Loading...
HomeMy WebLinkAbout00-03738 ~. .~ ~ . L '" " ~' .c. ,'1 _.~ ROBERT WILSON RD1, BOX 85 NEWPORT, PA 17074 ;'- '.~, " .'. . ',' IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYL VANIA AND WILLIAM WILSON 4997 WESTCHESTER DRIVE, HARRlSBURG, PA 17112 Plaintiffs v. CIVIL ACTION - LAW CONTINUING CARE RX,: INC., 1217 SLATE HILL ROAD, CAMP HILL, PENNSYLVANIA 17011 PHI, INC. Defendants NO. 00-3738 CIVIL TERM 0 (;::) c C) ~:: '-- -0 cu r"'- . .. r" ~..; , z :;:::: i""-- :-...) ~~~ 0 .. < c. :::;; ~ c" -"'~ c:::' ;:.."> C '..::.) () ;-2': . . .",-~ ~ =<! :J.J H< PRELIMINARY INJUNCTION AND NOW, this 2,0 ~ay of June, 2000, upon consideration of Plaintiffs' Motion for Special Injunction, it is ordered and decreed as follows, pending further order of court: 1. Defendants are enjoined from consummating any merger between them; and 2. Defendant Continuing Care RX, Inc., is enjoined from issuing additional shares of stock. A HEARING on the dissolution, continuation or modification of this preliminary injunction shall be held on Thursday, June 22, 2000, at 9:30 a.m., in Courtroom No.1, Cumberland County Courthouse, Carlisle, Pennsylvania. . ?',. .. , '.'~ " "''''--'''''d "" . THIS PRELIMINARY INJUNCTION shall be effective upon the filing of a bond, with surety approved by the court, or the depositing of cash, with the prothonotary, in the amount of $25,000.00, by Plaintiffs, conditioned that if the injunction is dissolved because improperly granted or for failure to hold a hearing Plaintiffs shall pay to any person injured all damages sustained by reason of granting the injunction and all legally taxable costs and fees. See Pa. R.C.P. 1531(b). mE AFORESAID BOND or cash must be filed or deposited within 10 days of today's date. See Goodies Oide Fashion Fudge Co. v. Kuiros, 408 Pa. Super. 495,597 A.2d 141 (1991). Allen C. Warshaw, Esq. Edward A. McMerty, III, Esq. 305 North Front Street, 5th Floor P.O. Box 1003 Harrisburg, PA 17108-1003 Attorneys for Plaintiffs Michael R. Kelley, Esq. 100 Pine Street P.O. Box 1166 Harrisburg, PA 17108-1166 Attorney for Defendants :rc BY THE COURT, J. .~. ~ 00 t?\i~~~ ""l~k,h ~., ;1 ..,.., IN TIlE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT, PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG, PA 17112 PLAINTIFFS CivilActionNo.~) -3?lY e<J;{~/~ V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 and PHI, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 DEFENDANTS NOTICE You have been sued in court. If you wish to defend against the claims set forth in the following pages, you must take action within twenty (20) days after this Complaint and Notice are served, by entering a written appearance personally or by an attorney and filing in writing with the court your defenses or objections to the claims set forth against you. You are warned that if you fail to do so the case may proceed without you and a judgment may be entered against you by the court without further notice for any money claimed in the Complaint or for any other claim or relief requested by the Plaintiff. You may lose money or property or other rights important to you. YOU SHOULD TAKE THIS PAPER TO YOUR LAWYER AT ONCE. IF YOU DO NOT HAVE A LAWYER OR CANNOT AFFORD ONE, GO TO OR TELEPHONE TIlE OFFICE SET FORTH BELOW TO FIND OUT WHERE YOU CAN GET LEGAL HELP. Court Administrator 4th Floor, Cumberland Connty Courthouse Carlisle, PA 17013 (717) 240-6620 ,.... "- .u ~",~!'t> .f IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD I,BOX85 NEWPORT, PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRlSBURG,PA 17112 Civil Action No. PLAINTIFFS V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 and STEPHEN PROCTOR 7 AL YDAR BOULEVARD DILLSBURG, PA DEFENDANTS NOTICIA Le han demandado a usted en la corte. Si usted quiere defenderse de estas demandas expuestas en las paginas signientes, usted tiene viente (20) dias de plazo al partir de la fecha de la demanda y la notificacion. Usted debe presentar una apariencia escrita 0 en persona 0 por abogado y archivar en la corte en forma escrita sus defensas 0 sus objeciones a las demandas en contra de su persona. Sea avisado que si usted no se defiende, la corte tomara medidas y puede entrar nna orden contra usted sin previo aviso 0 notificacion y por cualquier queja 0 alivio que es pedido en la peticion de demanda. Usted puede perder dinero 0 sus porpiedades 0 otros derechos importantes para usted. LLEVE ESTA DEMANDA A UN ABODAGO IMMEDIATAMENTE. SI NO TIENE ABOGADO 0 SI NO IlENE EL DINERO SUFICIENTE DE PAGAR TAL SERVICIO, VAYA EN PERSONA 0 LLAME POR TELEFONO A LA OFICINA CUYA DIRECCION SE ENCUENTRA ESCRITA ABAJO PARA AVERIGUAR DONDE SE PUEDE CONSEGUlR ASISTENCIA LEGAL. Court Administrator 4th Floor, Cumberland Connty Courthouse Carlisle, P A 17013 (717) 240-6620 " ~ ~ '~'<;f~;? . IN ruE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT,PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG,PA 17112 PLAINTIFFS Civil Action No. ()(J- 37.3% Ct;;..rV:;",",--_ V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 PIll, INC. 1271 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 DEFENDANTS COMPLAINT 1. Plaintiffs, Robert Wilson and William Wilson (the "Wilsons"), bring this action in their capacity as minority shareholders of Defendant Continuing Care Rx, Inc. ("CCRx") against Defendants, CCRx and its majority shareholder, PIll, seeking to enjoin PIll from using its power as majority shareholder to dilute the value of Plaintiffs' CCRx shares at the same time it is causing the corporation to purchase those shares and to appoint a custodian to continue the business while Plaintiffs and Defendants seek to resolve their differences. These actions by PIll are part of a broader plan directed at depriving the Wilsons of the fair value of the time, money and ideas they have invested in CCRx, a corporation that they helped found, which continues to provide services based entirely upon their ideas. While each action undertaken by Defendants may in isolation appear permissible, in combination that serve to maliciously oppress the minority shareholders of " . . < ~ 1--t',c',o, , the corporation in derogation of fiduciary duties owed by the corporation's directors and its majority shareholder to the minority shareholders. 2. Plaintiff William Wilson is an individual residing at 4997 Westchester Drive, Harrisburg, PA 17112. 3. Plaintiff Robert Wilson is an individual residing at RD 1, Box 85, Newport, PA 17074. 4. Defendant Continuing Care Rx, Inc. is a Pennsylvania Corporation with its registered office at 1217 Slate Hill Road, Camp Hill, Pennsylvania 17011. 5. Defendant pm is a Pennsylvania Corporation with its registered office at 1217 Slate Hill Road, Camp Hill, Pennsylvania 17011. 6. Plaintiffs Robert and William Wilson are registered pharmacists who, in December of 1996, with a third individual, Thomas Trite, founded a corporation called Continuing Care Rx, Inc. ("CCRxl "). 7. From December 24,1996, until February 25,1998, Robert Wilson, William Wilson and Thomas Trite were the owners and managers ofCCRxl. 8. The business of CCRxl was to enter into contracts with nursing homes and other institutions under which CCRxl would provide and distribute prescription drugs to the residents of the nursing home or other institution. 9. In February of 1998, CCRxl entered into an agreement with pm, a Pennsylvania corporation, to provide and distribute prescription drugs at nursing homes owned and operated by Presbyterian Homes Incorporated, a subsidiary of PHI. 10. In February of 1998, pm entered into an Asset Purchase Agreement with William Wilson, Robert Wilson and Thomas Trite under which pm purchased the business, name and other assets ofCCRxl, subject to certain liabilities, and created a new corporation by the name Continuing Care lb:, Inc. ("CCRx2") to operate the pharmacy business previously operated by CCRxl. A true ,.~~-,,-- "h '~1ll,"., and correct copy of that Asset Purchase Agreement is attached hereto and made a part hereof as Exhibit "A." 11. The Asset Purchase Agreement also provided that the WiIsons and PHI would enter into an agreed to Management Agreement and an agreed to Stockholders Agreement. 12. On or about February 25, 1998, the Wilsons and Trite entered into a Management Agreement and a Stockholders Agreement. 13. Under the Shareholders Agreement, the Wilsons and Trite (the "Minority Shareholders") were to subscribe to two hundred and fifty (250) shares of stock, representing twenty.five percent (25%) of the issued stock, with PHI (the "Majority Shareholder") retaining seven hundred and fifty (750) shares or seventy-five (75%) of the issued stock. A true and correct copy of that Shareholders Agreement is attached hereto and made a part hereof as Exhibit "B." 14. Under the Management Agreement, The Wilsons and Trite were engaged by CCRx2 for a term offive (S)years as "management consultants." A true and correct copy of that Agreement is attached hereto and made a part hereof as Exhibit "C." 15. Under the Management Agreement, the consulting duties included: (a) During the Consulting Term [five years], the Management Consultants [the Wilsons] shall be available to assist [CCRx2] in the ongoing management of the retail and institutional pharmacy Business to be carried on by [CCRx2], including the total management of the Business. Specifically, Management Consultants shall select, hire and train the staff and employees of Pharmacy, supervise, evaluate and determine the compensation of such employees, develop operational policies, staffing levels and budgets, and perform all other functions required to manage and operate the Business. (b) Management Consultants agree to provide the consulting services as defined herein and to use their best efforts and abilities in performing services, and to give Pharmacy the full benefit of Management Consultants' knowledge, experience, judgment and expertise in rendering pharmaceutical services to the retail and institutional public. "~ ,~'"" ~, ".(1%';" 16. From February 25, 1998, until August 10, 1999, the Wilsons provided the consulting services as defined in the Management Agreement, used their best efforts and abilities in performing services, and gave CCRx2 the full benefit of their knowledge, experience, judgment and expertise in rendering pharmaceutical services to the retail and institutional public. 17. On August 10,1999, CCRx2, through its Chairman of the Board, Stephen Proctor, advised William and Robert Wilson that CCRx2 was terminating the Management Agreement as ofthat date. 18. There was no good cause for that termination. 19. On January 6, 2000, the Wilsons filed against CCRx2 and Stephen Proctor a Complaint in the Court of Common Pleas for Cumberland County, alleging that CCRx2 and Proctor breached the Management Agreement by terminating the Wilsons without cause, and that CCRx2 and Proctor breached of the implied duty of good faith arising collectively from the Asset Purchase Agreement, Management Agreement and Shareholder Agreement ("Initial Litigation"). The Initial Litigation is not settled at this time and the parties to it are currently exchanging discovery requests. A true and correct copy of the Complaint is attached hereto and made a part hereof as Exhibit "D." 20. On or about May 30, 2000, Defendant CCRx2 advised Plaintiff, through their counsel, that CCRx2 believed that Plaintiffs were responsible for causing and/or allowing operational deficiencies related to and regulating the acquisition, storage, dispensing, safeguarding and accountability for certain controlled substances. 21. On or about May 31, 2000, Defendant CCRx2 produced a report that set forth possible operational deficiencies related and regulating the receipt, handling and delivery of certain drugs during the time Plaintiffs were managing the affairs ofCCRx2. 22. The aforesaid report specifically admits an effort to assess the level of compliance with provisions of the law related to the acquisition, storage, dispensing, safeguarding and accountability for certain controlled substances was "greatly impeded. . . by the absence, not only ,'---'-'""' .-, ~ ' ~ " -""""C,' ~~ , ' of the previous management, but virtually all other personnel formerly holding positions of responsibility at this pharmacy, including all pharmacists." 23. Even though the alleged operational deficiencies were purportedly caused and/or allowed by Plaintiffs, Defendant CCRx2 neither authored the report upon nor at any time asked Plaintiffs for information possessed by Plaintiffs regarding those alleged deficiencies. If Defendants had make such reasonable inquiry of Plaintiff with respect to the alleged operational deficiencies, they would have learned that most, if not all, of the alleged violations never occurred. 24. Despite the fact that neither CCRx2 nor the person investigating the alleged operational deficiencies for CCRx2 ever discussed those alleged deficiencies with Plaintiffs, CCRx2 has purportedly advised a governmental agency of them. 25. By reporting the alleged operational deficiencies to a governmental agency without properly investigating them, CCRx2 has unnecessarily exposed itself and Plaintiffs to the probability of a lengthy and expensive regulatory investigation. 26. By failing to investigate those alleged operational deficiencies adequately, CCRx2 has created unnecessary uncertainty about the possible exposure of the corporation to governmental sanctions, significantly reducing the value of its stock. 27. On May 11, 2000, CCRx2 held a meeting of its Board of Directors (the "Board"), at which, the Board approved an Agreement and Plan of Merger ("Merger Plan"), whereby CCRx2 would be merged with and into CCRx, L.L.C., a wholly-owned subsidiary of Defendant. 28. Under the terms of the proposed Merger Plan, the shares of CCRx2 cornmon stock held by Defendant are to be exchanged for a 100% ownership interest in CCRx, L.L.C. and the shares held by the Plaintiff and Trite would be exchanged for $200.00 per share in cash, effectively forcing the Wilsons out of the ownership of the corporation. ",," ~"~,~ ~ ~ ,'" -- , , ' 29. At the May 11,2000 Board meeting, the Board also approved the sale of up 3,000 additional shares ofCCRx2 common stock at $200.00 per share to the existing shareholders of the corporation ("Sale of Shares"), pm and the Wilsons and Trite. 30. Under the Sales of Shares plan, initially, each shareholder can purchase a number of shares equal to his proportional ownership prior to the sale, i.e., the Minority Shareholders can buy up to 25% and pm can buy up to 75%, but the plan permits pm to buy more than its proportional share if the Minority Shareholders fail to buy all the shares allotted to them, effectively allowing pm to dilute the Wilsons ownership interest in CCRx2. 31. On June 7, 2000, counsel for CCRx2, on behalf of the Secretary of CCRx2, sent the rninority sharehOlders ofCCRx2 written notice of (I) the proposed Sale of Shares; (2) the proposed meeting of the shareholders ofCCRx2 to approve the proposed Merger Plan, scheduled for Tuesday, June 20, 2000; and (3) the availability to the Minority Shareholders of Dissenters' Rights under Subchapter D of the Pennsylvania Business Corporation Law, as amended, 15 Pa. Cons. Stat. g130 1 et sea. A true and correct copy of the June 7, 2000 letter and attachments is attached as "Exhibit E." 32. The $200.00 per share price established in the Sale of Shares plan proposed by Defendant CCRx2 and the Majority Shareholder, pm, grossly underestimates the value of the corporation's common stock. 33. Under the Sale of Shares plan, to avoid dilution of their 25% ownership share, the Minority Shareholders must pay in cash or cash equivalents by 5:00 p.m. on Thursday, June 23, 2000 up to $240,000 or permit pm to buy more shares and decrease the Minority Shareholders position in the corporation. 34. Due to the short amount oftime between receiving notice of the Sale of Shares and the final date to purchase such shares, the Wilsons cannot raise the $100,000 they would need to maintain their ownership position in the corporation. "" .'" '.- , .- ~~ ", !,," , , 35. The Merger Plan unfairly prejudices the interests of the Minority Shareholders because it permits the Majority Shareholder to convert its seventy-five percent (75%) ownership of CCRx2 into one-hundred percent (100%) ownership ofCCRx, L.L.C., while the corporation buys out the Minority Shareholders' shares at unconscionably low prices. 36. Despite the inadequacy of such remedy at law, to preserve their recourse to Dissenters' Rights under Subchapter D of the BeL, on or about June 19,2000, the Plaintiffs filed the required notice with CCRx2 of their intent to dissent from the Merger Plan and seek a fair valuation of their shares. A true and correct copy of that notice is attached hereto as Exhibit "F". 37. Plaintiffs, Robert and William Wilson, are entitled to a Preliminary Injunction, enjoining Defendant CCRx, Inc. and its Majority Shareholder, PHI, from proceeding with the proposed meeting of the shareholders to approve the Merger Plan and consummating the proposed Sale of Shares because Defendants have acted improperly and maliciously to oppress the Minority Shareholders. Count I - Oppression of Minority Shareholders 38. Plaintiffs hereby incorporate paragraphs one (1) through thirty-six (36) by reference as if fully set forth herein. 39. By attempting to effectuate the Merger Plan and Sale of Shares, Defendant CCRx2, as controlled by its Majority Shareholder, Defendant PHI, and Defendant PHI have acted to oppress Plaintiffs, the Minority Shareholders in CCRx2. 40. Without consulting with or making a reasonable inquiry of any information possess by the Plaintiffs on the subject, Defendants proceeded with the hasty investigation of the alleged operational deficiencies in an effort to depress the value of Plaintiffs' interest in the corporation. 41. Following that action, Defendants, knowing Plaintiffs could not quickly raise the funds necessary to buy new shares to maintain their ownership stake, proposed the Sale of Shares in an effort to dilute Plaintiffs stake in CCRx2. ,,'- , ~ ~ 1lll"-- "'~hi:HM, 42. In combination with the Sale of Shares, Defendants proposed the Merger Plan, whereby the Plaintiffs interests are to be cashed-out at a deflated value while the Majority Shareholder gains 100% ownership of the organization through the merger with and into CCRx, L.L.C. 43. While permissible when taken and viewed in isolation, in combination, Defendants actions serve to oppress the Minority Shareholders, leaving them only the legal remedy of asserting their Dissenters' Rights and ~eking a valuation, which will be greatly deflated due to Defendants actions with respect to the governmental investigation of the alleged operational deficiencies and the dilution of Plaintiffs' ownership share. WHEREFORE, Plaintiff respectfully ask that this Court to enter a Preliminary Injunction restraining Defendants from (I) holding the proposed meeting of the CCRx2 shareholders, scheduled for Tuesday, June 20, 2000 at 10:00 a.m.; (2) completing the proposed Sale of Shares by Thursday, June 23, 2000 at 5:00 p.m. and to appoint a cnstodian to continue the business of the corporation pending a final hearing and judgment in this proceeding. Count II - Breach of Fidnciary Duty 44. Defendants, as Majority Shareholder, elect and control the Board of Directors of CCRx2. 45. The directors of a CCRx2, although elected and controlled by the Majority Shareholder, owe fiduciary duties to all the shareholders of CCRx, and, in all their corporate actions, must act with the utmost care for, loyalty to and in the best interests of the corporation. 46. At the behest of Defendant PHI, as Majority Shareholder, the directors of CCRx2 and CCRx itself have breached their fiduciary duties to the Minority Shareholders by (I) undertaking a hasty investigation of the alleged operational deficiencies without making a reasonable inquiry into any information possessed by the Plaintiffs concerning such deficiencies; (2) carelessly and ,....""iil;'..-- ~~.~ ,. - ~" ..," I. - "-'--'~~,n<',' .' " irresponsibly reporting the alleged operational deficiencies to a governmental agency without making such reasonable inquiry, which may greatly decrease the value of the corporation's stock; (3) at the urging of the Majority Shareholder, approving and going forward with the Merger Plan and Sale of Shares in an effort to oppress the Minority Shareholders in breach of their duties of care and loyalty; and (4) failing to treat the Minority Shareholders fairly, thus, creating the need for the Initial Litigation and this litigation that serve only to waste scarce corporate resources for the sole benefit of the Majority Shareholder. WHEREFORE, Plaintiffs respectfully ask that this Court enter a Preliminary Injunction restraining Defendants from (1) holding the proposed meeting of the CCRx2 shareholders, scheduled for Tuesday, June 20, 2000 at 10:00 a.m.; (2) completing the proposed Sale of Shares by Thursday, June 23, 2000 at 5:00 p.m. and appoint a custodian to continue the business of the corporation pending a final hearing and judgment in this proceeding. Respectfully submitted, Date: bfq/{)O a&v~ Allen C. Warshaw, Esquire AttomeyldNo.I7145 Edward A. McMerty, ill, Esquire Attorneyld.No.82493 Duane, Morris & Heckscher LLP 305 North Front Street, 5th Floor P.O. Box 1003 Harrisburg, P A 17108-1003 (717) 237-5500 Attorneys for William & Robert Wilson '.~ "'~...:-.. .~ -4.~", . , , ASSET PURCHASE AGREE~ THIS AGREEMENT, made aa of the 25th day of February, 1998, among and between CONTINUING CARE Rx, Inc., a Pennsylvania business corporation ("Seller"), PHI, a Pennsylvania nonprofit corporation ("Buyer"), and ROBERT WILSON, WILLIAM WILSON AND THOMAS TRITE, individuals (sometimes referred to as "Pharmacists"). WIT N E SSE T H Wl{EREAB, Seller is the owner and operator of a retail and institutional pharmacy business (the "Business") which has an office located at 28 South Second Street, Newport, pennsylvania. Buyer will or has formed a new Pennsylvania business corporation to be known as "Continuing Care Rx,- Inc," hereafter referred to as "Newco." Seller desires to sell to Newco and Buyer desires that Newco purchase substantially all of the assets used in the Business. I?harmacists own lOa\' of the outstanding and issued shares of Seller and are employees of the Business. Pharmacists desire that Seller sell its assets, including the name "Continuing Care Rx, Inc.," to Newco. Pharmacists will enter into a Management Agreement with Buyer to.manage and operate the business of Newco. NOW, THEREFORE, in reliance upon the representations and warranties made herein and for good and valuable consideration, Seller, BUYE!r and Pharmacists, intending to be legally bound hereby, covenant and agree as follows; ARTICLE I PLAN OF ACQUISITION 1.1 Purchase and Sale of Assets by Newco. (a) S\.lbject to and upon the terms and conditions of this Agreement, at the Closing, Seller shall transfer, sell, convey, assign and deliver to Buyer, by instruments in form.and substance satisfactory to Buyer, and Buyer shall purchase from Seller, all of Seller'S right and title to and interest in the accounts receivable, equipment, truck leases, furnishing9' inventory, prescription files, computer hardware, assumption of leases for leased equipment and space, business records, customer lists, telephone numbers, pharmaceutical supply contracts, licenses (subject to compliance with requirements promulgated by the Bureau of Professional and occupational Affairs, Pennsylvania Department of State), goodwill, the corporate name "Continuing Care Rx, Inc.." all computer programs, software and data files, whether stored on- line or on magnetic tapes or other media, and all books and records regarding the foregoing (all the assets to be so sold and acquired being herein called the "Assets")_ - iIl'~~"~ 1-- ,~~, ~"-' ~ '~.....~ _.~....~ ,~, (b) Newco sh~~l m~ke available to Selle4 .nd it~ agents upon reasonable request such books of account and' records as may be necessary for Seller to prepare tax returns and to respond to a~d defend audits of tax returns. . 1.2 PUr~hase Price. In consideration of the transfer of the Assets, Buyer shall pay to Seller Two Hundred Thousand 1$200,000.00) Dollars (the .purchase Price"), payable as follows: {al Twenty-five Thousand ($25,000.00) Dollars on March 15, 1998, and Twenty-five Thousand ($25,000.00) Dollars on the 15th day of the next succeeding five (5) calendar months, for a total of One Hundred Fifty Thousand ($150,000.00) Dollars; (b) Two Hundred Fifty shares of Class A $1 par value stock of Newco, constituting 25% of the ClasB A $1 par value stock to be issued by Newco; and (e) Forty-nine Thousand Seven Hundred and Fifty ($49,750.00) Dollars within forty-five (45) days after the first anniversary of the Closing, if, as of such first anniversary, Newco shall have retained all business existing as of the Closing. If Newco shall not have retained all such existing business, then the $49,750 shall be reduced ~2,OOO for every one (1%) percent loss of business (i .e., a thirty (30%) percent loss of business would result in no deferred payment) ; provided, however, that if and when an increase of business is brought on line to counterbalance losses, and such increase exceeds twenty-five (25\) percent over the initial amount of business existing at the time of Closing, the entire amount of retainage shal'l be released to Seller in such manner as Seller shall request. Buyer hereby assumes liability for all accounts payable arising out of asset purchases. Buyer shall not aSsume any other liability or obligation of Seller, contingent or otherwise, other than gOing-forward performance obligations under agreements for the operation of the Business as disclosed to and accepted by Buyer. 1.3 Closinq. The closing of the transactions contemplated by this Agreement (the "Closing"), shall take place at the offices of Seller and shall be effective at the close of business on the Closing Date. The day on which the Closing OCCUrs is referred to as the "Closing Date." The parties agree to use their. best efforts to effect the Closing on or before the Closing Date. The parties shall use their best efforts to have the Closing occur on a date which is mutually agreeable to the parties, but not later than February 28, 1998. The Closing Date may be extended at the request of any party to a date not later than March 31, 199B. 1.4 Execution and Delivery of closinq Documents. Before the Closing, each party shall cause to be prepared, and at the Closing the parties shall execute and deliver, each agreement and 2 ~--. ~~ - - ~. ~'~t~IWIl::, . . instrument requh _d by this Agreement to delivered and not theretofore accomplished. ~ so .exec1.l'ted At the closing, and (a) Seller shall execute and deliver to Buyer assignments, bills of sale, other title and transfer documents as Buy~r shall deem necessary, and possession of the Assets; (b) Pharmacists and Buyer shall execute a Management Agreement in the form of ~xhibit A attached hereto. (c) Pharmacists and Buyer shall execute a Stockholders' Agr~ement in the form of Exhibit B attached hereto. (dl Seller shall give Buyer copies of all records in its possession relating to the Assets, including insurance policies, tax statements and certificates of occupancy, if any. (el Each party shall execute and deliver such other appropriate and customary documents as the other parties reasonably may request for the purpose of consummating the transactions contemplated by this Agreement. All actions taken at the Closing shall be deemed to have been taken simultaneously at the time the last of any such actions is taken or completed. 1.5 Further Assurances. After the Closing, the parties shall execute and deliver such additional documents and take such additional actions as may reasonably be deemed necessary or advisable by any party to consummate the transactions contemplated by this Agreement. 1.6 No Assumption of Li"bilitiel;3. Except as expressly provided in this Agreement, Buyer shall not assume any liabilities of Seller. All such liabilities shall remain the responsibility of Seller. 1.7 No Brokers. Each p"rty hereby represents and warrants to the other parties that he or it has not employed any broker, agent or finder or incurred any liability for any brokerage fees, ag~nts' commissions or finders' fees in connection with the transactions contemplated herein. ARTICLE II REPRESENTATIONS OF SELLER AND PHARMACISTS Seller and Pharmacists, jointly and severally, represent to Buyer as follows: 3 - - ..1 " ~_.....' ....' , .='!It_ 2.1 Orc::taniz...tion and' Good' Standinq of _",ller." Serler corporatiot)., duly organized. validly subsisting and. in standing under the laws of the Commonwealth of Pennsylvania. is a good 2. 2 Power and Authority. Seller hast-he corporate power and authority ~nd all licenses and permits required by governmental authorities to own, lease and operate its Business and Assets and to carryon He Business as currently being conducted. 2. 3 AuthClricy and Validity. Seller has the corporate power and author*ty to execut.e, deliver and perform its obligations under this Agreetrentand the other agreements and documents executed or to be executed' ~y Selle.r in connection with this Agreement. and the execut ion,;! del.ivery and perfonnance by Seller of this Agreement and the other~gre~ments and documents executed or to be executed by it in connect~on with this Agreement have been duly authorized by all necessary Forporate action. Each Pharmacist has the capacity and authorit,y;to execute, deliver and perform his obligations under this Agreement and all other agreements and documents he is executingbr will execute in connection herewith. 2.4 Bindina Effect. This Agreement and the other agreements and documents e.xecuted or to be executed by Seller and Pharmacists. or any of them, in connection with this Agreement, have been or will have been duly executed and delivered by Seller and Pharmacists, or any of them, and are or will be, when executed and delivered. the legal, valid and binding obligations of Seller and Pharmacists, or any of them, enforceable in accordance with their terms, except that a court may limit: (a) enforceability under bankruptcy. insolvency or other similar laws affecting creditors rights; (b) the availability of certain remedies under equitable principles of general applicability; and {e} rights to indemnification due to considerations of public policy. 2.5 Comuliance with Other Instruments. Neither the execution and delivery by Seller and Pharmacists of this Agreement or the other agreements and documents executed or to be executed by Seller and Pharmacists in eonnneetion with this Agreement. nor the consummation by Seller and pharmacists of these agreements or transactions will be in conflict with, or constitute a default or breach under. or permit the termination or the acceleration of maturity of. or result in the imposition of any lien, claim or encumbrance upon any Assets or property of Seller. 2.6 Necessary Aoprovals and Consents. No authorization, consent. permit or license, or approval of, declaration, registration or filing with, any person, governmental or regulatory 4 "" '", J_~" .,~...i:"~, authority or agency is necessary' for the exeCL ~on arrd d~livery by Pharmacists, or any of them, of this Agreement or the other agreements executed or to be executed by Pharmacists, or any of them, in connection with this. Agreement or the consummation by pharmacists, or any of them, of the transactions contemplated hereby or thereby. 2.7 Seller's Financial Statements. Seller has delivered to Buyer and will continue to deliver to Buyer until Closing, true, correct and complete copies of financial statements of Seller (the "Financial Statements"), which delivery is hereby acknowledged by Buyer. The Financial Statements present fairly the assets, liabilities and financial position of Seller as of the dates thereof and the results of operations and changes in financial position thereof for the periods then ended, in conformity with generally accepted accounting principles applied on a consistent basis throughout such periods. Since January 1, 1997, there has been no change in accounting principles applicable to or methods of accounting used by Seller. The books and records of Seller have been and are being maintained in accordance with all applicable legal and accounting requirements and good business' practices, reflect only valid transactions, are complete and correct in all material respects, and accurately reflect in all material respects the basis for the financial position and results of operations of Seller set forth in the Financial Statements. 2.8 ~sence of Certain Changes. Since January 1, 1997, to the best of their knowledge and after reasonable investigation, Seller and Pharmacists have not (except as may result from the transactions contemplated by this Agreement) : (al suffered any change in the Business, results of operations, working capital, assets, liabilities. conditior. (financial or otherwise). or the manner of conducting its Business, other than changes in the ordinary course of business, none of which, individually or in the aggregate, have had a material adverse effect on Seller: (b) suffered any damage or destruction to or lass of its Assets not covered by insurance, or received any communication of any loss of customers or suppliers, or terminated or lost the services of any key employees that does or might have a material adverse effect on the Bu.siness, r.esults of operac:!.ons, assets, condition (financial or otherwiseJ, or prospects of Seller; (cJ acquired or disposed of any asset, or incurred. assumed, guaranteed, endorsed, paid or discharged any indebtedness, liability or obligation, or subjected or permitted to be subjected any material amount of assets to any lien, claim or encumbrance of any kind, except in the ordinary course of business or pursuant to agreements in force at the date of this Agreement; 5 , ~,~" ., (d) forgiven, compromis~d, cancel~_j, releaseu, waived or permitted to lapse any material rights or claims; (e) entered into or terminated any material agreement or commitment or agreed to make or made any changes in material leases or agreements other than renewals or extensions thereof and leases, agreements and commitments entered into in the ordinary course of business; (fl written up, written down or written off the book value of any material amount of assets; (g) declared, paid or set aside for pa~ent any dividend or distribution with respect to its capital stocK; (h) redeemed, purchased or otherwise acquired or sold, granted or otherwise disposed of, directly or indirectly, any of its capital stocK or securities or any rights to acquire such capital stock or securities or agreed to changes in the terms and conditions of any such rights; (i) increased the compensation of or paid or accrued any bonuses to any employees or contributed to any employee benefit plan, other than in accordance with established written policies, practices or requirements that have been supplied to Buyer or Newco contemporaneously herew~th; (j) entered into any employment, compensation or collective bargaining agreement with group, other than contracts terminable at will; consulting, any person or (k) benefit plan; (I) made any loan or advance to any stockholder, director or employee or to any person or entity associated in any way affiliated with any stockholder, officer, or employee; entered into, adopted. or amended any employee officer, with or director (m) entered into any other material commitment or transaction other than in the ordinary course of business. 2.9 Title to Assets and Eauioment. Seller. has and will convey to Buyer good and marketable title to the Asaets, free and clear of all liens and encumbrances- All assets material to the present operations of Seller are reflected on the Financial Statements. Immediately after the Closing, Buyer will own or lease all Assets necessary for the conduct of the Business to be acquired by Buyer from Seller, as conducted by Seller immediately before the Clos ing - 6 .~~~.~ ~~_. - , I ~. "~-,~ , , ~.10 Condit~Jn of Tanqible Assets. the.'best of the knowledge of Seller and Pharmacists, there are no materiai defects in the tangible Assets of Seller as disclosed to Buyer and they are adequate for the uses to which they are being put or would be put in the ordinary course of Seller's Business. 2.11 Inventory Good and Salable. The inventories shown on the Balance Sheet or thereafter acquired consist generally of items of a quantity and quality usable and salable in the ordinary course of the Business of Seller. 2.12 Contracts. Seller has furnished or made available accurate and complete copies of all contracts to Buyer. All such contracts are valid, binding, subsisting and' enforceable in accordance with their respective terms. Neither Seller nor any Pharmacist has received notice that Seller is in breach or default under any of euch contracts, and, to the knowledge of Seller and Pharmacists, there is no existing breach nor is there any valid basis for any claim of defaul t by any party thereunder. The consummation of the transactions contemplated hereby will not affect the continuance in full force and effect of such-contracts. There is no material dispute, mistake or misunderstanding among the parties to any such contract nor are the parties hereto aware of the potential for any such dispute, mistake or misunderstanding, and no penalty has been incurred with respect thereto. Neither Seller nor any Pharmacist has received notice of any plan or intention of any other party to any such contract or agreement to exercise any right to cancel or terminate any such contract or agreement in advance of its normal maturity or termination date, and neither Seller nor any Pharmacist knows of any fact that would justify the exercise of such right. All such contracts and agreements are fully assignable without the consent of any third party. 2.13 Litiqation and Government Claims. There are no pending suits, claims, actions or other proceedings against or governmental investigation or inquiry about Seller or, to the best of Seller's knowledge, threatened against or relating to Seller or Pharmacists Which could have a materially adverse effect on the Assets or the transactions contemp~ated by this Agreement. 2.14 yudqments. Decrees and Orders in Restraint of Business. Seller is not a party to or subject to any judgment, order or decree entered in any suit or proceeding brought by any governmental agency or by any other person enjoining or restricting seller in respect of any business practice or the acquisition of any property or the conduct of the Business. Neither Seller nor Pharmacists knows or has grounds to know of any basis for any such action or of any governmental investigation relating to Seller. There are no claims against Seller pending or threatened, anticipated or contemplated, which, if valid, would constitute or 7 - "' ~ ,,-, ..... ~ "~ ~~ - ~ result in a breae:., of any 'representation, '" .rant~' covenant or agreement set forth herein. 2.15 Compliance With Laws. To the best of its knowledge, seller is substantially in compliance with all laws applicable to its Business and Assets. including environmental laws. 2.16 ERISA. Seller is not in default under and has no accrued obligations under any employee welfare benefit plan or employee ;pension benefit plan within the meaning of ERISA, and has no formal plan or commitment, whether legally binding or not, to create any ERISA plans that would affect any present or former employee of Seller, or such present or former employee's dependents or beneficiaries. Seller has made all required contributions to all ERISA plans which it sponsors and maintains. All reports required by any governmental agency with respect to such plans have been timely filed. 2.17 Labor Rel"tions. To the knowledge of Seller and Pharmacists, Seller is in compliance with all applicable laws respecting employment and employment practices, terms,. conditions of employment, wag~s and hours. 2.18 Adequate Insurance. All insurable Assets are insured for Seller's benefit under valid and enforceable policies, in amounts and against such risks and losses as are customary in seller's Business. Seller shall keep such insurance in effect until risk of loss shall have passed to Buyer by the terms of this Agreement. 2.19 Accur<<cv of Information Furnished. No representation by Seller or Pharmacists in this Agreement nor any information relating to seller delivered by Seller or Pharmacists to Buyer contains any untrue statement of a material fact. Seller and Pharmacists have disclosed to Buyer all facts known to them that are to their knowledge material to the Business. operations, financial condition or prospects of Seller. 2.20 Environment. To the best of its knowledge, Seller has complied with all statutes, ordinances, rules, regulations, requirements, orders and decisions issued by any federal. state or local governmental body or agency established thereby. 2.21 No Fraud or Abuse. Neither seller nor Pharmacists have committed any act or taken any action in violation of the Medicaid and Medicare laws of the United States, nor, to the best of their knowledge, are they or anyone of them under investigation for violation of such statutes. 2.22 Covenant Not to Comoete. (al Management Consultants. during the Consulting Term and for an additional period of six (6) months thereafter (the "Noncompetition Term"), shall not: B ~ :.". I"""~'ll:i - k _ ~ ...~ ~"""ilX (1/ Canvass. solicit, or act_,ely pUrsue business or employment for provision of pharmaceutical or durable medical supply services from any of NEWCO's clients; (2) Disclose any proprietary or confidential information of Pharmacy or its Parent or the Business relating to (i) the customers, clients. employees and accounts of Pharmacy or its Parent or the Business. including, but not limited to, identity of Pharmacy's or its Parent's customers if such identity is proprietary or confidential, or (ii) Pharmacy's or Parent's business methods. systems, plans, policies and personnel. (b) It is understood between the parties that individuals, and perhaps facilities, have certain freedom of choice of provider of pharmacy and medical supply services. As such, no violation of those provisions is intended and the parties hereto agree to cooperate to avoid violation. (c) If Pharmacy claims that Management Consultants, or any one or more of them, have materially violated this covenant not to compete, then it shall give Management Consultants thirty {301 days written notice specifying with reasonable detail the claim violation. If Management Consultants dispute the claimed violation, or its materiality, Management Consultants shall advise Pharmacy in writing w'ithin ten (10) days after the thirty-day notice period, and the dispute promptly shall be referred to resolution by impartial arbitration conducted under the auspices and pursuant to the rules of the American Arbitration Association. Costs and attorneys fees of the prevailing party shall be taxed to the other party. - Pending such resolution, Pharmacy shall not be required to continue to make the annual payments set forch in section 3 hereof, but if Management Consultants prevail at arbitration. Pharmacy then shall promptly make Management Consultants whole, with six (6\) percent simple interest, for any payments of fees withheld. (d) In addition to any other remedies that Pharmacy and Parent may have under this agreement for alleged violations of this section, Pharmacy and Parent may apply to any court of competent jurisdiction for equitable relief, inclUding specific performance and injunctions restraining Management Consultants from committing or continuing any such violation of this Agreement~. 2.23 Chanae of Name of Seller. As of the Closing, Seller shall (i) cease doing business under the name "Continuing Care Rx, Inc." or any other trade names transferred to Buyer pursuant to this Agreement, and (ii) change its name. 9 I ~ ~ ~"",~.. ~ ' - ~.il!i ARTI CLE n I REPRESENTATIONS OF BuYER ~' .' Buyer represents to Seller and Ph.armac.iats that as of the Closing Date: . 3.1 Orqaniz~tion and Good Standing of Newco. Buyer is and Newco will be a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. 3.2 Power and Authority. Buyer has and Newco will have the full corporate power and authority and all licenses and permits required by governmental authorities to own, lease and operate its properties and assets and to carry on its business as the Business of Seller is currently being conducted. 3.3 Authority and Validity. Buyer is and Newco will have the corporate power and authority to execute, deliver. and perform its obligations under this Agreement and the other agreements and documents executed or to be executed by them in connection with this Agreement, and the execution, delivery and peJ:'formance by Buyer and Newco of this Agreement and the other agreements and documents executed or to be executed by them in connection with this Agreement have been duly authorized by all necessary corporate actions. 3.4 Bindinq Effect. This Agreement and the other agreements and documents executed or to be executed by Buyer and Newco in connection with this Agreement have been or will have been duly executed and delivered by them and will be, when Newco has been formed, its legal, valid and binding obligations, enforceaole in accordance with their terms, except as (a) enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights; (b) the availability of certain remedies may be limited by equitable principles of general applicability; and Ic) rights to indemnification may be limited by considerations of public policy. 3.5 Necessary Approvals and Consents. Except for approvals already obtained or filings or notices already made or given, nO authorization, consent, permit or license. or approval of, or declaration, registration or filing with, any person or governmental or regulatory authority or agency wi1+ be necessary for the execution and delivery by Buyer and Newco of this Agreement or the other agreements executed or to be executed by Buyer and Newco in connection with this Agreement or the consummation by it of the transactions contemplated hereby and thereby. 10 '--, ~~ ~~ - ,- ~ i~~,~"- ~_"""k . ARTICLE IV~. COVENANTS OF SELLER AND PHARMACISTS " Seller and Pharmacists, jointly and severally, covenant with Buyer as follows: . . . , 4.1 Bulk Sales. Seller either has complied with all bulk B~les la~s ap~licable to the sale contemplated by this Agreement or w~ll sat~sfy ~n full out of the proceeds of this sale the claims of all of its creditors. Seller shall satisfy such creditors in full within ten (10) days of execution hereof and shall provide to Buyer within fifteen (15) days of execution, evidence of same. Notwithstanding the provisions of section 9.15 hereof, Seller hereby consents to the immediate application by Buyer and Newco for injunctive relief or damages if the provisions of this subsection are breached. Seller hereby agrees to indemnify and hold harmless Buyer and Newco from, and reimburse Buyer and Newco for, any and all claims, liabilities or obligations which Buyer and Newco may suffer or incur by reason of any noncompliance with any applicable bulk sale, fraudulent conveyance or other laws for the protection of creditors. 4.2 Operation of the Business of Seller, During the period preceding the Closing Date, Seller and Pharmacists shall: (a) conduc~ Seller's operations in the ordinary course of business consistent with past and current practices of Seller, ~nd shall use their best efforts to maintain and preserve intact its business organization and good will, to retain the services of its key employees, and to maintain satisfactory relationships with suppliers, distributors, customers and others having business relationships with Seller; (b) confer with Buyer on a regular and frequent basis to report material operational matters and the general status of ongoing operations; (c) notify Buyer of any emergency or other change in the normal course of Seller's Business and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated) if such emergency, change, complaint, investigation or hearing would be material to Seller's Business or properties; (d) not hire or fire any persons, raise or lower the salary of any person, enter into any employment agreement, or any agreements with customers of Seller other than in the ordinary course of business. without the express written consent of Buyer; and (e) take no action that. or fail to take any action the failure to take which would cause or permit their representations 11 -"" I'~b.' . , contained herein ..0 be untrue in any mat~ al re'spec.t on. the Closing Date. 4.4 Coooeration. best efforts to: Seller and Pharmacists shall use their (a) proceed promptly to make or give the necessary applications, notices, requests and filings to obtain at the earliest practicable date and, in any event, before the Closing Date, the approvals, authorizations and consents necessary to consummate the transactions contemplated by this Agreement; (bl cooperate with and keep Buyer informed in connection with this Agreement; and (e) take such actions as Buyer may reasonably request to consummate the transactions contemplated by this Agreement and diligently attempt to satisfy, to the extent within their control, all conditions precedent and subsequent to this Agreement. 4.5 Notice of any Material Chanqe. Seller and.Pharmacists shall, promptly after the first notice of occurrence thereof, but not later than the Closing Date, disclose the occurrence of any event or the existence of any facts that: la) had euch event occurred or such facts existed or been known at the date hereof, would have been required to have been disclosed to Buyer under the provisions of this Agreement; (b) would make any of their representations in this Agreement untrue in any material respect; or (el would otherwise constitute a material adverse change in the Business, results of operation, working capital, Assets, liabilities or condition (financial or otherwise) of Seller. 4.6 Access; Confidentiality, Prior to the Closing Date, Seller and Pharmacists shall afford to Buyer and its officers, employees, accountants, counsel and other authorized representatives, full access to and the right to inspect, review or make copies, as appropriate, of Seller's Assets, properties, books, contracts, commitments and records, view its physical properties, and communicate with key employees of Seller on a basis reasonably satisfactory to and with the prior specific approval of Seller. Seller and Pharmacists will furnish or use their best efforts to cause its or their representatives to furnish promptly to Buyer such additional financial and operating data and other documents and information relating to Seller's business as Buyer or its duly authorized representatives may from time to time reasonably request. Buyer agrees that any and all information it receives regarding the assets or operation of Seller prior to the Cloeing Date are and will be kept confidential except as required to be 12 ~" "- ~' '" ~~~ ""-" ',"~- ,"'.'-' ~ "" ~"'ill)t-"' , disclosed pursual._ to a 'subpoena or otht conjunction with a legal proceeding. sim:i.J.ar _ ~-order in 4.7 Certain Prohibited Transactions. Prior to the Closing, Seller will not, and Pharmacists will cause it to not: (a) purchase, sell or dispose of or grant licenses or other rights in and to any of the Assets, or make or give any warranty or guaranty with respect to the products or services of Seller, other than in the ordinary Course of business and consistent with the practices in existence on the date of this Agreement; ,(b) except in the ordinary course of business, without Buyer's pri!or written consent, enter into any material long-term contracts 'or commitments ; waive any material rights or claima; modify, amend, cancel or terminate any material agreement, debts or claims; icn~ur any indebtedness for borrowed money; or make any loans; a~s!ume, guarantee or otherwise become responsible for the obligations of others; (c) merge or consolidate with another entity, invest in or otherwise purchase the business or assets of another business substantially as an entirety, or sell substantially all of it.s assets to another person, or enter into any agreements for the foregoing; (d) make any contribution to any employee benefit plan or increase the compensation of or pay bonuses to its employees other than in accordance with established practices or requirements, or enter into employment. agreements; (e) declare or pay any dividends or other payments or distributions of any kind on its capital stock or otherwise change its capital structure;. (f) purchase or otherwise acquire, or issue or sell any shares of capital stocK; (g) grant or issue any options, warrants or right.s of any kind to acquire ahares of, or securities convertible into. its capital stock; (h) mortgage, pledge or subject to any lien, charge or other encumbrance any of the Assets; or (i) take any other action that might materially impair the Assets, or take or fail to take any other action that would cause or permit the representations or warranties made herein to be untrue in any material respect at the time of Closing. 13 ...~~ ~.~~~ 4.10 Consent~ to ~ssiqnment. Seller ana their best efforts co obcain written consencs and vendors on or prior to the closing Date. .larma<s'ists.......ill use of contract parties ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AND PHARMACISTS The obligations of Seller and Pharmacists to consummate the transactions contemplated by this Agreement shall be sUbject to the satisfaction on or before the closing Date of each'of the following conditions: 5.1 90mpliance. Buyer has, or has caused to be, satisfied or complied with and performed in all material respects all terms, covenants and conditions of this Agreement to be complied with or performed by it on or before the Closing Date. 5.2 Representations. All of the representations made by Buyer in this Agreement and in all certificates and other documents delivered by Buyer to Seller and Pharmacists pursuant hereto or in connection with the transactions contemplated hereby are true and correct in all material' respects at the Closing Date, except for changes contemplated hereby or thereby. 5.3 Absence of Litioation. No order, judgment or decree by any court or governmental agency or authority shall be in effect that enjoins, restrains or prohibits the consummation of the transactions contemplated by this Agreement. 5.4 Opinion of Counsel. Buyer shall deliver to Seller an opinion of its counsel stating that the transactions contemplated hereunder are duly authorized and fully enforceable in accordance with their terms, and that counsel has no knowledge of any breach of this Agreement by BJyer. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER Except as may be waived by Buyer, the obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction on or before the Closing Date, of each of the following conditions; 6.1 Comoliance. Seller and Pharmacists have, or have caused to be, satisfied or complied with and performed in all material respects, all terms, covenants and conditions of this Agreement to be complied with or performed by any of them on or before the Closing Date. Buyer is not obligated to purchase from seller if 14 ~Iilil. '_0 ~IM~ either Seller 01 Pharmacists 'do not comp conditions and covenants. wi t~. suOh, terms, 6.2 Representations _ All of the representations made by Seller and Pharmacists in this Agreement are true and correct in all mat~rial respects as of the date ?ereof and at the Closing Date, w1th the same force and effect as 1f such representations and warranties had been made at and as of the Closing Date, except for changes permitted or contemplated hereby or thereby. 6.3 Consents to Transaction. Seller, Pharmacists and Buyer have received all consents required to be obtained to consummate the transactions contemplated by this Agreement. 6.4 Opinion. Seller shall deliver to Buyer an opinion of its counsel, in form and substance satisfactory to Buyer, Btating that the transactions contemplated hereunder are duly authorized, fully enforceable in accordance with their terms, that counsel has no knowledge of any breach of this Agreement, and opining to such other matters as Buyer may reasonably request. 6.5 Absence of Litiqation. No order. judgment or decree shall be in effect that prohibits the consummation of the transactions contemplated by this Agreement or, in the sole judgment of Buyer, otherwise would materially interfere with the operation of the assets and business of Seller after the Closing Date. 6.6 Materi~l Adverse Chanqes. No material adverse change in the Business, properties, Assets, liabilities, results of operations, or condition, financial or otherwise, of Seller has occurred. ARTICLE VII INDEMNIFICATION AND REMEDIES 7.1 Indemnification by Seller and Pharmacists, Seller and Pharmacists. jOintly,and severally, shall indemnify Buyer for all losses, liabilities, damages, costs and expenses (including reasonable attorneys' fees) incurred by Buyer resulting from or arising out of or in connection with the defense by Buyer against any assertion of liability made against Buyer in connection with any misrepresentation or breach by Seller or Pharmacists under this Agreement or under any documents or other agreements executed or delivered hereto, including but not limited to: (a) income, franchise, sales, use and other taxes, including penalties and interest with respect thereto, of or relating to operations of Seller through the Closing Date, including those resulting from the sale of the Assets pursuant to this Agreement; lS - -~ ~.l ~~ - - ---- Ib) cO'lcractual liabilities aml. ,ligat1'ons 'of Seller not assumed by Buyer pursuant to this Agreement! Qr - . Ie) any liability under the bulk sales law, or sales tax of any state or municipality arising out of or,in connection with the sale of the Assets. 7.2 Indemnification by Buyer and Newco. Buyer and Newco jointly and severally agree to indemnify, defend and hold harmless Seller and its officers, directors, employees, successors and assigns from and against any and all costs, liabilities and damages resulting from: (i) any and all 10Bses, damages or deficiencies resulting from any and all: (A) misrepresentations or breaches of warranty hereunder on the part of Buyer; (E) failures by Buyer to perform or otherwise fulfill any undertaking, covenant or other agreement or obligation hereunder; (C) liabilities of Buyer arising subsequent to the Closing; (D) all liabilities of Buyer, regardless of when such liability arose, which are not exprellsly assumed hereunder; and (ii) any and all actions, suits, proceedings. claims, liabilities, demands, assessments, judgments, costs and expenses, including reasonable attorney's fees, incident to the foregoing provision. ARTICLE VIII CLOSING 8.1 Closinq, March 31, 1998. The Closing shall take place on or before ARTICLE IX -MISCELLANEOUS 9.1 Expenses. Each of the parties hereto shall pay its or their own expenses incurred in connection with this Agreement and the transactions contemplated hereby. 9.2 Entire Agreement- This Agreement, the Exhibits hereto, and the other documents executed or delivered pursuant hereto, contain the complete agreement among the parties with respect to the transactions contemplated hereby and supersede all prior agreements and understandings among the parties with respect to such transactions. 9.3 Counterparts, This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute only one original. 9.4 Notices, Any notice; demand, request or other communication that may be or is required to be given by any party to any other party pursuant to this Agreement shall be in writing and shall be mailed by firet class, registered or certified mail, 16 ~.~ ~ ~ - return receipt r~quested,postage prepaid, '~_ .tr_~sfuitted by hand delivery, facsimile or telex, addressed as-follows: - If to Seller or Pharmacist?,: Continuing Care Rx, Inc., 28 South Second Street, Newport, Pennsylvania, If to BUyer: 1211 Slate Hill Road, Camp Hill, PA 17011, Each party may designate by written notice to all other parties a new address to which any notice may thereafter be so given, served or sent. A notice will be deemed given when so mailed or transmitted. 9.5 Successors and Assians. This Agreement and the rights, interests and obligations hereunder shall be binding upon and shall inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. 9.6 Waiver and Other Action. This Agreement may be amended only by a written instrument executed by the party against which or whom enforcement of the amendment is sought. 9.7 Severabilitv, If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision shall be severed, and this Agreement shall be construed and enforced as if such provision were never a part hereof; the remaining provisions shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance, and in lieu of such illegal, invalid or unenforceable provision, there shall_be adged automatically as part of this Agreement" a provision as similar in its terms to such illegal, invalid or unenforceable provision-as may be possible and be legal, valid and enforceable. 9.6 agreement Closing. 9.9 bssignabilitv. The obligations of Seller and Pharmacists under this Agreement shall not be assignable by Seller and Pha.rmacists without the prior written consent of Buyer. The obligations of Buyer under this Agreement shall not be assignable by Buyer without the prior written consent of Seller and Pharmacists. Survival. Each representation, warranty, covenant, and indemnity made by any party hereto shall survive the 9.10 Assumotion of Oblioations bv Buver. Notwithstanding anything herein to the contrary, upon due incorporation of Newco, the parties hereto agree that the rights and obligations of Buyer hereunder shall be assumed by Newco and shall inure to its benefit without any further action of any party hereto. 17 -~ ._~ -~, 9,11 Apo1ic;gole Law" ,Thi.s Agreement t; ,11. be<'gove'rned by, construed and, interpret.ed ~n &cco,rdance .w:lt.h ,the laws of,the Commonwealth of Pennsylvania without giving effect to conflict of laws principles thereof. 9.12 Section and Other Headinqs. The section and other headings contained in this Agreement are for convenience of reference purposes only and shall not affect the interpretation or meaning of this Agreement. 9.13 bmendmente. Neither this Agreement nor any provision hereof shall be modified, changed, discharged or terminated except by an instrument in writing signed by the party against whom the enforcement of any modification, change, discharge or terminat.ion is sought. 9,14 Succession Clause. The covenants herein contained shall bind, and the benefits and advantages shall inure to, the respecti ve heirs, executors, administrators, Buccessoraand assigns of the parties hereto, 9.15 Dispute Resolution, (a) If a dispute arises between Seller and Pharmacists on the one hand and Buyer and Newco on the other hand regarding (i) interpretation of this Agreement, (iil the reasonableness of any action taken or jUdgment that any party makes in any instance where that party has agreed in this Agreement to be reasonable in taking that action or making that judgment, (iii) the reasonableness of any cost or expense that one party seeks to charge the other in accordance with the terms of this Agreement. or (iv) whether any party has defaulted in respect of any of the obligations it or he has undertaken under the terms of this Agreement (collectively, a "Disput.e"), no party hereto may initiate litigation to resolve the Dispute, but the Dispute shall be determined by arbitration in t.he City of Harrisburg, Pennsylvania, in accordance with the Commercial Arbitratic:m Rules of the American Arbitration Association ("MA") then in effect, by a sole arbitrator who (Al has the qualifications and experience set forth in subsection (bl hereof, and (B) is selected as provided in subsection (cl hereof. The arbitrator shall base his award on the terms of this Agreement and shall endeavor to follow the law and judicial precedents which a Unit.ed States District Judge sitting in the Middle. ,District of Pennsylvania would apply in t.he event the Dispute were litigated in such court. The arbitrator shall render the award in writing and shall include the findings of fact and conclusions of law upon which the award is based. The arbitration shall be governed by the substantive laws of the Commonwealth of Pennsylvania applicable to contracts made or to be performed therein, and by the Federal Arbitration Act. Title 9, U.S. Code, without regard to conflicts of law rules, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof, 18 ~"- ~. ~-~-.... ~ .'. (b) An:, person nominated or recomn,. "ded to serVe as an arbitrator hereunder shall be a neutral and impartial lawyer with excellent academic and professional credentials, with training and experience as an arbitrator, who is or has been a partner in or counsel to a highly respected law firm for at least fifteen years as a practicing attorney specializing in general corporate and commercial matters. (cl The arbitrator shall be selected as provided in this subsection (c) and otherwise in accordance with AAA's Commercial Arbitration Rules then in effect, except that any party shall be entitled to strike on a peremptory basis, for any reason or no reason, any and all of the names of potential arbitrators on the list SUbmitted to the parties by the AAA as being qualified in accordance with the criteria set forth in subsection (bJ hereof. In the ~vent that the parties cannot agree on a mutually acceptable arbitrator from one or more lists submitted by the AAA. the President of the MA shall designate three person who, in his or her opinion, meet the criteria set forth in subsection (b) hereof, which designees may include persons named on any lists submitted by AAA- Seller and Pharmacists on the one hand, and Buyer and Newco on the other hand, shall be entitled to strike one of such three designees on a peremptory basis, indicating their order of preference with respect to the remaining designees, and a selection of the arbitrators shall be made from among such designees which have not been so stricken by any party in accordance with their indicated order of mutual preference. (dJ If multiple Disputes are pending concurrently, the parties may consolidate those Disputes for purposes,ofarbitraton as described above. ' . (e) The arbitration specified herein is the sole and exclusive procedure for the resolution of Disputes to wl1ich this section 9.15 is intended to apply _ Either party may seek a preliminary injunction or other preliminary judicial relief, howeve~, if in that party's judgment, such action is necessary for the sole purpose of avoiding irreparable harm. Despite such action, the parties shall continue to participate in good faith in the arbitration procedure set forth above. (fJ The provisions of this section 9.15 shall survive the termination of this Agreement. 19 "' - ""' ~ ,-~, ~ , ~-"""'..,~ IN WITNESS 'oREOF, the parties heret have .@xec1,lted this Agreement as of tne day and year first above written. ~~~ Secretary :~'~~{~ELLER President PHI, BOYER AND NEWCO BY;~L.~- t.-Presi nt ' I (ev ~ ~) j2t.1t #(;{~ Robe.t Wilson, PHARMACIST ilft~ /Ii:%: W 1 iam Wilson, PHARMACIST ~ / ~~ ~ Thomas T.ite, PHARMAC ST f:\HOME\JDK\PHARMACY .12!i/518 20 , ,~. ,.... 'l';i;;l. .' CONTINUING CARl Rx,INC. STOCKHOLDERS' AGREEMENT THIS STOCKHOLDERS' AGREEMENT, made the 2~th day of February, 1998, by and among PHI, a Pennsylvania nonprofit corporation (II PHI II), ROBERT WILSON, WILLIAM WILSON AND THOMAS TRITE, individuals ("Pharmacists"), collectively referred to hereinafter as "Stockholders." , WIT N E SSE T H WHERBAS, PHI is the purchaser of the business, name and other assets of Continuing Care Rx, Inc., a Pennsylvania business corporation, and intends to operate a pharmacy business through a new corporation to be formed by PHI under the name 'Continuing Care Rx, Inc." ("Newco"); a~d WHEREAS, PHI will subscribe to seven hundred and fifty (750) shares of Class A $1 par value stock of Newco (. Stock"j and Pharmacists will subscribe to two hundred and fifty (250) shares of Class A $1 par value stock of Newco; and WHEREAS, Stockholders wish to provide a market for their Stock; and , WHEREAS, PHI and pharmacists desire to insure the continuity and harmonious management of Newco by imposing certain restrictions and obligations on each Stockholder with respect to the ownership, transfer or other disposition of their Stock. NOW, THEREFORE, in con8ide~ation of the promises and mutual covenants contained herein, and in conside):'ation of the declarations of Stockholders to be fully bound he):'eby, it is agreed by and among Stockholders as follows: 1. Reatrictir;,m 9n Tranqfer. The parties do not want the Stock of Newco to be made generally available to persons other than the present stockholders and those parties to whom PHI may sell two hundred and forty (240) shares of its Stock. Therefore, no Stockholder shall sell. assign, transfer, encumber or otherwise dispose of (hereinafter referred to collectively as "Transfer") any of its or his Stock which it or he may own or may hereafter acquire, unless the Stockholder desiring to make the Transfer (hereinafter called "Transferor") shall have first offered PHI and other stockholders the right to purchase as Bet forth in Section 2 and elsewhere herein; except that no consent Of any Stockholder -- h - .......-. <- (~ .' shall be required for PHI to transfer up to two hundred and forty (240) shares of its Stock to other parties who agree to be bound by the terms of this Agreement. However, if PHI desires to dispose of more or all of its shares in Newco, then and in Buch event, PH! shall be bound by the same terms and conditions relating to other stockholders. This Agreement will supersede any restrictions on Transfers of Stock set forth in the Bylaws of Newco where terms may differ from those contained herein. No attempted encumbrance or transfer of any shares of Newco'S Stock not in accordance with the terms of this Agreement shall be reflected on Newco's books. 2. Transfers Ourinq Lifetime. If a Trall.sferor wishes to Transfer any or all of its or his Stock during its existence or his lifetime. it or he shall notify Newco and all of the Remaining Stockholders by a written statement of intention to transfer and the name and address of any prospective purchaser, assignee, transferee, lienor or recipient of any other disposition, the number of shares of Stock involved in the proposed Transfer, and the price and terms of such proposed Transfer. Upon receipt of this notification, Newco or the Remaining stockholders, whichever the case may be, shall notify the Transferor of its or their intention to purchase some or all of the offered Stock within t~irty (30) days of receiving such notice on the same terms and conditions as set forth in the offer being reviewed. If the notification involves all of the Transferor's Stock. then Newco shall have first choice to purchase all of such Stock. Otherwise, the Remaining Stockholders ahall have the right to purchase such Stock as is involved in proportion to their respective ownership of Stock (excluding the offered Stock), or in such other proportion as they shall agree upon. 3. Death. Dissolution. Disability, Bankruptcy. In the event a Stockholder dies, dissolves, becomes by reason of total disability unable to carry out his normal duties in the business of Newco, is adjudicated a bankrupt, then upon the first to OCCUr of such occurrences, the Stockholder shall be deemed to have requested Newco or the Remaining Stockholders to purchase its or his Stock, and Newco and the aemaining Stockholders shall be deemed to have given notice of their intent to purchase the St-Qck, as if the notice required in section 2 above had been given. For these purposes, "total disability. shall mean the inability to perform adequately the professional and other assigned duties as defined in the Management Agreement executed by each individual Stockholder and Newco. 4. Sale PriceL The sale price for Stock, where no bona fide third party offer to purchase exiats, shall be the fair market value of the shares of offered Stock as determined by an independent certified public accountant ("CPA") agreed to by all parties. This valuation shall be based upon transfer of a similar percentage interest in publicly traded pharmacy companies. Newco - . ,~" ~ .- ~ 1M" - ~ .~"-, ff-f .' will provide such data as the CPA deems necessary or useful to make such determinacion of the fair markec value of the offered Stock. The fees and reimbursed expenses charged by the CPA in the valuation under this section shall be borne Bole1y by Newco. The sale price for the Stock shall be paid in cash or by check at the Closing. 5. Failure to ~urchase, If a right to purchase provided in sections 2 and 3 hereof is not exercised by Newco or the Remaining Stockholders by giving the required notice, the Tranaferor may make a bona fide Transfer of any such unaccepted Stock to the prospective purchaser, assignee, transferee, lienor or recipient of any other disposition named in the Consent Request, but only in strict accordance with the terms therein stated. If the Transferor shall fail to make such Transfer to such prospective purchaser, assignee, transferee, lienor or recipient of any other disposition within thirty (30) days following the expiration of the time provided for the acceptance by the Remaining Stockholders, such Stock shall again become subject to the terms and restrictions of this Agreement. 6. Closing. The closing shall take place at the office of Newco or at such other.place as shall be agreed upon, within ninety (90) days of the date of notice of intent to Transfer. 7. Delivery of Stock. Upon the payment to the Transferor of the purchase price, the Transferor shall sign and deliver the Stock of the Stockholder to the purchasing Stockholders. Each Stockholder appoints NewcQ, through its Secretary or such other officer as its Board of Directors may designate, as his or its agent and attorney-in-fact to execute and deliver all documents needed to convey his or its Stock if such selling Stockholder is not present at the Closing. This power of attorney is coupled with an interest and does not terminate on Stockholder's disability or death, and continues for so long as this Agreement is in effect. e. Restrictive Endorsement. Each certificate representing Stock now or hereafter held by Stockholders shall bear a conspicuous legend in substantially the following form: "The transfer of the Stock represented by the within certificate is restricted under the terms of an Agreement dated February 25, 199B, a copy of which is on file at the office of Newco." 9. T~rminatinq the 1I.qreement. This Agreement shall terminate upon the occurrence of any of the following events: (al cessation of Newco'a business; (bl dissolution of Newco; (cl whenever there is only one surviving Stockholder bound by the terms hereof; (d) voluntary agreement of all parties who are then bound by the terms hereof; or te) upon election of Stockholders, if another Stockholder violates any provision of this Agreement. Upon the termination of this Agreement, each Stockholder shall surrender its 3 - -~ --, , . _0.' ," or his certificates to Newco and Newco shall issue to it or him in lieu thereof new certificates for an equal number of shares of Stock without the endorsement set forth in section B hereof. 10. Continuation of Restrictions. This Agreement shall continue to apply to shares of Stock transferred by any Stockholder, and any other Stockholder may require as a condition of such a Transfer that the transferee execute an agreement substantially identical in form to this Agreement (which may be accomplished by a certificate of acceptance and adoption of this Agreement), to which all of the transferee's ahares of Stock will be subject, and which agreement will be treated 'as a part of this Agreement. 11. BOOKS and Recor~9. Books of account shall be maintained by Newco and proper entries maqe therein of all sales, purchases, receipts, payments, transactions and property of Newco, and the books and records of Newco shall be retained at the principal place of business of Newco. Each Stockholder shall have free access at all reasonable times to all books and records maintained relative to Newco's business. 12. Accountinq, The fiscal year of Newco shall be from January 1 to December 31 each year. On the 31st day of December, commencing in the year in which this Agreement is executed, and on the 31st day of December in each succeeding year, a general accounting shall be made and taken by Stockholders of all revenues, purchases, receipts, payments and transactions of Newco during the preceding fiscal year, and of all the capital property and current liabilities of Newco. 13. Profits and LOsseS. Distribution of profits shall be at least quarterly made at such time and in such amounts as are determined by the Board of Directors of Newco. Each Stockholder shall be entitled to a division of profits, if any, in the same proportion as the number of shares of the class owned by that Stockholder related to the total number of shares issued by Newco. 14. Invalid Provisions. The invalidity or unenforceability of any particular proviSion of this Agreement shall not affect the other provisions hereof, and this Agreement shall ~e construed in all respects as if such invalid or unenforceable provisions were omitted. 15. Modification < No Agreement shall be valid unless the parties hereto. 16. Notices. Any and all notices, designations, consents, offers, acceptances or any other communication provided for herein shall be given in writing by registered or certified mail, return change or modification of this it is in writing and signed by all 4 - ~ I -." ~---" ~~ ." " receipt requested, which shall be addressed to Stockholders at their place of business or residence, other address as may be designated by it or him, Each shall be deemed given at the time it is mailed. 17. tlenefit. This Agreement shall be binding upon the parties, their heirs, legal representatives, Sucoessors and assigns. Each individual Stockholder in furtherance hereof agrees to execute a Will directing his executor to perform this Agreement and to execute all documents necessary to effectuate the purposes of this Agreement, but the failure to execute Buch Will shall not affect the rights of any Stockholder or the Qbligations of any estate. as provided in this Agreement. the other or to such such notice 18, Govern:inq Law, This Agreement shall be governed by, construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflict of laws principles thereof. 19. Specific Performance. The parties agree tnat the Stock is unique, that failure to perform the obligations under this Agreement will result in irreparable damage to the other parties and that specific performance of these obligations may be obtained upon terms and condit~ons contained herein by a suit in equity. 20, Waiver. The failure of any party to insist on compliance or enforcement of any provision of this Agreement shall not affect its validity or enforceability or constitute a waiver of future enforcement of that provision or of any other proviSion of this Agreement, 21. Copies. More than one (1) copy of this Agreement may be executed, and all parties agree and acknowledge that each executed copy shall be a duplicate original. 5 t- -ll ~; .' " IN WITNESS WHEREOF, the parties have agreed to and have executed this Agreement as of the day and year first above written. PHI ,EE:,;:- ;2.-e; ( By: (1:?e~@aw , C t:v(cfz, ~~ itv' ~ Robert Wilson, PHARMACIST IlJ);kvl/l;~ William wilson, PHARMACIST G~;$/~ Thomas Trite, PHARMACIST Agreed and acknowledged by the following persons who are not themselves parties to this Agreement, but who are the corporation whose shares are the subject of this Agreement and the spouses of parties to this Agreement. who themselves have read this Agreement and who agree that they will be bound by all of its provisions, including (but not limited to] restrictions on Transfer and establishment of value of the Stock for all purposes. Continuing Care ~ In:. (Newco) By: ~L ~ C--. . l/ItJ~ a1:: F,\W0K6\JO<\STc<AaT2 :iln5/~8 "" 1l'lll!JIISlL' VV! LoU:J:J JHU O'lL. Ji.JVl flU.JDlle1\ltl.J'i nVJVlc,J r,u JIV, 11 ((OJ 101 ( r, '!. '. .' 'l:..J- MANAGEMENT AGREEMENT BETWEEN CONTINUING CARE RX. INC. AND ROBERT WILSON, WILLIAM WILSON AND THOMAS TRITE THIS AGREEMENT, made as of the 25th day of February, 1998, among and between CONTINUING CARE Rx, INC., a Pennsylvania business corporation ("Pharmacy"), and ROBERT WILSON. WILLIAM WILSON and THOMAS TRITE, individuals (collectively referred to as "Management Consultantsll) . WIT N E SSE T H ~ HEREAS , institutional products and services; and Pharmacy has been formed :0 do retail and business in the field of pharmaceuticals and related services and desires to contract for management .~HEREAS. Management Consul tants are iL'.~ependent contractors and l~censed pharmacists in the Commonwealth of Pennsylvania who have expertise in managing and operating a retail and institutional pharmacy business (the IIBusinessll). NOW, THEREFORE, in reliance upon the representations and ~ warranties made herein and for good and valuable consideration, Pharmacy and Management Consultants, intending to be legally bound hereby, covenant and agree as follows: . 1. Nature of Manaqement Consultant position. (a) Pharmacy desires, upon the purchase of Management Consultants' Business, to make use of Management Consultants' expertise. (b) Pharmacy shall retain Management Consultants, and Management Consultants shall accept such retainage from Pharmacy for a period of five (5) years (the "Consulting Term II ) to undertake such duties and to perform such services as reasol'l.i@.bly may be assigned to them by the Board of Directors of Pharmacy or by its officerS, as further defined in section 2 hereof. (c) Management Consultants shall be independent contractors and not employees of Pharmacy and, subject only to the terms of section 2 hereof, shall determine their own method of operation in accomplishing such tasks as may be assigned. Management Consu1t(l.nts shall not be entitled to receive any compensation, j' commissions or benefits from Newco other than those expressly provided in this Agreement. "'---' ......... Ie..... v ~^ V~~ LV ~J JUV V, IJ nm lnC~UJICAJnR UVmC0 U\AIIV, Ill/OjlOII r, j .0 " (d) Pharmacy agrees that Management Consultancs have the right to act as consul tants for, or be employed in any other capacity by, any other parties concerning any subject matter. 2, Scope of Consu~tinq Duties. (a) During the Consulting Term, Management Consultants shall be available to assist Pharmacy in the ongoing management of the retail and institutional pharmacy Business to be carried on by Pharmacy, including the total management of the Business. Specifically, Management Consultants shall select" hire and train the staff and employees of Pharmacy, supervise. evaluate and determine the compensation of such employees, develop operational policies, staffing levels and budgets, and perform all other functions re~uired to manage and operate the Business. (b) M~~agement Consultants agree to provide t~e consulting services as defined herein and to use their best efforts and abilities in performing the services, and to give Pharmacy the full benefit of Management Consultants' knowledge. experience, judgment and expercise in rendering pharmaceutical services to the retail and instit",'.ltional public. (c) It is agreed between the parties that Management Consultant:s are independent c:;ontractors. They shall not hold themselves out as employees, partners or agents of Pharmacy for any purpose whatsoever. Management Consultants control the manner and means of performing the services and are responsible for the full, adequate ~nd timely completion of the services. (d) During the course of this Agreement, Management Consultants agree to maintain as confidential any cop~es, abstracts, documents, summaries of any papers or any other material of a confidential nature which may come into their possession in the course of their consulting relationship with Pharmacy. 3. I"ees. (a) Pharmacy shall pay to Management Consultants a total annual payment of Two Hundred Ninety Thousand ($290,000.00) Dollars for each year of the Consultant Term distributed in.~welve (12) equal monthly installments payab1eon the first day of each and every month. The hours of service of Management Consultants on any given day shall be those which meet the reasonable needs of the ~ Business and shall not be established by Pharmacy. periOdiCallY,] but at least sixty (60) days prior to the end of each year, the parties shall meet and review the terms and conditions for the next year's compensation package. (b) employees, disability None of the including but insurance, benefits provided by Pharmacy to its not limited to medical, life, accident or pensions, unemployment or workers' 2 ,-~ - , '" ~ ~~- VeJ-LO-jj lnV 0, jj AM rH~tlnKji\li jjUMh~ IAl N[ J1JJbjJblJ f, 4 ~. .' , . compensation or profit sharing plans, shall be available to Management Consultants. Management Consultants, however, are not '- precluded from purchasing medical, life, accident or disability insurance at their own expense if it can be purchased as part of a group plan. No withholding of federal or state income taxes, social security, or related contributions shall be made from payments made to Management Consultants. Management Consultants are solely responsible for payment of the taxes and contributions due to governmental bodies as a result of payments received by them under this Agreement,_ (c) Pharmacy shall pay Management Consultants for any reasonable travel, marketing and other expenses relating to the Business. Pharmacy will reimburse Management Consultants for expenses for on~ (]) national educational meeting per year. 4. during months Covenant ~ot to Compete. (a) Management Consuj tants, the Consult~ng Term and for an additional period of .ix (6) thereafter (the "Noncompetition Term"), shall not: (1) Canvass, solicit, or actively pursue business or em~'oyment for provision of pharmaceutical ,r durable medical supply services from any of NEWCO's cll~nts; ....., (2) Disclose any proprietary or confidential information of Pharmacy or its Parent or the Business relating to (i) the customers, clients, employees and accounts of Pharmacy or its Parent or the Business, including, but not limited to, identity of Pharmacy's or its Parent's customers if such identity is proprietary or confidential, or (ii) Pharmacy's or Parent's business methods, systems, plans, policies and personnel. (b) It is understood between the parties that individuals, and perhaps facilities, have certain freedom of choice of provider of pharmacy and medical supply services. As such, no violation of those, provisions is intended and the parties hereto agree to cooperate to avoid violation. (c) If pharmacy claims that Management Consultants. or any one or more of them, have materially violated this covenant not to compete, then it shall give Management Consultants thirty (30) days written notice specifying with reasonable detail the claim violation. If Management Consultants dispute the claimed violation, or its materiality, Management Consultants shall advise Pharmacy in writing within ten (10) days after the thirty-day notice period. and the dispute promptly shall be referred, to resolution by impartial arbitration conducted under the ausp~ces and pursuant to the rules of the American Arbitration Association. Costs and attorneys fees of the prevailing party shall be taxed to the other party. Pending such resolution, Pharmacy shall not be required to continue to make the annual payments set forth in ......... 3 '-" "- ....... - " ~ " ~. . . -- ~ ~"'. " UCT-L~-~~ THU 8:14 AM PRESBYTERJAN HOMES FAX NO, 7177637617 p, 5 " . . section 3 hereof, but if Management Consultants prevail at arbitration, Pharmacy then shall promptly make Management Consultants whole, with six (6%) percent simple interest, for any payments of fees withheld, . (dl In addition to any other remedies that Pharmacy and Parent may have under this agreement for alleged violations of this section, ~harmacy and Parent may apply to any court of competent jurisdiction for equitable relief, including specific performance and injunctions restr~ining Management Consultants from committing or continUing any such violation of this Agreement. 6. Validitv. If for any reason any provision of this Agreement shall be determined to be invalid or unenforceable, the validity and effect 0f tbe other provisions shall not be affected. Without 1i.miting the gen ~rality of the foregoing, the invalidity ,)f Management Consultants' covenant not to compete, set forth .Ln section 4 above, shall n)t affect Pharmacy's obligation to make tae payments to Management Consultants set forth in section 3 above in respect to any year if Management Consultants shall in fact strictly observe such covenant during such year notwithstanding its invalidity. 7. Waiver of Breac:h. The waiver by Pharmacy or by Managenl(~nt Consultants of a breach of any provision of this Agreement by the other party shall not operate, or be construed. as a waiver of any other breach of such other party. 8. Termination Circumstances. This Agreement shall terminate immediately upon Transfer by the Management Consultants. without substitution of a like number of Management Consultants, of their shares of Class A $1 par value stock of Pharmacy during the Consulting Term. In such event, Pharmacy's then remaining obligation shall cease. In the event of the death of one or more of the Management Consultants, the surviving Management Consultants and Pharmacy shall negotiate a new Management Agreement to provide for continuing management services for Pharmacy. 9. Assiqnment, This Agreement shall inure to the benefit of, and be binding upon, Pharmacy, its successors and assigns. This Agreement shall be binding on Management Consultants, 'their heirs. executors or administrators, and legal representatives. but shall not be assignable by Management Consultants and the obligations of Management Consultants may not be delegated. 10. Entire Aareement. This Agreement represents the entire understanding of the parties on its subject rna,tter. This Agreement may not be amended except by a writing signed by the party against whom enforcement of any amendment is sought. 4 {' . .~ .~ ~..,~ - ilOi.U V~j-LO-~~ lnU O,jq ilM rKt~~!nK1AN jjUMt~ 'AX NQ 1177637617 p, 6 " . . '-' 11. Applicable Law. The parties agree that this Agreement shall be construed and enforced pursuant to the laws of the Commonwealth of Pennsylvania. IN WITNESS' WHEREOF, the parties have set their hands as of the day and year first above written. ~(jM (aA JJ4.d.) 1. CONTINUING CARE Rx, INC. By:/;{- .L ~ Robert Wilson 1JJJJJ/l4n1/Z~ William Wilson ~ b~~~ Thomas te ,~- F:\HOME\JOK\MGT~TPH \...I 2/25/" \.;.t L" ~ - ,"~~ ~U"~'. " VERIFICA TION I, William Wilson, hereby aver and state that I have read the foregoing document which has been drafted by my counsel. The factual statements contained therein are true and correct to the best of my knowledge, information and belief although the language is that of my counsel and, to the extent that the content of the foregoing document is that of counsel, I have relied upon counsel in making this verification, This statement is made subject to the penalties of 18 Pa. C.S.A, S 4904 relating to unsworn falsification to authorities, which provides that if I make knowingly false statements, I may be subject to criminal penalties, /1'1 .ll ' /1/1,.'/, / 4 ,I (; "llg (/(J?' ~~~ William Wilson HB0\40497.1 - ~~~..,:..-- ~ 0 "~ ~" " VERIFICATION I, Robert Wilson, hereby aver and state that I have read the foregoing document which has been drafted by my counsel. The factual statements contained therein are true and correct to the best of my knowledge, information and belief although the language is that of my counsel and, to the extent that the content of the foregoing document is that of counsel, I have relied upon counsel in making this verification. This statement is made subject to the penalties of 18 Pa, C.S.A. ~ 4904 relating to unsworn falsification to authorities, which provides that if I make knowingly false statements, I may be subject to criminal penalties, (UJt w~ Robert Wilson HBG\40491J ~. -.' "~~ Ili .' CERTIFICATE OF SERVICE On this6hday of January, 2000, I, Sheny L. Weigel, a secretary in the law offices of Duane, Morris & Heckscher LLP, hereby certifY that I have served this day true and correct copies of the foregoing COMPLAINT in the above-captioned matter, by depositing same in the United States First Class Mail, postage prepaid, in Harrisburg, Pennsylvania, to those persons and addresses indicated below: David B. Disney, Esquire McNees, Wallace & Nurick 100 Pine Street P,O. Box 1166 Harrisburg, P A 171 08-1166 JwwJ- j'!JJJ~ Sheny L. W~el HBG\3830 1.2 " ._~~~. " .~ ~~ ~~. .' ~ ~ ~,-'" .- ,. IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT, PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG, PA 17112 PLAINTIFFS CiviIActionNo,..'2t"YY\_ It, C~"L --- I~ V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 " and STEPHEN PROCTOR 7 AL YDAR BOULEVARD DlLLSBURG, PA , 1 ~ ... ; -, DEFENDANTS NOTICE You have been sued in court, If you wish to defend against the claims set forth in the following pages, you must take action within twenty (20) days after this Complaint and Notice are served, by entering a written appearance personally or by an attorney and filing in writing with the court your defenses or objections to the claims set forth against you, You are warned that if you fail to do so the case may proceed without you and a judgment may be entered against you by the court without further notice for any money claimed in the Complaint or for any other claim or relief requested by the Plaintiff. You may lose money or property or other rights important to you. YOU SHOULD TAKE THIS PAPER TO YOUR LAWYER AT ONCE. IF YOU DO NOT HAVE A LAWYER OR CANNOT AFFORD ONE, GO TO OR TELEPHONE THE OFFICE SET FORTH BELOW TO FIND OUT WHERE YOU CAN GET LEGAL HELP. Court Administrator 4th Floor, Cumberland County Courthouse Carlisle, PA 17013 (717) 240-6620 HBG\3830I.2 ">q,'i- ..- ,- IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT,PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG, P A 17112 Civil Action No. PLAINTIFFS V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 and STEPHEN PROCTOR 7 ALYDAR BOULEVARD DILLS BURG, PA DEFENDANTS NOTICIA Le han demandado a usted en la corte. Si usted quiere defenderse de estas demandas expuestas en 1as paginas siguientes, usted tiene viente (20) dias de plazo al partir de la fecha de la demanda y la notificacion. Usted debe presentar una apariencia escrita 0 en persona 0 por abogado y archivar en la corte en forma escrita sus defensas 0 sus objeciones a las demandas en contra de su persona, Sea avisado que si usted no se defiende, la corte tomara medidas y puede entrar una orden contra usted sin previo aviso 0 notificacion y por cualquier queja 0 alivio que es pedido en 1a peticion de demanda, Usted puede perder dinero 0 sus porpiedades 0 otros derechos importantes para usted, ' LLEVE ESTA DEMANDA A UN ABODAGO IMMEDIATAMENTE. SI NO TIENE ABOGADO 0 SI NO TIENE EL DINERO SUFICIENTE DE PAGAR TAL SERVICIO, VAYA EN PERSONA 0 LLAME POR TELEFONO A LA OFICINA CUYA DIRECCION SE ENCUENTRA ESCRITA ABAJO PARA AVERIGUAR DONDE SE PUEDE CONSEGUIR ASISTENCIA LEGAL, Court Administrator 4th Floor, Cumberland County Courthouse Carlisle, PA 17013 (71 7) 240-6620 HBG\3830 1.2 ,..-- - ~~-, l' ,I IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD I BOX 85 NEWPORT, PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG,PA 17Il2 Civil Action No. PLAINTIFFS V, CONTINUING CARE RX, INC, 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 and STEPHEN PROCTOR 7 AL YDAR BOULEVARD DILLS BURG, PA DEFENDANTS COMPLAINT 1. Plaintiff William Wilson is an individual residing at 4997 Westchester Drive, Harrisburg, P A 17Il2. 2. Plaintiff Robert Wilson is an individual residing at RD I, Box 85, Newport, P A 17074. 3. Defendant Continuing Care Rx, Inc. is a Pennsylvania Corporation with its registered office at 1217 Slate Hill Road, Camp Hill, Pennsylvania 17011. HBG\3830L2 - - "~- ,.:. ~ J:;-.. .' t' 4. Defendant Stephen Proctor is an individual residing at 7 Aldyar Boulevard, Dillsburg, Pennsylvania. Proctor is Chairman of the Board of Continuing Care Rx, Inc. 5. Plaintiffs Robert and William Wilson are registered phannacists who, in December of 1996, with a third individual, Thomas Trite, founded a corporation called Continuing Care Rx, Inc. ("CCRxI "), 6. From December 24, 1996, until February 25, 1998, Robert Wilson, William Wilson and Thomas Trite were the owners and managers of CCRxI. 7. The business of CCRx1 was to enter into contracts with nursing homes and other institutions under which CCRxI would provide and distribute prescription drugs to the residents ofthe nursing home or other institution, 8, In February of 1998, CCRxI entered into an agreement with PHI, a Pennsylvania corporation, to provide and distribute prescription drugs at nursing homes owned and operated by Presbyterian Homes Incorporated, a subsidiary of PHI, 9, In February of 1998, PHI entered into an Asset Purchase Agreement with William Wilson, Robert Wilson and Thomas Trite under which PHI purchased the business, name and other assets of CCRxI, subject to certain liabilities, and created a new corporation by the name Continuing Care Rx, Inc. ("CCRx2") to operate the phannacy business previously operated by CCRxI. A true and correct copy of that Asset Purchase Agreement is attached hereto and made a part hereof as Exhibit "A." I O. The Asset Purchase Agreement also provided that the Wilsons and PHI would enter into an agreed to Management Agreement and an agreed to Stockholders Agreement. II. On or about February 25, 1998, the Wilsons and Trite entered into a Management Agreement and a Stockholders Agreement. 12. Under the Shareholders Agreement, the Wilsons and Trite were to subscribe to two hundred and fifty (250) shares of stock, twenty-five percent (25%) of the issued stock. A HBG\38301.2 " " - ~'"""~ " . . true and correct copy of that Shareholders Agreement is attached hereto and made it part hereof as Exhibit "B." 13. Under the Management Agreement, The Wilsons and Trite were engaged by CCRx2 for a term of five (5) years as "management consultants," A true and correct copy of that Agreement is attached hereto and made a part hereof as Exhibit "c." 14. Under the Management Agreement, the consulting duties included: (a) During the Consulting Term [five years], the Management Consultants [the Wilsons] shall be available to assist [CCRx2] in the ongoing management of the retail and institutional phannacy Business to be carried on by [CCRx2], including the total management of the Business. Specifically, Management Consultants shall select, hire and train the staff and employees of- Pharmacy, supervise, evaluate and determine the compensation of such employees, develop operational policies, staffing levels and budgets, and perform all other functions required to manage and operate the Busines~, (b) Management Consultants agree to provide the consulting services as defined herein and to use their best efforts and abilities in performing services, and to give Pharmacy the full benefit of Management Consultants' knowledge, experience, judgment and expertise in rendering pharmaceutical services to the retail and institutional public. 15, From February 25,1998, until August 10,1999, the Wi/sons provided the consulting services as defined in the Management Agreement, used their best efforts and abilities in performing services, and gave CCRx2 the full benefit of their knowledge, experience, judgment and expertise in rendering phannaceutical services to the retail and ~titutional public. 16. On August 10, 1999, CCRx2, through its Chairman of the Board, Stephen Proctor, advised William and Robert Wilson that CCRx2 was terminating the Management Agreement as of that date, 17. There was no good cause for that termination. HBG\3&30l.2 ~ ~-~" =~ . . " Count I 18, Plaintiffs hereby incorporate paragraphs one (1) through seventeen (17) by reference as if fully set forth herein. 19. By terminating the Management Agreement, CCRx2 breached the Management Agreement in that that Agreement does not allow termination without cause and there was no cause for that termination. 20. Under the Management Agreement, each of the Wilsons was and is entitled to at least one/third (113) of the $290,000 ($96,666.66), compensation agreed to for the first year. 21. In fact, as agreed, each of the Wilsons received $115,000 each during the first year of the Agreement and are, therefore, entitled to at least $115,000 each for each of the four years remaining under the Agreement. 22. In addition, the Management Agreement provided that: Periodically, but at least sixty (60) days prior to the end of each year, the parties shall meet and review the terms and conditions for the next year's compensation package, 23, Plaintiffs believe that if the required meeting had been held and the parties had acted in good faith, their compensation under the Agreement would necessarily have been increased significantly. 24, Plaintiffs are entitled to an amount in excess $115,000 per year for each of the four years remaining under the Management Agreement. WHEREFORE, Plaintiffs respectfully that this Court enter judgment in their favor and against defendant CCRx2 in an amount in excess of $1 00,000.00. Count II 25. Plaintiffs hereby incorporate paragraphs one (1) through twenty-four (24) by reference as if fully set forth herein, I HBG\38301.2 --.k_ "~Lo 26, The Management Agreement provided that: Periodically, but at least sixty (60) days prior to the end of each year, the parties shall meet and review the tenus and conditions for the next year's compensation package. 27. The Wilsons expended extensive time and efforts in developing the business of CCRx 1. 28. The three agreements, the Asset Purchase Agreement, th;: Management Agreement and the Shareholder Agreement, were each part of total agreement between the parties intended ensure that the Wilsons were fully compensated for their time and efforts in developing the business and assets ofCCRxl that were being transferred under the Asset Purchase Agreement. 29. Defendant CCRx2 had an implied duty to deal with Plaintiffs in good faith under the three Agreements, 30. Defendant CCRx2 failed to negotiate the compensation due under the Management Agreement as required by the Agreement. 31. At various times, CCRx2 waived apparent violations of the Management Agreement which it now claims as a basis for the termination of that Agreement. 32. At various times, the parties to the Management Agreement agreed that there were aspects of the Management Agreement which should be amended in order to better accomplish the purposes of the parties. 33. Defendant CCRx2 failed to negotiated amendments to the Management Agreement which the parties had agreed would be appropriate to accomplish the purposes of the Agreement and to comply with the Internal Revenue Code. 34. CCRx2 violated its duty to deal in good faith by: a. failing to negotiate future compensation due under the Management Agreement; HBG\38301.2 "'" -,~.;;,.:. ~ " " . -u ,boi:...". b. terminating the Management Agreement without good cause; c. asserting claims against the Wilsons which had previously been waived; and d. failing to negotiate amendments to the Management Agreement which all of the parties to that Agreement had agreed would be appropriate to accomplish the purposes of the Agreement. WHEREFORE, Plaintiffs respectfully request that this Court enter judgment in their favor and against CCRx2 in an amount in excess of $ 100,000, Count ITI 35. Plaintiffs hereby incorporate paragraphs one (1) through thirty-four (34) by reference as if fully set forth herein. 36. Steven Proctor caused CCRx2 to wrongfully terminate the Management Agreement without cause and for reasons having nothing to do with the Wilsons' performance under the Management Agreement. 37. Steven Proctor wrongfully and tortiously interfered with the Plaintiffs' contractual relations with CCRx2. WHEREFORE, Plaintiffs respectfully request that this Court enter judgment in their favor and against Defendant Proctor in an amount in excess of $1 00,000. Respectfully submitted, Date: 1/10 /00 ~t~ Allen C, Warshaw, Esquire AttomeyldNo, 17145 Duane, Morris & Heckscher LLP 305 North Front Street, 5th Floor P.O. Box 1003 Harrisburg, PA 17108-1003 (717) 237-5500 Attorneys for William & Robert Wilson HBG\3g:~OI.2 .' McNEES, WALLACE & NURICK ATTORNEYS AT LAW 100 PINE STREET P. O. BOX 1166 HARRISBURG, PA 17108-1166 TELEPHONE 17171 232-8000 FAX {7171237~5300 http://www.mwn.com fD)m@rnow~fnl UlJ JUN - 8 2000 lfu MARK M, VAN BLARGAN DIRECT DIAL: (717) 237-5347 E-MAILADDRESS:MVANBLAR@MWN.COM June 7,2000 DUANE, MORRIS & HECKSCHER LLP , William Wilson 4997 Westchester Drive Harrisburg, PA 17112 Robert Wilson RD 1, Box 85 Newport, PA 17074 Thomas A. Trite, Ph, D, 6512 Windmere Road Harrisburg, PA 17111 Re: Continuing Care RX, Inc, Our File: 19547-0001 Dear Sirs: First, attached to this letter is an Information Statement, which describes the terms and conditions under which you may purchase additional shares of stock in Continuing Care RX, Inc, ("CCRX"), Second, this letter will provide you with notice of a meeting of the shareholders of CCRX, which is scheduled for 10:00 a,m" June 20,2000, at CCRX's registered office located at 1217 Slate Hill Road, Camp Hill, PA 17011, The sole agenda item for this meeting is to vote on the proposed Agreement and Plan of Merger (which is attached as Exhibit "B" to the Information Statement), Third, enclosed with this letter is a Notice of Dissenters' Rights and Right to Demand Payout (with schedules) as required by applicable law, We are sending Allan Warshaw a courtesy copy of this letter and its enclosures, Very truly yours, ::N~'r;;JfRICK Mark M, Van Blargan JJk P7f:: )r..--:(;V<f:rII4-/ . COLUMBUS, OH WASHINGTON, D,C, . -,,- " MMVB:jad Enclosures c: Allan C, Warshaw, Esquire (wI encl) Stephen E. Proctor (wI encl) , , INFORMATION STATEMENT June 7, 2000 Continuing Care Rx, Inc. Continuing Care RX, Inc. (the "Corporation") is offering for sale exclusively to existing stockholders a total of up to 3000 shares of the Corporation's authorized but unissued shares ("New Shares"), at a purchase price of $200,00 per share. The Corporation will realize total proceeds of $600,000,00 if all of the New Shares are sold, Each of the stockholders is being given the opportunity to purchase New Shares on the following terms and conditions: 1, The purchase price for each of the New Shares will be $200,00 per share, 2, Each stockholder will have the initial right to purchase a pro-rata portion of the New Shares. Thus, PHI, as the owner of 75% of the issued and Qutstanding shares of capital stock of the Corporation, will have the initial right to purchase 75% of the New Shares, or 2250 New Shares for an aggregate purchase price of $450,000,00, Each of the minority stockholders will have the initial right to purchase 8,33% of the New Shares, or 250 New Shares each, for an aggregate purchase price of $50,000,00, 3, In order to exercise the opportunity to purchase the New Shares, the Corporation must have received the stockholder's respective purchase price, in cash or a cash equivalent (together with the fully completed and executed subscription agreement described below) no later than June 21, 2000 at 5 p.m. E.P.T. Such stockholder must deliver the amount of the purchase price and subscription agreement to the Corporation's principal office, located at 5775 Allentown Boulevard Suite 202, Harrisburg, PA 17112, 4, In the event that any of the minority stockholders do not exercise the opportunity granted herein to purchase New Shares, PHI will have the further opportunity to purchase all of such unpurchased New Shares, for the same per-share purchase price, so long as PHI tenders such purchase price, in cash or cash equivalent, to the Corporation within thirty (30) days after the expiration of the initial period, THI:SE SECURITIES ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH DEGREE OF RISK. PURCHASE OF THESE SECURITIES IS ONL YSUITABLE FOR PERSONS WHO HAVE SUBSTANTIAL FINANCIAL RESOURCES AND NO NEED FOR LIQUIDITY IN THIS INVESTMENT AND ARE IN A POSITION TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT., BECAUSE THEY ARE BEING OFFERED AND SOLD IN AN EXEMPT, NON-REGISTERED TRANSACTION, THE RESALE OR OTHER REDISTRIBUTION OF THE SHARES WILL BE SUBSTANTIALLY RESTRICTED BY FEDERAL AND STATE SECURITIES LAWS. {AI71686:2} .' THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. PROSPECTIVE PURCHASERS ARE URGED TO READ THIS INFORMATION STATEMENT AND IT'S EXHIBITS CAREFULLY, BUT SHOULD NOT CONSTRUE ITS CONTENTS AS LEGAL OR TAX ADVICE. EACH PROSPECTIVE PURCHASER SHOULD CONSULT WITH HIS OR HER OWN REPRESENTATIVE, ACCOUNTANTS AND OTHER ADVISORS AS TO LEGAL, TAX, FINANCIAL AND RELATED MATTERS CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY FOR THE INVESTOR. . IMPORTANT INFORMATION ABOUT THE OFFERING Financial and Governance Matters By letter dated May 25, 2000, McNees, Wallace and Nurick, counsel to CCRX, provided to Duane, Morris and Heckscher, LLP, counsel to certain of the stockholders, copies of the following documents: 1, Monthly financial statements provided to the CCRX Board of Directors from January 1999, through April 2000; 2, A draft of the 1999 Audit Report of Boyer and Ritter (which has not been finalized); and 3, All minutes of the Board of Directors and Committee meetings of CCRX from November, 1999 through April 26, 2000, Compliance Matters Attached to this Information Statement as Exhibit "A" is a copy of a regulatory review report prepared by Buzzeo Associates, Ltd, which assesses the Corporation's level of compliance with the federal Controlled Substances Act for the period March, 1998 through August, 1999 ("Buzzeo Report"), The Buzzeo Report describes a number of violations of the Controlled Substances Act. CCRX has voluntarily disclosed these violations to the federal Drug Enforcement Administration ("DEA"), The DEA is currently considering its enforcement stance with regard to these violations, All identified violations have either been corrected, or are in the process of being corrected, Further investigations (which continue) may yield violations of other laws which govern pharmacy operations, At present, it is not possible to quantify or speculate on the effect that the Controlled Substances Act violations, together with the possibility of other regulatory violations, will have on the Corporation's ability to do business on a going forward basis, Corporate Reorqanization At a meeting of the Board of Directors held on May 11, 2000, the Board approved the formation of CCRX, LLC as Pennsylvania limited liability company, and approved a Plan and Agreement of Merger of the Corporation with and into CCRX, LLC, with CCRX, LLC as the surviving entity ("Plan of Merger"), on the terms and conditions described therein, {A171686:2} . ~ .l<IIIt 1'>...-~', .' A copy of the Plan of Merger is attached hereto as Exhibit "B, " and a copy of the referenced Board Minutes is attached as Exhibit "C," Under the Plan of Merger, PHI will exchange its shares in the Corporation for 1 00% of the membership interests in CCRX, LLC, while the shares of the minority stockholders will be exchanged for cash at fair market value, initially determined at $200,00 per share, and as subsequently adjusted upward or downward based on a valuation of such shares performed by an independent appraiser engaged by the Corporation, The Corporation cannot predict the effect of this corporate reorganization on the value of its shares, It is presently anticipated that the merger will occur in June or July, 2000, Availabilitv of Additional Information The Corporation will make available to each prospective purchaser at a reasonable time prior to the purchase of the New Shares the opportunity to ask questions and receive answers concerning the Corporation and the terms and conditions of the offering, Because the Corporation and a number of its existing stockholders are in active litigation, all questions should be directed to counsel for the corporation: Mark M, Van Blargan McNees, Wallace and Nurick 100 Pine Street Harrisburg, P A 17110 717-237-5347 Subscription AQreement In order to purchase shares pursuant to this offering, the purchaser must fully complete and execute the Subscription Agreement in the form attached hereto as Exhibit "0", {AI71686:2} .~ EXHIBIT "A" BUZZEO AUDIT (attached) ~-' ^- ~1. " -~~~ -~~ ''''''''''~'i "MAY-31-2000 WED 11:41 AM tKB FAX NO. 2022235619.. P. 01/14 LAW OFF ICES KJ.EINl'",J~U), KAPLAN AND BEGKER ~~ 1140 NINETE~NTH sTReET, N.W. A1.AN H. K,APl.AN TI~OM^5 o. He::NT~1.e:FF tw::I-IA~O G. MORCY PE:TER o. SAFIH KINSE:Y S, REAGAN PETe::Jt R. MATH.:nS DONNIE: A. OCAVtRS OANILL It. DWYI:R qiLE:I\olN E. OAVIS PR!l;5/;OTT M. 1.ASSMAN CTACY l.. EHRL.ICH .JE:NNlr-~f!l A. OA.VIOC.ON STACEY L. VAl.E:Fll0 WASHINGTON, D. c. 20036-6601 TELEPHON~ (202) 2.e3.5120 fACSIMIU: (202) 223.51319 E-MAIL: kkb@kkblaw.colYl WEST COAST OFF'IC:~: ONE MARKE:T 5TREI5:T sn.UART 'roweR, $UITE 1450 SAN FFlANC1SCO, CA9410lS'1313 TELltPMONE: (415) !J::3B~OOI4 FA<:5IMII.~ (41~) s:aa.OOlEi VIN~lO.NT A. f<LEIM;ELO 1901.199:::1 May 31,2000 By Facsimile - 717-237-5300 Mark Van Blargan, Esq. McNees, Wallace & Nurick 100 Pine Street P.O. Box 1166 Harrisburg, P A 17108-8000 RE: CCRx Audit Dear Mark; Enclosed is a copy of the report of Buzzeo Associates, Ltd., of the DEA compliance audit of Continuing Care Rx, Inc., of Newport, Pennsylvania for the period March 1998 through August 1999. Sincerely, L5R Peter R. Mathers Enclosure ( I ) 1 - '"-- - ,. '",,",,"---; MAY-31-2000 WED 11:41 AM'KKB FAX NO. 2022235619' P. 02/14 Continuing Care Rx, ~nc. 28 s. Seoond Street Newport, Pennsy1vania DEA NO. BC5201378 (March 1998 to August 1999) BACltGROUNP On March 27 through 31, 2000, Ronald S. Garibotto of Buzzeo Associates, Ltd. conducted a review of continuing Care Rx, Inc. of Newport, Pennsylvania. Patrick J. Laughlin, Rl?h., Chief Operating Officer, and Andrew R. I?eolet, Director of Operations, were the principal points of contact during this review. Also interviewed wer~ subordinate pharmacists and other support personnel. The review was intended as an assessment of the pharmacy'-s level of compliance with provisions of the Controlled Substance Act (CSA) and with regulations and policies of the brug Enforcement Administration (DEA). The period under review was from March 1998 to l\.ugust 1999. CCRK, Inc. was formed in 1997 by Thomas Trite and William J. and Robert A. Wilson, each of whom held 33 1/3% of the stock. Mr. Trite was not actively ~nvolved in the management of the business; the Wi1sons operated the business and were the on-site supervisors. In early 1998 PHI purchased 75% of CCRx., Inc., and in March of that year a new corporation, retaining the CCRx.., Xnc. name, was formed. The Wilsons remained as the managers of the pharmacy. In April 1999, Mr. Peclet was hired to assist in the supervision of the pharmacy. Mr. peclet, who has many years of experience in the long term care industry, soon became uncomfortable with the way that CCRx waS being operated and with the resistance to his recommendations for improvement. Consequently, he was considering resigning his position if substantial changes were not made. In August 1999, the previous management of CCRx was removed. However, they continued to retain their combined 16 2/3% interest in the business. Shortly thereafter, Mr. Laughlin, RPh., was hired as Chief Operating Officer. Mr. Peclet became the Direotol:' of operations with Mr. Trite as Chief Executive Officer. This structure remains in place today. The instant review represents, in part, an attempt to reconstruct the operating environment under the previous management from the incorporation of CCRx, Inc" in March 1998 until A~gust 1999. A particular effort was made to assess the level of oompliance with pl:'ovisions of the CSA relative to the acquiSition, storage, dispensing, safeguarding, and accountability for Schedule IX, XXX, IV and V controlled sub13tances during that period. This effort was grE\atly impE\ded by the lack of reliable inventories, by the general state of disarray of controlled substances records for that period, and by the absence, not only of the previous management, but of virtually all other personnel formerly holding positions of 1 2 - .......,~ _ _ =_J~ " ~ - 1~'!UI' j Ie; MAY-31-2000'WED li:41 AM'KKB FAX NO. 202223561~ P. 03/14 responsibility at this pharmacy, including all pharmacists. Even given those limitations, it can be reliably concluded that CCRx, Inc., during this period was not in compliance with the requirements of the CSA. The violations uncovered during thil3 reVJew were many and, in some instances, extraordinarily serious. Should the DEA conduct a like inspection, the violations of the CSA and implementing regulations, 130 uncovered, would likely result in extraordinary monetary fines and administrative sanctions. Unfortunately, many of the past violations cannot at this late date be resolved. :en ,addition. the continued ownership interest of prior management who had responsibility during this period could be an impediment to DEA cooperation necessary to fully resolve issues with the status of the pharmacy registration and other issues which may need to be addressed with the DEA. FINDINGS/agCQMMENOATIONS 1. :et: appears that Continuing Care Rx (CCRx) is operating without !l. valid DBA Registration. CCRx continued to utilize DEA Registration number BC520131B, which was issued to th~ former corporation of the same name, despite the incorporation of a new legal entity on March 4, 1998. Upon the ohange of ownership, DBA should have been a4vised of the change of ownership and either requested to transfer the existing registl:'ation OX'. an application for a new DEA registration should have been submitted. Recommendation, a. Obtain a new DEA registration. . Bnsure that a corporate officer signs the DEA application for registration b. To prevent future issues, prepare a "Change of Owne1:'ship" operating procedure. Include-the record, inventory and power of attorney requirements for continuing to operate under the previous owners' DEA registration until the new owners' DEA registration is acquired. 2. Powers of Attorney (POA) authorizing the execution of: the DEA Forms 222 for obtaining SchedUle II controlled substanceS, were defective since they were issued pursuant to an invalid DBA registration. Recommendation, Upon _ receipt of a new DEA regisl:ration. hav.e the corporate officer that signed the DF.A application for registl"ation, revoke the current powers of attorney and issue powers of attorney to those employees that will execute the DEA Forms 222, 2 3 ,'.""- MAY-31-2000'WED 1i:42 AM'KKB FAX NO. 202223561~ . , P. 04/14 3. Continuing Care Rx had no current DBA Biennial Inventory. This inventory is required by regulations and is necessary for the DBA to conduct a reliable accountability of the controlled substances entrul3ted to the pharmacy under the DEA registration. Such an accountability is a core element of a DEA inspection. Failure to provide an accurate inventory represents a primary violation of the Contl:'olled Substance Act (CSA) . Recommendation, a. Immediately conduct a complete and accurate :Biennial Inventory of all controlled substances in the control and possession of the DEA registrant. b. In addition to those controlled substances dispensing, include those held for return, those in emergency kits, etc. held for disposal, c. Designate if conducted at the opening or close of business. 'd. Ensure that the number of commercial containers for each controlled s~bstance is listed. 4. None of the actions required to allow for the lawful transfer of business from the former DBA registrant to the new regil3trants, such as notification to the DEA of the date of the discontinuance of business of the former registrant and the surrender to the DEA of the old DEA Registration and of unused DEA Forms 222, appear to have been done. In addition, no inventories of scheduled drugs intended for transfer from the old registrant to the new appear to have been completed. Recommendationl3: a. Prepare a memorandum to the file addressing this issue. b. Upon receipt of the new DEA registration surrender the old DBA registration and any unused DEA Farms 222. 5. DEA Farms 222 prepared for the ordering of Schedule II medications were incorrectly executed through failure to note the receipt of individual items and the extensive use of lines and ditto marks on the face of the forms. Recommendations, Continue to ensure that all future DEA Forms 222 are complete and accurate. 3 4 ~ ""'"' .""~~ -->~ "" - ,. - .lu:~' MAY-31-2000 WED 11:42 AM KKB FAX NO. 202223561~ p, 05/14 6. Some ~eceiving ~eco~ds (invoices) for Schedule II controlled substances appear to be missing. Recommendation: Contact the vendor/supplier(s) and attempt to obtain missing receiving records. 7. Some DEA ~orms 222 appear to be missing. Recommendation: Contact the vendor/supplier(s) and attempt to obtain missing receiving records and copies of the executed DEA Forms 222. 8. Emergency dispensing of Schedule II controlled substances do not meet the regulatory requirements (see attached Requirements) . a. A high percentage of Schedule II dispensing were handled as emergencies. b. "Authorization for Emergency Dispensing" was not marked on the face. of the prescription and the date of the alleged emergency was not noted. c, The quantities so dispensed were often grossly in excess of those necessary to meet the emergency. d. The signed prescription was not paired with the initial notice of the emergency. e. A separate prescription was not prepared for the emergency dispensing, rather the amount dispensed was either subtracted from the prescription for ongoing treatment or the amount authorized was increased by the amount of the emergency dispensing. f. Despite flagrant and persistent violations, this facility had never reported a doctor to the PEA for failure to provide a signed prescription for an emergency dispensing within the seven day limit. Re<;ommendation: a. Continue to ensure that the SchedUle II dispensing requirements are fully implemented. b. Obtain any outstanding prescriptions. c. Attach the original order to the signed emergency prescription. 4 5 - .~ -~ '~. ~~ '-._,,; MAY-31-2000 'WED 11':42 AM 'KKB FAX NO. 2022235618. " p, 06/14 9, Partially filled Schedule II prescriptions were not marked "LTCF Patient" or "Terminally Ill", Recommendation: Continue to ensure that the regulatory requirements for partially dispensing Schedule II prescriptions. 10. Schedule II prescriptions often did not list the doctor's address, DBA registration number, or the quan~ity authorized. Recommendation. Attempt to retrieve and obtain complete prescriptions for the previous Schedule II. 11. Schedule II prescriptions were not filed sequentially. Recommendation: File these prescriptions in sequential order by prescription number. 12. Records pertaining to Schedule II separated from al'l other records of generally not readily retrievable and medications were not the facility and were available for review. Recommendation: To the extent possible, bring some degree of order to these records. 13. Schedule II medications were dispensed prescriptions made out to "Stock." pursuant to Recommendation: Attempt to retrieve and obtain prescriptions for individual patients. 14. Facsimile Schedule II prescriptions were accepted for patients not living in a long term care facility. Recommendation: Attempt to obtain original signed prescriptions or have the practitioners sign the facsimile. . 15. Schedule III, IV and V medicat.ions were dispensed pursuant to medical orders which routinely do not contain all of the information required for a prescription. 5 6 ~ - - .. .~ ~""'I MAY-31-2000 WED 11:43 AM KKB FAX NO. 2022235619,. " p, 07/14 Recomnlendation: :Ensure that information. all prescriptions contain the required 16. No back-up system was in place for the computer to capture data in case of a power failure. Recommendation: Current management has resolved this issue with the installation of the necessary back-up system. 17. Distribution of Schedule II, III, IV and V controlled substances was done on prescriptions rather than by distribution records and DEA Forms 222 if a Schedule II listing the required information. In some situations it was not possible to confirm that the recipient possesses a valid DEA registration. Recommendation: Attempt to reconstruct the distributions and memorandum that outlines th", issue, the number of substances distributed and the recipients and registrations. prepare a controlled their DEA 16. Controlled substances were routinely returned to the facility after acceptance by the customer. Recommendation: None. No remedy is presently available. 19. Controlled substances were routinely destroyed by transfer to an incinerator. This was done without documentation and without witness. Recommendation: None. No remedy is presently available. 20. ~he facility's alarm system had been inoperable. Recommendation, Current management has remedied this deficiency with the installation of a new system. 21. No background investigations have been done on any employee, even those with actual o-r potential access to controlled substanceS. 6 7 . _....-= -M-\- MAY-31-2000 WED 11:43 AM'KKB FAX NO. 202223561~ " P. 08/14 Recommendation, Current management inveatigations. must expedite these background NOTE. The registrant shall not employ, as an agent or employee who has access to controlled substances, any person who has been convicted of a felony offense relating to controlled substances or who, at any time, had an application :eor registration with the DBA denied, had a PEA registration revoked or has surrendered a DEA registration for cause. For purposes of this subeection, the term IIfor cause" means a surrender in lieu of, or as a consequence of, any federal or state administrative, civil or criminal action resulting from an investigation of the individual's handling of controlled substances. 22. Emergency Kits Prescriptions were generally not prepared for Schedule III, IV and V dispensing from the emergancy kits, rather the amount so dispensed was rou~inely subtracted from the prescription for ongoing treatment or the amount authorized was increased by pharmacy personnel to cover the quantity dispensed from the emergency kit. The precise n1,lmber of emergency kits in circulation fl;'om this pharmacy during the pel;'iod of review and the tracking system in place, if any, could not be determined. Recommendation: Contin1,le to: a. Ensure that prescriptions are obtained for emergency dispensing from the emergency kits and that the tracking system fully accounts for the emergency kits and the controlled substances. b. Attempts are made to retrieve outstanding prescriptions. 23. Accountability discrepancies. The accountability of selected controlled substances for the period of August 12, 199B thr01,lgh Jan1,lary 3, 1999 reflected numerous discrepancies. Thefts and significant losses require a report to the DE.l\.. Thefts, significant losses and overages reflect recordkeeping, inventory andlor security.violations. 24. Continue to ensure that no patient controlled substances are accepted for return. 7 8 " '"--~~",'-'- MAY-31-2000 WED 11:43 AM kK8 FAX NO. 202223561a. p, 09/14 REVIEW Registration: During the period under review, this pharmacy was operating under DEl\. Registration BC520137S, issued on February 4, 1997, to the former corporation which ope:l'ated continuing Care Rx upon its inception on or about that date and which authorized Continuing Care Rx to handle medications in Schedules 2, 2N, 3, 3N, 4, and 5. This registration was renewed on July 27, 1999, ~ppro~imately a month before its scheduled expiration. This registration expires on August 31, 2002. The pharmacy also continued to operate under the State of Pennsylvania pharmacy license issued to the former corporation. Records indicate that on March 4, 1998, Articles of Incorporation for a new ~ega1 ent~ty whieh retaineQ the name Continu~ng Care Rx. Inc. were filed with the Pennsylvania secretary Of State. Inie new filing was occasioned by a change in ownership with the purchase of 75% of the old corporation's stock by PHI and the addition to the corporation's board of Steven E. Proctor and Ron Robinson as Secretary and Treasurer, respectively. The shareholders of this new corporation are PHI stock, Thomas Trite with 8.33%, and Robert A. Wilson, each with 8.33%. with 75% of the and Will iam J. Sometime on or about February 25, 1998, the former Continuing Care Rx, Inc., reportedly in the person of either Robert l\.. or William J. Wilson, or both, had drafted a Limited Power of Attorney authorizing the new corporation, continuing c:are Rx, Inc., to continue in business under the former's EIN number, state license number and DEl\. registration number. It could not be determined whether or not this power of attorney was ever formally executed. However, this issue would appear moot since the POA was intended to expire on April 26, 1998. The regulations require the issuance of a new PEA registration upon the change in ownership or the transfer of the previous registration with the permission of the DEA or issuance of a new DEl\. registration with the establishment of a new operating entity. These circumstances would appear to have occurred on or about March 199B. No record of the application for or receipt of a new DEA registration could be found. Review of the PEA registrations indicate that no action relative to the DElA registration had been initiated. Consequently, Continuing Care Rx, Inc., during the review period, was operating under a DEA registration which may have become de facto null and void upon the formation of the new corporation and/or the change at owner~nip. 8 9 " "''''''''''Ie. MAY-31-2000 WED 11:44 AM'KKB FAX NO, 202223561~ p, 10/14 powe:r of Atto:rneYI The Powers of Attorney (POA) which authorized pharmacist to order Schedule II medications were issued against an invalid DEA registration. ordering Schedule II, III, IV and V Controlled Substances I Review of executed DEA Forms 222 revealed that many were not completed in compliance with the relevant regulations in that, at a minimum, the receipt of individual items was not noted on the face of the order form. In addition, no log of executed and unused DEA Forms 222 was maintained. A number of order forms were not able to be accounted for and a number of corresponding invoices could not be located. These lapses complicated the attempts at drug accountability discussed below. All records relative to Schedule II controlled substances were not maintained separate from all other records of the pharmacy as required by the r~gulations. It was not possible to reconstruct with confidence the process by which Schedule XI drugs were ordered and safeguarded during that period since nOne of the principals is currently employed at the pharmacy. In addition, perpetual inventories for the period, despite a rigorous sl"arch, could not be found. This is a particularly significant loss because those inventories would have been very useful in helping to establish Schedule II drug management praotices as well as other related issues examined in several sections below. In the absence of these inventories, it is not possible to assess such rudimentary questions as to how quickly after receipt Schedule II medioations were secured in the locked storage cabinet and entered into the corresponding perpetual inventory. Reportedly Schedule II medications were not vigorOUSly safeguarded since a quantity of liquid medications was allegedly left on the floor in the I.V. room and otherwise unprotected for an extended period of time. It was likewise not possible to assess these same issues relative to SchedUle III, IV and V medications. It is clear, however, that at that time, as now, Schedule III, IV and V medications, upon receipt, were stored on open shelving with the general merchandize. Controlled Substance Storage' As can best be determined without extensive interview of personnel active during the period under review, the storage and safeguarding of Schedule II, III, IV and V medications was as described in the foregoing section. There was no policy against employees carrying personal belongings, including pocketbooks and other bags, into the pharmacy proper. 9 10 ~ 'H . -~~~ ."'.~~. -. -~,>- MAY-31-2000 WED 11:44 AM'KKB FAX NO. 202223561 g. P. 11/14 Prellcriptions: Sch~dule II - The review indicates substantial non-compliance in all areas relative to the dispensing of Schedule II medications. As desoribed in the Findings, above, virtually all the requirements of the Schedule II emergency dispensing provisions were routinely ignQred. The emergency provisions were routinely invoked, quantities so dispensed were grossly in excess of those necessary to meet the supposed emergency and the required documentation was effectively neVer produced. Partially filled Schedule II prescriptions were not marked "LTCF" or "Terlllinally Ill" as required. Schedule II pJ:'escriptions were filled pursuant to facsimile medical orders for patients not residing in a nursing home, and routine Schedule II prescriptions did not contain all of the information necessary to make th", preacril?tion valid under the law. In addition, Schedule II prescription"" as with all other Schedule II records, were not maintained separately from all other records of the pharmacy. Schedule III. IV. and V - Schedule III, IV and V prescriptions, which at that time consisted principally of facsimile medical orders, did not contain all the J:'equired information, including the prescribing doctor's DE!\. registration number. Schedule III, IV and V prescriptions generally were not refilled. The computer system was programmed to produce a new prescription for each order. E:me:,;-geney Kits ~rescriptions were generally not prepared for Schedule III, IV and V dispensing from the emergency kits, ratheJ:' the amount 80 dispensed was routinely subtracted from the prescription for ongoing treatment or the amount authorized was increased by pharmacy personnel to cover the quantity dispensed from the emergency kit. 'l'he precise number of emergency kits in circulation from this pharmacy dUJ:'ing the period of review and the tracking system in place, if any, could not be determined. Ret\l.n1s, Reportedly CCRx, under the former management, routinely and indiscriminately accepted the return of all merchandize, including Schedule II, III, IV and V controlled substances. This apparently was done without any documentation. The absence of perpetual inventories for the period under review and the reported policy of not giving credit for controlled substances ret;urned to the pharmacy prevented independent verification of the acceptance of Schedule III, IV and V returns. Apparently CCRx did not reuse returned controlled substances but set them aside for destruction or other disposition. However, the question of what happens to non-controlled returns and the possible reuse needs to be addressed. 10 11 ~~- ~ ~....-,",. .. - bil,ilil, . . MAY-31-2000 WED 11:45 AM'KKB FAX NO. 2022235619- p, 12/14 prug PisposaJ.: Repo~tedly all controlled substances, including outdates and those returned as described above, were given to an employee to be taken to an incinerator for destruction. This was done without any documentation, and this employee, for whom no background check had been completed, was unaccompanied by any witness at any point during the alleged destruction process. No destruction file and no documentation relative to the disposition of any controlled substances could be located among the records, of the former management. Thefts/Losses. No Theft/Loss file could be located. There was no record of any reports of losses or thefts of controlled substances forwarded to the !:lEA. PEA Biennial/Other Inven~ories, There was no DBA Biennial Inventory available at this facility. As discussed previously, this is a serious deficiency since the bie=ial inventory is one of the first documents that the DBA would request upon initiation of an inspection. Failure to provide, such an inventory would virtually assure an adverse finding relative to the pharmacy's ability to account for controlled substances and would set an unnecessarily adverse tone for the inspection in general. Also as previously noted, no perpetual inventories for the period under review could be found. Although perpetual inventories are extra-legal documents since their maintenance is required neither by the CSA nor state regulations, inspectors know that they are routinely kept and were, in fact, kept at this faCility. Their lack of availability would result in the gratuitous creation of an atmosphere of suspicion. Accountability: A complete accountability was attempted for four Schedule II drugs and six Schedule III, IV and V drugs. This effort was greatly impeded by the aforementioned lack of a biennial inventory. In place of a biennial inventory, an inventory conducted on August 12, 1998 was used as the starting inventory and an inventory conducted on January 3, 1999 was used as the closing inventory. However, the reliability of both of these inventories is highly. suspect since they were conducted for business rather than drug accountability purposes and one was not limited to controlled substances. It could not be determined whether or not the Schedule II drugs had been counted or estimated with all the drugs, Schedule III, IV and V, :rounded off to decitnals, e,g. 1.4 bottles of 100=140 units. consequently, no one was prepared to attest to the accuracy of the figures. 11 12 '" ,~ -~,,- ~......- C_='.,'.\,\ MAY-31-2000 WED 11:45 AM KKB FAX NO. 20222356i3 p, 13/14 Th~s exerc~se was further exacerbated by the failure to have all invoices for Schedule III, IV and V substances readily available. This resulted in the constant reworking of the computation as additional invoices were located over several days. The one apparC!nt bright spot in this effort was the eventual ability of the computer system to produce dispensing records. The results of the accountability are attached. In general they could indicate the possibility of at a minimum recordkeeping and/or inventory discrepancies relative to controlled Bubstandes. Of p~rticular concern is the shOrtage in oxycontin 10 and the gross overages in many of the Schedule III, IV and V drugs. Computer System. Aa mentioned above, the computer system in use at CC:Rx.. is capable of producing dispensing data for drug accountability purposes. As with most systems, however, it is primarily intended a~ a billing instrument. Consequently the initial attempts produced inflated dispensing totalS since the system was counting second and sllhsequent billings as new dispensing. However, when the request , was sufficiently refined, dispensing records with some reliability ware produced. In addition, the system is capable of producing all tUe required printout;!. It can produce both in printout and terminal display all refill and partial fill information required by statute. The system does not count medications dispensed by satellite pharmacies as having been dispensed from CCRx. No back- up system was in place to ensure capture of data in the event of tue failure of the primary system. S'l!cur:l.ty' Reportedly the former management disconnected t~e alarm system because it chronically went off, resulting 1n considerable annoyance to the employees and to the police who were obliged to respond. In addition, there were no cameras in place at critical points in the facility and access to the pharmacy was in no way restricted. At that time there was no staging area for the drivers so they would be obliged to routinely prepare packages for delivery in the pharmacy itself, thereby greatly contributing to the alleged general feeling of chaos. There was no policy in force which prohibited employees from entering the pharmacy with any personal belongings, such as pocketbooks, bags, and backpacks. that could be used to conceal controlled substances or other merchandize. Cardboard boxes were not immediately broken down and removed from the pharmacy. No lockers were provided for the storage of employees' personal belongings. Complete background investigations to include criminal and motor vehicle records were not conducted. Such investigations are absolutely essential in order to comply with the prohibition against the hiring or retention of employees with a record of drug offenses. 12 13 - MAY-31-2000 WED 11:45 AM KKB Enl e';' roC/) (,)'8 0>0 c " ,- " ~C/) ~ui 8re I- Z w :l! a:w wc) :::e< ~z 0<( u.:l! ,.... ,~ ~i;r- ~ ' t: iI' ~I: I ~ 1:: ! ~I ! ." 'I I I ~ I I ,r i S 1m ~ I ,:! '. is i ~ fl " " !l ! :.~ Q ~I * U 0 :; "If. 11 " +::t:I....: "l'I.ill!. .. 't:,1.: C;; CD Ol!::: I > .c' IS" 0'.. ! ' J ::l ~ .. III ~ l -'1;"'>1..., g' ~,ti C\l - .. ..... ~ en ] .. '" 3 l.J I ..IJ ~ ~ 0 o~tf:~ I- 8 IJ " <( o . 0 ~ ~I- '" - 0 l!! ii II) ~ '" "-.. .51 , 0:> . ~ .c 'Ii " l!! - ~ .. 011 .. E .. ;Z !>I 2 Q 'l; I i . ..t~ I ~I '" .. " ~I :f'; <') "? '" N ~ In '" ~ ..., o '" 0:> ex> ex> ~I l!l u -'" m '" I!! ~ o :f'; ;;} 9 m C'l '" .... ~ '" 0lJ ~ ex> o '" ..., o 0:> It) <') ex> 0:> ~ '" J!l .. '" i -" c. ~ " ::! :f'; ~ .. <9 --~-- .... 0> ~ -~ .. "', I '" -- ..... .... t:; .... 8l~ 00) '" .... ~ i~ o '" lO 0:> :Bin N -, .. I .... I'..., It) ~ t;.... .... 0>'" o 00 o 00 ~ ~l() ~ ~ 1nl!2 ......, '" ~ " J ~~. ill ,.; " " is :s 11 '" 'C '" '" ;I:>: -- ,,- ,- . . ,-, FAX NO. 20222356tS :f'; ~ ..; , It) '" ... I L!) ,;g lb ~ .... N ~ .. C'l C) 0> (') ... o ~ .... o o '" N 0:> 0:> en ... "l E 1 c. :;;: 14 ;f< '" o oS '" o '" ~ .... lO IX; It) N 0:> '" N '" It) en ex> '" ~ 0:> 0:> '" '" I ,-' It) en o '" ... ,,\"-1-- - "l E 11 j .. -,- -- ,- '''1''''- J 15 .... .. P. 14/14 ;f< .., CO d N :f'; '" Ltl ,,; 0:> '" ~ ' c & ' ~ ,[,a1: ~~ ! ~ ~ N <( ! I ! .. ;j!; ~ N . !.. i '1''' I~ S) I 0. P I ...- I ~ '-j i !N ..... 0:> ... ... t:; '" '" t;j ... '" l::: '" .... I--r-"-' N .... ~ It) .... '" '" It) 0:> l?J ~ In '" t; C> ;:!: .., 1': 0:> 0:> !O ~ '" It) 0:> .... '" '" " ., :;; ~ "l E .. c. " N .. IS o -i EXHIBIT "B" PLAN AND AGREEMENT OF MERGER (attached) " .' ~ - ~,' 1i6.& "-~~"'j PLAN AND AGREEMENT OF MERGER OF CONTINUING CARE RX, INC, WITH AND INTO CCRX, LLC WIT N E SSE T H: WHEREAS, Continuing Care Rx, Inc, (the "Corporation") is a business corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania; and WHEREAS, CCRX, LLC is a limited liability company duly organized and existing under the laws of the Commonwealth of Pennsylvania ("LLC") (the Corporation and the LLC being hereinafter sometimes collectively referred to as the "Companies"); and WHEREAS, the Manager of the LLC, pursuant to applicable provisions of the Pennsylvania Limited Liability Company Law of 1994, as amended, has approved a merger whereby the Corporation is to be merged with and into the LLC, with the LLC being the survivor, 'upon the terms and subject to the conditions herein stated (the "Merger"); and WHEREAS, the Board of Directors of the Corporation and Board of Trustees of PHI ("PHI"), a Pennsylvania nonprofit corporation (which is the majority shareholder of the Corporation and the sole member and one hundred percent (100%) interest-holder of the LLC), pursuant to applicable provisions of the Pennsylvania Business Corporation Law of 1988, as amended, have approved the Merger. NOW, THEREFORE, it is agreed as follows: Section 1 The MerQer 1,1 At the Effective Time (as hereinafter defined), the Corporation shall be merged with and into the LLC, with the LLC as the surviving entity (hereinafter sometimes referred to as the "Survivor"), 1,2 At the Effective Time, the separate existence of the Corporation shall cease and the LLC shall succeed to all of the properties, rights, privileges, powers and franchises of the Corporation and shall be subject to all of the debts, liabilities and obligations of the Corporation, Section 2 Conversion of Shares 2,1 At the Effective Time: {A166612,2) 1 . .~. - ~ ! ""-, ~ , " (a) All shares of the common stock of the Corporation held by PHI shall be exchanged for one hundred percent (100%) of the membership interest in CCRX, LLC, (b) The holders of the remaining issued and outstanding shares of the common stock of the Corporation, specifically Robert Wilson ("Robert"), William Wilson ("William"), and Thomas Trite ("Trite"), shall be entitled to receive a sum equal to the fair market value of such shares as determined as follows: $200,00 per share, as subsequently adjusted upwards or downwards in accordance with a valuation of such shares performed by an independent appraiser selected by the Corporation, (c) The decision to convert certain shares of the common stock, and to authorize the payment of cash for certain other shares of the common stock, as described in this Section 2,1, has been approved by the Shareholder owning a majority of the shares of the Corporation, (d) If a shareholder believes that the price paid for the shares is inadequate, he may pursue a statutory dissenters' rights appraisal remedy. Section 3 Effective Time 3,1 The Merger shall become effective at the later of (i) the date that the Articles of Merger are filed with the Secretary of State of the Commonwealth of Pennsylvania, or (ii) the date set forth as the effective date in the Articles of Merger (the "Effective Time"), Section 4 Governance 4,1 At the Effective Time, the Certificate of Organization of the LLC shall be the Certificate of Organization of the Survivor until further amended as provided by applicable law, 4.2 At the Effective Time, the Operating Agreement of the LLC shall be the Operating Agreement of the Survivor until further amended in accordance with the provisions thereof and of applicable law, Section 5 Manaaement 5.1 At the Effective Time, the management of the Survivor shall be by the Manager of the LLC, Section 6 (A166612,2) 2 . - - ~~" " Amendment and Termination 6,1 At any time prior to the Effective Time, this Plan of Merger may be amended by an agreement in writing by the Board of Directors of the Corporation and the Manager of the LLC, to the fullest extent permitted by applicable law, - 6,2 At any time prior to the Effective Time, this Plan of Merger may be terminated and abandoned by the Board of Directors of the Corporation or the Manager of the LLC, to the fullest extent permitted by applicable law, Section 7 Governinq Law 7,1 This Plan of Merger shall be governed and construed in accordance with the laws of the Commonwealth ot Pennsylvania, without regard to choice-ot-Iaw provisions. IN WITNESS WHEREOF, the Companies have caused this Plan and Agreement ot Merger to be execl.lted this day of , 2000, WITNESS/A TTEST: CCRX, LLC, a Pennsylvania limited liability company ,.: Ii': By Stephen Proctor, Manager \' W/TNESS/A TTEST: CONTINUING CARE RX, INC" a Pennsylvania business corporation I i: I: I ~-, By Thomas A. Trite, Chiet Executive Officer {Al666l2, 2) 3 EXHIBIT "C" MAY 11, 2000 BOARD MINUTES (attached) ~~ - ", " -.........._~ h, " Minutes ofthe Continuing Care Rx Board of Directors Meeting Executive Session May 11, 2000 Attendance Stephen Proctor, Chair; Ronald Barth; Ronald Robinson; Thomas Trite, Mary Ann Adamczyk, Mark Van Blargan (all via conference call) Call to Order The Chairman called to order the Executive Session of the Board of Directors at approximately 10:35 a,m, Report of Legal Counsel Mark Van Blargan, counsel to CCRX, provided an update to the Board on certain compliance issues arising from the Wilsons' previous management activities, As a result of these issues, CCRX has made a voluntary disclosure, related to failure to comply with the Controlled Substances Act, to the federal Drug Enforcement Administration, The DEA is currently considering its enforcement stance with respect to these voluntary disclosures of non-compliance: These disclosures were made after consultation with Buzzeo and Associates, auditors with special expertise in these matters, and with Peter Mathers, an attorney with substantial experience in these matters, Buzzeo and Associates have performed another audit of CCRX, This audit disclosed a number of potentially serious violations of the Controlled Substances Act, All of the identified violations have either already been corrected, or are in the process of being corrected, Mr, Van Blargan, Mr. Proctor and Mr. Trite answered board members' questions about the compliance issues, Corporate Reoraanization One of the compliance issues discovered by Buzzeo and Associates was that CCRX has no record of the DEA being notified of the change in ownership when PHI originally purchased its shares in CCRX, Given this, and given the other issues which the auditors discovered about potential compliance issues caused by the Wilsons, the auditors are recommending that CCRX buyout all minority shareholders in the corporation, so that going forward, "the Wilsons" do not have any ownership interest. The DEA has been informed of this recommendation, Thus, the plan is to appJy (or seek a transfer of) the DEA registration to a new entity, wholly owned by PHI. Based on consultations with PHI's accountants, the suggested form of this new entity is an LLC, which will, among other advantages; allow PHI to more easily offset gains and losses from non-exempt activities, {A 173949:2} - ~, " To accomplish this corporate reorganization, Mr. Van Blargan presented the following plan of merger: 1, Form CCRX, LLC, with CCRX as the sole member 2, Merge CCRX with and into CCRX, LLC, with CCRX LLC as the survivor 3, As part of the merger, all will exchange its shares for the membership interest in CCRX, LLC, and the shares of the minority shareholders will be cashed out at fair market value (at the initial price of $200,00 a share and as subsequently adjusted upward or downward based on a valuation of the shares as determined by an independent appraiser chosen by the Corporation), 4, Elect Steve Proctor as the Manager of the LLC and authorize him, both as the Manager and as a representative of the sole member of CCRX, LLC, to approve the merger of CCRX into CCRX, LLC, 5, Recommend submission and approval of the Plan of Merger to the shareholders of CCRX ' 6, Authorize Steve Proctor and other cQrporate officers to take any and all actions necessary reasonably necessary to effectuate the intent of the foregoing, including but not limited to execution'of an Operating Agreement for CCRX, LLC, After discussion, the Board approved the plan of merger, The Plan of Merger is attached to the Minutes as Exhibit "A," Equity Infusion At the April 26, 2000 meeting, the Board of Directors, in executive session, authorized the issuance of additional shares of stock in the Corporation to existing shareholders, After further discussion, and due to the continued growth and expansion of the business, management is now recommending that up to $600,000 be offered for sale, at a purchase price of $200,00 per share (to reflect the current book value of the stock), After discussion, the Board, on a motion made and unanimously approved, authorized the issuance of up to $600,000 worth of stock, at a purchase price of $200,00 per share, and otherwise consistent with the plan for additional equity infusion approved at the April 26, 2000 board meeting, Other Business/Adjournment There being no other business, the Chairman adjourned the meeting at approximately 11:10a,m, Respectfully submitted, 1ftqil1[ (h{J]/v (A173949:2l Mark Van Blargan f Pt~~ "~.~~ EXHIBIT "0" SUBSCRIPTION AGREEMENT (attached) . '"" ~~ " . - ~ t-gl-lI:\lii~ol!' " CONTINUING CARE RX, INC, SUBSCRIPTION AGREEMENT The undersigned, intending to be legally bound, hereby makes the following Subscription Agreement: 1, I am presently a stockholder in Continuing Care RX, Inc, ("Corporation"), If stockholder is a corporation, all references to an individual hereunder are deemed to refer to the corporation, ' 2, I hereby subscribe for shares of Common Stock of the Corporation, as described in the Information Statement of the Corporation dated June 7, 2000 ("Information Statement"), for an aggregate purchase price of $ 3. I hereby warrant and represent to the Corporation that the followjng statements are true: (a) I recognize the speculative nature ofthis investment and that my investment is subject to loss, (b) Both I and, if applicable, my representative or advisor have had, if requested, an opportunity to ask questions of and receive satisfactory answers from a person or persons acting on behalf of the Corporation, concerning the Corporation and the terms and conditions of this investment, and all such questions have been answered to my full satisfaction, (c) The shares for which I hereby subscribe will be acquired for my own account for investment and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act of 1933, as amended, (d) I have received no representations or warranties from the Corporation or its affiliates, agents or representatives other than those contained or referenced in the Information Statement and, in making my investment decision, I am relying solely on the information contained in the Information Statement, my own personal knowledge, and investigations made by me or (if applicable) my representative or advisor, (e) The address and Tax Identification Number set forth below are my true and correct residence (or principal place of business) and Tax Identification Number. . (f) I acknowledge that the Corporation has made available to me and my representative or advisor the opportunity to obtain additional information to verify the accuracy of the information contained in the Information Statement and to evaluate the merits and. risks of this investment. {A174211:2} - 1 - - , 1ilI_ .~ ,< 4, I hereby acknowledge that I understand the meaning and legal consequences of the representations and warranties in Section 4 hereof and that the Corporation will rely upon such representations and warranties, and I hereby agree to indemnify and hold harmless the Corporation, and the Corporation's officers, directors, trustees, shareholders, attorneys, agents and representatives, and the successors of each upon the merger becoming effective, from and against any and all claims, demands, losses, damages, expenses or liabilities (including attorney's fees) due to or arising out of a breach of any of such representations or warranties, Notwithstanding the foregoing, however, no representation, warranty, acknowledgment or agreement made herein by me shall in any manner be deemed to constitute a waiver of any rights granted to me under federal or state securities laws, 5, I agree that the following restrictions and limitations are applicable to my purchase of these securities and any resales, pledges, hypothecations or other transfers thereof: (a) The shares shall not be sold, pledged, hypothecated or otherwise transferred unless they are registered under the Securities Act of 1933, as amended, and applicable state securities laws, or in the opinion of counsel to the Corp,oration are exempt therefrom (it is acknowledged that the Corporation has no obligation to undertake any such registration), (b) A legend summarizing such restrictions will be placed on any certificate evidencing ownership of the shares, 6, This Subscription was effected in the Commonwealth of Pennsylvania, SIGNATURE PAGE INSTRUCTIONS: The following Signature Page should be executed and acknowledged before a notary public, Deliver the entire notarized Subscription Agreement along with the payment for the shares to Thomas A. Trite, Ph.D" Chief Executive Officer, Continuing Care RX, Inc" 5775 Allentown Boulevard, Suite 202, Harrisburg, PA 17112 on or before June 16, 2000 at 5:00 p,m, EDT, {A174211 :2} - 2- .~ ~"'''' f: <, I I , I " I: Ii I' II Ii '] I, 'I I, - - "~ ,:" " SIGNATURE PAGE FOR SUBSCRIPTION AGREEMENT IN WITNESS WHEREOF, the undersigned has executed this SUbscription Agreement as of the _ day of , 2000 at (City) . Pennsylvania, Sworn to and subscribed before me This _date of , 2000, Signature of Purchaser, or authorized representative of Purchaser Name Typed or Printed Notary Public My Commission Expires: Tax Identification Number Telephone # Street Address City, Zip Code , Pennsylvania_ Sworn to and subscribed before me This date of , 2000, SUBSCRIPTION ACCEPTED FOR _UNITS), Continuing Care RX, Inc, By its: By Notary Public My Commission Expires {A174211:2} - 3 - - ..LO" '..... '__~<""..~jJlIiffiw.",,~.;,;"_ " Notice of Dissenters Rights and Right to Demand Payment To the shareholders of Continuing Care Rx, Inc, (the "Company"): NOTICE IS HEREBY GIVEN, pursuant to Sections 1571 and 1930 of the Pennsylvania Business Corporation law of 1988, as amended (the "BCl "), of the right of the shareholders of the Company to dissent from the proposed merger of the Company with and into CCR, llC, a Pennsylvania limited liability company (the "Merger"). Shareholders have the right to dissent from the Merger and obtain payment of the fair value of such shares by complying with the terms of Subchapter D of Chapter 15 of the BCl ("Subchapter D"), a copy of which is attached hereto as Schedule "1," Pursuant to Subchapter D, a shareholder must provide a written notice of the shareholder's intention to dissent to the Company prior to the vote on the Merger, and must not vote with regards to the Merger, or buy, sell, or otherwise transfer beneficial ownership of the voting shares of capital stoc~ after giving such notice, Beneficial owners of voting shares of capital stock must submit a written consent of the record owner of such shares at the time of giving notice of intention to dissent. The foregoing description is not a complete summary of the applicable provisions of Subchapter D, Shareholders considering exercising rights under Subchapter D are advised to review Schedule "1" in its entirety and to consult legal counsel. Notwithstanding this notice, holders of non-voting shares of capital stock of the Company do not have the right to vote to approve or disapprove the Merger. Pursuant to Section 1905 of the BCl, only holders of voting shares of capital stock of the Company have the right to approve or disapprove the Merger. A copy of the Plan and Agreement of Merger recommended by the Board of Directors for approval by the holders of voting shares of capital stock of the Company is attached as Exhibit "8" to the Information Statement. - w!._~':: " SCHEDULE 1 15 Pa.C.S.A. ~ 1554 i ii :1 I I :1 i"I " il II I 1 II I 11 BUSINESS CORPORATlO~ unless" for "Unless"; inserted subsec. (d); and redesignated fonner subsecs. Cd) and (e) as subsecs. (e) and (f) respectively. Official Source Note-1988: Subsection (a) is derived from act of May 5, 1933 (P.L. 364, No, 106), 9 318 (15 P.S. 9 1318), and is palterned in p <3:[ter Revised Model Business Corpo tlOn Act 9 16.20 (I 984). Subsections ( (c) and Cd) are new. Official Source Note-1990: Subsection (e) clarified. Subsection is new. Law Review Commentaries Some distinctive features of the new Vincent F. Garrity, Jr., 45 Bus.Law. Pennsylvania Business Corporation Law. (1989). Corporations <P181(7). WESTLAW Topic No, 101. Libra.ry References C.l.S. Corporations 9 339. P~L.E. Corporations 99 110 to 112. SUBCHAPTER D, DISSENTERS RIGHTS Section 157l. Application and effect of subchapter. 1572, Definitions, 1573, Record and beneficial holders and owners, 1574. Notice of intention to dissent. 1575, Notice 10 demand payment. 1576. Failure to comply with notice to demand payment, etc. 1577. Release of restrictions or payment for shares. 1578, Estimate by dissenler of fair value of shares, 1579, Valuation proceedings generally, 1580. Costs and expenses of valuation proceedings. Library References P.L.E. Corporations 99 103 et seq., 401 to 403, 442, 443, 475 to 478, 492, 493, 499, WESTLAW Electronic Research See WESTLA W Electronic Research Guide folloyting the Preface. ~ 1571. Application and effect of subchapter (a) General rule.-Except as otherwise provided in subsection (b any shareholder of a business corporation shall have the rigbt 1 dissent from, and to obtain payment of the fair value of his shares i the event of, any corporate action, or to otherwise obtain fair valu for his shares, where this part expressly provides that a sharehold, shall have the rights and remedies provided in this subchapter. Sel ~ection 1906(c) (relating to dissenters rights upon special trem ment) , For Title 15, Purdon's Statutes, see post 298 WERS, DUTIES, SAFEGUARDS 15 Pa.C.S.A. !l1571 Section 1930 (relating to dissenters rights), Section 1931(d) (relating to dissenters rights in share ex- hanges), Section 1932(c) (relating to dissenters rights in asset transfers). Section 1952(d) (relating to dissenters rights in division), Section 1962(c) (relating to dissenters rights in conversion), Section 2104(b) (relating to procedure), Section 2324 (relating to corporation option where a restriction 3U transfer of a security is held invalid), Section 2325(b) (relating to minimum vote requirement), Section 2704(c) (relating to dissenters right~ upon election), Section 2705(d) (relating to dissenters rights upon renewal of election), Section 2907(a) (relating to proceedings to terminate breach of qualifying conditions), Section 7104(b)(3) (relating to procedure), (b) Exceptions.- (1) Except as otherwise provided in paragraph (2), the holders of the shares of any class or series of shares that, at the record date fixed to determine the shareholders entitled to notice of and to vote at the meeting at which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to be voted on, are either: 0) listed on a national securities exchange; or (ii) held of record by more than 2,000 shareholders; shall not have the right to obtain payment of the fair value of any such shares under this subchapter, (2) Paragraph (1) shall not apply to and dissenters rights shall be available without regard to the exception provided in that para- graph in the case of: (i) Shares converted by a plan if the shares are not converted solely into shares of the acquiring, surviving, new or other corporation or solely into such shares and. money in lieu of fractional shares, (il) Shares of any preferred or special class unless the -articles, the plan or the terms of the transaction entitle all shareholders of the class to vote thereon and require for the adoption of the plan or the effectuation of the transaction the affirmative vote of a majority of the votes cast by all shareholders of the class, For Title 15, Purdon's Statutes, see post 299 "-- --I ~ ......~".,~ ,( ,. _l, ~ =- ~~ ""'"~"~ 1)',' - " ~ r'O i!1 15 Pa.C.S.A. ~ 1571 BUSINESS CORPORATION (iii) Shares entitled to dissenters rights under section 1906(( (relating to dissenters rights upon special treatment), (3) The shareholders of a corporation that acquires by purchas lease, exchange or other disposition all or substantially all of ti shares, property or assets of another corporation by the issuance, shares, obligations or otherwise, with or without assuming ti liabilities of the other corporation and with or without the inte' vention of another corporation or other person, shall not be ent tied to the rights and remedies of dissenting shareholders providE in this subchapter regardless of the fact, if it be the case, that tl acquisition was accomplished by the issuance of voting shares ' the corporation to be outstanding immediately after the acquisitic sufficient to elect a majority or IJlore of the directors of tl corporation, (c) Grant of optional dissenters rights.-The bylaws or a resol, tion of the board of directors may direct that all or a part of ti shareholders shall have dissenters rights in connection with at corporate action or other transaction that would otherwise not emit such shareholders to dissenters rights, (d) Notice of dissenters rights.-Unless otherwise provided 1 statute, if a proposed corporate action that would give rise to disse, ters rights under this subpart is submitted to a vote at a meeting' shareholders, there shall be included in or enclosed with the notice, meeting: (1) a statement of the proposed action and a statement that tl shareholders have a right to dissent and obtain payment of the fa value of their shares by complying with the terms of this subcha ter; and (2) a copy of this subchapter, (e) Other statutes.-The procedures of this subchapter shall a1; be applicable to any transaction described in any statute other th, this parr that makes reference to this subchapter for the purpose, granting dissenters rights. (0 Certain provisions of articles ineffective.- This subchapter m, not be relaxed by any provision of the articles, (g) Cross references.-See sections 1105 (relating t9 restriction c equitable relief), 1904 (relating to de facto transaction doctrit abolished) and 2512 (relating to dissenters rights procedure), 198&, Dee, 21, P,L. 1444, No, 177,9 103, effective Oct, I, 1989, Amend, 1990, Dec, 19, P,L. 834, No, 198,9 102, imd, effective, For Title 15, Purdon's Statutes, see post 300 I ';f' pOWERS, DUTIES. SAFEGUARDS 15 Pa.C.S.A. ~ 1571 , ii', Amended Committee Comment-1990: The pr.ocedure for the exercise of dissenters rights is revised generally along the lines of the 1978 revision to the Model Act. See 33 Bus,Law, 2587 (1978), However, the Delaware practice of not remitting the corporation's estimate offair value" is continued. The definition of "fair value" in 15 Pa,C,S, 9 1572 is revised to rnake clear that the new Delaware standard announced in Wein- berger v, UOP, 457 A,2d 701 (DeI.1983); is imported, The prior law as to the elimination of dissenters rights with respect to listed or widely~held shares in certain fundamental trans- actions is continued by subsection (b)(1), The failure of a dissenter to institute coUrt proceedings under this $ubchapter within a specified period c_ontinues t.o operate as an acceptance of the valuation proposed by the corporation. The relationship with the savings provisions of the statute (15 Pa.C,S,9 1105) is clarified by expressly providing that the existence of dissenters rights does not bar an injunction against a plan or amendment of articles if the court finds fraud or fundamental unfairness present, Cr., In re Jones & Laughlin Steel Corp" 488 Pa, 524, 412 A,2d 1099 (1980), The table of sections in subsection (a) is not intended to have independent substantive effect, It has been inc1u.ded for purposes of reference and merely collects all those sections which at the time the 1988 BCL was enacted provided for dissenters rights, The first sentence of subsection (a), however, is intended to have independent substantive effect, It is intended to be read with 15 Pa, C,$, 9 11 05 to say that statutory dissenters rights are avaiiable only where expressly conferred by another statut9ry provision, and in this sense is a limitation on the creation of additional dissenters rights, In addition, it operates as a limitation on the elimination of dissenters rights because subsection (I) protects it from being re- laxed by a provision in the articles. An articles provision, for example, that purported to make 15 Pa,C,S, 9 1930 (which confers dissenters rights in the context of mergers) inapplicable to the corporation, although not prohibited by the express terms of 9 1930, would be ineffective under subsection (f) as an attempt to relax subsection (a), In subsection (b)(2)(ii) the statutory voting requirement is con. formed to the general 1988 BCL approach which excludes absten- tions from the negative vote total. Subsection (b)(3) repeals the "mouse-swallows-the-lion" provision of Section 311F of the 1933 BCL and is further intended to overrule the suggestion in footnote seven of Terry v, Penn Central Corp" 668 F.2d 188, 194 (3d Cir,1981), \hat extra,statutory dissenters rights might be made available de. pending on the relative sizes of the parties to a fundamental transac- tion, It is intended that no common law dissenters rights of any type shall survive. the eIlactment of the 1988 BCL. See also the last sentence of 15 Pa,C.S, 9 1105, Subsection (c) permits the bylaws or the board of directors to confer dissenters rights even though they would,.not be requiJ'ed by the 1988 BeL. Under 15 Pa.G.S, 9 1504(c), the provision of the 'i~" ~'i a: ~~. ",~9I:-- ~, I' "': "" 1 For Title 15, Purdon's Statutes, see post 301 . ~~~ - '-1 ,J ,l '. '"' t~ ~".h"- illl" " ![ t ['I ,1 iL 'I liLl I' ll!: !J ~ 'i':' ;i: l,!'! ,I' ""'" 'i'l"" 15 Pa.C.S.A. ~ 1571 ca::"""",bJ " BUSINESS CORPOMl'IONS bylaws conferring nonstatutory dissenters rights may also be set forth in the articles, Under 15 Pa,C,S, 9 I 731(a)(1), the grant of nonstatutory dissenters rights may be made by a duly authorized committee of the board of directors if the transaction is not to be submitted to the shareholders for action, subject to compliance by the committee with any procedure applicable to action by the full board, Subsection (d) has only limited applicability to registered corpora- tions, See IS Pa,C,S, 9 2512, The statutes referred to in subsection (e) include the following: 7 P,S, S 1222 (banks) 40 P ,S, 9 910--51 (a) (title insurance cOlupanies) In addition to its application in the context of subsection (a) discussed above, subsection (D also protects the procedural provi- sions of Subchapter 15D from being relaxed in the articles, Cf 15 Pa.c.S, 9 1306(b), , The following terms used in this section are defined in IS Pa,C,S. 9 1103: "articles" "board of directors" "business corporation" "bylaws" "casting a vote" (see "voting") "dissenters rights" ('entitled to vote" "issue" "obligations " "plan" "relax" "shareholder" "shares" The following terms used in this section are defined in 15 Pa,C,S, 9 1572: "corporation" "fair value" \'-:' ''1 "i ';i Historical and Statutory Notes The 1990 amendment in subsec. (a)-. substituted "part" for "subpart", substi- tuted a reference to S 2704(c) for a refer- ence to S 2704, and added references to 9S 2705(d) and 7104(b)(3); in subd, (b)(2) hlserted "regard to ,the" and "p~o- vided in that paragraph", and added par. (b)(2}(iii); in subsec. (e) substituted "part" for "subpart"; inserted a new subsec. (0 and redesignated former sub- sec. (f) as 'subsec. (g). Official Source Note-1988: Derived from act of May 5, 1933 (P,L. 364, No, 106), !is 311F and SISA, Land M (IS P,S, !is 13IIF and ISI5A, Land M). Subsection (a) is patterned in part after Model Business Corporation Act 9 80(a) (1978), Subsection (b)(I) reUec's the expansion of the exclusion in tbe De- laware General Corporation, Law to cover all national securities exchanges and to reduce the number of shareholders from For Title 15, Purdon's Statutes, see post 302 ~ NNERS, DUTffiS, SAFEGUARDS 00 to 2,000. See Delaware General rporation Law 9 262(b)(l). Subsection (3) is broadened to eliminate dissenters -hts OIl all "de facto merger" purchases shares, property or assets and is in~ Ided to overrule footnote seven of Terry Penn Central Corp" 668 F.2d 188, .4 (3rd Cir,1981) (see new 15 Pa,C,S, 190.4), 'ficial Source Note-1990: Ref"",nces to 15 Pa,C,S, 8S 2705(c) ,d 710.4(b)(3) added in subsection (a) - 15 Pa.C.S.A. S 1571 Note 2 and conforming change made in subsec~ tion (e). Rule of subsection (b)(2) limited to situations in which subsection (b)( 1) applies to conform to other exceptions to the availabUity of dissenters ri'ghts (e.g. 15 Pa.c.S, 9 2537). Subsection (b)(2)(iii) is new. Subsection (l) is new. Cf. 15 Pa,C,S, 9 1306(a)(8), Law Review Commentaries New Pennsylvania Business Corpora- m Law: What litigators need to know. Mark J, Sonnenfeld and Kristine M. Cuene, 61 Pa,B,A,Q. 31 (1990), , Library Referen';'" Corporations (0';;>182.4(4). WESTLAW Topic No, 101. C,J,S, Corporations 8S 3.47, 350, 1 gen~ral 1 edera\law 2 Notes of Decisions Kales Co., 42 D, & C,2d .41, 32 Leh,L.J, 179, 1-967, . In general -the ipecial remedy provided by former ~ction by which dissenting stockholders lay reCQver for damage sustained by lrc:>ngfuI acts of majority in disposing of sS'ets of corporation, was an "action at loW" for benefit of dissenting stockhold- rs, and not a "suit in equity" ,for benefit f all stockholders of the corporation. ;chull> v, Mountain Tel. Co" 72 A.2d 87,36.4 Pa, 266, 1950, A dissatisfied stockholder was not re- . meted to the remedy provided by fonner ection; he could still pursue his equita- lIe reInedy. Lauman v.' Lebanon Valley {.R Co., 30 Fa. 42, 1858, see Barnett v. 'hiladelphia Market Co" 67 A, 912, 218 'a. 6.49, 1907, A shareholder of a business corporation vho i~ unable to agree with the corpora- ion on the fair value of his shares must ook to the remedies as provided by for- ner section. Guerber v, Whitehead & The former Business Corporation Law pertaining to dissenter's rights, was to be strictly construed. Newburger. Loeb & Co. v. Baldwin Securities Corp., 15 D. & C,2d 614, 1959, 2. Federallaw Election of board Qf directors to have corporation governed by Pennsylvania Business Corporation Law. which did not provide appraisaJ rights to dissenting shareholders, was outside scope of 9 lOb, Securities and Exchange Act of 1934. 15 U.S.C.A. 9 78j(b), governing manipulative and deceptive devices in connecti.on with "purchase or sale" of registered secl1ri- ties, where it could not have affected shareholder decision on reorganization and thereby transformed it into the kind of investment decision involved in a typi- cal merger or sale of stock [or cash. In re Penn Central Securities J,itigation M,D,L. Docket No, 56, .494' F,2d 528, C,A,197.4, For TItle 15. Purdon's Statutes, see post 303 I ~ Lllill~ ~--- - M'ft'J ,I , ~ I ~~ -~~~""""-; " .' !l ~. , I I I " i: ~. \ii f<. ,.",1,.,- ; , - 15 Pa.C.S.A. ~ 1572 , BUSINESS CORPORATIONS ~ 1572. Definitions The following words and phrases when used in this subchapter shall have the meanings given to them in this section unless the context clearly indicates otherwise; "Corporation." The issuer of the shares held or owned by the dissenter before the corporate action or the successor by merger, consolidation, division, conversion or otherwise of that issuer, 'A ' plan of division may designate which of the resulting corporations is the successor corporation for the purposes of this subchapter, The successor corporation in a division shall'have sole responsibility for payments to dissenters and other liabilities under this subchapter except as otherwise provided in the plan of division, "Dissenter." A shareholder or beneficial owner who is entitled to, and does assert dissenters rights under this subchapter and who has performed every act required up to the time involved for the asser' tion of those rights. "Fair value." The fair value of shares immediately before the effectuation of the corporate action to which the dissenter objects, taking into account all relevant factors, but excluding any apprecia, tion or depreciation in anticipation of the corporate action, "Interest." 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, includ- ing the average rate currently paid by the corporation on its principal bank loans, 1988, Dee, 21, P,L. 1444, No, 177,9 103, effective Oct. I, 1989, Amended 1990, Dee, 19, P,L. 834, No, 198, 9 102, imd, effective, Amended Committee Comment-1990: The definition of "corporation" includes within its scope successor or acquiring corporations in mergers or other fundamental transac~ tions, In these transactions, the obligations of the disappearing or acquired corporations must be assumed by the successor or acquir- ing corporation and they are thus included within the definition of "corporation." In the case of a division, this definition makes clear that liabilities arising under Subchapter 15D have the same status as any other liability of the dividing corporation and may be affected by a plan of division, subject to the provisions of 15 Pa,C,S, 9 1957, The definition of "shareholder" in 15 Pa,C,S, 9 1103 is phrased only in terms of a record owner of shares. This subchapter uses the tenn "dissenter" generally in place of "shareholder" in order to encompass both record and beneficial owners of shares. The term "dissenter" is also limiting, since only a person who has satisfied all the conditions imposed by this subchapter is entitled to For Title .15, Purdon's Statutes. see post 304 -- aWERS, DUl1ES, SAFEGUARDS 15 Pa.C.S.A. !l1572 the rights of a dissenter. Under the definition of "dissenter," a person who initially objects but fails to perform any of those condi- tions within the times specified loses the status and rights of a dissenter. "Pair value" is to be determined as of the time immediately before the effectuation of the corporate action, instead of the date of the shareholder vote, as is the case under most state statutes that address the issue, This comports with the plan of this subchapter to preserve the dissenter's prior rights as a shareholder until the effective date of the corporate action, rather than leaving him in a twilight zone where he has lost his former rights, but has not yet gained his new ones, Under the prior law, the court in an appraisal proceeding was generally limited to the consideration of net asset value, actual market value and investment value, as those terms were defined by relevant case law, See In re Jones & Laughlin Steel Corp" 328 Pa,Super, 442, 477 A2d 527 (1984), citing O'Connor Appeal, 452 Pa, 287,304 A,2d 694 (1973), The reference to "taking into account all relevant factors" in the definition of "fair valu~" is intended to import the Delaware approach of simply receiving (in a manner similar to eminent domain takings of securities) investment banker opinions concerning the price an informed and willing buyer would pay for the shares on the valuation date, The effect is, on the one hand, to broaden the permissible valuation methodologies and types of factors, su'ch as the existence of a control premium, that may be considered and, on the other, to reject artificial or "formula" ap- proaches such as that used in In re Spang Industries, Ine" 369 Pa,Super, 133,535 A,2d 86 (Pa,I987) (suggesting it may be appro- priate to consider reproduction cost). Tbe definition of "interest" is included to make interest computa- tions under this subchapter more realistic. The right to receive interest is based on'the elementary consideration that the corpora, tion has the use of the dissenter's money, and the dissenter has no use of it, from the effective date of the corporate action until the date of payment, The definition also requires the adjustment of rates to accommodate radical changes in prevailing rates like those seen in the late 1970s and early 1980s and that may be seen again in the future, The reference to the rate currently paid by the corporation provides a prima facie standard which should facilitate voluntary settlements, The following terms used in this section are defined in 15 Pa,C,S, Sll03: . "dissenters rights" "shareholder" '~shares'~ " Historical and Statutory Notes The 1990 amendment in the definition Official Source Note-l 988: of "corporation" added the second and Patterned after Madel Business Corpo- ~9ird sentences. ration Act S 81(a) (1978). The reference For TItle 15, Purdon's Statutes, see post 305 ;l', ~~ 'tt ',-,>;'rl_",,,,",, " ,t I ~- - : ~: ii', 15 Pa.C.S.A. !:j 1572 to consideration of all relevant factors in the definition of "fair value" is patterned after Delaware General Corporation Law S 262(h), and is intended as a codifica- tion of Weinberger v. DOP, Inc., 457 A,2d 701 (Del. 1983), The definition of <~'l$.. --_~'\ ~ BUSINESS CORPORATIONS "interest" is patterned after Delaware General Corporation Law 9 262(h). Official Source Note-1990: The last two sentences or the definition of "corporation" are new_ Library RefereD:ces Notes of Decisions Laughlin Steel Corp" 477 A,2d 527, 321 Pa.Super. 442, 1984. Dissenting shareholders' postmerger remedies were lim~ted to appraisal of fail value of their stock where merger pla~ had been filed with state department. or state which awarded. merger certificate dissenting shareholders did not contenc any of technical or procedural require- ments for merger Were not met, dissent. ing shareholders- failed to take action tc prevent merger despite period of almos! full month in which they could have acl. ed, and dissenting shareholders did no; seek rescission of me~ger for at .least 3 ~ months following its consummation. Ir r-e Jones & Laughlin Steel Corp., 412 A,2d 1099,488 Pa, 524, 1980, In determining fair value-of dissenter', shares, consideration must be given to aJ factors and elements which reasonabl~ might enter into fixing of value, includin~ asset value, market value, market price~ of comparable companies, market priCl and earnings ratio, management and pol icies, earnings, dividends, valuation of as sets, reserves for various contingencies tax liabilities, future earnings, and predic Hans of future business events. In rt Watt and Shand, 304 A,2d 694, 452 Pa 287, 1973, In ascertaining fair value of dissenter', shares in corporation, it is best to averagt earnings of corporation over severa. years to avoid undue emphasis on ont exceptionally good or bad year. In rt Watt and Shand, 304 A,2d 694, 452 Pa 287, 1973, In ascertaining fair value of dissenter'~ shares in department store corporation use of capitalization ratio of ten time~ average yearly earnings was within rangf Corporations ~182.4(4). WESTLAW Topic No. lOI. C,J,S~ Corporations 99 347, 350, Fair value 1. Fair value Net asset value, investment value, and market value are not exclusive methods to be used in determining going concern value when valuing stock under dissen- ters' rights statute; more liberal ap~ proach must include proof of vaiue by any techniques or methods which are generally considered acceptable in finan- cial community and otherwise admissible in court. In re Glosser Bros., Inc., 555 A,2d 129, 382 Pa,Super, 177, 1989, Market value is relevant in determina- tion of true intrinsic value of stock on going concern basis under dissenters' rights statute whenever it is reliable, i.e., whenever it represents amount that will- ing buyer is willing Lo pay for stock and amount for which willing seller wants to sell stock in open and free market; mar- ket value becomes less relevant as its reliability decreases and may in fact properly be deemed irrelevant when it provides no reliable information as to true value of stock. In re Glosser Bros., Inc.. 555 A,2d 129, 382 Pa,Super, 177, 1989, Mandate of judicial precedent is that court making statutory appraisal under slate's business corporation law consider" three methods of valuation, but it does not require that, after consideration, ac- tual weight be ascribed to any of the valuation methods in attempting to deter- mine fair value, and, if on the other hand it is determined that method of evaluation is of no assistance or would be mislead~ ing, it should not become component of final determination. In re Jones & For Title 15, Purdon's Statutes, see post 306 - 'OWERS, DUTIES, SAFEGUARDS 15 Pa.C.S.A. ~ 1573 If reason. In re Watt and Shand, 304 \,2d 694, 452 Pa, 287, 1973, While net asset value of corporation Dust be given significance in ascertaining -air val1.\e of dissenter's shares, especially n situations where there is no reliable narket value, for the stock, courts must Je extremely Judicious with respect to .veight .assigned this factor since value of ,hares in commercial or manufac::turing :oropany depends chiefly on what they will earn; a' subject on which balance sheet-throws little-light. In re Watt and Shand; 304 A.2d 694, 452 Pa, 287, 1973. $84.56 award per share to shareholder who objected to proposed elimination oC cumulative voting provision of corpora~ tion's articles and who held 813 shares was not, in light of expert testimony, ranging from $90 to $272, on fair value of shares, supported by competent and substantial evidence. Watt and Shand v. O'Connor, 283 A.2d 279, 444 Pa, 206, ,1971, appeal after remand 304 A,2d 694, 452 Pa, 287, Supreme Court has broad certiorari re. view and duty to determine whether find~ ings of trial court"are supported by com. petent or substantial evidence in matters concerning fair value payment to a dis. senting shareholder although court is not authorized to make independent determi~ nation as to fair value of shares_ Watt and Shand v. O'ConJ.lor, 283 A.2d 279, 444 Pat 206, 1971, appeal after remand 304 A.2d 694, 452 Pa, 287, "Full market value" meant presump~ tively the market price, withoui any ap- preciation .or depreciation in conse~ quence of the merger, subject io such evidence as would indicate that the pre~ sumed value was distorted. Dickinson v. Fire Ass'n of Philadelphia, 106 A.2d 607, 378 Pa, 396, 1954. Under former section, a dissenting shareholder, upon filing timely written objection to proposed merger and timely demand for payment, is entitled to [air value of his stock. Hamberg v. Pitts- burgh Western Land Corp" 41 D, & C.2d 591, 115 P,L,J, 85, ,1966, ~ 1573. Record and beneficial holders and owners (a) Record holders of shares.-A record holder of shares of a pusiness corporation may assert dissenters rights as to fewer than . all fif the shares registered in his name only if he dissents with respect to all the shares of the same class or series beneficially owned by any one person and discloses the name and address of the person or persons on whose behalf he dissents, In that event, his rights shall be determined as if the shares as to which he has dissented and his other shares were registered in the names of different shareholders, (b) Beneficial owners of shares.-A beneficial owner of shares of a business corporation who is not the record holder may assert dissen- ters rights with respect to shares held on his behalf and shall be lreated as a dissenting shareholder under the terms of this subchap- ter if he submits to the corporation not later than the time' of the assenion of dissenters rights a written consent of the record holder. A beneficial owner may not dissent with respect to some but less than ; all shares of the same class or series owned by the owner, whether or 'not the ,shares so owned by him are registered in his name, 1I988, Dee, 21, P,L. 1444, No, 177, S 103, effeclive Oct, 1,1989, Amended ~L?92, Dec, 18, P,L. 1333, No, 169, 9 3, effective in 60 days, For Title 15, Purdon's Statutes, see post ,': ~. 1 307 ~ ." f I " !~ " " I' ,1 ~ ~ , , ~ ,~ jj !. ~ . , jj ~ .Ii' I [Ii Ii: .;;: '! j, i, ,I n Ii li: 'I ': T'" ;i . ~" "" .~- ",,- ~"' .' 15 Pa.C.S.A. ~ 1573 BUSINESS CORPORATIOr- Committee Comment-1988: This section addresses the relationship between dissenters rights and the widespread practice of nominee or street name ownership of publicly held shares, Generally, a shareholder must dissent with respect to all the shares he 9wns or over -which he has power to direct the vote. If. a record shareholder is a nominee for several beneficial shareholders, however, some of whom wish to dissent and some of whom do not, subsection (a) permits the record shareholder to dissent with respect to a portion of the shares owned by him but only with respect to all the shares beneficially oW!led by a singie person. This limitation is necessary to prevent speculative abuse by a 'single beneficial shareholder who is not fundamentally -opposed to the proposed corporate action but who may wish to gamble, as to some of his shares, on the possibility -of a high payment to dissen. ters. Subsection (a) also requires a record shareholder who dissents with respect to a portion of the shares held by him to notify the corporation of the name and address of the beneficial owner on whose behalf he has dissented, Subsection (b) permits a beneficial shareholder to assert dissen- ters rights directly if he submits the record shareholder's written consent. Generally, corporations treat the record shareholder as the owner of shares, and a beneficial shareholder is entitled to assert dissenters rights only as set forth in this section, It would be foreign to the premises underlying nominee and street name owner ~ ship to require these "record shareholders to forward demands and participate in litigation on behalf of their clients, In order to make dissenters rights effective without burdening record shareholders, beneficial shareholders should be allowed to assert their own claims as provided in "this subsection, The beneficial shareholder is re- quired to submit a written consent by the record shareholder to his assertion of dissenters rights to verify the beneficial shareholder's entitlement and to permit the protection of any, security interest in the shares. In practice, a broker's customer who receives a for- warded notice of proposed corporate action and who wishes to dissent may request the broker to supply him with the name of the record shareholder (which may be a house nominee or a nominee of the Depository Trust Company), and a form of consent signed by the record shareholder. From that point forward, the corporation must deal with the beneficial shareholder, The following terms used in this section are defined in IS Pa,C,S, 9 1103: "business corp9ration" "dissenters rights" "shareholders" "shares" The term "corporation" used in this section is defined in 15 Pa,C.S, 9 1572, For Title 1.5, Purdon's Statutes, see post 308 POWERS, DUTIES, SAFEGUARDS 15 Pa.C.S.A. ~ 1574 Historical and Statutory Notes The 1992 amendment inserted "of the {IS P.S. 9 151SB (fourth sentence)). Pat- same .class or series" in the first sentence terued after Model Business Corporation of subsec, (a), Act !i 80(b) (1978), Official Source Note-1988: Derived from act of May 5, 1933 (P.L. 364, No, 106), !i SlSB (fourth sentence) Library References Corporations ~182.4(4). WESTLAW Topic No, 101. C.J.S. Corporations 99 347, 350. ~ 1574. Notice of intention to. dissent If the proposed corporate action is submitted to a vote at a meeting of $hareholders of a business corporation, any person who wishes to dissent and obtain payment of the fair value of his shares must file with the corporation, prior to the vote, a written notice of intention to demand that he be paid the fair value for his shares if the proposed action is effectuated, must effect no change in the beneficial ownership of his shares from the date of such filing continuously through the effective date of the proposed action and must refrain from voting his shares in .approval of such action, A dissenter who fails in any respect shall not acquire any right to payment of the fair value of his shares under this subchapter. Neither a proxy nor a vote ~ainst the proposed corporate action shall constitute the written notice required by this section, 1988, Dee, 21, P,L. 1444, No, 177, Ij 103, effective Oct, 1, 1989, Committee Comment-1988: if a shareholder vote Is called for, this section requires a share, holder to give notice of his intent to demand payment before the vote on the corporate action is taken. This notice enables other voters to determine ,how much of a cash payment may be required. It also serves to limit the number of persons to whom the corpora- tion must give further notice, including the technical details of depositing share certificates, This section has no application to actions taken without a shareholder vote. In order to be and remain a dissenter eligible to demand payment for his shares, this section requires that a shareholder must not only give the notice required by this section but must also vote against, or abstain from voting on, the proposal. The following terms used in this section are defined in 15 ~a;C,S, 9 1103: "business corporation" "shareholders" For Title 15, Purdon's Statutes, see post 309 ~ ~ 'r.;, --. ',~'F .' ~~~ r 'I" , i1 , i'" of; 11 'I' ~. .r E,. if] -Ii ,I ~\ ! ~ 'j!, ;" <! ~ =.- '0 Jh:lli!U" , 15 Pa.C.S.A. ~ 1574 BUSINESS CORPORATION "shares" I'votingll The following terms used in this section are defined in 15 Pa,C,S, 9 1572: "corporation" "dissenter" "fair value" Historical and Statutory Notes Official Source Note--1988: Patterned in part after Model Busine~ Derived from act of May 5, 1933 (P,L. Corporation Act Ij 81(c) (]980), 364, No, 106), ~ 51SB (15 P,S, ~ 1515B), Library References Corporations <P 182.4(5). WESTLAW Topic No, 101. c.J,S, Corporations Ijlj 348, 350, ~ 1575. Notice to demand payment (a) General rule.-If the proposed corporate action is approved b) the required vote at a meeting of shareholders of a business corpora tion, the corporation shall mail a further notice to all dissenters wh( gave due notice of intention to demand payment of the fair value oj their shares and who refrained from voting in favor of the proposec action, If the proposed corporate action is to be taken without a vote of shareholders, the corporation shaH send to all shareholders who are entitled to dissent and demand payment of the fair value of their shares a notice of the adoption of the plan or other corporate action, In either case, the notice shall: (1) State where and when a demand for payment must be sent and certificates for certificated shares must be deposited in order to obtain payment, ' (2) Inform holders, of uncertificated shares to what extent trans- fer of shares will be restricted from the time that demand for payment is received, (3) Supply a form for demanding payment that includes a re- quest for certification of the date on which the shareholder, or the person on whose behalf the shareholder dissents, acquired benefi- cial ownership of the shares, (4) Be accompanied by a copy of this subchapter, (b) Time for receipt of demand for payment.-The time set for receipt of the demand and deposit of certificated shares shall be not less th,an 30 days from the mailing of the notice, 1988, Dee, 21. P,L, 1444, No, 177, S 103, effective Oct, I, 1989, For Title 15, Purdon's Statutes, see post 310 "O~~ .L_ ............."Tjl!l~~"-.:, r ~'ft-'. ,~-, 1~; l\.OWERS, DUTIES, SAFEGUARDS I 15 Pa.C.S.A. ~ 1575 Committee Comment-1988: The basic purpose of this section is to require the corporation to tell all actual or potential dissenters what they must do in order to take advantage of their right to dissent, The requirements of what the notice must contain are spelled out in detail to ensure that the notice serves this basic purpose. In the case of an -action that is submitted to a vote of shareholders, the notice must be sent only to those persons who gave notice of their intention to dissent and who refrained from voting in favor of the proposed actions. In the case of a transaction not involving a vote by shareholders, the notice. must be sent to all persons who are eligible to dissent and demand payment, The notice must contain or be accompanied by a form which a person asserting dissenters rights may use to complete the demand for payment, The form must specify the date by which it must be received by the corporation, which date must be at least 30 days after the date of mailing of the. notice of how to demand payment. The notice must also specify where and when share certificates must be deposited, or, in the case of uncertificated, shares, wh:en restrictions' on transfer will become ~ffective. The date for deposit of share certificates may not be set at a date earlier than the date for receiving the demand for payment, ' This section contemplates the retention by the corporation of the share certificates (or prohibition of transfer in the case of uncertifi- cated securities) rather than the notation of the claim of dissenters rights provided for in Section 5151 of the prior law, There is no requirement that the procedures mandated by this section be completed before the proposed corporate action .can be consummated, It is intended rathet that the proposed corporate action may be consummated as soon as it has been approved without the necessity of waiting until the dissenters rights proce- dures have been completed, Prior to the 1988 BCL, dissenters rights were not available in a context where a meeting of shareholders was not to be held, The provision of subsection (a) relating to dissenters rights in the case of corporate action taken without a vote of shareholders opens the way for the introduction into Pennsylvania law of the short form merger (equivalent to the Delaware certificate of ownership and merger) procedure of 15 Pa,C,S, 99 1924(b)(3) and 1926, and similar changes. The following terms used in this section are defined in 15 Pa,C,S, 9 1103: "business corporation" "plan" "share certificate" "shareholder" ~ I For Title 15, Purdon's Statutes, see post 311 "shares" ~;. "voting" ,..~ - ... 'T~..<l>,"",-iC' > -:'tr-! .,." [I , T 'c,' , , 15 Pa.C.S.A. ~ 1575 BUSINESS CORPORA1'ION~ The following terms used in this section are defined in 15 Pa.C.S. S 1572: "corporation" "dissenter" "fair value" Historical and Statutory Notes Official Source Note-1988: Pattemed after Model Business Corpow ration Act 'i 81(d) (1978), Library References Corporations e=> 182.4(5). WESTLAW Topic No, 1O!. C.l.S. Corporations 99 348, 350. ~ 1576. Failure to comply with notice to demand payment, etc (a) Effect of failure of shareholder to act.-A shareholder wh, fails to timely demand payment, or fails (in the case of certificater shares) to timely deposit certificates, as required by a notice pursuan to section 1575 (relating to notice to demand payment) shall not haY< any right under this subchapter to receive payment of the fair valu( of his shares, (b) Restriction on uncertificated shares.-If the shares are no represented by certificates, the business corporation may resttic their transfer from the time of receipt of demand for payment unti effectuation of the proposed corporate action or the release of restric tions under the terms of section 1577(a) (relating to failure t< effectuate corporate action), (c) Rights retained by shareholder.-The dissenter shall retain al other rights of a shareholder until those rights are modified b\ effectuation of the proposed corporate action, 1988. Dee, 21. P,L. 1444, No, 177. S 103, effective Oct, I, 1989, Amende, 1990, Dec, 19, P,L. 834, No, 198, S 102, imd, effective, Amended Committee Comment-1990: This section in effect requires a person who files a demand for payment to timely deposit his share certificates as directed by the corporation in the notice required under 15 Pa.C.S. S 1575. Subsection (c), unlike the prior law, permits a dissenting share- holder betw'een the date of demand and the consummation of the merger, etc, to continue to exercise his or her voting, dividend and other rights, except the right to receive as a consequence of the consummation of the transaction the cash, property or rights that a nondissenting shareholder 'W"ould receive. For Title 15, Purdon's Statutes, see post 312 i" lfP ~;' 'bl '~!!lWERS, DUTIES. SAFEGUARDS , 15 Pa.C.S.A. S 1577 The following terms used in this section are defined in 15 Pa,C,S, b" !i 1103: b., "business corporation" "certificate" (see "share certificate") "shareholder" "shares" The following terms used in this section are- defined in !i 1572: ,~ t I' ,\, "dissenter" "fair value" ," C',t- A 15 Pa,C.S, H Historical and Statutory Notes . :: The 1990 amendment in subsec. (a) in. Patterned after Model Business Corpora. ,'liened "timely" twice, lion Act S 81(e) (I978), . Ollicial Source Note-1988: ': Derived from act of May 5, 1933 (P,L. :'.)64, No, 106), S 5151 (IS P,S. S 15151), Official Source Note-1990: 15 Pa.C.S. 9 1576: References to timely action added in subsection (a). Library References Notes of Decisions tion requirement to exercise dissenters' rights did not establish good cause, as other shareholder was unsophisticated in financial dealings. whereas intervening . shareholder had been stockbroker for many.years and was aware of statutory requirements. In re Glosser Bros., Inc., 555 A.2d 129, 382 Pa,Super, 177, 1989, Where shareholders [ailed within 20 days to submit their certificates to the corporation for a notation - thereon that demand for payment had been made, shareholders were not entitled to the sta- tus of dissenting shareholders. In re As. sodated Wholesalers. Inc.. 35 D. & C.2d 763, 78 York, 126, 1966, Corporations"'" 182.4(5), WESTLAW Topic No, 101. '" C,J,S, Corporations S'i 348, 350, {w general 1 ~"(; :j;l. In general _?~: Trial court improperly permitted share- ;::Holder and his corporation to intervene in ~)ppraisal proceeding to value dissenters' i,;',,~~~es after IDanagement~sponsored, ;~~ leveraged buy.out and merger of corpora. tion. as intervening shareholder had not ,4emonstrated "good cause" for his fail~ ure to comply with requirement of former section that he submit his share certifi~ .~ates to corporation for notation; fact ~at corporation permitted another share- . holder who had not complied with nota~ i~. ~ 1577. Release of restrictions or payment for shares '';; ,. (a) Failure to effectuate corporate act/on.-Within 60 days after .~ the date set for demanding payment and depositing certificates, if the ltpusiness corporation has not effectuated the proposed corporate '~il.ction, it shall return any certificates that have been depgsited and ,JI'telease uncertificated shares from any transfer restrictions imposed ~'by reason of the demand for payment. ,,~~ ;::t" 1~ ,'~i:, Ii 1\ For Title 15, Purdon's Statutes, see post 313 "' - - .. - ~. nJf.::kI."""-"" " I .~ 'n ~" ~- "C -=-'<1',' K't'. Ii! ~ ' tl !i't1t,..-_o,-.." ::'::: I)'; , I ~'----'-".' 15 Pa.C.S.A. ~ 1577 BUSINESS CORPORATIONS (b) Renewal of notice to demand payment.-When uncertificated shares have been released from transfer restrictions and deposited certificates have been returned, the corporation may at any later time send a new notice conforming'to the requirements of section 1575 (relating to notice to demand payment), with like effect. (c) Payment of fair value of shares.-Promptly after effectuation of tlle proposed corporate action, 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 (if their shares. are certificated) haye deposited their certificates the amount that the corporation estimates to be the fair value of the shares, or give written notice that .no remittance under this sectior. will be made, The remittance or notice shall be accompanied by: (1) The closing balance sheet' and statement of income of th" issuer of the shares held or owned by the dissenter for a fiscal yea: ending not more than 16 months before the date of remittance OJ notice together with the latest available interim financial state ments, (2) A statement of the corporation's estimate of the fair value 0 the shares, (3) A notice of the right of the dissenter to demand payment 0 supplemental payment, as the case may be, accompanied by a cop: of this subchapter, (d) Failure to make payment.-If the corporation does not rem: the amount of its estimate of the fair value of the shares as provide, by subsection (c), it shall return any certificates that have bee deposited and release uncertificated shares from any transfer restric tions imposed by reason of the demand for payment. The corpon, tion may make a notation on any such certificate or on the records c the corporation relating to any such uncertificated shares that sue demand has been made, If shares with respect to which notatio has been so made shall be transferred, each new certificate issue therefor or the records relating to any transferred uncertificate shares shan bear a similar notation, together with the name of tb original dissenting holder or owner of such shares, A transferee l such shares shall not acquire by such transfer any rights in th corPoration other than those that the original dissenter had aft, making demand for payment of their fair value, 1988, Dec, 21, P,L. 1444, No, 177,!i 103, effective Oct,!. 1989, Amend, 1990, Dee, 19, Pol, 834, No, 198,9 102, imd, effective, For Title 15, Purdon's Statutes, see post 314 -"~ 'OWERS, DUTIES, SAFEGUARDS 15 Pa.C.S.A. ~ 1578 Amended Committee Comment-1990: This section departs from the approach of the Model Act by continuing the prior prac~ice. also followed in Delaware, of not requiring payment of the estimated fair value of the shares in advance of trial. Section 81G) of the 1978 version of the Model Act has accordingly been omitted from the 1988 BeL Subsection (b) makes it dear that the corporation at any time after returning the deposited shares may send a new notice under 15 Pa,e.S,9 1575 and repeat the procedure. The following terms used in this section are defined in 15 Pa,e,S, 9 1103: "business corporation" "certificates" (see "share certificate") "shares" The following terms used in this section are defined in 15 Pa,e,S. 9 1572: "corporation" "dissenter" "fair value" Historical am! Statutory Notes The 1990 amendment in subd, (c)(I) ~nserted "or notice", in subd. (c)(3), in- ierted "payment or" and inserted "as the :ase may be", and in subsec. (d) inserted "such" preceding "uncertificated shares" in the second sentence. :'3 1515D, E and I). Patterned in part after Model Business Corporation Act 9 81(0 (1978) and Delaware General Corpora- tion Law :'3 262. - Official Source Note-198B: Derived from act of May 5. 1933 (P.L. 364, No. 106), ~ 515D, E and I (15 P.5. Official Source Note-1990: Subsections (c) and (d) cLarified. Library References Corporations <S;;>182.4(S). WE5TLAW Topic No, 101. C,J,5, Corporations ~~ 348, 350. ~ 1578. Estimate by dissenter of fair value of shares (a) General rule.-If the business corporation gives notice of its estimate of the fair value of the shares, without remitting such amount, or remits payment of its estimate of the fair value of a dissenter's shares as permitted by section 1577(c) (relating to pay- ment of fair value of shares) and the dissenter believes that the amount stated or remitted is less than the fair value of his shares, he may send to the corporation his own estimate of the fair vahie of the shares. which shall be deemed a demand for payment of the amount or the deficiency, For Title 15, Purdon's Statutes, see post 315 ~~ ~- ."..~~ . ''',,- . I Wr, I" ifF, I't: " 1,,:1 II:, <" q',~ lIP Iil: iff 'i- t Ii ,I i II I "'''f'' .",' ".." , i i:., '. ~1~,J; A ."."..".".." 15 Pa.C.S.A. S 1578 BUSINESS CORPORATIONS (b) Effect of failure to file estimate.-Where the dissenter does not file his own estimate under subsection (a) within 30 days after the mailing by the corporation of its remittance or notice, the dissenter shall be, entitled to no more than the amount stated in the notice or remitted to him by the corporation, 1988, Dee, 21. P,L. 1444, No, 177, S 103, effective Oct. I, 1989, Amended 1990, Dee, 19, P,L. 834, No, 198, S 102, imd, effective. Amended Committee Comment-1990: 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. The following terms used in this section are defined in 15 Pa,C.S, S 1103: "business corporation" "shares" The following terms used in this section are defined in 15 Pa,C,S, S 1572: "corporation" "dissenter' , "fair value" Historical and Statutory Notes The 1990 amendment rewrote subsec. no more than the amount remitted to hi! (b), which prior thereto read: by the 9orporation." "(b) Effect of failure to file estimate.- Where a corporation has remitted pay- ment of its estimated value of a dissen- ter's shares, and the dissenter does not file his own estimate within 30 days after the mailing by the corporation of its re- mittance, the dissenter shaH be entitled to Official Source Note-1988: Patterned in part after Model Busine, Corporation Act!i 8l(g) (1978), Official Source Note-1990: Subsection (b) clarified. Library References Corporations 1$=182.4(5). WESTLAW Topic No, lOI. C,J,S, Corporations !i!i 348, 350, S 1579. Valuation proceedings generally (a) General rule.-Within 60 days after the latest of: . (1) effectuation of the proposed corporate action; (2) timely receipt of any demands for payment under secti, 1575 (relating to notice to demand payment); or For Title 15, Purdon's Statutes, see post 316 - WERS, DUTIES, SAFEGUARDS 15 Pa.C.S.A. ~ 1579 (3) timely receipt of any estimates pursuant to section 1578 relating to estimate by dissenter of fair value of shares); _ny demands for -payment remain unsettled, the business corpora- l may file in court an application for relief requesting that the fair lIe of the shares be determined by the court, b) Mandatory joinder of dissenters.-All dissenters, wherever re- ing, whose demands have not been settled shall be made parties to , proceecling as in an -action against their shares. A copy of the )lication shall be served on each such dissenter. If a dissenter is a nresident, the copy may be served on him in the manner provided prescribed by or pursuant to 42 Pa,C,S. Ch, 53 (relating to bases jurisdiction and interstate and international procedure).' :c) Jurisdiction of the court.-The jurisdiction of the court shall be :nary and exclusive, The court may, appoint an appraiser to ;eive evidence and recommend a decision on the issue of fair tue, The appraiser shall have such power and authority as may be ,cified in the order of appointment or in any amendment thereof, (d) Measure of recovery.-Each dissenter who is made a party all be entitled to recover the amount by which the fair value of his ares is found to exceed the amount, if any, previously remitted, 15 interest. (e) Effect of corporation's failure to file application.-If the corpo- tion fails to file an application as provided in subsection (a), any ;senter who made a demand and who has not already settled his Urn against the corporation may do so in the name of the corpora- ,n at any time within 30 days after the expiration of the 6O-day riod. If a dissenter does not file an application within the 30-<iay -riod, each dissenter entitled to file an application shall be paid the rporation's estimate of the fair value of the shares and no more, ,d may bring an action to recover any amount not previously ailtted, ' 88, Dee, 21. P,L. 1444, No, 177, '3 103, effective Oct, I, 1989, 42 Pa,C,$,A, 9 5301 et seq, Committee Comment-1988: Subsection (h)(2) of the Model Ad is supplied by the definition of "court" in new 15 Pa,C.S, '3 1103, and the Model Act_provision on discovery has been omitted, The following terms used in this section are defined in 15 Pa,C,S, '3 1103: "business corporation" "court" "shares" For Title 15, -Purdon's Statutes, see post 317 ~~ iiiJ,,,"- . - . ?firf" '!P;'?1t r,i' 11': "., !i::: i!;' ~ .i, 1;: 1: ~,! i'j( Ii) ,all .-j;f ':rl[: - ..." ~.= hillill_.....~.. 15 Pa.C.S.A. ~ 1579 -~ "'~.....", . BUSINESS CORPORATIONS The following terms used in this section are defined in 15 Pa.C.S, 9 1572: "corporation" "dissenter" "fair value" "interest" Historical and Statutory Notes Official Source Note-1988: ~ 1515C, F and G). Patterned in pari Derived from act of May 5, 1933 (P.L. after Mode! Business Corporation Ati 364, No. 106). !i!i 515C, F and G (J5 P.S, S 81(h) (1978), Library References Corporations "'182.4(6), WESTLAW Topic No, 101. C.J.S, Corporations SS 349, 350, In general 1 Appraisals 4 Burden of proof 3 Interest 5 Jurisdiction 2 Review 6 Notes of Decisions benefit of majority shareholders was ir sufficient to confer juns4iction upon a) praisal court, acting pursuant to formE section, to determine validity of sue transaction. In re Jones & Laugh1j Steel Corp" 412 A,2d 1099,488 Pa. 52, 1980, 1. In general Fonner section's appraisal cause of ac- tion for shareholders with respect to merger or buyout coexists with common- law causes of action against majority shareholders or officers. Herskowitz v. NutrilSystem, lnc" C,A, 3 (Pa,1988), 857 F.2d 179, rehearing denied, certiorari de- nied 109 S,Ct. 1315, 1331,489 V,S, 1054, 1060, 103 L.Ed,2d 584, 599, Object of appraisal proceeding is to de~ termine value of dissenter' 5 shares on go- ing concern basis. In re Watt and Shand, 304 A,2d 694, 452 Pa, 287, 1973, A claim by plaintiffs that defendants breached their fiduciary duties in connec- tion with a corporate merger did not state a cause of action in trespass; plain- tiffs' exclusive remedy was to have their stock appraised under former section. Shapiro v, Berwind Corp" 13 0, & C,3d 647, 1980, 2. Jurisdiction "Freezing out" of minority sharehold- ers for purpose of continuing business for 3. Burden of proof Burden is on dissenting shareholders show why he should be afforded disse ters' rights, and if corporation's exerci of its option to terminate shareholdel rights for failing to comply with natatj, requirement is questioned, sharehold has burden of showing why; good cav shown requirement properly focuses whether there was reasonable explar tion for failure to comply or other reas why corporation's termination of dissl Lers' rights was unwarranted, 110t whe er there was prejudice to corporation. re Glosser Bros., Inc., 555 A.2d 129, 3 Pa,Super, 177, 1989. 4... AppraJs;als Trial court improperly refused to Ci sider market value of stock in apprais going concern value for purposes or y~ lug dissenters' shares after manageme sponsored, leveraged buy-out and mer of corporation; only 50% to 60% of st- of corporation was closely held, althOl trading in remaining stock was admiu Iy thin prior to merger, stock was Ib For Title 15, Purdon's Statutes, see post 318 ~ ~OWERS, DUTIES, SAFEGUARDS ,n national exchange and was steadily raded at average rate of approximately ,0,000 to 40,000 shares per month, and here was no evidence of manipulation in narket or exercise of control of market IY family and management group. 1n re :Jlosser Bros.. Inc., 555 A.2d 129, 382 la.Super. 177, 1989. In nonjury trial to determine value of iissenters' shares after rnanagement- :ponsored, leveraged -buy-out, trial court )roperly permitted dissenters~. expert to estiIy as to value of certain assets based Ipon appraisal performed at company's -equest, even though appraisal report .vas not admitted into evidence, as ap- ?taisal.report was type of source material ~peJ;i. valuing stock would reasonably -e1yon in forming his opinion; trial court argely credited expert's analysis as to ~set value of stock, but reduced reliance m . 'value to 65% thereby taking cogni- ~kce of possible effect of adversary pro- ~ess on quality of expert's testimony. In :-e Glosser Bros., Inc., 555 A.2d 129, 382 P',Super, 177, 1989, ,;l.n valuing dissenters' shares after man. ;lgement-sponsored, leveraged buy~out ilid merger, trial court properly acc~pted -:l.issenters' expert's testimony as to net isset value of stock, even though expert did not take into account tax effect -or writing up of certain of company's assets; expert testified that since valuation of stock was to be made on going concern basis, placing higher value on assets was therefore really assessment of true value of. operating business, and thus it would be unrealistic to consider any higher tax that might be incurred as a result of higher value assigned to assets. In re Qlosser Bras" Inc" 555 A,2d 129, 382 Pa.Super. 177, 1989. On record, court in statutory appraisal proceeding properly rejected market val- ue of stock and also rejected investment value method of determining value, arid was not bound to consider conclusorv affidavit of counsel for plaintiffs in previ- ous case, and, although appraisers could differ as to true asset value, court did not err in finally accepting asset value from corporation's own balance sheet in sum of $54. In re Jones & Laughlin Steel Corp" 477 A,2d 527, 328 Pa,Super, 442, 1984, '.l 15 Pa.C.S.A. ~ 1579 Note 6 5. Interest Even assuming that dissenting share. holders' cross appeal from valuation pro- ceeding was not untimely, trial court properly determined' that interest on ap. praised value of stock should run at rate of 8%, representing prudent investor's rate, rather than 11.3%. representing av- erage rate paid by corporation on its bar. rowi-ngs. In re Glosser Bros., Inc., 555 A,2d 129, 382 Pa,Super. 177, 1989, A 10.5% interest calculation was prop- er to compensate dissenting shareholders, in statutory appraisal proceeding, for de- privation of use of fair value 'of their stock from effective date of merger plan. In re Jones & Laughlin Steel Corp., 477 A.2d 527, 328 Pa,Super, 442, 1984, In proceedings under former section, petitioners were not entitled to receive any interest on the award from date of decree until payment. Sanders v. Stein- wehr Development Corp., 33 D. & C.2d 25, 5 Adams L.J, 133, 1964, 6. Review In view of .fact that issues in statutory stock appraisal case were ones of law, that trial court had read prior decision of the Superior Court, affirmed by Supreme Court as precluding consideration of the threshold entitlement question on the merits, and in view of passage of time since inception of litigation, Superior Court would accept facial propriety of appeal and would address the merits, as requested by appellees at oral argument, notwithstanding argument of dissenting stockholders on appeal, by motion to dis- miss, that appealing corporation had waived issues by taking appeal directly from trial court's adjudication before ex~ ceptions were argued. In re Jones & Laughlin, Steel Corp.. 477 A,2d 527, 328 Pa.Super. 442, 1984. Supreme Court's scope of review on appeal from judgments in dissenting shareholders' statutory appraisal pro. ceeding was limited to narrow certiorari in which Supreme Court could consider only whether court below had jurisdic. tion. whether proceedings were regular, and whether court exceeded its powers, and court could not consider whether trial court had committed error of law in not awarding interest or other compensa- tion for detention of fair value*~ Farrow For Title 15, Purdon's Statutes, see post 319 it, '" -. """~~,~.".~ . ,~~ 4.j('.' ~ -"........,,,<<,~ m1'!i I ' r 'i I;; i H _I;: ~ l,' .~ ..._~~ !Jiha<' . tJ 15 Pa.C.S.A. ~ 1579 Note 6 v. General Waterworks Corp., 177 A.2d 82, 406 Pa, 152, 1962, BUSINESS .CORPORATION~ ~ 1580. Costs and expenses of valuation proceedings (a) General rule.-The costs and expenses of any proceeding ur, der section 1579 (relating to valuation proceedings generally); indue ing the reasonable compensation and expenses of the appraise appointed by the court, shall be determined by the court and assesse against the business corporation except that any part of the costs an expenses may be apportioned and assessed as the court deen appropriate against all or some of the dissenters who are parties an whose action in demanding supplemental payment under scctie 1578 (relating to estimate by dissenter of fair value of shares) te court finds to be dilatory, obdurate, arbitrary, vexatious or in b, faith, (b) Assessment of counsel fees and expert fees where lack of g(){ faith appears.-Fees and expense's of counsel and of experts for f respective parties may be assessed as the court deems appropria against the corporation and in favor of any or all dissenters if t corporation failed to comply substantially with the requirements this subchapter and may be assessed against either the corporati, or a dissenter, in favor of any other party, if the court finds that t party against whom the fees and expenses are assessed acted in b faith or in a dilatory, obdurate, arbitrary or vexatious manner respect to the rights provided by this subchapter. (c) Award of fees for benefits to other dissenters.-If the co- finds that the services of counsel for any dissenter were of substant benefit to other dissenters similarly situated and should not assessed against the corporation, it may award to those coun reasonable fees to be paid out of the amounts awarded to I dissenters who were benefited, 1988, Dee, 21, P,L. 1444, No, 177,9 103, effective Oct,!, 1989, Committee Comment-1988: This section provides that generally the costs of an appraisal proceeding should be assessed against the corporation, But the court is authorized to assess costs, in whole or in part, against any party based upon that party's 'Conduct, Individual dissenters may be called upon to pay counsel fees for other dissenters if the court finds that the services were of substantial benefit to the dissenters ordered to pay, The purpose of all these grants of discretion with respect to costs and counsel fees is to increase the incentives of both sides to . proceed in good faith under this subchapter to attempt to resolve their disagreement without the need of a formal judicial appraisal of the value of shares. For Title 15, Purdon's Statutes, see post 320 - 'UNDAMENTAL CHANGES ,Iaintiff succeeded to all of the merging .-orporation's rights and liabilities and vas entitled to maintain the action for iamages. Sun Pipe Line Co. v. Altes, 511 '.2d 280, C,A,Ark,1975, Where Pennsylvania railroad merged ..vith New Yark railroad and merger was ili"ected under Pennsylvania Business :orporation taw, the, merged corpora- ion through its trustees was entitled to oring wit to recover for any injuries to railroad corporations which existed be- fore the merger. while the holding com- pany which did not exist before date of mergel;:" had no interest in nor did it suc~ ceed to any interest in premerger railroad claims by virtue of the transfer of stock to the holding company. In re Penn Cent. Securities Litigation, 335 F.Supp. 1026, D,C,1971. Stockholder of merged Pennsylvania corpor'ation had capacity to sue deriva- tively, under federal securities laws, on behalf of merged corporation and against directors and officers of merged corpora. tion, surviving corporation, investment banking firm and other defendants, aI- though under Pennsylvania law merged corpoI:'ation had lost any legal identity, and failure to serve merged corporation, "- 15 Pa.C.S.A. ~ 1930 merely a nominal party, was nol fatal since recovery could go directly to share- holders o[ merged corporation. Miller v. Steinbach, 268 ESupp, 255, D,C,N,Y, 1967, After consolidation of building and loan associations, action should not thereafter be brought against a constituent, where all properties are held by consolidated association. Educational Soc. of Y ozgad v, Gordon, 166 A, 499, 310 Pa. 470, 1933, Creditor of purchased corporation may sue purchasing corporation for debt as- sumed by latter. Mitchell v. Liberty Clay Products Co., 139 A, 853, 291 Pa, 282, 1927. Where corporation had been merged in new corporation, with different name, under the acts of 1909 and 1915, record of action brought against former ,compa- ny could be amended, under Act 1852, May 4, P,L. 574 (~ 533 of Title 12, Civil and Equitable Remedies and Procedure), by changing name of defendant to that of new company, though statute of limita- tions may have intervened since .suit brought. Kuyalowicz v. G. & E. Co., 50 C,C, 331. 17 Sch, 283, 1921. ~ 1930. Dissenters rights (a) General rule.-If any shareholder of a domestic business cor- poration that is to be a party to a merger or consolidation pursuant to a plan of merger or consolidation objects to the plan of merger or consolidation and complies with the provisions of Subchapter D of Chapter 15 1 (relating to dissenters rights), the shareholder. shall be entitled to the rights and remedies of dissenting shareholders therein provided, if any, See also section 1906(c) (relating to dissenters rights upon special treatment), (b) Plans adopted by directors only.-Except as otherwise provid- ed pursuant to section 1571(c) (relating to grant of optional dissen- ters rights), Subchapter D of Chapter 15 shall not apply to any of the shares of a corporation that is a party to a merger or consolidation pursuant to section 1924(b)(1 lei) (relating to adoption by board of directors) , (c) Cross references.-See sections 1571(b) (relating to exceptions) and 1904 (relating to de facto transaction doctrine abolished), 1988, Dee, 21, P,L. 1444, No, 177.9 103, effective Oct, 1, 1989, Amended '1992, Dee, 18, P,L. 1333, No, 169, 9 3, effective in 60 days, 'IS Pa,C,S,A, ~ 1571 et seq, . . For Title 15, Purdon's Statutes, see post 487 ~J-; . ,,",,, "~~. ~-;. I - "".....~~ = $i"<_~: . June 13,2000 Mark M, Van Blargan, Esquire McNees, Wallace & Nurick 100 Pine Street Harrisburg, PA 17101 Re:Continuinl! Care Rx. Inc. Dear Mark: We write to you in your capacity as Secretary of Continuing Care Rx, Inc. ("CCRX"), Weare in receipt of your Information Statement, which describes the terms and conditions regarding purchase of additional shares of stock in CCRX. The Information Statement identifies a deadline of June 21,2000 at 5:00 p.m, for the purchase of additional shares, We understand you have postponed that deadline to June 23,2000 at 5:00 p,m, We have received a notice of a meeting of the shareholders of CCRX for the purpose of voting on a proposed agreement and plan of merger. We have also received the notice of dissenters' rights and right to demand payout. Please consider this letter to be written notice of our intention to demand that we be paid the fair value for our shares in CCRX if the proposed merger is effectuated, This notice is intended to comply with 15 Pa,C.S,A. 1574, We also object to the proposed actions and to their timing, First, the price of $200 per share set forth in the Information Statement is far below the current value per share of CCRX, We understand you have arrived at this price based on the book value of the shares, Current book value is an irrelvant basis for valuation given the nature ~ - ~ - ,-~ , --- ~ ~~". .-- , -~~~--"'m,;"I?;"_'''- .' of the business (services) and the explosive growth you anticipate (as demonstrated through your own projections), Consequently. the decision to sell shares at the below-market value of $200 per share is a clear breach of fiduciary duty to existing shareholders, Furthermore, the timing of the two actions, coupled with this unfair price. places us in an impossible situation and constitutes wrongful oppression of our rights. For example. the Pennsylvania Business Corporation defines "fair value" as "the fair value of shares immediately before the effectuation of the corporate action to which the dissenter objects, taking into account all relative factors, but excluding any appreciation or depreciation in anticipation of the corporate action," 15 Pa, C.S,A. !31572. The amended committee comment clarifies that: '''Fair value' is to be determined as of the time immediately before the effectuation of the corporate action, instead of the date of the shareholder vote, as is the case under most state statutes that address the issue." In other words, fair value is to be determined immediately prior to the effectuation of the merger, not immediately prior to the vote on the merger, The vote on the merger is to take place , , on June 21, 2000, You have set an amended deadlme of June 23, 2000 to respond to the offer to purchase additional shares, If we fail to respond by June 23, you will sell shares to the majority stockholder at the unfairly low pric~ of $200 per share, We understand the merger will not be effectuated until after June 23, In other words, under the scheme that you have contrived, forcing us to exercise our dissenters' rights before the sale of additional stock but effectuating the merger (and thereby fixing "fair value") after the sale of additional stock pursuant to the Information Statement forces us to either: (a) pay an additional $133,333.33 to CCRX to retain our pro rata interest without (i) any assurance that the merger will ultimately occur, (ii) any control over how the $133,333,33 will be used or (iii) any assurance that we will receive any economic value in exchange for our investment or (b) suffer a 75% dilution of our interest in CCRX, Unfortunately, we do not have access to $133,333.33 in "cash or cash equivalents" as demanded by the Information Statement and cannot make the required payment, thereby assuring an unfair dilution in the value of our interest in CCRX. We therefore hereby demand that you agree to value our interest based on our current percentage ownership of CCRX, regardless of any subsequent issuance of additional shares or effectuation of a corporate merger. If you do not agree, please let us know immediately so we may take the necessary legal action. -~ ~ l-~...,,,,,i',,, . We are gravely disappointed that you have decided to contrive a scheme to cheat us out of the fair value of our shares rather than observing your fiduciary duty to us. Sincerely, William Wilson Robert Wilson cc: Allen C. Warshaw, Esq. HBG\51260. I ~~ ,~ - -. .~- ~~ VERIFICA TION I, William Wilson, hereby aver and state that I have read the foregoing document which has been drafted by my counsel. The factual statements contained therein are true and correct to the best of my knowledge, information and belief although the language is that of my counsel and, to the extent that the content ofthe foregoing document is that of counsel, I have relied upon counsel in making this verification, This statement is made subject to the penalties of 18 Pa, C.s.A. g 4904 relating to unsworn falsification to authorities, which provides that if! make knowingly false statements, I may be subject to criminal penalties, iif~ 9 ;fI~_ HBG\40497.1 ~ '" '<.- ; ~: . VERIFICA TION I, Robert Wilson, hereby aver and state that I have read the foregoing document which has been drafted by my counsel. The factual statements contained therein are true and correct to the best of my knowledge, information and belief although the language is that of my counsel and, to the eJi:tent that the content of the foregoing document is that of counsel, I have relied upon counsel in making this verification, This statement is made subject to the penalties of 18 Pa, C.S,A. g 4904 relating to unsworn falsification to authorities, which provides that if I make knowingly false statements, I may be subject to criminal penalties, Ik1 Robert Wilson HBG\40497.1 " >, "~"~ 'j~.&\k#" . CERTIFICATE OF SERVICE On this 19th day of June, 2000, I, Sherry L. Weigel, a secretary in the law offices of Duane, Morris & Heckscher LLP, hereby certify that I have served this day true and correct copies of the foregoing COMPLAINT in the above-captioned matter, by depositing same in the United States First Class Mail, postage prepaid, in Harrisburg, Pennsylvania, to those persons and addresses indicated below: Mark Van Blargan, Esquire McNees, Wallace & Nurick 100 Pine Street P.O. Box 1166 Harrisburg, PA 17108-1166 ~- - ,--" -il?Ji-J ''>- , IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT, P A 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRlSBURG,PA 17112 PLAINTIFFS . Civil Action No, m- _~~p C3ul7iiiJ1 V, CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 PHI, INC. DEFENDANTS BRIEF IN SUPPORT OF MOTION OF PLAINTIFFS. ROBERT WILSON AND WILLIAM WILSON FOR A SPECIAL INJUNCTION Pursuant to Rule 1531 of the Pennsylvania Rules of Civil Procedure and Section 1767 ofthe Pennsylvania Business Corporation Law of 1988, as amended, 15 Pa, Cons. Stat. g 1301 et sea. (the "BCL"), Plaintiffs, Robert Wilson and William Wilson (the "Plaintiffs" or the "Wilsons"), by and through their attorneys, Duane, Morris & Heckscher, LLP, respectfully requests this Court to issue a Special Injunction pending the hearing on Plaintiffs' Motion for a Preliminary Injunction as is proposed in the accompanying Order and, in support thereof, sets forth the following: HBG\5 1632. I ~-~. -- ~-~i:' >1 Introduction Plaintiffs bring this action in their capacity as minority shareholders in Defendant CCRx against CCRx and its majority shareholder, PHI, seeking to enjoin PHI from using its power as majority shareholder to diiute the value of Plaintiffs' shares at the same time it is causing the corporation to purchase those shares. These actions by PHI are part of a broader plan directed at depriving the Wilsons of the fair value of the time, money and ideas they have invested in CCRx, a corporation they help found, which continues to perform services based on their ideas, While each action undertaken by Defendants may in isolation appear permissible, in combination, they serve to maliciously oppress the minority shareholders in derogation of the fiduciary duties owed by the corporation's directors and its majority shareholder to the minority shareholders, Parties Plaintiff William Wilson is an individual residing at 4997 Westchester Drive, Harrisburg, PA 17112. Plaintiff Robert Wilson is an individual residing at RD I, Box 85, Newport, PA 17074, Defendant Continuing Care Rx, mc, is a Pennsylvania Corporation with its registered office at 1217 Slate Hill Road, Camp Hill, Pennsylvania 17011. Defendant PHI is a Pennsylvania Corporation with its registered office at 1217 Slate Hill Road, Camp Hill, Pennsylvania 17011, Statement of Facts A. History of CCRx. Inc. Plaintiffs Robert and William Wilson are registered pharmacists who, in December of 1996, with a third individual, Thomas Trite, founded a corporation called Continuing Care Rx, mc, ("CCRx1 "). From December 24, 1996, until February 25, 1998, Robert Wilson, William Wilson and Thomas Trite were the owners and managers of CCRx1, which enter into contracts with nursing HBG\51632.1 -2- '" ~- ~ ~ " e-_ _M.Mi~~':-i , homes and other institutions for the provision and distribution of prescription drugs to the residents of the nursing home or other institutions. In February of 1998, CCRx1 entered into an agreement with PID, a Pennsylvania corporation, to provide and distribute prescription drugs at nursing homes owned and operated by Presbyterian Homes Incorporated, a subsidiary ofPID. In addition, at that time, PHI entered into an Asset Purchase Agreement with William Wilson, Robert Wilson and Thomas Trite under which PHI purchased the business, name and other assets of CCRx1, subject to certain liabilities, and created a new corporation by the name Continuing Care Rx, Inc, ("CCRx2") to operate the pharmacy business previously operated by CCRxI. See Exhibit "A" to the verified Complaint. The Asset Purchase Agreement also provided that the Wilsons and PID would enter into an agreed to Management Agreement and an agreed to Stockholders Agreement, which, on or about February 25, 1998, the Wilsons and Trite entered into with CCRx2 and PID, respectively. Under the Shareholders Agreement, the Wilsons and Trite (the "Minority Shareholders") were to subscribe to two hundred and fifty (250) shares of stock, representing twenty-five percent (25%) of the issued stock, with PID (the "Majority Shareholder") retaining seven hundred and fifty (750) shares or seventy-five (75%) of the issued stock. See Exhibit "B" to the verified Complaint. Under the Management Agreement, The Wilsons and Trite were engaged by CCRx2 for a term of five (5) years as "management consultants." See Exhibit "C" to Plaintiffs' Complaint. Under the Management Agreement, the consulting duties included: During the Consulting Term [five years], the Management Consultants [the Wilsons] shall be available to assist [CCRx2] in the ongoing management of the retail and institutional pharmacy Business to be carried on by [CCRx2], including the total management of the Business. Specifically, Management Consultants shall select, hire and train the staff and employees of Pharmacy, supervise, evaluate and determine the compensation of such HBG\51632.1 -3- 'jj . .~ ~~ .~ ~ - "~~ '~U --,' , ~:ri employees, develop operational policies, staffing levels and budgets, and perform all other functions required to manage and operate the Business. Management Consultants agree to provide the consulting services as defmed herein and to use their best efforts and abilities in performing services, and to give Pharmacy the full benefit of Management Consultants' knowledge, experience, judgment and expertise in rendering pharmaceutical services to the retail and institutional public. From FeblUlll)' 25, 1998, until August 10, 1999, the Wilsons provided the consulting services as defined in the Management Agreement, used their best efforts and abilities in performing services, and gave CCRx2 the full benefit of their knowledge, experience, judgment and expertise in rendering pharmaceutical services to the retail and institutional public. B. Termination of the Wilsons & the Initial Liti2ation On August 10, 1999, CCRx2, through its Chairman of the Board, Stephen Proctor, advised William and Robert Wilson that CCRx2 was terminating the Management Agreement as of that date. CCRx had no good cause for that termination. On January 6, 2000, the Wilsons filed against CCRx2 and Stephen Proctor a Complaint in the Court of Common Pleas for Cumberland Countyl, alleging that CCRx2 and Proctor breached the M!IIlagement Agreement and the implied duty of good faith arising collectively from the Asset Purchase Agreement, Management Agreement and Shareholder Agreement by terminating the Wilsons without cause (the "Initial Litigation"). The Initial Litigation is not settled at this time and the parties to it are currently exchanging discovery requests. See Exhibit "D" to the verified Complaint. I This action is Civil Action No. 2000-119 currently pending before the Honorable Wesley Oyler, JI. HBO\51632,l -4- ,~-~'~ ~~ ~ ~ ~""'....- .. ~,- if Ll& "E~ C. Internal Audit and Allel:ed Ooerational Deficiencies On or about May 30, 2000, Defendant CCRx2 advised Plaintiff, through their counsel, that CCRx2 believed that Plaintiffs were responsible for causing and/or allowing operational deficiencies related to and regulating the acquisition, storage, dispensing, safeguarding and accountability for certain controlled substances, Subsequently, Defendant CCRx2 produced a report that set forth the operational deficiencies related to the receipt, handling and delivery of certain drugs during the time Plaintiffs were managing the affairs of CCRx2, The aforesaid report specifically admits an effort to assess the level of compliance with provisions of the law related to the acquisition, storage, dispensing, safeguarding and accountability for certain controlled substances was "greatly impeded. . . by the absence, not only of the previous management, but virtually all other personnel formerly holding positions of responsibility at this pharmacy, including all pharmacists." Even though the alleged operational deficiencies were purportedly caused and/or allowed by Plaintiffs, Defendant CCRx2 neither authored the report upon nor at any time asked Plaintiffs for information they possessed regarding those alleged operational deficiencies. If Defendants had made such a reasonable inquiry of Plaintiff with respect to the alleged operational deficiencies, they would have learned that most, if not all, of the alleged operational deficiencies had never occurred. Despite the fact that neither CCRx2 nor the person investigating the alleged operational deficiencies for CCRx2 ever discussed those events with Plaintiffs, CCRx2 has purportedly advised a governmental agency of their occurrence. By reporting the alleged operational deficiencies to a governmental agency without properly investigating them, CCRx2 has unnecessarily exposed itself and Plaintiffs to the probability of a lengthy and expensive regulatory investigation. By failing to HBG\51632.1 -5- "' , _.....~. ~, ~~. . lMiil~r'Ii'-. investigate those alleged operational deficiencies adequately, CCRx2 has created unnecessary uncertainty about the possible exposure of the corporation to sanctions, significantly reducing the value of its stock. D. Merl!er Plan and Sale of Additional Shares of CCRx Common Stock On May 11,2000, CCRx2 held a meeting of its Board of Directors (the "Board"), at which, the Board approved an Agreement and Plan of Merger ("Merger Plan"), whereby CCRx2 would be merged with and into CCRx, L.L.C., a wholly-owned subsidiary of Defendant PHI. Under the terms of the proposed Merger Plan, the shares of CCRx2 common stock held by Defendant PHI are to be exchanged for a 100% ownership interest in CCRx, L.L.C. and the shares held by the Plaintiff and Trite would be exchanged for $200.00 per share in cash, effectively forcing the Wilsons out of the ownership of the corporation. At the May 11,2000 Board meeting, the Board also approved the sale of up 3,000 additional shares ofCCRx2 common stock at $200,00 per share to the existing shareholders of the corporation ("Sale of Shares), namely, PHI, the Wilsons, and Mr, Trite, Under the Sale of Shares plan, initially, each shareholder can purchase a number of shares equal to his proportional ownership prior to the sale (the "Pro Rata Share"), i.e., the Minority Shareholders can buy up to 25% and PHI can buy up to 75%, but the plan permits PHI to buy more than its Pro Rata Share if the Minority Shareholders fail to buy all the shares allotted to them, effectively allowing PHI to dilute the Wilsons ownership interest in CCRx2, On June 7, 2000, counsel for CCRx2, on behalf of the Secretary ofCCRx2, sent the minority shareholders of CCRx2 written notice of (I) the proposed Sale of Shares, the purchase option available to Plaintiffs to extend only to Tuesday, June 20, 2000 at 5:00 p,m. (later extended by 1IBG\51632.1 -6- , ". -. .; 100- =~,- arltrif'<i mutual agreement to Thursday, June 23, 2000 at 5:00 p.m.); (2) the proposed meeting of the shareholders of CCRx2 to approve the proposed Merger Plan, scheduled for Tuesday, June 20, 2000; and (3) the availability to the Minority Shareholders of Dissenters' Rights under Subchapter D of the Pennsylvania Business Corporation Law of1988, as amended, 15 Pa, Cons. Stat. g 1301 et sea, (the "BCL"), S~e Exhibit "E" to the verified Complaint. These proposed actions of CCRx2 and its Majority Shareholder, PHI, seek to prejudice the interests of and oppress the Minority Shareholders. For example, the $200,00 per share price established in the Sale of Shares plan proposed by Defendant CCRx2 grossly underestimates the value of the corporation's common stock. Furthermore, under the Sale of Shares plan, to avoid dilution of their 25% ownership share, the Minority Shareholders must pay in cash or cash equivalents by 5:00 p.m. on Thursday, June 23, 2000 up to $150,000 or permit PHI to buy more shares and decrease the Minority Shareholders' position in the corporation. In addition, due to the short amount of time between receiving notice of the Sale of Shares and the final date to purchase such shares, the Wilsons will be unable to raise the $100,000 they would need to maintain their ownership position in the corporation, Finally, the Merger Plan unfairly prejudices the interests of and oppresses the Minority Shareholders because it permits the Majority Shareholder to convert its seventy-five percent (75%) ownership ofCCRx2 into one-hundred percent (100%) ownership of CCRx, L.L.C" while the corporation buys out the Minority Shareholders' shares at unconscionably low prices. HBG\51632.1 -7- ~L._~J =._ -<J ~~....~~- . ~ !i1l;>1 Argument 1. Plaintiffs Are Entitled to A Preliminarv Iniunction and ADDointment of a Custodian Plaintiffs, Robert and William Wilson, are entitled to a Preliminary Injunction, enjoining Defendant CCRx, Inc. and its Majority Shareholder, Pill, from proceeding with the proposed meeting of the shareholders to approve the Merger Plan and consummating the proposed Sale of Shares because Defendants have acted improperly, maliciously and in a fundamentally unfair manner to oppress the Minority Shareholders. A court of equity may grant a preliminary injunction only where the rights and equity of the plaintiffs are clear and free from doubt and the hann sought to be remedied is great and irreparable, See Carrim/er v. Tavlor. 402 Pa. Super. 197,200,586 A.2d 928, 931 (1990), The grant of a preliminary injunction serves to maintain the status quo as it exists before the acts complained of occurred, thus, preventing irreparable injury or gross injustice, See DiLucente CorP, v. Peunsvlvania Roofing Co.. Inc.. 440 Pa Super. 450,655 A.2d 1035, anneal denied. 542 Pa. 647, 666 A.2d 1056 (1995); Smotkin v. Manhattan-Ward. Inc.. 363 Pa, Super. 597, 526 A,2d 1223 (1987), Pennsylvania law places the initial burden of proof upon the party seeking the injunction to establish his or her own rights as well as the inequitable nature of the defendant's conduct, while it requires the defendant to show that its conduct was reasonable or that a defense to the claim exists. See Sovereil!Il Bank v. Hamer, 449 Pa Super. 978, 674 A.2d 1085, anneal denied. 546 Pa, 695,687 A.2d 379 (1996); see also Hemnfield Two. v. Hanchuk, 153 Pa. Cornrow. 173,620 A.2d 668, apneal denied. 537 Pa. 643, 644 A.2d 165 (1993), In a closely held corporation, where the directors or those who control the corporation have acted oppressively toward one or more holders of five percent (5%) or more of the outstanding HBG\51632.1 - 8 - ~~.--~ ":m:u'- A"~'~; shares of any class of the corporation's stock in their capacities as shareholders, directors or officers, the court may <lPpoint one or more persons to be custodians of the company, who shall continue the business of tht:l corporation until such oppression is relieved, See 15 Pa. Cons. Stat. ~ 1103 (defining a closely-held corporation as one with less than 30 shareholders); ~ 1767 (permitting the appoin1ment of a custodian); ARC Manufacturing Co.. Inc. v, Konrad, 321 Pa. Super. 72, 467 A.2d 1133 (1983), In ARC Manufacturing. the court properly appointed a custodian to run a business where two shareholder-directors of the corporation had forced out a third shareholder-director in violation of their fiduciary duties, See 321 Pa Super at 77; 467 A.2d at 1138, a. The Plaintiffs' Rights As Shareholders of CCRx . Inc. Are Clear And Free From Doubt Under the BCL, shareholders in a Pennsylvania corporation have many rights, among them, the right to vote on certain corporate matters, particularly fundamental change transactions, such as the merger of the company with another firm or the issuance. See 15 Pa, Cons. Stat. ~ 1 924(a), The BCL also provides protections to shareholders from actions by the corporation or majority sharebolders that are fraudulent or fundamentally unfair. See ~ 1105. For instance, in corporate affairs, a majority shareholder may act in their own interest, but when they do so, it must also be in the best interest of all shareholders and the corporation. See Ferber v. American Lamo Co.. 503 Pa. 489,491-92469 A.2d 1046, 1049-50 (1983), Furthermore, the BCL provides that the directors of a corporation stand in fiduciary relation to the corporation. See ~ 1712(a). In perfonning the duties of corporate director, he or she must act with reasonable care, in good faith and in the best interest of the corporation. See Id.; Enterra Com. v. SGS Assoc., 600 F, Supp, 678 (B.D, Pa. 1985). In a closely-held corporation, such as HBG\51632.1 -9- ~ . - ."'''''''', ~' ~ ~'.^~:- '" .,-" , """~ "Iil\j 'frto"j CCRx, where one shareholder elects and controls the directors of the corporation, the fiduciary duties of the directors to the Minority Shareholders are heightened. In addition, as holders of securities issued by a Pennsylvania corporation, shareholders have rights arising from the operation of Pennsylvania securities laws, in particular~, the right for an exempt, unregistered offering of shares to existing shareholders to be made initially only on a pro rata basis and only permitting one shareholder to acquire more than its pro rata share after the expiration ofa reasonable period oftirne. See 70 P.S. ~ 203(n); 64 Pa. Code ~ 203.141. In 1997, Plaintiffs, along with Mr. Trite, conceived and created CCRx, ai'1d through their efforts and astute business sense, the company grew into a successful enterprise. So successful did their business become,. that in early 1998, PHI purchased the name of and controlling interest in CCRx, allowing the Plaintiffs and Mr. Trite to continue as Minority Shareholders. In addition, after PHI acquired the CCRx, the Plaintiffs remained as managers of the firm, a position they held until August 1999. Thus, throughout its existence, Plaintiffs, as owners, shareholders and managers, have invested inordinate amounts of their time, money and intellectual capital into CCRx. Beginning in August 1999, for its own pecuniary gain, PHI, which as 75% owner controls the Board of Directors, set out on a course to force the Plaintiffs out of employment with and, later, partial ownership in CCRx. In August 1999, CCRx terminated the Plaintiffs Management Agreement with CCRx without just cause, necessitating the Plaintiffs' institution of the Initial Litigation. When the Initial Litigation did not force the Plaintiffs from their ownership in the company, in May 2000, PHI and the CCRx Board conceived the two-pronged attack that is the subject of this litigation (I) to dilute the Plaintiffs' of their ownership share in CCRx via the Sale of Shares and (2) to divest Plaintiffs of their shares at artificially depressed prices via the Merger HBG\51632,1 -10 - .- < - --oJ 'i~_ " _,d.l.lji~I~,i\j!2<: Plan. Although ostensibly permitted under the provisions of the BCL, the Defendants actions to effectuate the Merger Plan and Sale of Shares are manifestly unreasonable and fundamentally unfair and are designed solely to rid CCRx and its Majority Shareholder, PHI, of its fiduciary duties to the Minority Shareholders. Moreover, the Defendants, knowing the individual Minority Shareholders will be unlikely to raise the capital necessary to purchase the additional shares allotted to them, propose a Sale of Shares plan that initially offers the shares to all existing shareholders on a pro rata basis, while allowing PHI to buy more shares only if the Minority Shareholders fail to buy all the shares allotted to them. On the surface, this plan appears fair and equitable, giving every shareholder a chance to buy more shares, but in reality, it permits the well-funded corporate Majority Shareholder, PHI, to oppress the individual Minority Shareholder who lack access to large pools of cash to purchase new shares. In fact, the initial offer available to all shareholders, including the Plaintiffs, lasts only fourteen (14) days, from June 7-23, 2000, while the plan gives, PHI, up to 30 days after the end of the initial period to buy up any shares the Minority Shareholders fail to buy. Accordingly, the well- funded, corporate Majority Shareholder, PHI, gets double the time to accumulate the funds to dilute the Plaintiffs' ownership stake than the less-monied individual Minority Shareholders get to find the funds to protect that ownership stake. Furthermore, at the behest of Defendant PHI, as Majority Shareholder, the directors of CCRx2 and CCRx itself have breached their fiduciary duties to the Minority Shareholders by (1) undertaking a hasty investigation of the alleged operational deficiencies without making a reasonable inquiry into any information possessed by the Plaintiffs concerning such deficiencies; (2) carelessly and irresponsibly reporting the alleged operational deficiencies to a governmental HBG\51632~1 - 11 - , . ..............."....'~ -~ .- ~'''''~,"-",,; agency without making such reasonable inquiry, which may greatly decrease the value of the corporation's stock; (3) at the urging of the Majority Shareholder, approving and going forward with the Merger Plan and Sale of Shares in an effort to oppress the Minority Shareholders in breach of their duties of care and loyalty; and (4) failing to treat the Minority Shareholders fairly, thus, creating the need for the Initial Litigation and this litigation that serve only to waste scarce corporate resources tor the sole benefit of the Majority Shareholder. Of course, all these action by Defendants are occurring at a time when Plaintiffs are being forced to exercise their Dissenters' Rights as a result of the Merger Plan that will effectively force them out of the company at an absurdly low price. See Exhibit "F" to the verified Complaint. When viewed in combination with Defendants irresponsible handling of the alleged operational deficiencies, it is clear that Defendants only pl,Irpose is to deflate the value of Plaintiffs stake in CCRx2 while, at the same time, forcing them to exercise their Dissenters' Rights to establish a value of that stake at an artificially low price. Although each action by Defendant when viewed in isolation appears permissible, in combination, they clearly serve only to oppress the Minority Shareholders in violation of the fiduciary duties owed by Defendants to the Minority Shareholders and the corporation. b. The Harm the Plaintiffs Will.Suffer If the Merl!:er Plan and Sale of Shares Are Effectuated Is Great and IrreDarable A plaintiff's injury is irreparable if it will cause damage that can be established only by conjecture and not by accurate monetary standards. See West Penn Specialty MSO v. Nolan, 737 A.2d 295 (Pa. Super. 1995); American Exoress Travel Related Services Co. v. Laul!hlin, 424 Pa. Super. 622, 623 A.2d 854, apoeal denied, 535 Pa. 644, 633 A.2d 149 (1993). A preliminary injunction is appropriate where the threatened injury in the form of monetary loss is of such HBG\5163H -12 - ,~ '~:"',H magnitude as to render an action for damages inadequate, e.g., where the loss threatens the existence of a business. See Three County Services. Inc. v. Philadelohia Inauirer. Inc., 337 Pa. Super. 741, 486 A.2d 997 (1985). In particular, in circumstances where a corporate action is fraudulent or unfundamentally unfair, an affected shareholder may obtain an injunction to enjoin such corporate action. See 15 Pa. Cons. Stat. ~ 1105; see also Warhirne v. ARWCO Corn., 451 Pa. Super. 468, 679 A.2d 1317 (1996) (explaining that section 1105 permits a court to grant an injunction where a corporate action is fraudulent or fundamentally unfair but dismissing that plaintiffs claim for failure to establish such fraud or fundamental unfairness). Plaintiffs have invested three years of their lives, vast sums of money and enormous amounts of intellectual capital conceiving, creating, building, operating, managing, and most recently, defending their stake in CCRx. By terminating Plaintiffs employment with CCRx, hastily investigating and injudiciously reporting the alleged operational deficiencies without making a reasonable inquiry of the information Plaintiffs possessed that such deficiencies did not, in fact, occur, and maliciously seeking to dilute and divest Plaintiffs of their stake in CCRx, Defendants have caused Plaintiffs great and irreparable harm. If Defendants are permitted to effectuate their Merger Plan and Sale of Shares, they will first dilute Plaintiffs stake in the corporation, taking that stake from 16.6% to as low as 4.1 %, and then divest Plaintiffs of their shares at the artificially low price of $200.00 per share, a price that does not reflect the true value of those shares. Were Plaintiffs to rely solely on their Dissenters Rights under Subchapter D of the BCL, they would be left with a recovery, which even if at a fair price, would occur several months from now, at a time after Defendants had effectively diluted Plaintiffs' stake through the Sale of Shares, leaving Plaintiff a wholly inadequate remedy at law. HBG\51632.1 - 13- ., , ." . ~ " ~ - ~ -~ """""""'"~., One of the primary purposes of a preliminary injunction is to maintain the status quo while the parties resolve or litigate to conclusion the controversy between them. The Pennsylvania Supreme Court has described the status quo a preliminary injunction should maintain as "the last, actual, peaceable and. . . uncontested status" that preceded the controversy between the parties. Vallev Fome Historical Society v. Washinl!ton Memorial Chaoel, 443 Pa. 491, 426 A.2d 1123 (1981). For some time, Plaintiffs and Defendants have been engaged in settlement discussions involving both the matters underlying the Initial litigation and the subjects of this litigation. Defendants undertook their efforts to effectuate the Merger Plan and Sale of Shares to "raise the stakes" in those negotiations. The action by Defendants left Plaintiffs no recourse but to file this litigation or suffer irreparable harm. This Court, however, can level the playing field, return the parties to "the last actual, peaceable and uncontested" status between them by enjoining the shareholder meeting to vote on the approval of the Merger Plan and the consummation of the Sale of Shares, thus, preventing irreparable harm to the Plaintiff without damaging the Defendant's interest, who will continue to maintain their Majority Shareholder position and control of CCRx. Conclusion Plaintiffs, Robert and William Wilson, are entitled to a Preliminary Injnnction, enjoining Defendant CCRx, Inc. and its Majority Shareholder, PHI, from proceeding with the proposed meeting of the shareholders to approve the Merger Plan and consummating the proposed Sale of Shares because Defendants have acted improperly, maliciously and in a fundamentally unfair manner to oppress the Minority Shareholders in the following ways: (1) by proposing a Sale of Shares that in operation permits the well-funded, corporate Majority Shareholder to dilute the position of the less-monied individual Minority HBG\51632.l - 14- .- "- -~ 'IlK '"i....~l.>~~..."'"" ~Jl!Mt;)~ . Shareholders, who get only half the time the corporate shareholder gets to raise the significant funds to protect their ownership stake; and (2) by proposing a Merger Plan that will divest the Minority Shareholders of their shares at an artificially low price of $200 per share. As a result of these actions to oppress them, the Plaintiffs, as Minority Shareholders, seek to enjoin Defendants from (1) holding the proposed meeting of the CCRx2 shareholders, scheduled for Tuesday, June 20, 2000 at 10:00 a.m.; and (2) completing the proposed Sale of Shares by Thursday, June 23, 2000 at 5:00 p.m. and seek the appointment a custodian to continue the business of the corporation while the Majority and Minority Shareholders seek to resolve their differences. Respectfully submitted, Date: bf1 !o(} O//~(t~ Allen C. Warshaw, Esquire Attorney IdNo. 17145 Edward A. McMerty, III Attorney Id. No. 82493 Duane, Morris & Heckscher LLP 305 North Front Street, 5th Floor P.O. Box 1003 Harrisburg,PPl 17108-1003 (717) 237-5500 Attorneys for William & Robert Wilson HBG\51632.1 - 15- ~~'W," . CERTIFICATE OF SERVICE On this 19th day of June, 2000, I, Sherry L. Weigel, a secretary in the law offices of Duane, Morris & Heckscher LLP, hereby certify that I have served this day true and correct copies of the foregoing BRIEF IN SUPPORT OF MOTION OF PLAINTIFFS, ROBERT WILSON AND WILLIAM WILSON FOR A SPECIAL INJUNCTION in the above-captioned matter, by depositing same in the United States First Class Mail, postage prepaid, in Harrisburg, Pennsylvania, to those persons and addresses indicated below: Mark Van Blargan, Esquire McNees, Wallace & Nurick 100 Pine Street P.O. Box 1166 Harrisburg, PA 17108-1166 HBG~1632~1 - 16 - ~l.,. . ,~.. '; , ..... ~"cl "" ....." ~ '~*,,,;:" , IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT,PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG,PA 17112 PLAINTIFFS Civil Action No. /Y) -.J?Y' eo i ( ~ V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 PHI 1271 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 DEFENDANTS MOTION FOR SPECIAL INJUNCTION Pursuant to Rule 1531 of the Pennsylvania Rules of Civil Procedure and Section 1767 of the Pennsylvania Business Corporation Law of 1988, as amended, 15 Pa. Cons. Stat. ~ 1301 et seq. (the "BCL"), Plaintiffs, Robert Wilson and William Wilson (the "Plaintiffs"), by and through their attorneys, Duane, Morris & Heckscher, LLP, respectfully requests this Court to issue a Special Injunction and in support thereof, sets forth the following: HBG\51629.1 ',:- ~ "' lllIiIIlil'. - l,~~ "'~ """,',., h-'i~'",- I. On June 16, 2000, Plaintiffs filed a verified Complaint setting forth its claims against Defendants, CCRx, Inc. and its Majority Shareholder, PHI, for oppression of the Minority Shareholders ofCCRx and breach of fiduciary duties. 2. Plaintiffs' Complaint, which is herein incorporated by reference, sets forth in sufficient detail that: (a) Plaintiffs are Minority Shareholders of CCRx, owning approximately two hundred and fifty (250) shares of stock, twenty-five percent (25%) of the issued stock, and PHI is the Majority Shareholder of CCRx holding seven hundred and fifty (750) shares or seventy-five (75%) of the issued stock. A true and correct copy of that Shareholders Agreement is attached to the verified Complaint as Exhibit "B." (b) In May 2000, without making a reasonable inquiry into information in the possession of Plaintiffs about the operations of CCRx under their management, Defendant CCRx conducted a hasty investigation of and produced a report concerning alleged violations of federal laws related and regulating the receipt, handling and delivery of certain drugs during the time Plaintiffs were managing the affairs of CCRx. (c). By failing to investigate those alleged violations adequately and irresponsibly reporting them to DEA without a reasonable investigation, CCRx has created unnecessary uncertainty about the possible exposure of the corporation to federal sanctions, significantly reducing the value of its stock. (d) On May 11, 2000, CCRx held a meeting of its Board of Directors (the "Board"), at which, the Board approved an Agreement and Plan of Merger ("Merger Plan"), whereby CCRx would be merged with and into CCRx, L.L.C., a wholly-owned subsidiary of Defendant. HBG\51629.1 -2- . , ~ 11i~.' ^~' --'"'it. ~"" -,.._, "-l~iLMfi~~_:J (e) Under the terms of the proposed Merger Plan, the shares of CCRx common stock held by Defendant are to be exchanged for a 100% ownership interest in CCRx, L.L.C. and the shares held by the Plaintiff and Trite would be exchanged for $200.00 per share in cash, effectively seeking to force the Wilsons out of the ownership of the corporation at an unconscionably low price. (t) At the May 11,2000 Board meeting, the Board also approved the sale of up 3,000 additional shares ofCCRx common stock at $200.00 per share to the existing shareholders of the corporation ("Sale of Shares), PHI and the Wilsons and Trite. Under the Sales of Shares plan, initially, each shareholder can purchase a number of shares equal to his proportional ownership prior to the sale, i.e., the Minority Shareholders can buy up to 25% and PHI can buy up to 75%, but the plan pennits PHI to buy more than its proportional share if the Minority Shareholders fail to buy all the shares allotted to them, effectively allowing PHI to dilute the Wilsons ownership interest in CCRx. (g) The $200.00 per share price established in the Sale of Shares plan proposed by Defendant CCRx and the Majority Shareholder, PHI, grossly underestimates the value of the corporation's common stock. 3. Absent an immediate grant of special relief in the form of a preliminary injunction, Defendants CCRx, Inc. and its Majority Shareholder, PHI, in breach of their fiduciary duties, will be permitted to unfairly oppress the interests of the Minority Shareholders of CCRx. 4. Absent an immediate grant of special relief in the form of a preliminary injunction, Defendants CCRx, Inc. and its Majority Shareholder, PHI, will cause Plaintiffs immediate and HBG\51629.1 - 3 - .~ ~ ~ -~-- - ~ ~ ~-'.ww"""'~ - ,-.-" lillJ L--~l]'Jim'-~ irreparable harm, which, despite the availability of Dissenters Rights under the Pennsylvania Business Corporation Law, cannot be adequately remedied at law, including: (a) the dilution of their 25% ownership share via the Sale of Shares; and (b) loss of their ownership stake in CCRx via the Merger Plan without just and fair compensation, due to the actions of Defendants that have artificially deflated the value of the corporation's shares. 5. Defendant CCRx, Inc. and its Majority Shareholder, PHI, will not suffer any legitimate harm by the issuance of the special injunction requested herein as the operations ofCCRx will continue and PHI will retain its 75% ownership stake in CCRx and control of the CCRx Board of Directors. 6. Any harm that may result from the issuance of the special injunction requested herein would be lesser than the harm that would result in the absence of such equitable relief. 7. Issuance of the special injunction requested herein appropriately preserves the status quo pending ultimate resolution of this matter by the Court. 8. The relief requested herein is narrowly tailored to accomplish the goal of preserving the status quo, pending final resolution ofthis matter. 9. The conduct of Defendants, CCRx, Inc., and its Majority Shareholder, PHI, is actionable and Plaintiffs' right is clear, such that Plaintiffs will likely succeed on the merits of its claims. WHEREFORE, Plaintiffs respectfully requests that this Court enter a Special Injunction on the tenns set forth in the accompanying proposed Order enjoining Defendants CCRx, Inc. and PHI from (I) holding the proposed meeting of the CCRx shareholders, scheduled for Tuesday, June 20, HBG\51629.1 -4- _."...,--~ ~~ "~,~- . ~l,:_ 2000 at 10:00 a.m.; and (2) consummating the proposed Sale of Shares by Thursday, June 23, 2000 at 5:00 p.m. and appoint a custodian to continue the business of the corporation pending a hearing on Plaintiffs Motion for a Preliminary Injunction in this proceeding. Respectfully submitted, Date: 6/19/00 Qftv (V Allen C. Warshaw, Esquire Attorney IdNo. 17145 Edward A. McMerty, ill, Esquire Attorney Id. No. 82493 Duane, Morris & Heckscher LLP 305 North Front Street, 5th Floor P.O. Box 1003 Harrisburg, PA 17108-1003 (717) 237-5500 Attorneys for William & Robert Wilson lIBG\51629.l - 5 - ~ - . -.~ ~~ - ,-~ ~~-' CERTIFICATE OF SERVICE On this 19th day of June, 2000, I, Sherry L. Weigel, a secretary in the law offices of Duane, Morris & Heckscher LLP, hereby certify that I have served this day true and correct copies of the foregoing MOTION in the above-captioned matter, by depositing same in the United States First Class Mail, postage prepaid, in Harrisburg, Pennsylvania, to those persons and addresses indicated below: Mark Van Blargan, Esquire McNees, Wallace & Nurick 100 Pine Street P.O. Box 1166 Harrisburg, PA 17108-1166 Sh~o(LU~ HB6\51629.1 -6- ,.,=~ ~ :";'I~~ ,~ . ~ _. ~ f Ji.i:lH1!r@'h , , IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT,PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG, PA 17112 PLAINTIFFS Civil ActionNo.C6- .J-7.U> C(.).:{~ V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD cAMP HILL, PENNSYLVANIA 17011 PHI, INC. 1271 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 DEFENDANTS AFFIDAVIT OF WILLIAM WILSON William Wilson, being duly sworn, states the following to be true to his personal knowledge: 1. Plaintiff William Wilson is an individual residing at 4997 Westchester Drive, Harrisburg, PA 17112. 2. Plaintiff Robert Wilson is an individual residing at RD 1, Box 85, Newport, PA 17074. 3. Defendant Continuing Care Rx, Inc. is a Pennsylvania Corporation with its registered office at 1217 Slate Hill Road, Camp Hill, Pennsylvania 17011. 4. Defendant PHI is a Pennsylvania Corporation with its registered office at 1217 Slate Hill Road, Camp Hill, Pennsylvania 17011. HBG\51636.1 ~:,;= ~ - "'> -'!l iJ=- _ ~ . "~ " 1.\ligF~,;,: , 5. Plaintiffs Robert and William Wilson are registered pharmacists who, in December of 1996, with a third individual, Thornas Trite, founded a corporation called Continuing Care Rx, Inc. ("CCRxl "). 6. From Decernber 24, 1996, until February 25, 1998, Robert Wilson, William Wilson and Thomas Trite were the owners and managers ofCCRxl. 7. The business of CCRxI was to enter into contracts with nursing homes and other institutions under which CCRxl would provide and distribute prescription drugs to the residents of the nursing home or other institution. 8. In February of 1998, CCRxI entered into an agreement with PHI, a Pennsylvania corporation, to provide and distribute prescription drugs at nursing homes owned and operated by Presbyterian Homes Incorporated, a subsidiary of PHI. 9. In February of 1998, PHI entered into an Asset Purchase Agreement with William Wilson, Robert Wilson and Thomas Trite under which PHI purchased the business, name and other assets ofCCRxl, subject to certain liabilities, and created a new corporation by the name Continuing Care Rx, Inc. ("CCRx2") to operate the pharmacy business previously operated by CCRxl. A true and correct copy of that Asset Purchase Agreement is attached to the Complaint in this action as Exhibit "A." 10. The Asset Purchase Agreement also provided that the Wilsons and PHI would enter into an agreed to Management Agreement and an agreed to Stockholders Agreement. 11. On or about February 25, 1998, the Wilsons and Trite entered into a Management Agreement and a Stockholders Agreement. 12. Under the Shareholders Agreement, the Wilsons and Trite (the "Minority Shareholders") were to subscribe to two hundred and fifty (250) shares of stock, representing twenty-five percent (25%) of the issued stock, with PHI (the "Majority Shareholder") retaining HBG\51636.1 -2- ~ ~ !!Iil.U1 ~-"_.~. ~~ ~"~ '" "\ie~Ih seven hundred and fifty (750) shares or seventy-five (75%) of the issued stock. A true and correct copy of that Shareholders Agreement is attached to the COmplaint as Exhibit "B." 13. Under the Management Agreement, The Wilsons and Trite were engaged by CCRx2 for a term of five (5) years as "management consultants." A true and correct copy of that Agreement is attached to the Complaint as Exhibit "C." 14. Under the Management Agreement, the consulting duties included: (a) During the Consulting Term [five years], the Management Consultants [the Wilsons] shall be available to assist [CCRx2] in the ongoing management of the retail and institutional pharmacy Business to be carried on by [CCRx2], including the total management of the Business. Specifically, Management Consultants shall select, hire and train the staff and employees of Pharmacy, supervise, evaluate and determine the compensation of such employees, develop operational policies, staffmg levels and budgets, and perform all other functions required to manage and operate the Business. (b) Management Consultants agree to provide the consulting services as defined herein and to use their best efforts and abilities in performing services, and to give Pharmacy the full benefit of Management Consultants' knowledge, experience, judgment and expertise in rendering pharmaceutical services to the retail and institutional public. 15. From Febrnary 25,1998, until August 10, 1999, the Wilsons provided the consulting services as defined in the Management Agreement, used their best efforts and abilities in performing services, and gave CCRx2 the full benefit of their knowledge, experience, judgment and expertise in rendering pharmaceutical services to the retail and institutional public. 16. On August 10, 1999, CCRx2, through its Chairman of the Board, Stephen Proctor, advised William and Robert Wilson that CCRx2 was terminating the Management Agreement as of that date. 17. There was no good cause for that termination. 18. On January 6, 2000, the Wilsons filed against CCRx2 and Stephen Proctor a Complaint in the Court of Common Pleas for Cumberland County, alleging that CCRx2 and Proctor HBG\51636.1 - 3 - ~--.,~ , .~ ""~ ..-- .". ~11llHi'M~Jt---.- breached the Management Agreement by terminating the Wilsons without cause, and that CCRx2 and Proctor breached of the implied duty of good faith arising collectively from the Asset Purchase Agreement, Management Agreement and Shareholder Agreement ("Initial Litigation"). The Initial Litigation is not settled at this time and the parties to it are currently exchanging discovery requests. A true and correct copy of the Complaint is attached to the Complaint in this action as Exhibit "D." 19. On or about May 30, 2000, Defendant CCRx2 advised Plaintiff, through their counsel, that CCRx2 believed that Plaintiffs were responsible for causing and/or allowing operational deficiencies related to and regulating the acquisition, storage, dispensing, safeguarding and accountability for certain controlled substances. 20. On or about May 31, 2000, Defendant CCRx2 produced a report that set forth possible operational deficiencies related and regulating the receipt, handling and delivery of certain drugs during the time Plaintiffs were managing the affairs of CCRx2. 2 I. The aforesaid report specifically admits an effort to assess the level of compliance with provisions of the law related to the acquisition, storage, dispensing, safeguarding and accountability for certain controlled substances was "greatly impeded. . . by the absence, not only of the previous management, but virtua1ly all other personnel formerly holding positions of responsibility at this pharmacy, including all pharmacists. II 22. Even though the alleged operational deficiencies were purportedly caused and/or allowed by Plaintiffs, Defendant CCRx2 neither authored the report upon nor at any time asked Plaintiffs for information possessed by Plaintiffs regarding those alleged deficiencies. If Defendants had make such reasonable inquiry of Plaintiff with respect to the alleged operational deficiencies, they would have learned that most, if not all, of the alleged violations never occurred. 23. Despite the fact that neither CCRx2 nor the person investigating the alleged operational deficiencies for CCRx2 ever discussed those alleged deficiencies with Plaintiffs, CCRx2 has purportedly advised a governmental agency of them. HBG\51636.l -4- ,,~,~ " -~ - - ~ ~ ' "l9;l~~.~~-= ~- < ~ ~,- 1iI!Ir'-.~d~M~~'" 'n - ~~~ - 'crJ:I1'cli',-L 24. By reporting the alleged operational deficiencies to a govemmental agency without properly investigating them, CCRx2 has unnecessarily exposed itself and Plaintiffs to the probability of a lengthy and expensive regulatory investigation. 25. By failing to investigate those alleged operational deficiencies adequately, CCRx2 has created unnecessary uncertainty about the possible exposure of the corporation to governmental sanctions, significantly reducing the value of its stock. 26. On May 11, 2000, CCRx2 held a meeting of its Board of Directors (the "Board"), at which, the Board approved an Agreement and Plan of Merger ("Merger Plan"), whereby CCRx2 would be merged with and into CCRx, L.L.C., a wholly-owned subsidiary of Defendant. 27. Under the terms of the proposed Merger Plan, the shares of CCRx2 common stock held by Defendant are to be exchanged for a 100% ownership interest in CCRx, L.L.C. and the shares held by the Plaintiff and Trite would be exchanged for $200.00 per share in cash, effectively forcing the Wilsons out of the ownership of the corporation. 28. At the May 11,2000 Board meeting, the Board also approved the sale of up 3,000 additional shares ofCCRx2 common stock at $200.00 per share to the existing shareholders of the corporation ("Sale of Shares"), PHI and the Wilsons and Trite. 29. Under the Sales of Shares plan, initially, each shareholder can purchase a number of shares equal to his proportional ownership prior to the sale, i.e., the Minority Shareholders can buy up to 25% and PHI can buy up to 75%, but the plan permits PHI to buy more than its proportional share if the Minority Shareholders fail to buy all the shares allotted to them, effectively allowing PHI to dilute the Wilsons ownership interest in CCRx2. 30. On June 7, 2000, counsel for CCRx2, on behalf of the Secretary ofCCRx2, sent the minority shareholders of CCRx2 written notice of (1) the proposed Sale of Shares; (2) the proposed meeting of the shareholders ofCCRx2 to approve the proposed Merger Plan, scheduled for Tuesday, June 20, 2000; and (3) the availability to the Minority Shareholders of Dissenters' Rights under HBG\51636.1 - 5 - ~..........~ ....~ . "~". ,~ " ,~~-~ ;, Subchapter D of the Pennsylvania Business Corporation Law, as amended, 15 Pa. Cons. Stat. ~ 1301 et seQ. A true and correct copy of the June 7, 2000 letter and attachments is attached as "Exhibit E." 31. The $200.00 per share price established in the Sale of Shares plan proposed by Defendant CCRx2 and the Majority Shareholder, PHI, grossly underestimates the value of the corporation's common stock. 32. Under the Sale of Shares plan, to avoid dilution of their 25% ownership share, the Minority Shareholders must pay in cash or cash equivalents by 5:00 p.m. on Thursday, June 23, 2000 up to $240,000 or permit PHI to buy more shares and decrease the Minority Shareholders position in the corporation. 33. Due to the short amount of time between receiving notice of the Sale of Shares and the final date to purchase such shares, the Wilsons cannot raise the $100,000 they would need to maintain their ownership position in the corporation. 34. The Merger Plan permits the Majority Shareholder to convert its seventy-five percent (75%) ownership of CCRx2 into one-hundred percent (100%) ownership of CCRx, L.L.C., while the corporation buys out the Minority Shareholders' shares at unconscionably low prices. 35. Despite the inadequacy of such remedy at law, to preserve their recourse to Dissenters' Rights under Subchapter D of the BCL, on or about June 19,2000, the Plaintiffs filed the required notice with CCRx2 of their intent to dissent from the Merger Plan and seek a fair valuation of their shares. A true and correct copy of that notice is attached to the Complaint as Exhibit "F". I1Idhm~ w111iam Wilson Sworn and subscribed before me this n'll. day of 9u!U..- ,2000 ~ y/. C.4JJ otary Public NOTARIAL SEAL SHIRLEY S. CLARK, Notary Public Harrisburg, Dl\Ijphin County My Comml~ion Expires June 15, 2004 HBG\51636.l "~. -. . ~- '., 'uo.. ,,~- ~k!J-"lL~l:j ,. ~ < .->0 IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT, P A 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG, PA 17112 PLAINTIFFS Civil Action No. (Yl- . ~ 7,2 P &d ~ v. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 and PHI 1271 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 DEFENDANTS ORDER FOR PRELIMINARY INJUNCTION AND APPOINTMENT OF A CUSTODIAN AND NOW, this _ day of June, 2000, upon consideration of Plaintiffs Complaint and Motion for Preliminary Injunction and Appointment of a Custodian and having determined that: 1. Plaintiff will suffer irreparable harm and loss if Defendants CCRx, Inc. and its Majority Shareholder, PHI are permitted to: (a) to hold the proposed meeting of the CCRx shareholders, scheduled for Tuesday, June 20, 2000 at 10:00 a.m., to approve the Merger Plan, whereby CCRx, Inc. shall be ..,,-""""'''''' = ~ ~ ~.-~,~ Jt.tI - " -='-'illi8.w~~j;_ " - merged with and into CCRx, L.L.C. and the Minority Shareholders shall be cashed-out at an unfairly low price; and (b) to consurnrnate the proposed Sale of Shares by Thursday, June 23, 2000 at 5:00 p.m., by which the Minority Shareholders shall irreparably suffer dilution of their ownership stake in CCRx, Inc. 2. Plaintiffs, Robert and William Wilson have no adequate remedy at law. 3. Greater injury will be inflicted upon Plaintiffs, Robert and William Wilson by the denial of temporary injunctive relief than would be inflicted upon Defendants CCRx, Inc. and its Majority Shareholder, PHI, upon the granting of such relief. IT IS HEREBY ORDERED AND DECREED THAT: (I) Defendants CCRx, Inc. and its Majority Shareholder, PHI, are hereby enjoined and restrained, pending trial on the merits from: (a) holding the meeting of the CCRx, Inc. shareholders for approval of the Merger Plan; (b) consurnrnating the Sales of Shares, whereby CCRx, Inc. proposed to offer up to 3,000 additional shares to existing shareholders ofCCRx, Inc. common stock; and (2) The Court, at its sole discretion in the near future, shall appoint one or more persons to serve as custodian of CCRx, Inc., to continue the business of the corporation pending a final hearing and judgment in this proceeding. BY THE COURT: , J. HBG\51513.1 ~ Ulld . ~~ ,. ~. - ,. ,,-, M$l,]'~+; . , IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT,PA 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG,PA 17112 PLAINTIFFS Civil Action No. (\(). .<"tlf"G'c..d'r~ V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 PHI 1271 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 DEFENDANTS MOTION FOR PRELIMINARY INJUNCTION AND APPOINTMENT OF A CUSTODIAN Pursuantto Rule 1531 of the Pennsylvania Rules of Civil Procedure and Section 1767 of the Pennsylvania Business Corporation Law of 1988, as amended, 15 Pa. Cons. Stat. ~ 1301 et sea. (the "BCL"), Plaintiffs, Robert Wilson and William Wilson (the "Plaintiffs"), by and through their attorneys, Duane, Morris & Heckscher, LLP, respectfully requests this Court to issue a Preliminary Injunction and to appoint a custodian to continue the business of CCRx in such manner as is proposed in the accompanying Order and, in support thereof, sets forth the following: HBG\51520.1 l- ~~ ~ ~" ..,~." ~m;,;- ^ . 1. On June 16, 2000, Plaintiffs filed a verified Complaint setting forth its claims against Defendants, CCRx, Inc. and its Majority Shareholder, PHI, for oppression of the Minority Shareholders of CCRx and breach of fiduciary duties. 2. Plaintiffs' Complaint, which is herein incorporated by reference, sets forth in sufficient detail that: (a) Plaintiffs are Minority Shareholders of CCRx, owning approximately two hundred and fifty (250) shares of stock, twenty-five percent (25%) of the issued stock, and PHI is the Majority Shareholder of CCRx holding seven hundred and fifty (750) shares or seventy-five (75%) of the issued stock. A true and correct copy of that Shareholders Agreement is attached to the verified Complaint as Exhibit "B." (b) In May 2000, without making a reasonable inquiry into information in the possession of Plaintiffs about the operations of CCRx under their management, Defendant CCRx conducted a hasty investigation of and produced a report concerning alleged violations of federal laws related and regulating the receipt, handling and delivery of certain drugs during the time Plaintiffs were managing the affairs of CCRx. (c). By failing to investigate those alleged violations adequately and irresponsibly reporting them to DEA without a reasonable investigation, CCRx has created unnecessary uncertainty about the possible exposure of the corporation to federal sanctions, significantly reducing the value of its stock. (d) On May 11, 2000, CCRx held a meeting of its Board of Directors (the "Board"), at which, the Board approved an Agreement and Plan of Merger ("Merger Plan"), whereby CCRx would be merged with and into CCRx, L.L.C., a wholly-owned subsidiary of Defendant. HBG\51520.1 -2- ,- ~- O~r"':.i.l,.! , (e) Under the terms ofthe proposed Merger Plan, the shares ofCCRx common stock held by Defendant are to be exchanged for a 100% ownership interest in CCRx, L.L.C. and the shares held by the Plaintiff and Trite would be exchanged for $200.00 per share in cash, effectively seeking to force the Wilsons out of the ownership of the corporation at an unconscionably low price. (t) At the May 11,2000 Board meeting, the Board also approved the sale of up 3,000 additional shares ofCCRx common stock at $200.00 per share to the existing shareholders of the corporation ("Sale of Shares), PHI and the Wilsons and Trite. Under the Sales of Shares plan, initially, each shareholder can purchase a number of shares equal to his proportional ownership prior to the sale, i.e., the Minority Shareholders can buy up to 25% and PHI can buy up to 75%, but the plan permits PHI to buy more than its proportional share if the Minority Shareholders fail to buy all the shares allotted to them, effectively allowing PHI to dilute the Wilsons ownership interest in CCRx. (g) The $200.00 per share price established in the Sale of Shares plan proposed by Defendant CCRx and the Majority Shareholder, PHI, grossly underestimates the value of the corporation's common stock. 3. Absent an immediate grant of special relief in the form of a preliminary injunction, Defendants CCRx, Inc. and its Majority Shareholder, PHI, in breach of their fiduciary duties, will be permitted to unfairly oppress the interests of the Minority Shareholders ofCCRx. 4. Absent an immediate grant of special relief in the form of a preliminary injunction, Defendants CCRx, Inc. and its Majority Shareholder, PHI, will cause Plaintiffs immediate and HBG\51520.1 - 3 - -">~>- - ~H~ ..'. W , . Ui.l~,&".",: , irreparable harm, which, despite the availability of Dissenters Rights under the Pennsylvania Business Corporation Law, cannot be adequately remedied at law, including: (a) the dilution of their 25% ownership share via the Sale of Shares; and (b) loss of their ownership stake in CCRx via the Merger Plan without just and fair compensation, due to the actions of Defendants that have artificially deflated the value of the corporation's shares. 5. Defendant CCRx, Inc. and its Majority Shareholder, PHI, will not suffer any legitimate harm by the issuance of the preliminary injunction requested herein as the operations of CCRx will continue under the direction of the custodian appointed by the Court and PHI will retain its 75% ownership stake in CCRx and control of the CCRx Board of Directors. 6. Any harm that may result from the issuance of the preliminary injunction requested herein would be lesser than the harm that would result in the absence of such equitable relief. 7. Issuance of the special injunction requested herein appropriately preserves the status quo pending ultimate resolution of this matter by the Court. 8. The relief requested herein is narrowly tailored to accomplish the goal of preserving the status quo, pending final resolution of this matter. 9. The conduct of Defendants, CCRx, Inc., and its Majority Shareholder, PHI, is actionable and Plaintiffs' right is clear, such that Plaintiffs will likely succeed on the merits of its claims. WHEREFORE, Plaintiffs respectfully requests that this Court enter a Preliminary Injunction on the terms set forth in the accompanying proposed Order enjoining Defendants CCRx, Inc. and PHI from (1) holding the proposed meeting of the CCRx shareholders, schednled for Tuesday, June HBG\51520.1 -4- "0'1 ~~_, , ' 20, 2000 at 10:00 a.m.; and (2) consummating the proposed Sale of Shares by Thursday, June 23, 2000 at 5:00 p.m. and appoint a custodian to continue the business of the corporation pending a final hearing and judgment in this proceeding. Respectfully submitted, Date: b/; tj /00 ukl/~ Allen C. Warshaw, Esquire Attorney Id No. 17145 Edward A. McMerty, ill, Esquire Attorney Id. No. 82493 Duane, Morris & Heckscher LLP 305 North Front Street, 5th Floor P.O. Box 1003 Harrisburg, PA 17108-1003 (717) 237-5500 Attorneys for William & Robert Wilson HBG\;1520~1 - 5 - - '" " ~ ".~ .:ll~'-; ...: ~ CERTIFICATE OF SERVICE On this 19th day of June, 2000, I, Sherry L. Weigel, a secretary in the law offices of Duane, Morris & Heckscher LLP, hereby certify that I have served this day true and correct copies of the foregoing MOTION in the above-captioned matter, by depositing same in the United States First Class Mail, postage prepaid, in Harrisburg, Pennsylvania, to those persons and addresses indicated below: Mark Van Blargan, Esquire McNees, Wallace & Nurick 100 Pine Street P.O. Box 1166 Harrisburg, P A 17108-1166 HBG\51520.1 HBG\51520~1 -6- -,- .-- r~~-"' , ~ _" n ......,..,~~rr_,' .... IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ROBERT WILSON RD 1, BOX 85 NEWPORT, P A 17074 and WILLIAM WILSON 4997 WESTCHESTER DRIVE HARRISBURG, PA 17112 PLAINTIFFS Civil Action No. t'Y) -.??3f (!;od~ V. CONTINUING CARE RX, INC. 1217 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 and PHI 1271 SLATE HILL ROAD CAMP HILL, PENNSYLVANIA 17011 DEFENDANTS ORDER FOR SPECIAL INJUNCTION AND NOW, this _ day of June, 2000, upon consideration of Plaintiffs Complaint and Motion for Special Injunction and having determined that: I. Plaintiff will suffer irreparable harm and loss if Defendants CCRx, Inc. and its Majority Shareholder, PHI are permitted to: (a) to hold the proposed meeting of the CCRx shareholders, scheduled for Tuesday, June 20, 2000 at 10:00 a.m., to approve the Merger Plan, whereby CCRx, Inc. shall be ~~ 'Ww.~",~' ,~. c~ merged with and into CCRx, L.L.C. and the Minority Shareholders shall be cashed-out at an unfairly low price; and (b) to consummate the proposed Sale of Shares by Thursday, June 23, 2000 at 5:00 p.m., by which the Minority Shareholders shall irreparably suffer dilution of their ownership stake in CCRx, Inc. 2. Plaintiffs, Robert and William Wilson have no adequate remedy at law. 3. Greater injury will be inflicted upon Plaintiffs, Robert and William Wilson by the denial oftcmporary injunctive relief than would be inflicted upon Defendants CCRx, Inc. and its Majority Shareholder, PHI, upon the granting of such relief. IT IS HEREBY ORDERED AND DECREED THAT: (1) Defendants CCRx, Inc. and its Majority Shareholder, PHI, are hereby enjoined and restrained, pending hearing on Plaintiffs Motion for a Preliminary Injunction from: (a) holding the meeting of the CCRx, Inc. shareholders for approval of the Merger Plan; (b) consummating the Sales of Shares, whereby CCRx, Inc. proposed to offer up to 3,000 additional shares to existing shareholders ofCCRx, Inc. common stock; and (2) Hearing on Plaintiffs Motion for a Preliminary Injunction is scheduled for June _,2000, at , in Courtroom BY THE COURT: J. HBG\51631.l -"--,-- ,- -.-..,,, - '" , , !iF ro-_t~ 4. ROBERT WILSON RD1, BOX 85 NEWPORT, PA 17074 IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYL VANIA AND WILLIAM WILSON 4997 WESTCHESTER DRIVE, HARRISBURG, PA 17112 Plaintiffs v. CIVIL ACTION - LAW CONTINUING CARE RX,: INC., 1217 SLATElllLL ROAD, CAMP lllLL, PENNSYLVANIA 17011 PHI, INC. Defendants NO. 00-3738 CIVIL TERM PRELIMINARY INmNCTION AND NOW, this 22.Jiay of June, 2000, upon consideration of the attached letter from Allen C. Warshaw, Esq., attorney for Plaintiffs, the hearing previously (') scheduled for June 22, 2000, is continued generally. .';~ n':.:::,(:: .--.. matter. ,,/ -.-: - :: Counsel are directed to contact the court if they desire a hearing~1~thi~~' ~::.l':"~' ~;'c; ~-.~ ;g~ ~~' r~,~) ~ \-~ _~;I ........ ..... :J_J ..-,< ,- (,-) '-.,-i'1 BY THE COURT, , '< '-,; Allen C. Warshaw, Esq. Edward A. McMerty, III, Esq. 305 North Front Street, 51h Floor P.O. Box 1003 Harrisburg, PA 17108-1003 Attorneys for Plaintiffs Michael R . Kelley, Esq. 100 Pine Street P.O. Box 1166 Harrisburg, PA 17108-1166 Attorney for Defendants :rc -lNill"~ "--,~ , ,,~-- ,<"' ,- ',-. - ,"~--" ~~," ,-""~ " ""~.'" :,z DUANE, MORRIS & HECKSCHER LLP FAX (717)232-4015 PHILADELPHIA, PA NEW YORK, NY LONDON. ENGLAND CHICAGO. lL W ASHlNGTON, DC SAN FRANCISCO, CA BOSTON, MA MlAM1, FL WILMINGTON, DE WAYNE,PA CHERRY lllLL, NJ NEWARK,NJ WESTCHESTER, NY PRINCETON, NJ PALMBEACH,FL ALLENTOWN, PA HOUSTON, TX BANGOR, ME ATIORNEYSATLAW AlLENe. WARSHAW DIRECT DIAL: (717) 237-5508 E-MAIL: warshaw@duanemorris.com 305 NORTH FRONT STREET, 5th FLOOR P.O. BOX 1003 HARRISBURG, PA 17108-1003 (717) 237-5500 www.duanemorris.com June 21, 2000 VIAF ACSIMILE (717) 240-6462 & FIRST CLASS MAIL The Honorable Judge Wesley Oler, Jr. Cumberland County Courthouse 1 Courthouse Square Carlisle,PA 17013-3387 Re: Wilson, Robert and William v. Continuing Care Rx, Inc. and Proctor, Stephen; Civil Action No. 2000-H'1 373,g' Our File No. D5761-0001 Dear Judge Oler: Please be advised that the parties have resolved the above-captioned litigation and, therefore, ask that you continue generally the hearing scheduled for tomorrow until such time as appropriate documents can be filed discontinuing the action. Thank you for your cooperation and consideration in this matter. Sincerely, ~C 1//-- Allen C. Warshaw for DUANE, MORRIS & HECKSCHER LLP ACW:slw cc: Robert & William Wilson Mark Van Blargan, Esquire Michael Kelley, Esquire HBG\51824.1 .;uN Z 2 2000