstanding shares of stock of appellee Washington Steel Corporation (Washington). Because we take a narrower view than did the district court of the limits on Chemical's lending authority, and because, on the present record, no facts support the trial court's order, we reverse the grant of preliminary relief and remand for further proceedings.
On January 15, 1974, Washington executed a credit agreement with Pittsburgh National Bank, Chemical, and Morgan Guaranty Trust Company, pursuant to which the banks agreed to lend Washington up to $10,000,000. Pittsburgh National was the lead bank in that transaction, agreeing to advance 55% Of the funds. The credit agreement identified Pittsburgh National as "agent" of the lenders for purposes of the loan. Chemical agreed to advance 22.5% Of the funds, or an amount up to $2,250,000. Morgan Guaranty made a similar commitment.
In connection with its participation in the loan to Washington, Chemical received certain information from Washington, some of which was non-public in nature. This information included a May, 1973 Study produced by Washington, providing cash flow and earnings projections for Washington through 1982. In addition, Washington supplied Chemical with quarterly statements of its financial affairs as well as a year-end statement dated December 28, 1978 for the fiscal year ending September 30, 1978.
Besides participating as one of three banks lending money to Washington, Chemical also served as one of two registrars for its common stock. Its function as registrar was to ensure that no more than the authorized number of Washington shares of stock were issued.
Over the years, Chemical has also been the lead bank in loans to Talley. In January, 1979, Talley decided to endeavor to acquire Washington. On or about January 13, 1979, Talley spoke to Paul Fitzgerald, a Vice President at Chemical. Fitzgerald was the principal Chemical liaison to Talley, having worked on four or five Talley loan agreements during the prior seven years. At that time Talley discussed a possible acquisition of an unnamed company. Two days later, on January 15, Fitzgerald met with Talley representatives at the offices of Chemical's legal counsel. A discussion was held as to whether Chemical might participate in financing Talley's proposed acquisition of Washington, which was for the first time identified as the proposed acquisition target. An attorney for Talley indicated a belief that Chemical had an ongoing business relationship with Washington. As noted above, this relationship included an outstanding loan agreement and Chemical's service as a registrar for Washington stock.
Later in the day of January 15, Fitzgerald and other members of the Chemical Corporate Banking Department discussed in greater detail the possibility of financing the proposed acquisition. One of the persons attending this meeting was John Roach, District Director for Western Pennsylvania, who supervised the Washington Steel account at Chemical. Roach indicated that there was a loan outstanding to Washington Steel in which Pittsburgh National was the lead bank and Chemical and Morgan Guaranty were participants. Roach also stated that he could not be sure what Washington Steel's reaction would be to the Talley offer. At the conclusion of the meeting, a senior officer of the Chemical Corporate Banking Division made a policy decision that the Bank was not precluded from participating in the proposed loan, assuming that the loan was justified from the standpoint of Talley's creditworthiness.
Thereafter, Fitzgerald and his staff performed a credit analysis of Talley. Concluding that the company was a favorable credit risk, senior credit officials approved the loan commitment. Accordingly, on January 18, 1979, a commitment letter was executed by Chemical and other participating banks confirming the terms upon which each agreed to participate in the Talley loan and setting forth its terms.
By letter delivered on January 19, 1979, Talley communicated to Washington management and directors its proposal for a merger of the two companies to be accomplished by Talley's paying $36.00 per share of common stock to the shareholders of Washington. This offer was rejected by Washington's management and, by letter of January 23, 1979, notice of the rejection was conveyed to the Washington shareholders.
On January 26, 1979, Talley renewed its offer to merge with Washington, this time proposing to pay $37.50 per share of common stock. In connection with the tender offer, Talley filed a Schedule 14D-1 Statement with the Securities and Exchange Commission. See Section 14(d) of the Securities and Exchange Act of 1934, as added by 15 U.S.C. § 78n(d). In addition, Talley filed a registration statement with the Pennsylvania Securities Commission, in compliance with the Pennsylvania Takeover Disclosure Law, 70 P.S. § 71 Et seq.
On January 31, 1979, Washington's management sent a letter to its shareholders urging rejection of the Talley offer. It reiterated this position in a February 1 newspaper advertisement. On February 5, 1979, Washington brought the instant suit in the United States District Court for the Western District of Pennsylvania. In pertinent part, Washington contended (1) that Talley had violated §§ 14(d) and (e) of the Securities and Exchange Act of 1934, as added by 15 U.S.C. §§ 78n(d) and (e) (the Williams Act), by its allegedly inadequate disclosures and deceptive practices in connection with the tender offer, and (2) that Chemical had violated its fiduciary duty to Washington in that it had ...