SCHEDULE 14A
(Rule 14a-l01)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. ___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by Rule 14a-6
(e)(2)).
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material under Section 240.14a-11(c) of Section 240.14a-12.
COMMERCIAL NATIONAL FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, no par value
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(2) Aggregate number of securities to which transaction applies:
700,000 shares of common stock
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$12.50 (per share price to be paid in transaction)
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(4) Proposed maximum aggregate value of transaction: $8,750,000
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(5) Total fee paid:
$1,108.63
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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PRELIMINARY COPY DATED NOVEMBER _____, 2004
COMMERCIAL NATIONAL FINANCIAL CORPORATION
101 North Pine River
Ithaca, Michigan 48847
_______________, 2004
Dear Shareholder:
A special meeting of shareholders will be held at __:00 a.m. on
_______________, 2005, at ______________________________, Ithaca, Michigan.
The purpose of the special meeting is to consider and vote on a proposed
transaction that would allow us to terminate the registration of Commercial
common stock under the Securities Exchange Act of 1934 and eliminate significant
burdens, risks and expense related to that registration. Referred to as "going
private," the proposed transaction is expected to reduce the number of our
shareholders of record to fewer than 300 persons, as required for termination of
the registration. The reduction in the number of shareholders would be
accomplished by a merger of a newly-formed, wholly-owned subsidiary of
Commercial with and into Commercial.
Under the terms of the Agreement and Plan of Merger, each shareholder who
owns fewer than 4,000 shares of common stock immediately prior to the effective
time of the merger would have his or her shares converted into the right to
receive $12.50 per share in cash, and each shareholder who owns 4,000 or more
shares would have his or her shares remain outstanding as Commercial common
stock after the merger.
At the special meeting, shareholders will also consider and vote on a
proposed amendment to Commercial's Articles of Incorporation. The amendment
would grant Commercial a right of first refusal with respect to future transfers
of shares of Commercial common stock. This amendment is intended to slow the
growth in the number of our shareholders in the future, thus avoiding or
delaying the need to again register. Approval of the amendment is contingent
upon shareholder approval of the Agreement and Plan of Merger. As a result, the
amendment will not become effective unless the merger is approved and is
effective.
Our Board of Directors has approved the going private transaction and the
amendment and believes they are in the best interest of all Commercial
shareholders. The board recommends that you vote FOR the proposed transaction
and FOR the amendment.
Sincerely,
___________________________
Jeffrey S. Barker
President and Chief Executive Officer
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. WE URGE YOU TO
SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, REGARDLESS OF
WHETHER YOU PLAN TO ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING,
YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON.
COMMERCIAL NATIONAL FINANCIAL CORPORATION
101 North Pine River, P.O. Box 280
Ithaca, Michigan 48847
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of Commercial National Financial
Corporation, a Michigan corporation ("Commercial") will be held at _____:00 a.m.
on _______________, 2005, at the ______________________________,
____________________, Ithaca, Michigan, for the following purposes:
(1) To approve the Agreement and Plan of Merger dated as of November 16,
2004, by and between Commercial and CB Merger Company, a Michigan
corporation ("CB Merger Co."), pursuant to which CB Merger Co. will
merge with Commercial, with Commercial being the surviving
corporation, and each of the transactions contemplated thereby. This
proposal is not contingent on shareholder approval of the amendment
proposal.
(2) To approve an amendment to Commercial's Articles of Incorporation
which would grant Commercial a right of first refusal with respect
to future transfers of shares of Commercial common stock. The
amendment is contingent on shareholder approval of the Agreement and
Plan of Merger.
(3) To transact such other business as may properly come before the
meeting or any adjournments of the meeting.
Only shareholders of record at the close of business on _______________,
2004, are entitled to notice of and to vote at the meeting and any adjournment
of the meeting. As of _______________, 2004, there were __________ shares of
Commercial common stock outstanding.
Those shareholders who will receive cash if the merger is approved are
entitled to dissent and be paid the fair value of their shares by complying with
the procedures detailed in Sections 764 to 772 of the Michigan Business
Corporation Act (see pages 26-28).
Shareholders are cordially invited to attend the meeting in person.
Whether planning to attend the meeting or not, shareholders are urged to
complete, date and sign the enclosed proxy and return it promptly. Any proxy may
be revoked by the person giving it any time before it is voted at the meeting.
Proxies may be revoked by delivering to Patrick G. Duffy, Secretary, 101 North
Pine River, Ithaca, Michigan, 48847, a written notice of revocation bearing a
later date than the proxy, by duly executing and delivering to the Secretary a
subsequently dated proxy relating to the same shares or by attending the meeting
and voting in person (although attendance at the meeting will not in and of
itself constitute revocation of a proxy). The enclosed, addressed envelope
requires no postage if mailed in the United States.
By Order of the Board of Directors,
Patrick G. Duffy, Secretary
Date: _______________, 2004
YOUR VOTE IS VERY IMPORTANT.
PLEASE SIGN, DATE AND RETURN YOUR PROXY PROMPTLY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER OR THE AMENDMENT, PASSED
UPON THE MERITS OR FAIRNESS OF THE MERGER OR THE AMENDMENT OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE INFORMATION DISCLOSED IN THIS NOTICE OF SPECIAL
MEETING OF SHAREHOLDERS AND THE ACCOMPANYING PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRELIMINARY COPY DATED NOVEMBER _____, 2004
COMMERCIAL NATIONAL FINANCIAL CORPORATION
101 North Pine River, P.O. Box 280
Ithaca, Michigan 48847
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
To be held _______________, 2005
GENERAL INFORMATION
This proxy statement and the accompanying notice to holders of common
stock of Commercial National Financial Corporation, a Michigan corporation, are
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors, to be voted at a special meeting of Commercial's shareholders to
be held at __:00 a.m. on _______________, 2005, at the ____________________,
located at ____________________, Ithaca, Michigan, or any adjournment of that
meeting ("Special Meeting"). This proxy statement and accompanying proxy card
were first sent or given to shareholders on _______________, 2004.
Holders of record of common stock at the close of business on
_______________, 2004, will be entitled to vote at the Special Meeting on
_______________, 2005, and any adjournment of that meeting. The purpose of the
meeting is to consider and vote on (i) a proposal to approve the Agreement and
Plan of Merger, dated as of _______________, 2004, which will result in the
merger of Commercial and CB Merger Company, a newly-formed subsidiary of
Commercial organized for the sole purpose of facilitating this proposed
transaction; (ii) a proposal to approve an amendment to Commercial's Articles of
Incorporation; and (iii) any other business that may properly come before the
meeting or any adjournments of the meeting. The Agreement and Plan of Merger is
attached to this proxy statement as Appendix A. The text of the proposed
amendment is attached to this proxy statement as Appendix B.
Pursuant to the Agreement and Plan of Merger, CB Merger Company will merge
with and into Commercial, with Commercial continuing as the surviving
corporation after the merger. If Commercial shareholders approve the Agreement
and Plan of Merger, each shareholder owning fewer than 4,000 shares of common
stock immediately before the effective time of the merger will be entitled to
receive $12.50 per share in cash, without interest, and each shareholder owning
4,000 or more shares immediately before the effective time of the merger will
continue to hold the same number of shares after the merger and will not receive
any cash. The proposed amendment would prohibit future transfers of common stock
unless the transferee shareholder first offers to sell the shares he or she
would like to transfer, to Commercial. The proposed amendment is contingent on
shareholder approval of the Agreement and Plan of Merger.
The merger will be effective when Commercial files a certificate of merger
with the Michigan Department of Labor and Economic Growth or as otherwise
specified in the certificate of merger. After the effective time of the merger,
Commercial anticipates it will have fewer than 300 shareholders of record. As a
result, Commercial would be able to terminate the registration of its common
stock under the Securities Exchange Act of 1934 and eliminate significant
related expenses.
This document provides you with detailed information about the merger and
the proposed amendment. Please see "Where You Can Find More Information" on
page 38 for additional information about Commercial on file with the Securities
and Exchange Commission.
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SUMMARY TERM SHEET
This Summary Term Sheet, together with the "Questions and Answers,"
following this Summary Term Sheet, briefly describe the material terms of the
merger and the amendment. To fully understand the proposed merger and amendment,
we encourage you to carefully read the entire proxy statement and all of its
appendices. The actual terms of the merger are found in the Agreement and Plan
of Merger, which is attached to this proxy statement as Appendix A. The text of
the proposed amendment is located in Appendix B. For your convenience, we have
directed your attention in parentheses to the locations in this proxy statement
where you can find a more complete discussion of each item listed below.
- - The merger would result in a reduction in the number of Commercial
shareholders of record. This reduction is expected to permit Commercial to
terminate the registration of its common stock under the Exchange Act.
(See pages 24 and 25.)
- - The merger would be effective when a certificate of merger is filed with
the Michigan Department of Labor and Economic Growth, or as otherwise
specified in the certificate of merger. Commercial intends to file the
certificate of merger promptly following shareholder approval of the
merger proposal. (See page 23 and 24.)
- - Each Commercial shareholder who owns 4,000 or more shares of common stock
immediately prior to the effective time of the merger will continue to
hold the same number of shares as a result of the merger. (See pages
20-23.)
- - Continuing Commercial shareholders following the effective time will not
be entitled to any cash payment as a result of the merger. (See pages
20-23.)
- - Each Commercial shareholder who owns fewer than 4,000 shares of common
stock immediately prior to the effective time of the merger will be
entitled to receive only cash, without interest, in the amount of $12.50
for each share of common stock held immediately prior to the effective
time. (See pages 20-23.)
- - Following the effective time of the merger, shareholders who are entitled
to be paid cash for their shares will no longer be shareholders of
Commercial. (See page 20.)
- - Each Commercial shareholder who owns fewer than 4,000 shares of common
stock immediately prior to the effective time of the merger may elect to
dissent from the merger. (See pages 26-27.)
- - The Company intends to finance the merger through a combination of working
capital and funds received through the proceeds of the sale by Commercial
of trust preferred securities. (See page 24.)
- - As a result of the merger, Commercial anticipates that it will be able to
terminate the registration of its common stock under the Exchange Act.
This means Commercial would no longer publicly file financial information
nor incur the burdens, risks and expense associated with being subject to
this act. (See pages 24 and 25.)
- - Following the completion of the merger, Commercial's common stock may
continue to be quoted in the OTC Bulletin Board or Commonly referred to as
Pink Sheets, however, the public would have less access to information
about Commercial. (See pages 37 and 38.)
- - Commercial's directors and officers may have, or appear to have, a
conflict of interest in voting for and recommending the approval of the
merger. (See pages 15.)
- - The merger may be taxable to those shareholders who receive cash for their
shares. These shareholders are expected to recognize gain or loss for
federal, and possibly state and local, income tax purposes when they
receive cash for their shares. They will generally recognize gain or loss
equal to the difference between the
amount of cash received and their tax basis in their shares of common
stock. THESE SHAREHOLDERS SHOULD CONSULT THEIR PERSONAL TAX ADVISORS FOR A
FULL UNDERSTANDING OF THE MERGER'S CONSEQUENCES. (See pages 28 and 29.)
- - Commercial's financial advisor, Donnelly Penman & Partners, has given the
Board of Directors a written opinion dated November 17, 2004, that states
the cash consideration to be paid to shareholders who receive cash is fair
from a financial point of view. (See pages 15-20.) A copy of this opinion
is attached to this proxy statement as Appendix C.
- - The amendment will not take effect unless the shareholders approve the
merger. (See pages 30.)
- - The proposed amendment is expected to help slow the growth in the number
of shareholders, thus avoiding or delaying the need to again register the
common stock under the Exchange Act. The amendment would be effective when
Commercial files a certificate of amendment with the Michigan Department
of Labor and Economic Growth. Commercial intends to file the certificate
of amendment promptly following shareholder approval of the amendment
proposal. The amendment is contingent on shareholder approval of the
Agreement and Plan of Merger. (See pages 30 and 31.)
- - THE BOARD OF DIRECTORS HAS DETERMINED THAT THE PROPOSED MERGER AND
AMENDMENT ARE EACH SUBSTANTIVELY AND PROCEDURALLY FAIR TO AND IN THE BEST
INTERESTS OF COMMERCIAL AND ITS SHAREHOLDERS, INCLUDING ALL UNAFFILIATED
SHAREHOLDERS. THE BOARD HAS ALSO DETERMINED THAT THE PRICE OF $12.50 PER
SHARE PAID TO THOSE HOLDERS RECEIVING CASH FOR THEIR SHARES AFTER THE
EFFECTIVE TIME IS A FAIR PRICE.
- - YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE AGREEMENT AND
PLAN OF MERGER PROPOSAL AND FOR THE AMENDMENT PROPOSAL.
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS. The
forward-looking statements are based on management's beliefs, assumptions,
current expectations, estimates and projections about the merger, the Agreement
and Plan of Merger, the proposed amendment, Commercial itself, the economy and
the banking industry generally. Words such as "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "is likely," "plans,"
"predicts," "projects," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("risk factors") that are difficult to predict with regard to
timing, extent, likelihood and degree of occurrence. Actual results and outcomes
may materially differ from what may be expressed or forecasted. Risk factors
include, but are not limited to, changes in banking laws and regulations;
changes in securities and tax laws; changes in governmental and regulatory
policy; changes in the national and local economy; changes in costs and other
assumptions used in forecasting management's expectations concerning the costs
and cost savings associated with the merger; the ability of Commercial to
implement effectively the merger; and the ability to and speed with which
Commercial may achieve all cost savings anticipated from the merger. These are
representative of the risk factors that could cause a difference between an
ultimate actual outcome and a forward-looking statement.
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QUESTIONS AND ANSWERS
The questions and answers below are a summary of items described in this
proxy statement. To fully understand the merger and the amendment, you are
encouraged to read carefully the entire proxy statement.
WHY DID THE COMPANY SEND ME THIS PROXY STATEMENT?
We sent you this proxy statement and the enclosed proxy card because the
Company's Board of Directors is soliciting your vote for use at the Special
Meeting of Shareholders to be held at the time and place, and for the purposes,
set forth in the Notice of Special Meeting of Shareholders. This proxy statement
summarizes information that you need to know in order to cast an informed vote
at the meeting. However, you do not need to attend the meeting to vote your
shares. Instead, you may simply complete, sign and return the enclosed proxy
card in the envelope provided.
WHAT IS THE TIME AND PLACE OF THE SPECIAL MEETING?
The meeting will be held at __________ in Ithaca, Michigan, at _____:00
a.m. local time, on _______________, 2005.
WHO MAY BE PRESENT AT THE SPECIAL MEETING AND WHO MAY VOTE?
All holders of Company common stock may attend the meeting in person.
However, only holders of record of Company common stock as of the close of
business on _______________, 2004 may cast their votes in person or by proxy at
the meeting.
WHAT DO I NEED TO DO NOW?
Please sign, date and complete the enclosed proxy card and promptly return
it in the enclosed, self-addressed, prepaid envelope so that your shares can be
represented at the meeting.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker will vote your shares for you only if you instruct your broker
how to vote for you. Your broker should mail information to you that will
explain how to give these instructions.
CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes, Just mail to Patrick G. Duffy, the Company's Secretary, a written
revocation or a later-dated, completed and signed proxy card before the meeting
or simply attend the meeting and vote in person.
WHAT IF I DON'T SEND BACK A PROXY CARD OR VOTE MY SHARES IN PERSON AT THE
SPECIAL MEETING?
If you don't return your proxy card or vote your shares in person at the
meeting, each of those shares will be treated as not present at the meeting and
will have the same effect as a vote against the merger and the amendment.
WHY HAS THE BOARD OF DIRECTORS CHOSEN THIS COURSE OF ACTION?
The Board of Directors has recommended the merger so that Commercial will
no longer incur the burdens, risks and expense associated with its obligations
as a reporting company under the Exchange Act.
WHAT IS A MERGER?
A merger is a mechanism by which two companies are effectively combined
into a single, surviving company. One company "survives" (i.e., exists
following) a merger. Commercial will be the company that survives the proposed
merger.
WHEN WILL THIS HAPPEN?
If the shareholders approve the merger and the amendment, the effective
time of the merger and the amendment is expected to be shortly after the Special
Meeting of Shareholders.
WHAT IS "GOING PRIVATE?"
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The term "going private" is used within this proxy statement to mean the
transformation of Commercial from a company that is obligated to file detailed,
periodic reports and comply with other requirements under the Exchange Act (a
"reporting company") to a company with less than 300 shareholders that is no
longer subject to those requirements. This transformation will take place after
the effective time of the merger. Commercial has decided to go private to
eliminate the burdens, risks and expense associated with being a reporting
company.
WHAT WILL HAPPEN IF I OWN FEWER THAN 4,000 SHARES?
Shareholders who own fewer than 4,000 shares immediately prior to the
effective time of the merger will, as a result of the merger, no longer be
shareholders of Commercial. This means that they will no longer have voting
rights or the right to receive dividends or distributions from Commercial. They
will be paid $12.50 in cash for each pre-merger share they held.
WHAT IF I OWN 4,000 OR MORE SHARES?
Shareholders who own 4,000 or more shares immediately prior to the
effective time of the merger will continue to hold the same number of shares
following the effective time of the merger. These shareholders will not receive
cash in connection with the merger.
WHAT IF I HOLD MY SHARES IN STREET NAME?
Any shares you hold in street name will be added to the number of any
shares you may hold directly in record name in determining the number of shares
you hold. You will be entitled to retain your Commercial common stock as a
result of the merger only if you certify to Commercial that the total number of
shares of common stock you hold (whether of record or in street name) is 4,000
or more. The Agreement and Plan of Merger has detailed provisions regarding the
treatment of shares held in street name. You should read the discussion under
"THE TRANSACTION - Material Terms" on pages 20-22 for a description of these
provisions as well as the terms of the Agreement and Plan of Merger.
HOW WILL I RECEIVE MY CASH FOLLOWING THE MERGER?
After the effective time of the merger, Commercial will send transmittal
documents to former shareholders entitled to receive cash. These documents
explain how you should turn in your old share certificates in exchange for cash.
If applicable, Commercial will pay you for your old shares after you have
surrendered your old share certificates.
SHOULD I SEND IN MY SHARE CERTIFICATES NOW?
No. After the merger is complete, Commercial will send written transmittal
materials for surrendering share certificates to persons who own fewer than
4,000 shares of common stock immediately before the effective time of the
merger.
WILL THE MERGER AFFECT COMMERCIAL BANK?
No. The Bank will continue to operate as a wholly owned subsidiary of
Commercial following the merger.
WHAT IS THE PURPOSE OF THE AMENDMENT?
The amendment will allow Commercial to slow the growth of its shareholder
base by requiring a shareholder who would like to transfer his or her shares to
first offer to sell the shares to Commercial.
IF I HAVE ADDITIONAL QUESTIONS, WHO CAN I CONTACT?
If you have additional questions regarding the proxy, this proxy
statement, the merger, the amendment or related matters, you should contact:
Jeffrey S. Barker, President and CEO of the Company at (989) 875-4144.
SPECIAL FACTORS
REASONS FOR THE MERGER
The Board of Directors believes that the benefits derived by Commercial
National Financial Corporation (the "Company" or "Commercial") and its
shareholders from being a reporting company are outweighed by the substantial
burdens, risks and expense associated with being a reporting company. The
purpose of the proposed merger (the "Merger") with CB Merger Company ("CB Merger
Co.") is to permit the Company to terminate the registration of its common stock
(the "Common Stock") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and thus eliminate its reporting and other obligations under the
Exchange Act. The Merger is expected to make that possible by causing the
Company to have fewer than 300 shareholders of record.
Management estimates that being subject to the Exchange Act presently
causes the Company to incur incremental expense for legal, accounting and other
direct and indirect costs. Estimated expenses for calendar 2004 associated with
being a reporting company are expected to be approximately $96,000 and for 2005
$362,000. Costs for 2003 were approximately $85,832. See "THE TRANSACTION -
Termination of Exchange Act Registration" (pages 24 and 25).
Passage of the Sarbanes-Oxley Act of 2002 (the "Act") has subjected, and
will subject, the Company and its directors and officers to additional burdens,
risks and expense that are substantial in scope. The new corporate governance,
accounting, internal control and liability provisions of the Act, while arguably
appropriate for large public companies, are believed by the Board of Directors
to place a disproportionately high burden on the management and financial
resources of relatively small companies such as Commercial. Bank holding
companies and banks, such as the Company and its subsidiary, are already subject
to a comparatively high degree of supervision, regulation and examination by
state and federal bank regulatory agencies. Bank regulatory requirements are in
some cases similar to those of the Act.
The Company would be able to terminate the registration of its Common
Stock and relieve itself of some of the legal duties, risks and expense
associated with being a reporting company if it had fewer than 300 shareholders
of record. See "THE TRANSACTION - Termination of Exchange Act Registration"
(pages 24 and 25). As of October 1, 2004, the Company had 696 shareholders of
record. Of those shareholders, approximately 536 shareholders own fewer than
4,000 shares. The shares held by holders of fewer than 4,000 shares represent in
the aggregate approximately 702,476 shares, or 17.1% of the Company's
outstanding shares. Ownership of the 82.9% of the Company's shares held by
holders of 4,000 or more shares is well dispersed, with one shareholder
beneficially owning 7.41% of the shares and no other single shareholder
beneficially owning more than 5% of the shares.
The Board of Directors recognizes and has carefully considered the
possibility that some owners of fewer than 4,000 shares would prefer to keep
their shares. The Board of Directors is mindful of the fact that some of its
smaller shareholders are both shareholders and Commercial Bank (the "Bank")
customers of long standing. It is expected that some owners of fewer than 4,000
shares will be able to retain their shares by acquiring additional shares or
consolidating family holdings so that they own 4,000 or more shares. The Board
of Directors sincerely regrets the fact that some smaller shareholders who would
prefer to retain their shares will be paid cash for their shares. The Board of
Directors selected the price to be paid for shares in the Merger, which exceeds
recent reported transaction prices, in part with the intention of compensating
small shareholders for having their shares purchased against their wishes.
CB Merger Co. is a wholly owned subsidiary of the Company and was
organized solely for the purpose of facilitating the Merger. As a result CB
Merger Co.'s purpose and reasons for engaging in the Merger are the same as
those set forth above.
EFFECTS OF THE MERGER
The Merger is a going private transaction because it is intended to and,
if completed, will likely enable the Company to terminate the registration of
its Common Stock and thus eliminate the Company's reporting requirements and the
other burdens, risks and expenses associated with being a reporting company
under the Exchange Act. As a result of the Merger, it is expected that the
Company will no longer be subject to the provisions of the Act or the liability
provisions of the Exchange Act. In addition, officers of the Company will no
6
longer be required to certify the accuracy of the Company's financial
statements. For more information regarding this registration termination and
associated effects, see "THE TRANSACTION - Termination of Exchange Act
Registration" (pages 24 and 25). The Merger has been structured with the
expectation that upon consummation of the Merger the Company will have fewer
than 300 recordholders of its shares of Common Stock. The Company organized CB
Merger Co. solely to facilitate the Merger. CB Merger Co. will be merged with
and into the Company pursuant to the terms of the Agreement and Plan of Merger
(the "Plan of Merger"). The Company will be the surviving corporation to the
Merger; CB Merger Co. will cease to exist following the Merger and its
outstanding shares of common stock (all of which are held by the Company) will
be cancelled for no consideration. The Merger will be effective when Commercial
files a certificate of merger with the Michigan Department of Labor and Economic
Growth or as otherwise specified in the certificate of merger (the "Effective
Time").
The Merger is expected to benefit the Company by reducing the burdens,
risks and expenses associated with being a reporting company. However, the
Merger is also expected to have adverse effects. While the Common Stock would
likely continue to be traded on the OTC Bulletin Board or Commonly referred to
as Pink Sheets, shareholders would have decreased access to information about
the Company. Those shareholders being cashed-out may not wish to do so and would
not have the opportunity to participate in the Company's future growth and
earnings (if any). The Merger may negatively affect the goodwill of some of the
Bank's customers. See "SPECIAL FACTORS - Fairness; Recommendation of Board of
Directors" (pages 10-15).
If completed, the Merger will have the following effects.
Shareholders Owning Fewer than 4,000 Shares. Each share of Common Stock
owned by a shareholder who owns fewer than 4,000 shares immediately prior to the
Effective Time will be converted, pursuant to the terms of the Plan of Merger,
into the right to receive a cash payment of $12.50 per share. As of the
Effective Time, holders of these shares will have no further interest in the
Company. These shareholders will not have to pay any service charges or
brokerage commissions in connection with the Merger or the cash payments to
them, unless a bond is required in the event of a lost stock certificate.
Shareholders Owning 4,000 or More Shares. Each share of Common Stock owned
by a shareholder who owns 4,000 or more shares immediately prior to the
Effective Time will remain outstanding and continue to represent one share of
Common Stock following the Merger.
Beneficial owners of shares held in "street name." Some beneficial owners
of shares hold shares in accounts with banks, brokerage firms and other
investment institutions. Typically, shares held in such accounts are registered
in the name of the bank, broker, investment institution, or in the name of its
depository or nominee. Shares held in this way are referred to as shares held in
"street name". Typically, these institutions co-mingle the shares held for
multiple customers and hold all of them registered in the name of a depository
nominee. The right to retain stock or receive cash as a result of the Merger
will be determined with reference to the sum of the shares a shareholder holds
in street name plus the number of shares held directly in record name as of the
Effective Time. See "THE TRANSACTION - Material Terms" (pages 20-22).
BACKGROUND OF THE MERGER PROPOSAL
Of Commercial's approximately 696 current record shareholders,
approximately 536, or approximately 77.0%, hold fewer than 4,000 shares.
Collectively, the approximately 536 record holders of Common Stock holding fewer
than 4,000 shares own an aggregate of approximately 702,476 shares of Common
Stock, representing approximately 17.1% of the outstanding shares of Common
Stock. The Board of Directors and Company's management are of the view that the
recurring expense and burden of maintaining so many relatively small shareholder
accounts, coupled with the costs and regulatory burden associated with
maintaining registration of the Common Stock under Section 12 of the Exchange
Act, is not cost efficient for Commercial.
7
The Common Stock is not listed on any national securities exchange but
rather is traded on the OTC Bulletin Board or Commonly referred to as Pink
Sheets. To the knowledge of the Board of Commercial there are less than 8 market
makers in Commercial common stock. Accordingly, there is very limited trading of
the Common Stock, which may be due, in part, to the relatively few number of
holders owning Common Stock. Approximately 23.3% of the Common Stock is
beneficially owned or controlled by the executive officers and directors of
Commercial. This limited trading market has not allowed Commercial shareholders
to recognize the primary benefit which should be available to shareholders of a
publicly traded company, which is the ability to buy and sell stock in a liquid
market in which accurate and timely pricing information is readily available.
Although Commercial shareholders are provided some benefit due to
Commercial being a publicly traded company, the Board of Commercial has
determined that compliance with increasingly stringent reporting and auditing
requirements provides many disadvantages to off-set this benefit. As a
"reporting company" under the Exchange Act, Commercial is obligated to prepare
and file with the SEC annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and proxy statements that comply with Section
14 of the Exchange Act, in addition to other reports and forms from time to
time. In the wake of the Enron and WorldCom scandals, Commercial is subject to
increased and constantly changing regulatory requirements under the Act.
Compliance with these SEC reporting and audit requirements and increased
regulatory restrictions diverts the time of senior management and financial
staff from other Commercial business. Also, as a result of these increased and
changing legislative requirements, outside legal, auditing and accounting costs
continue to rise and are anticipated to continue to rise in the future.
The time that Commercial's management spends on preparation of required
reports and compliance with the new SEC regulations could be more productively
spent on other business matters that bear a more direct relationship to
Commercial's operations and profitability. The Company believes that becoming a
private company will enhance Commercial's operating flexibility and resources to
focus upon the long-range plans for Commercial and the needs of its customers.
Also, due to Commercial's status as a financial holding company which owns a
state chartered commercial bank, it will continue to be extensively regulated
under other federal and state laws. The Company will continue to be subject to
periodic reporting requirements and inspections from certain regulatory
agencies, including the Federal Deposit Insurance Corporation, the Board of
Governors of the Federal Reserve and the Office of Financial and Insurance
Services of the State of Michigan.
Based on the recommendation of Commercial's management, the Board
determined to consider the possibility of becoming a private company. On
September 28, 2004, the Board of Directors met with its general counsel and a
representative of Plante & Moran, LLP, to discuss the Act in more detail and to
discuss the issue of remaining public or "going private". All the directors were
present. Commercial's general counsel led the discussion and presented a
memorandum concerning the going private process and various issues and
considerations related to that process. This memorandum offered the positives
and negatives of remaining a public corporation; as well as the various methods
of reducing the number of recordholders pursuant to a going private transaction.
The representative of Plante & Moran attended the meeting to discuss Section 404
of the Act. Plante & Moran is the Company's internal audit firm and the Company
intended to engage them to assist in the review and implementation of Section
404. At that meeting, the representative of Plante & Moran made a presentation
on the requirements, process, and costs of a program which would lead to
compliance with Section 404 of the Act. Such a program would require evaluation,
documentation and assessment of the Company's internal control over financial
reporting to support management's certification on internal control over
financial reporting and the independent auditor's attestation on management's
assessment which would be required in 2005 under SEC rules adopted under Section
404 of the Act. The chief financial officer presented a spreadsheet showing the
estimated cost for the Company to remain public. This included the estimated
costs of compliance with Section 404 of the Act. The chief financial officer
also provided a report on the number of record shareholders and the breakdown of
shareholders by number of shares held. Extensive discussion followed on going
private. At the conclusion of that meeting, the Board authorized management to
further analyze a possible going private transaction and to obtain additional
information on the process and costs of going private.
8
At the Board of Directors meeting on October 20, 2004, management
presented its report on the further exploration of a going private transaction.
Written materials, including a memorandum prepared by general counsel, were
distributed and reviewed in advance. There was an extensive discussion of the
feasibility, legal and regulatory requirements, procedural issues and timeline
for a possible going private transaction by the Company. There was also a
discussion of the Board's fiduciary duties to the Company and its shareholders,
fairness issues, the approximate cost of a possible going private transaction,
and possible effects of such a transaction on the Company and its remaining
shareholders.
At that meeting, after extensive discussion, the Board of Directors
authorized Commercial's officers to further investigate the feasibility and
advisability of a merger transaction which would permit the Company to
discontinue its registration under the Exchange Act; to select, engage and incur
expenses for financial advisors, accountants, and legal professionals; to make a
presentation to the full Board on its findings and recommendations; and to
formulate and present specific proposals for later action by the Board of
Directors on such a transaction.
On November 11, 2004, all Board members, except Howard D. Poindexter,
attended a regularly scheduled board meeting. The officers of the Company and
general counsel presented to the Board of Directors a proposed merger
transaction intended to reduce the number of shareholders to a level which would
permit it to terminate its SEC reporting obligations. The officers presented
estimates of the direct and indirect costs to the Company of remaining a
registered company. The Board agreed that the burden on management and the
expense of the SEC reporting and other filing obligations outweighed any benefit
from the SEC registration.
Donnelly Penman & Partners presented a valuation report and opinion at the
November 11 meeting, a detailed description of an updated version of which is
contained in this proxy statement under the caption "Opinion of Financial
Advisor." Donnelly Penman & Partners explained the detailed procedures performed
and the financial analyses supporting the range of values. The board members
discussed the different factors involved in these procedures and Donnelly Penman
& Partners described the assumptions utilized in its valuation report.
Discussion took place, the substance of which is described in this proxy
statement under the caption "SPECIAL FACTORS - Fairness; Recommendation of Board
of Directors" (pages 10-15). The Board of Directors received from Donnelly
Penman & Partners a written opinion that, as of November 11, 2004, the fair
market value of the Company's common stock was $12.01 per share.
After considerable discussion, the Board of Directors unanimously voted in
favor of proceeding with the proposed "going private" merger transaction. The
Board reviewed the shareholder records and determined that shareholders owning
fewer than 4,000 shares should have their shares converted into the right to
receive cash in the Merger. In approving the Merger transaction, the Board took
into consideration the fact that, because shareholders would be aware of the
4,000 share cutoff for participating in the Merger, small shareholders who would
still prefer to remain as shareholders of Commercial, despite the Board's
recommendation, could elect to do so by acquiring sufficient shares so that they
would own at least 4,000 shares immediately prior to the Effective Time of the
Merger. This would allow a small shareholder to have some control over the
decision as to whether to remain a continuing shareholder after the Merger, or
to be a non-continuing shareholder and receive a cash payment for their shares.
The Board of Directors determined that $12.50 per share would be paid for
the shares of Common Stock converted to the right to receive cash in the Merger
and that the proposed merger transaction would be fair to the Company and its
shareholders (including unaffiliated shareholders).
At the November 11th meeting, the Board received the oral opinion of
Donnelly Penman & Partners that the $12.50 per share price was fair, from a
financial point of view, to shareholders owning fewer than 4,000 shares, who
would receive cash in the merger. Donnelly Penman & Partners later delivered a
written fairness opinion confirming its oral opinion. This opinion is presented
in Appendix C to this proxy statement.
9
At the November 11th meeting, the Board reviewed a proposed Agreement
and Plan of Merger and unanimously approved resolutions adopting the Plan of
Merger, authorizing management to proceed with the merger transaction and to
seek shareholder approval of the merger proposal. Legal counsel presented a
draft proxy statement and transaction statement on Schedule 13E-3 and discussed
the necessary SEC disclosures. The Board approved the form of proxy statement
and Schedule 13E-3 and authorized management to make all necessary filings with
the SEC or otherwise to consummate the proposed going private transaction. Each
director indicated his intent to vote as a shareholder in favor of the Plan of
Merger.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
APPROVAL OF THE PLAN OF MERGER AND "FOR" APPROVAL OF THE AMENDMENT.
FAIRNESS; RECOMMENDATION OF BOARD OF DIRECTORS
The structure and terms of the Merger were determined by current
management and the Board of Directors. The Board of Directors consists of eleven
persons, nine of whom are independent directors, and only two of whom are
officers of the Company. The Board retained Donnelly Penman & Partners, an
independent financial advisor experienced in the financial analysis and
valuation of financial institutions, to value the Common Stock. The cash
consideration to be paid for the Common Stock under the Merger was determined by
the Board of Directors, in part, based on Donnelly Penman & Partners' valuation
report.
Based in part on the valuation report and fairness opinion prepared by
Donnelly Penman & Partners and the considerations set forth below, the Board of
Directors has determined and reasonably believes that the Plan of Merger
proposal is in the best interests of, and substantively and procedurally fair
to, the Company and its shareholders (including the unaffiliated shareholders)
and that the Merger consideration of $12.50 per share payable to the
shareholders who will receive the cash in the Merger is fair to those
shareholders. Accordingly, the Board of Directors, including all of the
directors who are not employees of the Company or the Bank, unanimously approved
the Merger, and recommends that the shareholders vote in favor of the Merger and
the Plan of Merger. All of the members of the Board of Directors have expressed
an intention to vote in favor of the Plan of Merger, including all of the Board
members who are not employees of either the Company or the Bank.
In reaching its decision to approve the Merger and in making its
recommendation, the Board of Directors considered a number of material factors
as described below.
Positive Factors for Shareholders who Receive Cash in the Merger. The
factors that the Board considered positive for the shareholders who receive cash
in the Merger (including unaffiliated shareholders) included:
- The cash price per share of $12.50 offered in the Merger represents
a premium of $6.39 per share (104.6%) over the September 30, 2004
book value per share of $6.11, a premium of $1.25 over the most
recent sale transaction immediately before the Board action of
$11.25 and a premium of $.49 per share (4.1%) over the $12.01 fair
market value determined in the valuation opinion of Donnelly Penman
& Partners.
- The Merger consideration is all cash, which provides certainty of
value to those shareholders and immediate liquidity for the
shareholders who receive cash in the Merger.
- No brokerage or other transaction costs are to be incurred by
shareholders who receive cash in the Merger, unless a bond is
required in the event of a lost stock certificate.
Positive Factors for Remaining Shareholders. The factors that the Board
considered as positive for the shareholders who will remain shareholders
following the Merger, including unaffiliated shareholders, included:
10
- Remaining shareholders would realize the potential benefits of the
termination of the registration of the Common Stock under the
Exchange Act, including reduced expenses as a result of
deregistration with the SEC.
- Remaining shareholders would have the opportunity to participate in
the Company's future growth and earnings, if any.
- The Merger is expected to result in accretion to net income,
earnings per share and return on equity; this is a function of the
decrease in the number of shares of Common Stock as a result of the
Merger as well as cost savings.
- Remaining shareholders would not be required to pay income taxes as
a result of the Merger.
Negative Factors for Shareholders Receiving Cash in the Merger. The
factors that the Board considered negative for the shareholders who would
receive cash in the Merger (including unaffiliated shareholders) included:
- These shareholders would not have the opportunity to participate in
the Company's future growth and earnings, if any.
- These shareholders will not be able to sell their shares at a time
and for a price of their choosing.
- These shareholders may be required to pay income tax on the receipt
of cash in the Merger.
Negative Factors for Remaining Shareholders. The factors that the Board
considered negative for the shareholders who will retain their shares in the
Merger, including all unaffiliated shareholders, included:
- The Merger may negatively affect goodwill of certain of the Bank's
customers.
- After the Common Stock is deregistered, the shareholders will have
decreased access to information about the Company.
- Donnelly Penman & Partners valuation opinion, on which the Board
relied, did not utilize a marketability or minority interest
discount for its analyses.
- The remaining shareholders, following the Merger, will have
restrictions on their ability to transfer shares of Common Stock
because (i) the shares will be tradable only in privately-negotiated
transactions, and there will not be a public market for the Common
Stock, although, based on the historically low trading volume, this
factor is expected to have a limited impact; and (ii) assuming the
amendment to the Company's Articles of Incorporation is approved,
Commercial will have a right of first refusal with respect to future
transfers of shares.
Although the Board considered the negative factors described above, it
concluded that the benefits of the positive factors outweighed the detriments of
the negative factors and that the proposed transaction was substantively and
procedurally fair to and in the best interest of the Company's shareholders,
including unaffiliated shareholders.
Fair Price Considerations. The Board of Directors selected a price of
$12.50 per share as the amount to be paid to shareholders who receive cash for
their shares of Common Stock as a result of the Merger. The Board of Directors
selected a price that it believed to be in excess of the fair market value of
the shares, intending to at least partially compensate shareholders who receive
cash for the fact that they are being required to dispose of their shares when
some would probably prefer to keep their shares and that shareholders who
receive cash would probably incur some tax as a result of the Merger.
11
The Board of Directors considered the following factors when selecting the
purchase price and determining that it is fair:
- Donnelly Penman & Partners' valuation opinion that the fair market
value of shares of Common Stock was $12.01 per share as of November
11, 2004. The Board adopted, as part of its analysis, the analyses
of Donnelly Penman & Partners.
- There is a limited trading market for the Common Stock and not all
transactions in the Company's stock are reported to the Company.
- Prices in stock sale transactions reported to the Company in the
third quarter of 2004 ranged from $12.00 to $10.75 per share;
historical prices since January 1, 2002 ranged from $14.28 to $8.84
per share. To the Board's knowledge, the most recent transaction
involving the Common Stock prior to the November 11, 2004 Board of
Directors meeting was for $11.25 per share.
- The net book value of the Common Stock was $6.11 per share at
September 30, 2004.
- The perceived going concern value of the Company, as provided by
Donnelly Penman & Partners, was $12.01 per share.
- The Company repurchased shares during 2004 at an average price of
$11.30 per share.
- The Company has not received any offers during the last two years
for mergers or acquisitions of the Company or its assets or a
controlling interest in the Company's stock.
The Board of Directors did not consider the liquidation value of the
Company when selecting the purchase price. The Board of Directors did not
consider a liquidation analysis as a relevant factor because given the level of
regulation in the banking industry, the liquidation of a bank or discontinuance
of a bank's operations is an extremely unlikely event; the valuation opinion
provided by the financial advisor assumed, as one method of analysis, the sale
of the Company as a "whole" rather than in parts through a liquidation or
dissolution; and neither the Company's management nor the board has any
intention of liquidating the bank.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE PURCHASE PRICE
OF $12.50 PER SHARE IS A FAIR PRICE.
Fair Process Considerations. Based on a careful review of the facts and
circumstances relating to the Plan of Merger, the Board of Directors believes
that the Merger and the terms and provisions of the Merger, including the cash
paid to shareholders owning less than 4,000 shares, are substantively and
procedurally fair to the Company's unaffiliated shareholders. The Plan of Merger
was unanimously approved by the Board of Directors.
In concluding that the Plan of Merger, including the cash to be paid to
shareholders owning less than 4,000 shares, is procedurally fair to unaffiliated
shareholders, the Board considered a number of factors. The factors the
Company's Board of Directors considered, included the following:
- Because the proposed transaction is a merger of the Company and a
wholly-owned subsidiary of the Company, Michigan law would have
allowed the Board of Directors to approve the Plan of Merger without
a vote of shareholders. The Board of Directors has chosen to submit
the Plan of Merger to the shareholders for approval and has
conditioned the Merger on approval of the Plan of Merger by holders
of a majority of the issued and outstanding shares of Common Stock.
- The Board of Directors has included in the Plan of Merger a
provision that will give shareholders who receive cash in the Merger
the right to dissent from the Merger and petition a court to
12
determine the fair value of their shares. This right would not have
been available to shareholders in this transaction if the Board of
Directors had not chosen to include it. (Shareholders considering
exercising this right are cautioned, however, that exercising this
right is likely to entail certain costs and risks, and such
shareholders should carefully consider the full discussion of
dissenter's rights appearing on pages 26-27.)
- Shareholders who are expected to receive cash in the Merger
represent approximately 17.1% of the Common Stock. Because of the
small percentage of shares being cashed out in the Merger, the Board
concluded that having an unaffiliated representative to act solely
on behalf of shareholders who are not directors or officers of
Commercial was not necessary to assure fairness.
- The Company's Board of Directors is primarily comprised of
independent members, and, accordingly, there was no need to form a
special committee or retain any unaffiliated representative(s) to
represent unaffiliated shareholders, as the Board was able to
adequately balance the competing interests of the non-continuing
shareholders and the continuing shareholders in accordance with
their fiduciary duties. Although Board members do own stock in
Commercial, the 4,000 share cutoff set in the Plan of Merger was
determined without regard to the directors' share ownership, and as
this represented the sole potential conflict of interest and the
Board members will be treated identically to all other shareholders
in the Merger, the Board did not feel that any additional
protections that may be afforded by a special committee would be
significant.
- The Board obtained a valuation report and fairness opinion from an
independent third party concerning the Common Stock, and the Board
imposed no limitations upon Donnelly Penman & Partners with respect
to the investigation made or procedures followed in rendering its
valuation report and fairness opinion.
- The Board retained and received advice from legal counsel in
evaluating the terms of the Merger.
The Board is aware of, and has considered, the impact of the following
potentially countervailing factors on the procedural fairness of the proposed
Merger:
- Although the interests of those shareholders who own fewer than
4,000 shares are different from the interests of those shareholders
who own 4,000 or more shares and may create actual or potential
conflicts of interest in connection with the Merger, neither the
Board or any of the directors retained an independent, unaffiliated
representative to act solely on behalf of shareholders who own fewer
than 4,000 shares for the purposes of negotiating the terms of the
Plan of Merger or preparing a report concerning the fairness of the
Merger.
- The Merger is not structured to require approval of at least a
majority of the shareholders who will receive cash in the
transaction; however, the Board determined that any such voting
requirement would improperly usurp the power of the holders of a
majority of the Company's outstanding shares to consider and approve
the Plan of Merger as provided in Commercial's Articles of
Incorporation and under Michigan law.
- The only appraisal the Company sought in connection with the Merger
was the valuation report provided by Donnelly Penman & Partners.
- Neither the Company nor CB Merger Co. has made any provision in
connection with the Merger to grant unaffiliated shareholders access
to the Company's or CB Merger Co.'s corporate files or to obtain
counsel or appraisal services for such shareholders at the Company's
or CB Merger Co.'s expense.
13
The Board believes that the foregoing potentially countervailing factors
did not, individually or in the aggregate, outweigh the overall procedural
fairness of the Merger to the Company's unaffiliated shareholders, whether they
own more or less than 4,000 shares of Common Stock, and the foregoing factors
are outweighed by the procedural safeguards previously described. In particular,
with reference to the lack of a special committee, the Board felt that the
consideration of the transaction by the full Board, whose sole conflict of
interest is a relatively insignificant increase in aggregate share ownership
following the Merger and who will be treated identically to unaffiliated
shareholders in the Merger, was a sufficient procedural safeguard that made it
unnecessary to form a special committee or retain an unaffiliated
representative.
Alternatives Considered. The 4,000 share level was chosen by management
and recommended to the Board of Directors based on an analysis of the Company's
shareholder list as of October 1, 2004. Lower share ownership thresholds were
also considered. However, shareholders are free to buy or transfer shares until
the Effective Time. It is expected that some shareholders will acquire
additional shares before the Effective Time through market purchases or other
transactions in order to be an owner of more than the threshold number of shares
and thus remain a shareholder after the Merger. Because the number of
shareholders above the threshold could increase before the Effective Time, it
was necessary to select a threshold sufficiently high to make reasonable
allowance for changes in the composition of the shareholder list without
defeating the purpose of the proposed transaction. Other lower numbers were
considered and rejected as it was believed they would have resulted in an
unacceptably high risk that the transaction would not yield the desired result
of having less than 300 record shareholders.
Commercial's Board of Directors considered the following alternatives to
the Merger format:
- Reverse Stock Split. The Board considered the use of a process known
as a reverse stock split as an alternative to the Merger. A reverse
stock split would have involved a mechanism that proportionately
decreased the number of shares of stock held by shareholders. In a
reverse stock split, shareholders receive one share of stock for
every 4,000 (for example) shares owned; those shareholders holding
only fractional share interests following the split are cashed out.
As a result, there are fewer shareholders. The Board did not choose
this alternative because it would have resulted in a post-split
stock price that would be undesirably high, and because it would
have been necessary to require all remaining shareholders to
surrender their existing stock certificates to be exchanged for new
stock certificates, which would be relatively burdensome for both
shareholders and the Company.
- Tender Offer. The Board also considered making a tender offer to
purchase outstanding shares of Common Stock from the Company's
shareholders. This alternative could have reduced the number of
shareholders through their sale of Common Stock. However, it is
uncertain whether this process would result in the Company having
fewer than 300 shareholders--a threshold that the Company must meet
in order to go private and reduce the burdens associated with being
a reporting company. For this reason, the Board decided not to use
this alternative.
- Maintaining the Status Quo. The Board considered maintaining the
status quo. In that case, Commercial would continue to incur the
significant expenses, as outlined above, of being an SEC-reporting
company without the expected commensurate benefits. Thus, the Board
considered maintaining the status quo not to be in the Company's or
the best interest of unaffiliated shareholders and rejected this
alternative.
The Board of Directors did not consider other methods to reduce expenses
other than going private. Nor did the Board consider the possibility of a third
party buy-out. The Board did not consider these options because (i) these types
of transactions are inconsistent with the narrower purpose of the proposed
transaction, which is to discontinue the Company's SEC reporting obligations;
(ii) it was not aware of other methods of achieving expense
14
reductions that were comparable with those reductions possible through the
Merger; and (iii) no third party expression of interest in acquiring the Company
is presently before the Board.
Other Considerations. It could be argued that directors may have, or
appear to have, a conflict of interest in approving and recommending the
proposed Merger transaction. The transaction will result in a slight increase in
the percentage of ownership of all directors and officers. As a group, directors
and officers own approximately 23.3% of the outstanding shares of Common Stock;
following the Effective Time, the directors and officers would own approximately
28.1% of the shares. However, this benefit is shared proportionally by all
remaining shareholders. In addition, it is expected that the transaction will,
after it is concluded, reduce the risk of litigation and liability to which
directors and officers of public companies are exposed.
The foregoing discussion of the factors considered by the Board of
Directors is intended to discuss in reasonable detail the material factors on
which the Board of Directors relied; it does not necessarily reflect all factors
involved in the process. In view of the variety of factors considered in
connection with their evaluation of the Merger proposal, the Board of Directors
did not find it practicable to, and did not quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination. The Board considered all the factors as a whole in reaching its
determination. In addition, individual members of the Board of Directors may
have given different weights to different factors.
OPINION OF FINANCIAL ADVISOR
The Company engaged Donnelly Penman & Partners to render its report and
opinion with respect to the fair market per share value of the Common Stock for
purposes of evaluating the proposed transaction and the fairness of the proposed
transaction. At the November 11, 2004 meeting of the Board of Directors,
Donnelly Penman & Partners presented a valuation report and opinion that
reflected the fair value per share of the Common Stock as of November 11, 2004
(the "Opinion"), and gave an oral opinion on the fairness of the proposed $12.50
per share price offered in the Merger. Pursuant to the Company's request,
Donnelly Penman & Partners confirmed its oral fairness opinion with a written
fairness opinion dated November 17, 2004, in which it stated that, as of
November 11, 2004, the $12.50 per share price offered in the Merger was fair
from a financial point of view to the Company's shareholders. This fairness
opinion is attached to this proxy statement as Appendix C.
Donnelly Penman & Partners is a regional investment banking firm of
recognized standing. As part of its investment banking services, they are
regularly engaged in the valuation of corporate entities on a stand-alone basis
or in connection with capital raising and merger and acquisition transactions.
No limitations were imposed by the Company upon Donnelly Penman & Partners with
respect to the investigations made or procedures followed by Donnelly Penman &
Partners in rendering its Opinion.
Donnelly Penman & Partners was selected by the Company's management, in
consultation with the Board of Directors. The Board reviewed two proposals from
investment banking firms. Donnelly Penman & Partners was selected based on the
firm's reputation, experience (including particularly the firm's general
experience with community banks in the state of Michigan) and price. No material
relationship has existed during the past two years or is mutually understood to
be contemplated, or compensation received or to be received, as a result of the
relationship between Donnelly Penman & Partners and its affiliates and the
Company and its affiliates except for the engagement described in this proxy
statement. Donnelly Penman & Partners has been paid a fee of $25,000, plus
reimbursement of its expenses, for performing the valuation and providing its
fairness opinion.
In arriving at its Opinion, Donnelly Penman & Partners has:
1. Reviewed the Annual Reports of the Company for the years ended
December 31, 2002 through 2003 as well as interim financial
statements through October 31, 2004;
2. Reviewed the September 30, 2004 Board of Directors report;
15
3. Reviewed the Company's budget for the year ended December 31, 2004
and financial forecast through September 30, 2006;
4. Compared certain financial characteristics of the Company to certain
publicly held companies they deemed relevant;
5. Reviewed current banking industry conditions and trends concerning
the valuation of recent mergers and acquisitions;
6. Conducted discussions with the senior management of the Company
concerning the business and future prospects of the Company;
7. Prepared a discounted dividend analysis of the Company based on a
financial forecast derived from discussions with and deemed
reasonable by management of the Company; and
8. Reviewed such other data, including financial and industry data,
performed such other analyses and taken into account such other
matters as they deemed necessary or appropriate. In connection with
rendering its Opinion to the Company, Donnelly Penman & Partners
performed a variety of financial analyses, which are summarized
below. Donnelly Penman & Partners believes that its analyses must be
considered as a whole and that selecting portions of its analyses
and the factors considered by it, without consideration of all
factors and analyses, could create a misleading view of the analyses
and the processes underlying Donnelly Penman & Partners Opinion.
Donnelly Penman & Partners arrived at its Opinion based on the
results of all the analyses it undertook, assessed as a whole, and
it did not draw conclusions from or with regard to any one method of
analysis. The preparation of a valuation is a complex process
involving subjective judgments and is not necessarily susceptible to
partial analysis or summary description.
Donnelly Penman & Partners did not make or obtain any independent
evaluation, valuation or appraisal of the assets or liabilities of the Company,
nor was it furnished with such materials. Donnelly Penman & Partners has not
reviewed any individual credit files of the Company and has assumed, without
independent verification, that the reported allowances for credit losses are
adequate to cover such losses.
With respect to the comparable company analysis and comparable acquisition
transaction analysis summarized below, no public company utilized as a
comparison is identical to the Company, and such analyses necessarily involve
complex considerations and judgments concerning the differences in financial and
operating characteristics of the financial institutions and other factors that
could affect the acquisition or public trading values of the financial
institutions concerned. The forecasted financial information furnished by the
Company's management contained in or underlying Donnelly Penman & Partners'
analyses is not necessarily indicative of future results or values, which may be
significantly more or less favorable than such forecasts and estimates. The
forecasts and estimates were based on numerous variables and assumptions that
are inherently uncertain, including without limitation factors related to
general economic and competitive conditions. In that regard, Donnelly Penman &
Partners assumed, with the Company's consent, that the financial forecasts had
been reasonably prepared by management on a basis reflecting the best currently
available judgments of management, and that such forecasts will be realized in
the amounts and at the times contemplated thereby.
Estimates of values of financial institutions or assets do not purport to
be appraisals or necessarily reflect the prices at which financial institutions
or their securities actually may be sold. Accordingly, actual results could vary
significantly from those assumed in the financial forecasts and related
analyses. The analyses performed by Donnelly Penman & Partners were assigned a
weighting based on Donnelly Penman & Partners' opinion of their relative
comparability and significance with regard to the specific characteristics of
the Company.
16
In its analyses, Donnelly Penman & Partners made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of the Company. These assumptions
include: the expectation that interest rates will trend gradually upward through
2006 and remain constant thereafter; the expectation that general economic
conditions will neither deteriorate nor improve significantly relative to their
current state; the expectation that no significant industry regulations or
events that would impair the Company's ability to earn income at projected
levels will occur; and the expectation that industry trading and transaction
multiples will not change significantly from current values.
The following is a brief summary of the analyses performed by Donnelly
Penman & Partners in connection with its Opinion:
- - Analysis of Comparable Acquisition Transactions. Donnelly Penman &
Partners analyzed bank acquisition transactions announced and/or completed
since January 1, 2002. Each selling bank had total assets less than $500
million, a positive target net income in the twelve months prior to
acquisition and was headquartered in Michigan, Indiana or Ohio. This
analysis provided an approximate median multiple of 2.288 times price to
book value, 2.289 times price to tangible book value, 21.4 times last
twelve months earnings per share and a premium to core deposit metric of
17.49%. Applying the median multiple for price to book value of 2.288
times to the Company's September 30, 2004 book value per share of $6.09
results in an implied value per share of $13.93 on a control, marketable
basis. Using the same methodology, the values implied by applying the
relevant multiples to the Company's tangible book value per share at
September 30, 2004 of $6.09 and fully diluted earnings per share for the
twelve months ended September 30, 2004 of $.68 were found to be $13.94 per
share and $14.55 per share, respectively. Applying the median premium to
core deposits of 17.49% to Commercial National's $144.3 million in core
deposits as of September 30, 2004 resulted in a calculated value of $25.24
million. When added to Commercial National's book value of $24.94 million
as of September 30, 2004 and divided by the 4,083,278 shares outstanding
at the same date, the result is an implied value per share of $12.27. Core
deposits are defined as all deposits less CDs over $100,000 and brokered
or network deposits.
In this analysis, Donnelly Penman & Partners reviewed the following
transactions, identified by buyer and seller: Sky Financial Group/Prospect
Bancshares, Inc., Croghan Bancshares, Inc./Custar State Bank, Oak Hill
Financial, Inc./Ripley National Bank, Camco Financial Corporation/London
Financial Corporation, Lincoln Bancorp/First Shares Bancorp, Inc.,
Independent Bank Corporation/Midwest Guaranty Bancorp, Inc., Harrodsburg
First Financial Bancorp, Inc./Independence Bancorp, Chemical Financial
Corporation/Caledonia Financial Corporation, Sky Financial Group/GLB
Bancorp, Inc., Citizens First Bancorp, Inc./Metro Bancorp, Inc., Wayne
Bancorp, Inc./Banc Services Corporation, MainSource Financial Group/First
Community Bancshares, Inc., First Capital, Inc./Hometown Bancshares, Inc.,
First Indiana Corporation/MetroBanCorp, First Merchants Corporation/CNBC
Bancorp, and Charter One Financial, Inc./Charter National Bancorp, Inc.
Donnelly Penman & Partners notes that no selling bank reviewed was
identical to the Company and that, accordingly, any analysis of comparable
transactions necessarily involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
parties to the transactions being compared. In addition, Donnelly Penman &
Partners considered the fact that the proposed transaction does not
represent the sale of a control position and the values associated with
the Analysis of Comparable Acquisition Transactions do include a control
premium.
- - Analysis of Selected Comparable Companies. Donnelly Penman compared
selected operating results of Commercial National to a select group of
publicly traded commercial banks headquartered in Michigan, Indiana and
Ohio. The comparable set had total assets of between $150 and $400 million
and last twelve months return on average equity greater than 10.0%. Some
companies meeting these criteria may have been eliminated based on lack of
data as generated by SNL Financial - the source for the comparable
transactions data. The selected group had approximately the following
median values: $280.0 million in
17
total assets, $27.3 million in total equity, a Tier One risk-based capital
ratio of 12.38%, last twelve months return on average assets of 1.18%,
last twelve month returns on average equity of 12.34% and a last twelve
months efficiency ratio of 62.09%. This analysis provided valuation
benchmarks including the median price multiples of 1.838 times book value,
1.864 times tangible book value and 14.7 times last twelve months earnings
per share. Applying the median price to book value multiple to Commercial
National's book value per share as of September 30, 2004 resulted in an
implied per share value of $11.19 on a marketable basis. Using the same
methodology, the implied values provided by application of the relevant
multiples to Commercial National's September 30, 2004 tangible book value
and last twelve months earnings per share were found to be $11.35 per
share and $10.00 per share, respectively.
In this analysis, Donnelly Penman & Partners reviewed the following
companies: Century Financial Corporation (CYFL), Clarkston Financial
Corporation (CKSB), Consumers Bancorp, Inc. (CBKM), County Bank
Corporation (CYBK), F.S. Bancorp (FXLG), Futura Banc Corporation (FUBK),
Heartland Bank (HLAN), Middlefield Banc Corporation (MBCN), Ohio Heritage
Bancorp, Inc. (OHHB), Pavilion Bancorp, Inc. (PVLN), Southern Michigan
Bancorp, Inc. (SOMC) and United Bancorp, Inc. (UBCP).
No bank used in the above analyses as a comparison is identical to the
Company. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies
and other factors that could affect the trading values of the Company and
the banks to which it is being compared.
- - Discounted Dividend Analysis. Donnelly Penman prepared a discounted
dividend stream analysis of Commercial National, which estimated the
future after tax income that the Company might produce over a period from
November 11, 2004 through December 31, 2008. These estimates were derived
from discussions with and deemed reasonable by Commercial National's
management team. The estimates assumed that Commercial National's pre-tax
earnings would grow at a compound annual growth rate of approximately
12.8% throughout the projection period. This assumes that Commercial
National continues to grow their business in their home markets with the
majority of deposit growth coming from the Greenville locations and loan
growth driven by the residential mortgage company. Donnelly Penman has,
with the guidance of management, used the key assumption that the yields
on earning assets grow by 25 basis points in 2005 and 2006 and costs of
deposits and borrowings grow by 12.5 basis points in 2005 and 2006.
Donnelly Penman further assumed, with management's guidance, that the
Company would make dividend payouts equal to 70% of earnings through the
projection period, which is approximately consistent with the historical
dividend policy. The resulting dividends were then discounted to a present
value using a discount rate of 10.5%, based on Ibbotson Associates(1)
build up method with an industry discount applicable to commercial banks.
Based on the most recent Ibbotson's data the risk-less rate is 4.8%,
market risk premium is 7.0% and industry specific premium was -1.3%,
resulting in a discount rate of 10.5%, which Donnelly Penman regards as
appropriate given the nature of the company, industry risk and general
economic conditions. Donnelly Penman also estimated the residual value for
Commercial National's common stock using an earning multiple of 14.7 times
applied to projected 2008 net income of $4,275,502, which is an
approximation derived from the analysis of price to earnings multiples in
comparable publicly traded companies (see Analysis of Selected Comparable
Companies). The discounted dividend analysis implied a value of $12.26 per
share for Commercial National's common stock on a marketable basis. This
analysis does not purport to be indicative of actual values or actual
future results and does not purport to reflect the prices at which any
securities may trade at the present or at any time in the future. Donnelly
Penman included this analysis because it is a widely used valuation
methodology, but noted that the results of such methodology are highly
dependent upon the numerous assumptions that must be made, including
earnings growth rates, dividend payout rates, terminal values and discount
rates.
- --------
(1) Ibbotson Associates, "Stock, Bonds, Bills, and Inflation." Valuation
Edition 2003 Yearbook
18
- - Historical closing stock prices and trading volumes. Donnelly Penman
analyzed the quoted trades listed on the OTC Bulletin Board for Commercial
National Financial Corporation (CEFC) for varying historical periods.
Donnelly Penman used a simple average of the closing stock price quoted
for a period of 30 and 90 trading days and one calendar year. Only days in
which the security actually traded were counted in the simple average. For
the past 30 trading days, as of November 11, 2004, the historical average
price was $11.25 with a period volume of 6,943 compiled over 8 separate
trading days. For the past 90 trading days, as of November 11, the
historical average price was $11.07 with a period volume of 44,995
compiled over 31 separate trading days. For the past calendar year, as of
November 11, 2004, the historical average price was $11.38 with a period
volume of 176,222 compiled over 96 separate trading days. It should be
noted that volume may reflect "double counting" due to both the buy and
sell side of a transaction being counted. In addition, the prices and
volumes displayed are per the trading information provided on the
www.otcbb.com website and may not reflect all transactions that occurred
over the aforementioned time period.
- - Net Book Value. The net book value or net equity method implies that a
company is worth its accumulated retained earnings, or deficit, plus its
original capitalization. Net book value is primarily an amount arrived at
over a company's existence which reflects accounting history expressed in
unadjusted dollars and not the company's potential.
In most going concerns with a viable future it can be demonstrated that
these companies would change hands for more than net book value. Book
value is only of importance to the extent it provides an adequate base for
the continuance of operations. In most instances where a company earns a
significant return on its assets (both tangible and intangible), the net
book value approach is not representative of the company's intrinsic
business value. Donnelly Penman reviewed the book value of the Company's
assets in limited detail and have found net book value to be $24.94
million or $6.09 per share as of September 30, 2004.
Donnelly Penman & Partners typically applies either a marketability or
minority discount, or combination thereof, to value a minority share of a
relatively illiquid corporation on a comparable basis. No such discounts have
been applied to the Common Stock in this valuation. If such a discount were
applied, it would result in a valuation that would be significantly lower than
the assigned value. Donnelly Penman & Partners did not utilize a liquidation
analysis in part because, as with book value, in most instances where a company
earns a significant return on its assets (both tangible and intangible), the
liquidation value approach is not representative of the Company's intrinsic
business value. In addition, the purpose of the Opinion was to determine the
fair market value of the Common Stock, viewing the Company as a going concern.
The liquidation of the Company is not a method of valuation considered when
deriving fair market concern as a going concern for regulated financial
institutions.
Donnelly Penman & Partners' Opinion was directed to the Company's Board of
Directors and did not constitute a recommendation to the Company's Board of
Directors or the existing holders of Common Stock. Its Opinion is limited solely
to the value of the Common Stock as of November 11, 2004, given the relevant
market and Company specific information available at the present time, and the
fairness of the transaction from a financial point of view.
On the basis of, and subject to the foregoing, Donnelly Penman & Partners
is of the opinion that, as of November 11, 2004, the fair market value of the
Common Stock was $12.01 per share. The Company's Board of Directors determined
to pay $12.50 for each share of Common Stock that will be cashed out as a result
of the transaction, representing a 4.1% premium to the fair value of the Common
Stock as of November 11, 2004. Donnelly Penman & Partners issued an oral opinion
that the price of $12.50 per share to be paid to shareholders receiving cash as
a result of the Merger was fair from a financial point of view to those
shareholders as of November 11, 2004, the date the Board of Directors adopted
the Plan of Merger and determined the $12.50 price per share.
The Company will make the Opinion available at its principal office in
Ithaca, Michigan, during regular business hours until the date of the Special
Meeting for inspection and copying by any interested shareholder or
19
representative who has been so designated in writing. Additionally, the Opinion
will be attached as an exhibit to the Company's SC 13-E3 filing dated November
_____, 2004. Donnelly Penman & Partners has given its consent to such inspection
and copying by shareholders who are making their investment decision. Donnelly
Penman & Partners has consented to the reproduction of its fairness opinion in
this proxy statement. Donnelly Penman & Partners has consented to shareholders
relying upon Donnelly Penman & Partners' materials when making their investment
decisions. However, such materials do not constitute a recommendation by
Donnelly Penman & Partners as to how a shareholder should vote with respect to
the Plan of Merger.
THE TRANSACTION
MATERIAL TERMS
The following is a summary of certain provisions of the Plan of Merger and
certain matters relating to the Merger. The following summary does not purport
to be complete and is qualified in its entirety by reference to the Plan of
Merger which is attached as Appendix A to this proxy statement and is
incorporated into this proxy statement by reference. You are urged to read the
Plan of Merger in its entirety and to consider it carefully.
Brief Description of the Merger. If and when the Merger takes effect, any
shareholder who owns fewer than 4,000 shares of Common Stock immediately prior
to the Effective Time will no longer be a shareholder of the Company. These
shareholders will instead receive cash for their shares. All other shareholders
will continue to be shareholders of the surviving company, Commercial.
To fully implement the Merger and achieve the desired goal of decreasing
the burdens, risks and expense associated with reporting companies by
terminating the Company's reporting obligations, the following events must
occur: (i) the shareholders must approve the Plan of Merger; (ii) a certificate
of merger must be filed with the Michigan Department of Labor and Economic
Growth; (iii) the Company must file a final amendment to its going private
Schedule 13E-3 with the SEC; and (iv) the Company must terminate its filing
obligations under the Exchange Act by filing a Form 15 with the SEC.
Consideration; Conversion and Exchange of Stock Certificates. The Plan of
Merger provides that, at the Effective Time and subject to the exercise of
appraisal rights: (a) all outstanding shares of Common Stock, whether Record
Shares (as defined below) or Street Shares (as defined below), held of record by
a Holder (as defined below) holding fewer than 4,000 shares of Common Stock
immediately before the Effective Time shall, without any action on the part of
the holder thereof, be canceled and converted into the right to receive cash
equal to $12.50 per share; provided, however, that Commercial may presume that
all Street Shares are held by Holders holding fewer than 4,000 shares
immediately before the Effective Time unless Commercial or a beneficial owner of
Street Shares is able to demonstrate to Commercial's satisfaction that such
shares are held beneficially by a Holder holding 4,000 or more shares
immediately before the Effective Time, in which event such shares shall remain
outstanding with all rights, privileges, and powers existing immediately before
the Effective Time; (b) all outstanding shares of Common Stock other than those
described in (a), shall remain outstanding and held by the same holders; and (c)
the outstanding shares of CB Merger Co. shall, without any action on the part of
the holder thereof, be canceled.
For purposes of the Plan of Merger:
- the term "Record Shares" means shares of Common Stock other than
Street Shares, and any Record Share shall be deemed to be held by
the registered holder thereof as reflected on the books of
Commercial.
- the term "Street Shares" means shares of Common Stock held of record
in street name, and any Street Share shall be deemed to be held by
the beneficial owner thereof as reflected on the books of the
nominee holder thereof.
20
- the term "Holder" means (a) any record holder or holders of Record
Shares who would be deemed, under Rule 12g5-1 under the Exchange Act
as described below, to be a single "person" for purposes of
determining the number of record shareholders of Commercial, and (b)
any other person or persons who would be deemed to be a "Holder"
under the above clause if the shares it holds beneficially in street
name were held of record by such person or persons.
The Plan of Merger provides that Commercial (along with any other person
or entity to which it may delegate or assign any responsibility or task with
respect thereto) shall have full discretion and exclusive authority (subject to
its right and power to so delegate or assign such authority) to:
- make such inquiries, whether of any shareholder(s) or otherwise, as
it may deem appropriate for purposes of the above provisions, and
- resolve and determine, in its sole discretion, all ambiguities,
questions of fact and interpretive and other matters relating to
such provisions, including, without limitation, any questions as to
the number of shares held by any Holder immediately before the
Effective Time. All such determinations by Commercial shall be final
and binding on all parties, and no person or entity shall have any
recourse against Commercial or any other person or entity with
respect to such determinations.
For purposes of the above provisions, Commercial may in its sole
discretion, but shall not have any obligation to do so:
- presume that any shares of Common Stock held in a discrete account
(whether record or beneficial) are held by a person distinct from
any other person, notwithstanding that the registered or beneficial
holder of a separate discrete account has the same or a similar name
as the holder of a separate discrete account; and
- aggregate the shares held (whether of record or beneficially) by any
person or persons that Commercial determines to constitute a single
Holder for purposes of determining the number of shares held by such
Holder.
Rule 12g5-1 under the Exchange Act provides that, for the purpose of
determining whether an issuer is subject to the registration provisions of the
Exchange Act, securities shall be deemed to be "held of record" by each person
who is identified as the owner of such securities on records of security holders
maintained by or on behalf of the issuer, subject to the following:
- In any case where the records of security holders have not been
maintained in accordance with accepted practice, any additional
person who would be identified as such an owner on such records if
they had been maintained in accordance with accepted practice shall
be included as a holder of record.
- Securities identified as held of record by a corporation, a
partnership, a trust whether or not the trustees are named, or other
organization shall be included as so held by one person.
- Securities identified as held of record by one or more persons as
trustees, executors, guardians, and custodians or in other fiduciary
capacities with respect to a single trust, estate or account shall
be included as held of record by one person.
- Securities held by two or more persons as co-owners shall be
included as held by one person.
21
- Each outstanding unregistered or bearer certificate shall be
included as held of record by a separate person, except to the
extent that the issuer can establish that, if such securities were
registered, they would be held of record, under the provisions of
this rule, by a lesser number of persons.
- Securities registered in substantially similar names where the
issuer has reason to believe because of the address or other
indications that such names represent the same person, may be
included as held of record by one person.
Rule 12g5-1 further provides in pertinent part that, notwithstanding the
foregoing provisions:
- Securities held, to the knowledge of the issuer, subject to a voting
trust, deposit agreement or similar arrangement shall be included as
held of record by the recordholders of the voting trust
certificates, certificates of deposit, receipts or similar evidences
of interest in such securities; provided, however, that the issuer
may rely in good faith on such information as is received in
response to its request from a non-affiliated issuer of the
certificates or evidences of interest.
- If the issuer knows or has reason to know that the form of holding
securities of record is used primarily to circumvent the provisions
of Section 12(g) or 15(d) of the Exchange Act, the beneficial owners
of such securities shall be deemed to be the record owners of such
securities.
As soon as practicable after the Merger is completed, the Company will
mail to each shareholder who is to receive cash a letter of transmittal and
instructions for surrendering their stock certificates. When the Merger is
completed, the shares of Common Stock owned by each shareholder receiving cash
will automatically be converted into the right to receive cash. To receive the
cash, however, such shareholders must deliver to Commercial their stock
certificates along with a letter of transmittal and any other required
documents. No service charge will be payable by shareholders in connection with
the cash payments, and all expenses will be borne by the Company, except that a
bond may be required for a lost certificate. PLEASE DO NOT SEND US YOUR STOCK
CERTIFICATES UNTIL YOU RECEIVE THE LETTER OF TRANSMITTAL.
Dividends and Distributions. A shareholder will not be entitled to any
further dividends or distributions that are declared after the Merger is
completed on any shares of Common Stock that are automatically converted into
cash as a result of the Merger, regardless of whether the shareholder has or has
not surrendered his or her stock certificates to the Company. Each shareholder
will be entitled to dividends and distributions on his or her Common Stock
declared with record dates prior to the Effective Time.
Reasons for Engaging in Merger. See "SPECIAL FACTORS - Reasons for the
Merger" (page 6).
Vote Required. The Plan of Merger must be approved by holders of a
majority of the issued and outstanding shares of Common Stock. The presence in
person or by properly executed proxy of the holders of a majority of all issued
and outstanding shares of Common Stock entitled to vote at the meeting is
necessary for a quorum. As of October 1, 2004, 4,097,543 shares of Common Stock
were issued and outstanding. Of these shares, the Company's officers and
directors beneficially owned approximately 955,730 (23.3%) of such outstanding
shares.
Effective Time of the Merger. The Company expects to complete the Merger
during _______________, 2005. However, the Company cannot guarantee that the
Merger will be effective by the end of _______________, 2005.
The Effective Time will be the time of the filing with and acceptance for
record of a certificate of merger by the Michigan Department of Labor and
Economic Growth, or a later time specified in the certificate of merger. The
Company presently intends to file a certificate of merger as soon as practicable
after the approval of the Plan of
22
Merger proposal by the shareholders at the Special Meeting is obtained and the
other conditions precedent to the consummation of the Merger have been satisfied
or waived.
Conditions to Consummation of the Merger. The Boards of Directors of the
Company and CB Merger Co. have adopted the Plan of Merger and authorized the
consummation of the Merger. As the sole shareholder of CB Merger Co., the
Company has approved the Merger and the Plan of Merger. The completion of the
Merger depends upon a number of events, including:
- The approval of the Plan of Merger by the Company's shareholders.
- The filing and acceptance of a certificate of merger with the
Michigan Department of Labor and Economic Growth.
- The receipt of all regulatory approvals, if any.
The Merger and Plan of Merger are not contingent on shareholder approval
of the Amendment. Therefore, if the shareholders approve the Plan of Merger, the
Company and CB Merger Co. will proceed with the completion of the Merger
regardless of whether the shareholders approved the Amendment.
Amendment or Termination of the Plan of Merger. The Plan of Merger may be
amended by a written agreement approved by the Boards of Directors of the
Company and CB Merger Co., generally without the necessity of further action by
shareholders. However, shareholder approval is required for any modification or
amendment that is made after the shareholder vote and that has any of the
following effects:
- Changes the amount or kind of consideration that you will receive
for your shares of Common Stock;
- Changes any provision of the Company's articles of incorporation; or
- Adversely affects your rights as a shareholder.
No amendments or modifications to the Plan of Merger are presently
contemplated. However, if there is any material amendment to the Plan of Merger
before the Special Meeting, the Company will notify you and provide you with
information relating to the amendment prior to the meeting.
The Merger may be abandoned and the Plan of Merger terminated by the
mutual written consent of the Company and CB Merger Co. as provided in the Plan
of Merger. At this time, the Company has no intention of abandoning the Plan of
Merger.
REGULATORY REQUIREMENTS
Except for the filing of the certificate of merger with the Michigan
Department of Labor and Economic Growth upon the approval of the Merger by the
Company's shareholders, and compliance with federal and state securities laws,
the Company is not aware of any material United States federal or state or
foreign governmental regulatory requirement that must be complied with or
approval that must be obtained to complete the Merger.
CERTAIN CONSEQUENCES OF THE MERGER
Pursuant to the terms of the Plan of Merger, following shareholder
approval of the Plan of Merger proposal and subject to the fulfillment or waiver
of certain conditions, CB Merger Co. will be merged with and into Commercial,
and Commercial will continue as the surviving company in the Merger. The Merger
is expected to cause a reduction in the number of Commercial's shareholders of
record to under 300. This would permit the
23
Company to terminate the registration of the Common Stock with the SEC. As a
result of this termination, the Company's reporting and proxy solicitation
obligations under the Exchange Act would be eliminated. Various advantages and
disadvantages of the Merger are discussed above. See "SPECIAL FACTORS -
Fairness; Recommendation of the Board of Directors" (pages 10-15). The effects
of the termination of the registration of the Common Stock are discussed below.
See "THE TRANSACTION - Termination of Exchange Act Registration" (pages 24 and
25).
OPERATIONS OF THE BANK FOLLOWING THE MERGER
Following the Merger, the Company and the Bank intend to continue to
conduct their existing operations in substantially the same manner as now
conducted. The executive officers and directors immediately prior to the Merger
will be the executive officers and directors immediately after the Merger.
Except for the change that would result from the Amendment (if approved by the
shareholders), the Company's and the Bank's Articles of Incorporation and Bylaws
will remain in effect and unchanged by the Merger. The deposits of the Bank will
continue to be insured by the FDIC. The corporate existence of neither the
Company nor the Bank will be affected by the Merger. The Company and the Bank
will continue to be regulated by the same agencies that regulated each entity
before the Merger.
FINANCING OF THE MERGER
The Company estimates that the Merger transaction will require
approximately $8,875,000 in cash, which includes approximately $8,750,000 for
payment to shareholders whose shares of Common Stock are eliminated in the
Merger and approximately $125,000 to pay all of the expenses related to the
Merger.
The Company estimates that the breakdown of these expenses will be as
follows:
Legal Fees $ 75,000
Accounting Fees 5,000
Financial Advisor Fees 25,000
Printing and Mailing 7,000
Miscellaneous (filing fees, etc.) 13,000
---------
Total $ 125,000
=========
The Company intends to finance the Merger transaction first through
working capital (expected to be up to $125,000), and the remainder through the
proceeds of the sale by Commercial of trust preferred securities. The Company
has entered into a term sheet with Cohen Bros. & Co., pursuant to which
Commercial may issue up to $10,000,000 in trust preferred securities. The timing
of the issuance will be at Commercial's discretion. The securities will be 30
year instruments, and will bear interest at a variable rate, reset quarterly,
equal to Libor plus 2.15%. The issuance of the trust preferred securities will
be conducted as a private placement, exempt from United States securities law
registration requirements, through Cohen Bros. & Co.
TERMINATION OF EXCHANGE ACT REGISTRATION
The Common Stock is currently registered under the Exchange Act and quoted
in the OTC Bulletin Board or Commonly referred to as Pink Sheets. The Company
will be permitted to terminate the Exchange Act registration of its Common Stock
if there are fewer than 300 recordholders of outstanding shares of Common Stock.
Upon the completion of the Merger, the Company expects to have fewer than 300
shareholders of record. The Company intends to terminate the registration of its
Common Stock as promptly as possible after the Effective Time. The Company's
Common Stock may continue to be quoted in the OTC Bulletin Board or Commonly
referred to as Pink Sheets. See "INFORMATION ABOUT COMMERCIAL AND ITS AFFILIATES
- - Market for Common Stock and Dividend Information" (pages 37 and 38).
24
Termination of registration under the Exchange Act will substantially
reduce the information required to be furnished by the Company to its
shareholders and to the SEC, and would greatly decrease the burdens placed upon
the Company. For example:
- Certain provisions of the Exchange Act would no longer apply to the
Company. These provisions include the requirement of furnishing a
proxy or information statement in connection with shareholder
meetings under Section 14(a), the requirement to file Forms 10-K,
lO-Q and similar reports with the SEC, the requirements of Rule
13e-3 regarding "going private" transactions and the stock
transaction reporting and short-swing profit provisions of Section
16.
- The Act also contains obligations that the Company would no longer
need to comply with following deregistration. Examples of these
obligations include CEO and CFO certification of certain matters in
periodic reports filed with the SEC, Section 404 compliance (see
"SPECIAL FACTORS - Background of the Merger Proposal") (pages 7-10),
Audit Committee requirements (including director independence and
financial expert requirements) and expanded reporting obligations.
The Company estimates that termination of the registration of the Common
Stock under the Exchange Act will save the Company's approximately $132,000 per
year in legal, accounting, printing, management time and other expenses based on
2004 estimates. The following chart provides a breakdown of our historical and
estimated external expenses related to our SEC reporting obligations:
ESTIMATED ESTIMATED
2001 2002 2003 2004 2005
---- ---- ---- --------- ---------
Audit fees $ 59,580 $ 59,200 $ 66,800 $ 75,000 $ 89,000
Legal counsel 3,819 5,087 10,542 12,000 25,000
Corporate communications 1,437 1,127 1,312 2,000 2,000
SEC filing expenses 5,172 4,965 7,178 7,000 6,000
Certification of controls program 240,000
--------- --------- --------- --------- ---------
TOTAL $ 70,008 $ 70,379 $ 85,832 $ 96,000 $ 362,000
========= ========= ========= ========= =========
Estimated internal costs, consisting mostly of management time required
for compliance, rose from $20,000 in 2002 to $27,000 in 2003 and are estimated
to be $41,000 in 2004 and $100,000 in 2005. Compliance with the Act has
subjected, and will subject, the Company and its directors and officers to
substantial additional risks, burdens and expenses. A portion of the anticipated
expenses associated with being a reporting company include one-time costs
relating to compliance with the Act.
INTERESTS OF CERTAIN PERSONS
The executive officers and directors of the Company and the Bank who are
also shareholders will participate in the Merger in the same manner and to the
same extent as all of the other shareholders of Commercial. If the Merger is
completed, the respective ownership percentages of each of the directors and
executive officers who retains shares will increase slightly, as will the
ownership interests of every other shareholder who retains his or her shares. As
a result of the Merger, the collective ownership interest of the directors and
officers is expected to increase from approximately 23.3% to approximately
28.1%. In addition, it is expected that the transaction will, after it is
concluded, reduce the exposure of directors and officers to the risk of
litigation and liability to which directors and officers of public companies are
exposed. See "INFORMATION ABOUT COMMERCIAL AND ITS AFFILIATES - Voting
Securities and Principal Holders" (pages 36 and 37).
25
The executive officers and directors of the Company are not aware of any
other benefits or additional compensation in connection with this transaction
that will not be shared by the Company's unaffiliated shareholders generally.
The proposed transaction does not constitute a "change of control" for purposes
of any existing employment agreement with the executive officers of the Company.
The Company has not and does not anticipate entering into any new employment or
other compensation agreements with its executive officers as a result of the
Merger. All of the directors of the Company and the Bank and all of the
executive officers have advised the Company that they intend at this time to
vote their shares in favor of the proposal to approve the Plan of Merger for the
same reasons underlying the Board's decision to adopt the Plan of Merger and
approve the going private transaction.
DISSENTERS' RIGHTS
The Board of Directors has granted dissenters' rights identical to those
provided under the Michigan Business Corporation Act ("MBCA") to shareholders
who own less than 4,000 shares of Common Stock and will receive cash for their
shares in the Merger. Such holders may elect to dissent from the Merger and
obtain payment for their shares of Common Stock in the manner, with the rights
and subject to the requirements applicable to dissenting shareholders as
provided in Sections 761 through 774 of the MBCA (the "Dissenters' Rights
Statute"), copies of which are attached to this proxy statement as Appendix D.
The following is a summary of the Dissenters' Rights Statute and the
procedures for dissenting from the Merger and demanding dissenters' rights. This
summary is qualified in its entirety by reference to the Dissenters' Rights
Statute, which is reprinted in full as Appendix D to this proxy statement. Any
holder of Common Stock who wishes to exercise statutory dissenters' rights or
who wishes to preserve the right to do so should refer to the Dissenters' Rights
Statute and consult counsel prior to taking any action. FAILURE TO STRICTLY
COMPLY WITH THE PROCEDURES SET FORTH IN THE DISSENTERS' RIGHTS STATUTE COULD
RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
The Dissenters' Rights Statute provides that persons in whose name shares
of Common Stock are registered in the records of the Company, or beneficial
owners of shares to the extent of the rights granted by a nominee certificate on
file with the Company, and persons who are beneficial owners of shares held by
nominees as the recordholders (collectively defined, for purposes of this
Dissenters' Rights section only, as "shareholders"), may be entitled to
dissenters' rights, but only if they comply with the provisions set forth in the
Dissenters' Rights Statute.
Shareholders owning less than 4,000 shares of Common Stock who wish to
exercise dissenters' rights:
(a) must deliver to the Company, before the vote with respect to the
Merger is taken, written notice of their intent to demand payment
for their shares if the Merger is approved; and
(b) must not vote their shares in favor of approval of the Merger.
Shareholders who do not satisfy these requirements are not entitled to
payment for their shares under the Dissenters' Rights Statute. Although
shareholders electing to exercise dissenters' rights under the Dissenters'
Rights Statute must not vote FOR approval of the Merger, such shareholders are
not required to vote against approval of the Merger to exercise dissenters'
rights. A vote against approval of the Merger is not sufficient to comply with
the notice requirements described above.
If the Merger is approved, the Company must notify all shareholders
entitled to assert dissenters' rights under the Dissenters' Rights Statute that
the action was taken and send them a dissenters' notice no later than 10 days
after the Effective Time.
26
Upon receipt of the dissenters' notice, dissenters must make a payment
demand by the date set by the Company in the notice. A shareholder who elects to
exercise dissenters' rights must mail or deliver his or her written demand to:
Commercial National Financial Corporation, 101 North Pine River, P.O. Box 280,
Ithaca, Michigan, 48847, Atn: Corporate Secretary. The written demand for
payment should comply with the provisions of the Dissenters' Rights Statute and
should specify the shareholder's name and mailing address, the number of shares
of Common Stock owned, and that the shareholder is demanding payment for his or
her shares. The shareholder also must certify that the shareholder acquired
beneficial ownership of the shares before the date set forth in the dissenters'
notice and deposit his or her share certificates in accordance with the terms of
the dissenters' notice. Failure to make a payment demand or to deposit the share
certificates where required, each by the date set forth in the dissenters'
notice, shall forfeit the shareholder's entitlement to payment for his or her
shares under the Dissenters' Rights Statute.
Within seven days after the Merger is consummated or a payment demand is
received, whichever occurs later, the Company will pay dissenting shareholders
who complied with the Dissenters' Rights Statute the amount that the Company
estimates to be the fair value of the dissenters' shares, plus accrued interest.
A dissenting holder of Common Stock may notify the Company in writing of
his or her own estimate of the fair value of his or her shares of Common Stock
and the amount of interest due, and demand payment of that estimate, less any
payment made by the Company as described above (or, if applicable, reject the
Company's offer made to shareholders who were not beneficial holders of Common
Stock prior to the time that the transaction was publicly announced), if (a) the
dissenter believes that the amount paid by the Company (or offered as described
above) is less than the fair value of such shares or that interest was
incorrectly calculated; (b) the Company fails to make payment within 60 days
after the date set for demanding payment in the dissenters' notice; or (c) the
Company, having failed to complete the Merger, fails to return stock
certificates deposited pursuant to the dissenters' process or release transfer
restrictions placed on shares within 60 days after the date set for demanding
payment in the dissenters' notice. This demand must be made within 30 days after
the Company made (or offered as described above) payment to the shareholder. A
shareholder who fails to meet this deadline waives his or her right to demand
payment and must accept the amount paid (or offered) by the Company.
If a dissenter has rejected the Company's offer and demanded payment of
the fair value of the shares and interest due, the Company must (unless it
accepts the dissenter's demand) commence a judicial proceeding within 60 days
after receiving the payment demand and petition an appropriate court, as
described in the Dissenters' Rights Statute, to determine the fair value of the
shares and accrued interest.
All dissenters whose demands remain unsettled will be made parties to such
a judicial proceeding, the purpose of which is to determine the fair value of
the shares. To this end, the court may appoint one or more appraisers to receive
evidence and recommend a decision on the question of fair value. Each dissenter
made a party to the proceeding is entitled to judgment for the amount the court
finds to be the fair value of his or her shares, plus interest, minus the
amount, if any, that the Company previously paid such dissenter for his or her
shares. The court shall assess the costs of the proceeding (not, absent a few
limited exceptions, the fees and expenses of counsel to the dissenters) against
the Company, except that the court may assess costs against all or some of the
dissenters to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under the Dissenters'
Rights Statute. The court may also assess the fees and expenses of counsel and
experts against either party to the proceeding if that party acted arbitrarily,
vexatiously or not in good faith with respect to its rights (and, with respect
to the Company, its obligations) provided by the Dissenters' Rights Statute. In
addition, if the court finds that the services of counsel for a dissenter
substantially benefitted other dissenters similarly situated, and that fees for
such counsel should not be assessed against the Company, the court may award to
those counsel reasonable fees paid out of the amounts awarded to the dissenters
who were benefitted.
PURSUING DISSENTERS' RIGHTS MAY RESULT IN THE SHAREHOLDER RECEIVING MORE
OR LESS THAN THE PRICE OFFERED BY THE COMPANY AND MAY CAUSE THE SHAREHOLDER TO
INCUR SUBSTANTIAL LEGAL AND OTHER EXPENSES.
27
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF MERGER
The following discussion summarizes the material U.S. federal income tax
consequences of the Merger. The discussion is based upon the Internal Revenue
Code of 1986, as amended, its legislative history, applicable Treasury
regulations, existing administrative interpretations and court decisions
currently in effect. Any of these authorities could be repealed, overruled or
modified at any time after the date of this proxy statement, and any such change
could be applied retroactively. This discussion does not address any tax
consequences under state, local or foreign laws.
The discussion that follows neither binds the IRS nor precludes the IRS
from adopting a position contrary to that expressed in this proxy statement, and
the Company cannot assure you that such a contrary position could not be
asserted successfully by the IRS or adopted by a court if the positions were
litigated. The Company does not intend to obtain a ruling from the IRS with
respect to the U.S. federal income tax consequences of the Merger. In addition,
the Company does not intend to obtain an opinion from tax counsel with respect
to the federal income tax consequences of the Merger.
This discussion assumes that you hold your shares of Common Stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue Code.
This discussion does not address all aspects of federal income taxation that may
be important to you in light of your particular circumstances or if you are
subject to certain rules, such as those rules relating to:
- shareholders who are not citizens or residents of the United States;
- financial institutions;
- tax-exempt organizations and entities, including IRAs;
- insurance companies;
- dealers in securities; and
- shareholders who acquired their shares of Common Stock through the
exercise of employee stock options or similar securities or
otherwise as compensation.
Tax Consequences to Shareholders Who Retain Their Shares. If you are a
shareholder who retains your shares of Common Stock in the Merger and you do not
receive any cash or property (including stock) as part of the Merger, you will
not recognize gain or loss for U.S. federal income tax purposes as a result of
the Merger. The Merger will not affect the adjusted tax basis or holding period
of any shares of Common Stock that you continue to own following the Merger.
Tax Consequences to Shareholders Who Receive Cash For Their Shares. If you
are a shareholder who receives cash for your shares of Common Stock in the
Merger, you should be treated for federal income tax purposes as having had your
shares redeemed by the Company under Section 302 of the Internal Revenue Code.
Unless the cash received is treated as a dividend under Section 301 of the
Internal Revenue Code (as discussed below), you will recognize gain or loss for
U.S. federal income tax purposes with respect to the cash received for your
shares of Common Stock. The gain or loss will be measured by the difference
between the amount of cash received, $12.50 per share, and the adjusted tax
basis of your shares of Common Stock. The gain or loss will be capital gain or
loss and will be long-term capital gain or loss if you will have owned your
shares of Common Stock for more than one year at the time the Merger is
completed.
Section 302 of the Internal Revenue Code provides that the cash
distribution will not be treated as a dividend if the distribution is (i) "not
essentially equivalent to a dividend," (ii) "substantially disproportionate"
with
28
respect to the shareholder, or (iii) completely terminates the shareholder's
interest in the entity. The constructive ownership rules of Section 318 of the
Internal Revenue Code apply in comparing a shareholder's percentage interest in
the Company immediately before and immediately after the Merger. Generally, the
constructive ownership rules under Section 318 treat a shareholder as owning (i)
shares of Common Stock owned by certain relatives, related corporations,
partnerships, estates or trusts, and (ii) shares of Common Stock the shareholder
has an option to acquire. If you receive cash for your Common Stock in the
Merger and completely terminate your direct and constructive ownership interest
in the Company, you should recognize capital gain or loss as a result of the
Merger, and the cash distribution should not be treated as a dividend. Capital
gains and dividends are each taxed at a maximum rate of 15% for federal income
tax purposes, but in the case of cash received in the Merger, if taxed as a
dividend, you would not be able to offset the amount received by your adjusted
tax basis in your shares of Common Stock.
Tax Consequences to the Company, CB Merger Co. and the Bank. Neither the
Company, CB Merger Co. nor the Bank will recognize gain or loss for U.S. income
tax purposes as a result of the Merger.
Backup Withholding. Certain shareholders of the Company may be subject to
backup withholding on the cash payments received for their shares of Common
Stock. Backup withholding will not apply, however, if you furnish to the Company
a correct taxpayer identification number and certify that you are not subject to
backup withholding on the substitute Form W-9 or successor form included in the
letter of transmittal to be delivered to you following the date of completion of
the Merger (nonresidents should contact their tax advisers).
Backup withholding is not an additional tax but is credited against the
federal income tax liability of the taxpayer subject to the withholding. If
backup withholding results in an overpayment of a taxpayer's federal income
taxes, that taxpayer may obtain a refund from the IRS.
This discussion is not intended to be a complete analysis or description
of all potential U.S. federal income tax consequences of the Merger. In
addition, this discussion does not address tax consequences that may vary with,
or are contingent on, your individual circumstances. Moreover, this discussion
does not address any non-income tax or any foreign, state or local tax
consequences of the Merger. Accordingly, you are strongly encouraged to consult
with your own tax advisor to determine the particular U.S. federal, state, local
or foreign income or other tax consequences of the Merger that are applicable to
you.
AMENDMENT PROPOSAL
The Company's Board of Directors has unanimously approved, and recommends
that shareholders vote for the proposal to approve the Amendment. The following
discussion summarizes the change to the Company's existing Articles of
Incorporation that would be effected by the approval and adoption of this
proposal. This summary is qualified in its entirety by reference to the text of
proposed new Article XIII, which is included as Appendix B to this proxy
statement.
Proposed Article XIII would limit the number of record owners of the
Company's shares by granting the Company the right to purchase the shares of
Common Stock a shareholder would like to transfer. As a result of this change, a
Company shareholder that wants to transfer any Common Stock must give the
Company a period of thirty (30) days in which to purchase the shares. In
general, the purchase price the Company shall pay for the shares will be
established between the Company and the shareholder at not lower than the annual
transfer price set by the Board and not higher than the price offered by the
proposed transferee. If the Company does not exercise its purchase right, the
shareholder may proceed with the transfer of the shares.
For purposes of the Amendment, a "transfer" is defined as any type of
disposition of shares that would result in a change of the record ownership of
the shares. Consequently, the proposed Amendment would not limit transfers to or
among "street name" accounts, as shares held for beneficial owners by banks or
brokers are typically held of record by a depository nominee which is the
recordholder. These types of transfers generally do not result in
29
a change of the record ownership of the shares. The restriction imposed by the
Amendment would not be binding with respect to shares issued before shareholder
approval of the Amendment unless the shareholder voted for the Amendment
proposal.
Shareholder approval of the Amendment is contingent on shareholder
approval of the Plan of Merger and the implementation of the Merger. As a
result, the Amendment will not become effective unless the Plan of Merger is
approved and the Merger is carried out, even if shareholders approve the
Amendment. (However, the Merger is not contingent on shareholder approval of the
Amendment.)
Commercial's Board of Directors believes that the Amendment is in the best
interest of the Company and its shareholders because it would slow the growth in
the number of shareholders in the future, and thus enable the Company to avoid
or delay the need to again register the Common Stock.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE AMENDMENT
PROPOSAL, WHICH WOULD ADD ARTICLE XIII TO THE COMPANY'S ARTICLES OF
INCORPORATION.
ADDITIONAL SPECIAL MEETING INFORMATION
TIME AND PLACE
The Special Meeting will be held at ___:00 a.m. on ______, _________, 2005
at ___________________, located at ______________________________, __________,
Michigan __________.
VOTING AT THE SPECIAL MEETING
The Merger must be approved by the affirmative vote of the holders of a
majority of the shares entitled to vote at the Special Meeting. On October 1,
2004, the Company's directors and executive officers owned, directly or
indirectly, 955,730 shares of Common Stock, representing approximately 23.31% of
the approximately 4,097,543 outstanding shares of Common Stock as of that date.
DISSENTERS' RIGHTS
The Plan of Merger provides certain shareholders with dissenters' rights.
See "DISSENTERS' RIGHTS" (pages 26-27).
PROCEDURES FOR VOTING BY PROXY
If you properly sign, return and do not revoke your proxy, the persons
appointed as proxies will vote your shares according to the instructions you
have specified on the proxy. If you sign and return your proxy but do not
specify how the persons appointed as proxies are to vote your shares, your proxy
will be voted FOR approval of the Merger, FOR approval of the Amendment and in
the discretion of the persons appointed as proxies on all other matters brought
before the Special Meeting. As of the date of this proxy statement the Company
is not aware of any other proposal which is to be presented at the Special
Meeting other than those listed above.
You can revoke your proxy at any time before it is voted by delivering to
the Secretary of the Company at Commercial National Financial Corporation, 101
North Pine River, P.O. Box 280, Ithaca, Michigan, 48847, either a written
revocation of the proxy or a duly signed proxy bearing a later date or by
attending the Special Meeting and voting in person.
REQUIREMENTS FOR SHAREHOLDER APPROVAL
30
A quorum will be present at the Special Meeting if a majority of the
outstanding shares of Common Stock are represented in person or by valid proxy.
The Company will count abstentions and broker non-votes, which are described
below, in determining whether a quorum exists. Approval of the Plan of Merger
proposal and the Amendment proposal requires the affirmative vote of a majority
of the issued and outstanding shares of Common Stock. Any other matter that may
properly come before the Special Meeting requires that more shares be voted in
favor of the matter than are voted against the matter. The Company will count
abstentions and broker non-votes in determining the minimum number of votes
required for approval.
As of the close of business on the record date, Commercial had _________
shares of Common Stock, no par value, authorized, of which ____________ shares
were issued and outstanding. Each outstanding share is entitled to one vote on
all matters presented at the meeting.
Based on the _____________ shares outstanding as of the record date,
_____________ shares represented either in person or by proxy represent the
quorum and the minimum number of votes required to approve the Plan of Merger
proposal and the Amendment proposal.
Abstentions. A shareholder who is present in person or by proxy at the
Special Meeting and who abstains from voting on any proposal will be included in
the number of shareholders present at the Special Meeting for the purpose of
determining the presence of a quorum. Abstentions do not count as votes in favor
of or against a given matter. Since the Plan of Merger proposal and the
Amendment proposal must be approved by the affirmative vote of a majority of the
issued and outstanding shares, an abstention has the effect of a vote against
these proposals.
Broker Non-Votes. Brokers who hold shares for the accounts of their
clients may vote these shares either as directed by their clients or in their
own discretion if permitted by the exchange or other organization of which they
are members. Proxies that contain no voting instructions by the broker on a
particular matter are referred to as "broker non-votes" with respect to the
proposal(s) not voted upon. Broker non-votes are included in determining the
presence of a quorum. A broker non-vote, however, does not count as a vote in
favor of or against a particular proposal. Since the Plan of Merger proposal and
the Amendment proposal must be approved by the affirmative vote of a majority of
the issued and outstanding shares, a broker non-vote has the effect of a vote
against these proposals.
SOLICITATION OF PROXIES
The Company will pay the cost of the proxy solicitation. The Company's
directors, officers and employees may, without additional compensation, solicit
proxies by personal interview, telephone, e-mail or fax. The Company will direct
brokerage firms or other custodians, nominees or fiduciaries to forward our
proxy solicitation material to the beneficial owners of Common Stock held of
record by these institutions and will reimburse them for the reasonable charges
and out-of-pocket expenses they incur in connection with this process.
ACCOUNTANTS
The Company expects representatives from its principal accountants, Crowe
Chizek and Company LLP, to be present at the Special Meeting. These
representatives will have an opportunity to make a statement at the meeting and
will be available to respond to appropriate questions.
INFORMATION ABOUT COMMERCIAL AND ITS AFFILIATES
GENERAL
The Company is a financial holding company under the Bank Holding Company
Act of 1956, as amended. The Company was incorporated in Michigan on December
30, 1987. On May 31, 1988, Commercial acquired all of the stock of Commercial
National Bank, a national banking association chartered in 1962. On December 30,
1992,
31
Commercial National Bank converted to a state-chartered bank under the name
Commercial Bank (the "Bank"). The Bank concentrates its efforts primarily in two
areas, commercial lending and residential real estate lending. Loan, deposit and
other products are designed to support these market segments. The Bank also
provides a full range of traditional banking services to individuals located in
its service area. The Bank offers a variety of deposit products, including
checking, savings, money market, individual retirement accounts, certificates of
deposit and repurchase agreements. The Bank conducts business from its main
office in Ithaca, Michigan, and nine full-service branch offices located in
Alma, Pompeii, St. Louis, Mt. Pleasant, Middleton and Greenville, Michigan. The
Company's address and principal executive offices are located at 101 North Pine
River, P.O. Box 280, Ithaca, Michigan, 48847. Its telephone number is (989)
875-4144.
Commercial has not been convicted in a criminal proceeding, excluding
traffic violations and similar misdemeanors, during the past five years, not has
it been a party to any judicial or administrative proceeding during the past
five years that results in a judgment, decree or final order enjoining it from
future violations of, or prohibiting activities subject to, federal or state
securities law, or finding any violation of federal or state securities laws.
CB MERGER CO.
CB Merger Co. is a newly-formed Michigan corporation, and is a
wholly-owned subsidiary of the Company. CB Merger Co. was organized solely for
the purpose of facilitating the Merger. CB Merger Co. will merge into the
Company and will cease to exist after the Merger. CB Merger Co. has not
conducted any activities other than those incident to its formation, its
execution of the Plan of Merger and its assistance in preparing various SEC
filings related to the proposed going private transaction. CB Merger Co. has no
significant assets, liabilities or shareholders' equity. The address and
telephone number of CB Merger Co.'s business and principal executive officers
are the same as those of the Company.
CB Merger Co. has not been convicted in a criminal proceeding, excluding
traffic violations and similar misdemeanors, during the past five years, not has
it been a party to any judicial or administrative proceeding during the past
five years that results in a judgment, decree or final order enjoining it from
future violations of, or prohibiting activities subject to, federal or state
securities law, or finding any violation of federal or state securities laws.
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information with respect to the Company's
directors and executive officers as of October 1, 2004.
YEAR FIRST BECAME A
DIRECTOR OR OFFICER OF
NAME AGE PRINCIPAL OCCUPATION(s) FOR PAST 5 YEARS THE COMPANY OR BANK
- ------------------- --- ---------------------------------------- ----------------------
DIRECTORS
Richard F. Abbott 69 Retired from Commercial and Bank. 1989
Former interim president and
chief executive officer of the
Bank from September 15, 1993
until March 16, 1994, and of
Commercial from September 15, 1993
until May 18, 1994. Served as
executive vice president of the
Bank and Commercial from
May, 1990 to September 15,
1993, and from March 16, 1994
until December 31, 1996.
32
Jefferson P. Arnold 65 Attorney at law and has practiced law with 1994
The Arnold Law Offices for over 30 years.
Jeffrey S. Barker 56 President and chief executive officer of 1997
Commercial and the Bank since
November 12, 1997.
Don J. Dewey 67 Funeral director and the owner and 1987
President of Dewey Funeral Homes, Inc.
Patrick G. Duffy 41 Vice president and chief financial officer of 1999
Commercial and the Bank since February 19,
1997. Named executive vice president Of
Commercial and the Bank on May 19, 1999.
Robert S. Elmore 55 Chief Financial Officer of Rich mar 2004
Properties, a property development
Company.
David A. Ferguson 55 Member of Chodoka LLC. Previously 1985
Served as vice president of Ashcraft's
Market, Inc., a regional retail grocery store
Chain.
Paul B. Luneack 45 Vice President of Ken Luneack 2002
Construction, Inc., a building materials
Manufacturer.
Kim C. Newson 54 President of Alma Hardware Company and 1987
general manager of Alma True Value
Hardware, both of which are in the
retail Hardware business.
33
YEAR FIRST BECAME A
DIRECTOR OR OFFICER OF
NAME AGE PRINCIPAL OCCUPATION(S) FOR PAST 5 YEARS THE COMPANY OR BANK
- -------------------- --- -------------------------------------------- ----------------------
Howard D. Poindexter 68 Chairman of the Board of Commercial 1973
since February of 1993. Manager of
Poindexter Farms, an independent farming
business. From 1954 until his retirement in
1992, he was a soil conservationist for the
U.S. Department of Agriculture.
Scott E. Sheldon 48 Chairman of the Board of the Bank since 1985
July of 1997. Owner of Kernen-Sheldon
Agency, and Shepherd Insurance Agency,
which are insurance agencies.
OFFICERS
Jeffrey S. Barker 56 Executive Officer of the Corporation. (See 1997
above for further biographical information.)
Patrick G. Duffy 41 Executive Officer of the Corporation. (See 1999
above for further biographical information.)
Andrew P. Shafley 39 Senior vice president and senior loan 1998
officer of the Bank since May 19, 1999.
Served as vice president senior loan officer
from May of 1998 until May of 1999.
Served as vice president commercial loan
officer from January of 1996 until May of
1999.
34
All of the above-listed persons are citizens or permanent residents of the
United States. During the past five years, none of them have been a party in any
judicial or administrative proceeding that resulted in a judgment, decree, or
final order enjoining them from future violations of, or prohibiting activities
subject to, federal or state securities laws, or finding any violation with
respect to such laws. Nor have any of them been convicted in any criminal
proceeding during the past five years, excluding traffic violations and similar
misdemeanors. The address of the directors and executive officers is the same as
that of the Company. Except as provided above, the address and telephone number
of the employers of the directors and executive officers are the same as those
of the Company.
PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS
During the past two years, neither the Company nor CB Merger Co. has
engaged in significant transactions with any of their affiliates, executive
officers or directors, nor has either entity engaged in negotiations regarding
such types of transactions. There are no agreements between the Company, CB
Merger Co. or the Company's executive officers and directors and any other
person with respect to any shares of Common Stock, except for director and
employee stock options that may be exercised by the applicable director or
officer from time to time to purchase shares of Common Stock directly from the
Company. Directors and officers of the Company and their associates are
customers of and have had transactions with the Bank in the ordinary course of
business. All loans and commitments included in such transactions have been made
in the ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than the normal risk of
collectibility or present other unfavorable features. No director or executive
officer has pledged shares of Common Stock.
USE OF SECURITIES ACQUIRED AND PLANS OR PROPOSALS
The Company will cancel shares of Common Stock acquired for cash pursuant
to the Plan of Merger. These cancelled shares will constitute authorized but
unissued Common Stock.
The Merger, if carried out, is expected to enable the Company to terminate
the registration of its Common Stock under the Exchange Act and thus eliminate
its obligation to file reports (such as Form 10-Q quarterly and Form 10-K annual
reports) under the Exchange Act. See "THE TRANSACTION - Termination of Exchange
Act Registration" (pages 24 and 25).
Presently, neither the Company nor CB Merger Co. has any plans, proposals
or negotiations that relate to or would result in: any purchase, sale or
transfer of a material amount of assets of the Company or any of its
subsidiaries; any material change in the present dividend rate or policy, or
indebtedness or capitalization of the Company; any change in the present Board
of Directors or management of the Company, including any plans or proposals to
change the number or term of directors or to fill any existing vacancies on the
board or to change any material term of the employment contract of any executive
officer; or any other material change in the Company's corporate structure or
business.
35
VOTING SECURITIES AND PRINCIPAL HOLDERS
The following table sets forth, as of October 1, 2004, the total number of
shares of the Common Stock beneficially owned, and the percent of such shares so
owned, by each director and executive officer and by all directors and executive
officers of the Company as a group.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
-----------------------------------------------------
NUMBER OF SHARES OF
COMMON STOCK DIRECTLY STOCK TOTAL BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OR INDIRECTLY OWNED OPTIONS(2) OWNERSHIP CLASS
- --------------------------------------------------------------------------------------------------
Richard F. Abbott 104,952 3,540 108,492 2.65%
Jefferson P. Arnold 96,783 5,302 102,085 2.49%
Jeffrey S. Barker (3) 28,856 67,950 96,806 2.36%
Don J. Dewey 21,044 6,192 27,236 .66%
Patrick G. Duffy (3) 12,897 38,273 51,170 1.25%
Robert S. Elmore 270 -- 270 --
David F. Ferguson 77,100 2,281 79,381 1.94%
Paul B. Luneack (4) 95,093 1,294 96,387 2.35%
Kim C. Newson 24,356 6,426 30,782 .75%
Howard D. Poindexter 144,844 3,664 148,508 3.62%
Scott E. Sheldon 158,167 11,347 169,514 4.14%
Andrew P. Shafley (3) 16,517 28,582 45,099 1.10%
------- ------- ------- -----
All directors and executive
officers as a group (12
persons) 780,879 174,851 955,730 23.31%
======= ======= ======= =====
(1) The number of shares stated is based on information furnished by the
officers and directors and includes shares personally owned of
record by each person and shares which under applicable regulations
are deemed to be otherwise beneficially owned by each person.
(2) These numbers include vested stock options, granted under the
Corporation's 1991 Stock Option Plan and 2001 Stock Option Plan,
which entitle the holder to acquire beneficial ownership of such
shares within sixty days.
(3) These numbers include shares that are allocated to the person's
individual account under the Commercial Bank Employee Savings and
Stock Ownership Plan.
(4) Paul B. Luneack is the son of Kenneth R. Luneack who is the owner of
303,770 shares of Common Stock.
The Company is not aware of any arrangements that may result in a change
in control of the Company. During the past 60 days, neither the Company nor its
subsidiaries, directors or executive officers has engaged in any transactions
involving Common Stock, other than a sale of 3,500 shares of common stock
between Paul B. Luneack and David A. Ferguson, both directors of the
Corporation.
The following table sets forth, as of October 1, 2004, the names and
addresses of all beneficial owners of 5% or more of the Common Stock and shows
the amount and nature of such beneficial ownership.
36
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- -------------------------------------------------------------------------------------------------------
Kenneth R. Luneack (1)
9333 N. Union Road
St. Louis, Michigan 48880 303,770 7.41%
------- ----
(1) Kenneth R. Luneack is the father of director Paul B. Luneack.
STOCK REPURCHASES
During the past two years, the Company has repurchased the following
shares of Common Stock:
AVERAGE PRICE
PERIOD TOTAL NUMBER OF SHARES PURCHASED PAID PER SHARE
- ------------------------------------------------------------------------------------------
November 2002 - December 2003 22,829 $ 11.69
January 2004 - March 2004 ----- -----
April 2004 - June 2004 14,922 $ 11.33
July 2004 - September 2004 10,322 $ 11.26
CB Merger Co. has not purchased any shares of Common Stock since its
incorporation.
MARKET FOR COMMON STOCK AND DIVIDEND INFORMATION
The Common Stock is quoted in the over-the-counter market on the OTC
Bulletin Board or Commonly referred to as Pink Sheets under the symbol "CEFC."
Trading of the Common Stock is limited and sporadic, and the Company believes
there are occasional transactions among private parties that are not reported to
the Company. The Company had 696 shareholders of record as of October 1, 2004.
The table below sets forth the high and low prices for the Common Stock
for each calendar quarter from January 1, 2002, through September 30, 2004, as
reported to the Company, for the calendar quarters indicated, and the dividends
declared on the stock in each quarter. As previously noted, there may be other
transactions of which the Company is not aware. The prices and dividend
information have been adjusted for the 5% stock dividends issued in November
2003 and November 2002.
ACTUAL PRICE RANGE CASH DIVIDENDS
QUARTER ENDED SHARES TRADED HIGH LOW DECLARED
------------- ------------- ---- --- --------
March 31, 2002 24,150 10.40 9.09 .12
June 30, 2002 6,930 14.25 10.17 .13
September 30, 2002 8,715 13.58 11.50 .13
December 31, 2002 45,885 12.66 10.74 .13
March 31, 2003 29,200 13.14 10.95 .13
June 30, 2003 19,600 12.52 11.66 .13
September 30, 2003 16,500 12.38 11.29 .14
December 31, 2003 26,800 12.38 10.50 .14
March 31, 2004 38,400 12.65 10.70 .14
June 30, 2004 77,400 12.20 10.80 .12
September 30, 2004 52,900 12.00 10.75 .12
37
The payment of dividends by the Company and the Bank is affected by
various regulatory requirements and policies, such as the requirement to
maintain adequate capital above regulatory guidelines. The "prompt corrective
action" provisions of the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") impose further restrictions on the payment of dividends by
insured banks which fail to meet specified capital levels and, in some cases,
their parent bank holding companies. FDICIA generally prohibits a depository
institution from making any capital distribution (including payment of a
dividend) or paying any management fee to its holding company if the depository
institution would thereafter be undercapitalized. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
the Company's cash needs, including funds for acquisitions, payments of
dividends and interest, and the payment of operating expenses. Based on the
Bank's balance sheet as of September 30, 2004, the Bank could pay a dividend to
the Company in the amount of $1,950,000 without prior regulatory approval.
After the Merger, the Company will not be required to file reports under
the Exchange Act, and its Common Stock will not be registered under the Exchange
Act. The Common Stock may continue to be quoted in the over-the-counter market,
on the OTC Bulletin Board or Commonly referred to as Pink Sheets. The OTC
Bulletin Board or Commonly referred to as Pink Sheets is a centralized quotation
service that collects and publishes market maker quotes in real time primarily
through its website, Pinksheets.com, which provides stock and bond price quotes,
financial news and information about securities traded.
DESCRIPTION OF COMMON STOCK
The Company is authorized to issue 5,000,000 shares of Common Stock, no
par value. As of October 1, 2004, there were 4,097,543 shares of Common Stock
outstanding. Each share of Common Stock has equal voting rights, preferences and
privileges.
Number of Shareholders. As of October 1, 2004, there were approximately
696 shareholders of record.
Voting Rights. Each share of Common Stock has the same rights and is
identical in all respects with every other share of Common Stock. The holders of
Common Stock possess all voting rights with respect to the Company. Each holder
of Common Stock is entitled to one vote for each share held of record on all
matters submitted to a vote of holders of Common Stock.
FUTURE SHAREHOLDER PROPOSALS
If the shareholders do not approve the Plan of Merger proposal, or if the
Plan of Merger is approved but the Merger is not ultimately completed,
shareholders may submit proposals for consideration at the 2005 Annual Meeting
of Shareholders. In order to be eligible for inclusion in the Company's proxy
materials for next year's Annual Meeting of Shareholders, any shareholder's
proposal to take action at such meeting must be received at the Company's home
office at 101 North Pine River, P.O. Box 280, Ithaca, Michigan, 48847, no later
than November 26, 2004. This deadline is calculated in accordance with SEC Rule
14a-8(e)(Question 5) which states that any such proposal must be received at the
Company's principal executive offices not less than 120 calendar days before the
date of the Company's proxy statement released to shareholders in connection
with the previous year's annual meeting. Any such proposal shall be subject to
the proxy rules adopted under the Exchange Act. If a shareholder proposal is not
presented to the Company by February 9, 2005, SEC Rule 14a-4(c)(l) provides that
the Company may use discretionary authority to vote on the matter.
WHERE YOU CAN FIND MORE INFORMATION
The Company files reports, proxy statements and other information with the
SEC under the Exchange Act. Please call the SEC at l-800-SEC-0330 for further
information on the public reference rooms. You may read and copy, at the
prescribed rates, this information at the SEC's Public Reference Room, 450 Fifth
Street NW, Washington, D.C. 20549.
38
The SEC also maintains an Internet website that contains reports, proxy
statements and other information about issuers such as the Company, who file
electronically with the SEC. The address of that site is http://www.sec.gov.
The Company and CB Merger Co. have filed with the SEC a Rule 13e-3
Transaction Statement on Schedule 13E-3 in connection with the transactions
described in this proxy statement. As permitted by the SEC, this proxy statement
omits certain information contained in the Schedule 13E-3. The Schedule 13E-3,
including any amendments and exhibits filed or incorporated by reference as a
part thereof, is available for inspection or copying as set forth above or is
available electronically at the SEC's website.
DOCUMENTS INCORPORATED BY REFERENCE
To "incorporate by reference" information into this document means that
the Company is disclosing important information by referring you to another
document filed separately with the SEC. The information incorporated by
reference is considered to be a part of this document, except for any
information that is superseded by information that is included directly in this
document or in any other subsequently filed document that also is incorporated
by reference into this document.
This document incorporates by reference the documents listed below that
the Company has filed previously with the SEC. They contain important
information about the Company and its financial condition.
- Commercial's Annual Report on Form 10-K for the year ended December
31, 2003.
- Commercial's Quarterly Reports on Form lO-Q, for the quarters ended
March 31, 2004, June 30, 2004 and September 30, 2004.
The Company also incorporates by reference any additional documents that
it may file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act between the date of this document and the date of the Special Meeting.
The Company will provide, without charge, to each person to whom this
proxy statement is delivered, upon written or oral request of such person and by
first class mail or other equally prompt means within one business day of
receipt of such request, a copy of any and all information that has been
incorporated by reference, without exhibits unless such exhibits are also
incorporated by reference in this proxy statement. You may obtain a copy of
these documents and any amendments thereto by writing to the Company's Secretary
at 101 North Pine River, P.O. Box 280, Ithaca, Michigan, 48847.
These documents are also included in the Company's SEC filings, which you
can access electronically at the SEC's website at http://www.sec.gov.
The Company has not authorized anyone to give any information or make any
representation about the transaction or us that differs from, or adds to, the
information in this proxy statement or in our documents that are publicly filed
with the SEC. If anyone does give you different or additional information, you
should not rely on it.
39
INDEX TO FINANCIAL STATEMENTS
TITLE PAGE
- ----- ----
Selected Financial Data (unaudited) 41
Consolidated Pro Forma Balance Sheet (unaudited as of September 30, 2004) 42
Condensed Consolidated Pro Forma Statements of Income and Comprehensive Income
(unaudited for the year ended December 31, 2003, and the nine months ended September 30, 2004) 43-44
Pro Forma Earnings Per Share (unaudited fiscal year end and interim) 45
Pro Forma Ratio of Earnings to Fixed Charges (unaudited fiscal year end and interim) 45
Pro Forma Book Value Per Share (most recent balance sheet) 45
40
COMMERCIAL NATIONAL FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
(UNAUDITED)
Year to Date
September 30, Year Ended December 31
2004 2003 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Total interest income $ 10,181,991 $ 10,494,347 $ 13,848,265 $ 14,112,022 $ 16,097,226
Net interest income 7,379,463 7,293,551 9,704,099 8,921,545 8,952,190
Provision for loan losses 270,000 1,781,000 1,901,000 681,000 375,000
Net income 2,000,997 1,586,950 2,235,802 2,900,880 3,202,588
Per share data
Basic earnings per share .49 .39 .55 .73 .82
Diluted earnings per share .49 .39 .55 .72 .82
Cash dividends .38 .40 .54 .51 .49
Balance sheet data:
Gross loans 204,698,389 188,226,893 194,389,682 184,448,296 168,012,689
Deposits 166,002,283 165,585,020 169,564,537 166,059,479 162,578,611
Other borrowings 51,190,686 44,174,342 44,283,241 47,565,165 32,466,685
Equity 24,936,529 24,040,329 24,282,827 23,703,972 22,064,278
Total assets 243,859,510 234,999,931 239,788,247 238,250,583 218,397,880
Return on average assets (1) 1.10% .89% .94% 1.28% 1.48%
Return on average equity (2) 10.79% 8.75% 9.21% 12.60% 14.93%
Dividend payout ratio (3) 77.44% 101.38% 97.33% 70.35% 59.48%
Average equity to average assets (1) 10.24% 10.18% 10.22% 10.14% 9.90%
- -----------
(1) Annualized
(2) Average equity used in the above table excludes common stock subject to
repurchase obligations but includes average unrealized appreciation or
depreciation on securities available for sale.
(3) Dividends declared divided by net income
41
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED PROFORMA BALANCE SHEETS
As of September 30, 2004
Pro Forma Pro Forma
Historical Adjustments Combined
------------- ------------- -------------
ASSETS
Cash and due from $ 4,580,199 $ 4,580,199
Federal funds sold 2,392 2,392
Other interest bearing deposits 2,016,425 2,016,425
------------- -------------
Total cash and cash equivalents 6,599,016 6,599,016
Securities available for sale 21,007,131 21,007,131
Securities held to maturity 2,038,706 2,038,706
Federal Home Loan Bank stock, at cost 1,910,000 1,910,000
Gross loans receivable 204,698,389 204,698,389
Allowance for loan losses (2,437,117) (2,437,117)
------------- -------------
Net loans 202,261,272 202,261,272
Bank owned life insurance 3,975,503 3,975,503
Premises and equipment, net 3,904,713 3,904,713
Accrued interest receivable and other assets 2,163,169 2,163,169
------------- -------------
Total assets $ 243,859,510 $ 243,859,510
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing demand $ 22,896,009 $ 22,896,009
Interest-bearing demand 27,337,102 27,337,102
Savings 61,523,479 61,523,479
Time 54,245,693 54,245,693
------------- -------------
Total deposits 166,002,283 166,002,283
Securities sold under agreements to repurchase 13,526,736 13,526,736
Other short-term borrowings 379,164 379,164
Federal Home Loan Bank advances 37,284,786 37,284,786
Notes payable $ 8,750,000 8,750,000
Accrued expenses and other liabilities 1,730,012 1,730,012
------------- ------------- -------------
Total liabilities 218,922,981 8,750,000 227,672,981
Shareholders' equity
Common stock and paid-in-capital, no par value:
5,000,000 shares authorized; shares issued and
outstanding September 30, 2004-
4,083,278 and December 31, 2003-4,052,480 24,450,290 (8,750,000) 15,700,290
Accumulated earnings/(deficit) 339,136 339,136
Accumulated other comprehensive income, net of tax 147,103 147,103
------------- ------------- -------------
Total shareholders' equity 24,936,529 (8,750,000) 16,186,529
------------- ------------- -------------
Total liabilities and shareholders' equity $ 243,859,510 $ - $ 243,859,510
============= ============= =============
See notes for assumptions
42
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Year ended December 31, 2003
Pro Forma Pro Forma
Historical Adjustments Combined
------------ ------------ ------------
Interest and dividend income
Loans, including fees $ 12,582,171 $ 12,582,171
Taxable securities 696,893 696,893
Nontaxable securities 386,531 386,531
Federal funds sold 83,229 83,229
Federal Home loan Bank stock dividends 85,328 85,328
Interest on other deposits 14,113 14,113
------------ ------------
Total interest and dividend income 13,848,265 13,848,265
Interest expense
Deposits 2,447,889 2,447,889
Securities sold under agreements to repurchase 148,493 148,493
Federal Home Loan Bank advances 1,545,107 1,545,107
Other 2,677 $ 328,125 330,802
------------ ------------ ------------
Total interest expense 4,144,166 328,125 4,472,291
Net interest income 9,704,099 (328,125) 9,375,974
Provision for loan losses 1,901,000 1,901,000
------------ ------------ ------------
Net interest income after provision for loan losses 7,803,099 (328,125) 7,474,974
Noninterest income
Service charges and fees 469,337 469,337
Net gain on loan sales 818,023 818,023
Receivable financing fees 166,424 166,424
Other 574,139 574,139
------------ ------------
Total noninterest income 2,027,923 2,027,923
------------ ------------
Noninterest expense
Salaries and employee benefits 3,698,560 3,698,560
Occupancy and equipment 1,219,326 1,219,326
FDIC insurance 27,909 27,909
Printing, postage and supplies 272,017 272,017
Professional and outside services 390,434 (85,832) 304,602
Other 1,153,974 1,153,974
------------ ------------ ------------
Total non-interest expense 6,762,220 (85,832) 6,676,388
------------ ------------ ------------
Income before income tax expense 3,068,802 (242,293) 2,826,509
Income tax expenses 833,000 (82,380) 750,620
------------ ------------ ------------
Net income $ 2,235,802 $ (159,913) 2,075,889
============ ============ ============
Per share information
Basic earnings $ .55 $ .62
Diluted earnings $ .55 $ .62
43
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Nine Months ended September 30, 2004
Pro Forma Pro Forma
Historical Adjustments Combined
----------- ------------- -------------
Interest and dividend income
Loans, including fees $ 9,424,155 $ 9,424,155
Taxable securities 420,255 420,255
Nontaxable securities 240,417 240,417
Federal funds sold 30,038 30,038
Federal Home loan Bank stock dividends 60,462 60,462
Interest on other deposits 6,664 6,664
----------- -------------
Total interest and dividend income 10,181,991 10,181,991
Interest expense
Deposits 1,618,149 1,618,149
Securities sold under agreements to repurchase 102,882 102,882
Federal Home Loan Bank advances 1,079,587 1,079,587
Other 1,910 $ 245,419 247,329
----------- ------------- -------------
Total interest expense 2,802,528 245,419 3,047,947
Net interest income 7,379,463 (245,419) 7,134,044
Provision for loan losses 270,000 270,000
----------- ------------- -------------
Net interest income after provision for loan losses 7,109,463 (245,419) 6,864,044
Noninterest income
Service charges and fees 337,573 337,573
Net gain on loan sales 175,364 175,364
Receivable financing fees 126,437 126,437
Other 403,791 403,791
----------- -------------
Total noninterest income 1,043,165 1,043,165
----------- -------------
Noninterest expense
Salaries and employee benefits 2,948,386 2,948,386
Occupancy and equipment 997,780 997,780
FDIC insurance 19,189 19,189
Printing, postage and supplies 181,955 181,955
Professional and outside services 266,269 (48,000) 218,269
Other 919,052 919,052
----------- ------------- -------------
Total non-interest expense 5,332,631 (48,000) 5,284,631
----------- ------------- -------------
Income before income tax expense 2,819,997 (197,419) 2,622,578
Income tax expenses 819,000 (67,000) 752,000
----------- ------------- -------------
Net income $ 2,000,997 $ (130,419) $ 1,870,578
=========== ============= =============
Per share information
Basic earnings $ .49 $ .55
Diluted earnings $ .49 $ .55
See notes for assumptions
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Pro Forma Pro Forma Pro Forma
Year Year Year Nine months Nine months Nine months
ended ended ended ended ended ended
12/31/2003 12/31/2002 12/31/2003 9/30/2004 9/30/2003 9/30/2004
----------- ------------- -------------- -------------- -------------- -----------
Earnings
Add,
Pretax income $ 3,068,802 $ 4,030,880 $ 2,826,509 $ 2,819,997 $ 1,965,530 $ 2,622,578
Fixed charges 4,144,166 5,190,447 4,472,291 2,802,528 3,446,215 3,047,947
Amortization of
capitalized interest
Distributed income of
equity investees
Share of pre-tax losses
of equity investees
for which charges
arising from guarantees
are included in fixed charges
Less
Interest capitalized
Preference security
dividend requirements
Minority interest in
pre-tax income of
subsidiaries that have
not incurred fixed charges
----------- ------------- -------------- -------------- -------------- -----------
Total earnings 7,212,968 9,221,327 7,298,800 5,622,525 5,411,745 5,670,525
=========== ============= ============== ============== ============== ===========
Fixed charges
Interest expensed and
Capitalized 4,144,166 5,190,447 4,472,291 2,802,528 3,446,215 3,047,947
Amoritized premiums,
discounts an
capitalized interest
Interest within rental
expense
Preference security
dividend requirements
of consolidated subs
----------- ------------- -------------- -------------- -------------- -----------
Total fixed charges 4,144,166 5,190,447 4,472,291 2,802,528 3,446,215 3,047,947
=========== ============= ============== ============== ============== ===========
RATIO OF EARNINGS TO FIXED
CHARGES 174.05% 177.66% 163.20% 200.62% 157.03% 186.04%
Actual Pro Forma Pro Forma
9/30/2004 Adjustments 9/30/2004
------------ ------------- ---------------
Common stock and paid-in-capital $ 24,450,290 $ (8,750,000) $ 15,700,290
Retained earnings 339,136 339,136
Accumulated other comprehensive income, net
of tax 147,103 147,103
------------ ------------- ---------------
Total shareholders' equity $ 24,936,529 $ (8,750,000) $ 16,186,529
============ ============= ===============
Outstanding shares 4,083,278 (700,000) 3,383,278
Book value per share $ 6.11 $ (12.50) $ 4.78
45
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS
1. Commercial has assumed that the Merger occurred as of September 30,
2004, for the purposes of the unaudited consolidated pro forma
balance sheet, and as January 1, 2003 and January 1, 2004,
respectively, with respect to the unaudited condensed consolidated
pro forma income statements for the year ended December 31, 2003 and
the nine months ended September 30, 2004.
2. Commercial has assumed that a total of 700,000 shares are cashed out
in the merger at a price of $12.50 per share for a total payment of
$8,750,000.
3. Commercial has assumed that all of the cash required to consummate
the Merger will be provided from the trust preferred issue
4. Commercial has adjusted for a pretax cost, estimated to be
approximately $242,293 for the year ended December 31, 2003 and
$197,419 for the nine months ended September 30, 2004. The
applicable federal tax rate is assumed to be 34%. This is an
estimate of the actual cost incurred in these periods for legal,
accounting and other professional fees associated with the filing
requirements under the Exchange Act. This adjustment is not a
prediction of future results. No adjustment is made for employee,
overhead, indirect or incidental expenses. Management estimates that
costs associated with being a filing company under the Exchange Act
will be significantly higher in later periods.
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Plan of Merger"), dated as of November
16, 2004, is entered into by and between CB Merger Company ("Merger Co.") and
Commercial National Financial Corporation ("Commercial").
Merger Co. is a corporation, duly organized and validly existing under the
laws of the State of Michigan. As of the date of this Plan of Merger, the
authorized capital stock of Merger Co. consists of 60,000 shares of common
stock, no par value ("Merger Co. Common Stock"), of which 100 shares are issued
and outstanding. All of Merger Co.'s outstanding shares are owned by Commercial.
Commercial is a corporation, duly organized and validly existing under the laws
of the State of Michigan. As of the date of this Plan of Merger, the authorized
capital stock of Commercial consists of its common stock, no par value
("Commercial Common Stock"), of which 5,000,000 shares are authorized and of
which 4,097,973 shares are issued and outstanding. The respective Boards of
Directors of Commercial and Merger Co. deem this Plan of Merger advisable and in
the best interests of each such corporation and their respective shareholders.
The respective Boards of Directors of Commercial and Merger Co. have each
adopted the Plan of Merger, directed that this Plan of Merger be submitted for
approval by their respective shareholders, and recommended that the Plan of
Merger be approved by their respective shareholders.
Merger Co. and Commercial agree:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this Plan of
Merger, and in accordance with the Michigan Business Corporation Act (the
"Act"), at the Effective Time (as defined in Section 1.2), Merger Co. will merge
with and into Commercial (the "Merger"). Commercial will survive the Merger and
will continue its corporate existence (referred to after the Merger as the
"Surviving Corporation") under the laws of the State of Michigan. Upon
consummation of the Merger, the separate corporate existence of Merger Co. will
terminate and the name of the Surviving Corporation will be "Commercial National
Financial Corporation."
1.2 EFFECTIVE TIME. After approval of this Plan of Merger by the
shareholders of Merger Co. and Commercial, a certificate of merger will be filed
with the Michigan Department of Labor and Economic Growth for approval. The
Merger will become effective (the "Effective Time") when the certificate of
merger has been filed with the Michigan Department of Labor and Economic Growth
or as of any later time specified in the certificate of merger.
1.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
will have the effects set forth in the Act and in this Plan of Merger.
1.4 TREATMENT OF COMMON STOCK.
(a) At the Effective Time, by virtue of the Merger and without any
shareholder action, the following will occur:
(i) all outstanding shares of Commercial Common Stock (other
than shares of Commercial Common Stock, the holders of which exercise and
perfect dissenters' rights as set forth in Article III), whether Record Shares
(as hereinafter defined), or Street Shares (as hereinafter defined), held by a
Holder (as hereinafter defined) holding fewer than 4,000 shares of Commercial
Common Stock immediately before the Effective Time (a "Nonqualified Holder")
shall, without any action on the part of the holder thereof, be canceled and
converted into the right to receive cash equal to $12.50 per share of Commercial
Common Stock (the "Cash
Consideration"); provided, however, that Commercial may presume that all Street
Shares are held by Holders holding fewer than 4,000 shares of Commercial Common
Stock immediately before the Effective Time unless either Commercial or a
beneficial owner of Street Shares are able to demonstrate to Commercial's
satisfaction that such shares are held beneficially by a Holder holding 4,000 or
more shares of Commercial Common Stock immediately before the Effective Time, in
which event such shares shall remain outstanding with all rights, privileges,
and powers existing immediately before the Effective Time;
(ii) all outstanding shares of Commercial Common Stock other
than those described in subparagraph 1.4(a)(i) as being converted into the right
to receive the Commercial Cash Consideration, shall remain outstanding with all
rights, privileges, and powers existing immediately before the Effective Time;
and
(iii) the outstanding shares of Merger Co. Common Stock shall,
without any action on the part of the holder thereof, be canceled.
In no event shall any Holder holding, of record or beneficially,
immediately before the Effective Time, 4,000 or more shares of Commercial Common
Stock (a "Qualified Holder") (including any combination of Record Shares and
Street Shares) in the aggregate be entitled to receive any Cash Consideration
with respect to the shares of Commercial Common Stock so held. It shall be a
condition precedent to the right of any Holder to receive the Cash
Consideration, if any, payable with respect to the shares of Commercial Common
Stock held by such Holder that such Holder certify to Commercial in the letter
of transmittal delivered by Commercial as described in Section 2.2 that such
Holder held, of record or beneficially, immediately before the Effective Time
fewer than 4,000 shares of Commercial Common Stock (including any combination of
Record Shares and Street Shares) in the aggregate.
1.5 CERTAIN DEFINITIONS. For purposes hereof:
(a) The term "Record Shares" shall mean shares of Commercial Common
Stock other than Street Shares, and any Record Share shall be deemed to be held
by the registered holder thereof as reflected on the books of Commercial;
(b) The term "Street Shares" shall mean shares of Commercial Common
Stock held of record in street name, and any Street Share shall be deemed to be
held by the beneficial owner thereof as reflected on the books of the nominee
holder thereof; and
(c) The term "Holder" shall mean (i) any record holder or holders of
Record Shares who would be deemed, under Rule 12g5-1 promulgated under the
Securities Exchange Act of 1934, as amended, to be a single "person" for
purposes of determining the number of record shareholders of Commercial, and
(ii) any other person or persons who would be deemed to be a "Holder" under
clause (i) above if the shares of Commercial Common Stock such person holds
beneficially in street name were held of record by such person or persons.
1.6 ARTICLES OF INCORPORATION. The Articles of Incorporation of Commercial
in effect as of the Effective Time will be the Articles of Incorporation of the
Surviving Corporation after the Merger until amended in accordance with
applicable law.
1.7 BYLAWS. The Bylaws of Commercial in effect as of the Effective Time
will be the Bylaws of the Surviving Corporation after the Merger until amended
in accordance with applicable law.
1.8 BOARD OF DIRECTORS. The directors of Commercial immediately prior to
the Effective Time will be the directors of the Surviving Corporation from and
after the Effective Time until their respective successors will have been
elected or appointed and qualified or until their earlier death, resignation, or
removal in accordance with the Surviving Corporation's Articles of Incorporation
and Bylaws.
1.9 OFFICERS. The officers of Commercial immediately prior to the
Effective Time will be the officers of the Surviving Corporation from and after
the Effective Time until their respective successors have been elected or
appointed and qualified or until their earlier death, resignation, or removal in
accordance with the Surviving Corporation's Articles of Incorporation and
Bylaws.
1.10 SHAREHOLDER APPROVAL. The Merger is subject to the condition that
this Plan of Merger be approved by a vote of the holders of a majority of the
issued and outstanding shares of Commercial Common Stock.
ARTICLE II
STOCK CERTIFICATES
2.1 CERTIFICATES HELD BY QUALIFIED HOLDERS. Certificates evidencing shares
of Commercial Common Stock held by a Qualified Holder as of the Effective Time
will evidence the same number of shares of common stock of the Surviving
Corporation after the Effective Time.
2.2 CERTIFICATES HELD BY NONQUALIFIED HOLDERS. After the Effective Time,
the Surviving Corporation will send or deliver to each Nonqualified Holder a
letter of transmittal. This letter will describe how to exchange stock
certificates for the Cash Consideration. Until presented to the Surviving
Corporation as directed by the letter of transmittal, certificates that
previously represented shares of Commercial Common Stock held by a Nonqualified
Holder will only evidence the right to receive cash as provided in this Plan of
Merger. Upon presentation to the Surviving Corporation of certificates that
previously represented shares of Commercial Common Stock held by a Nonqualified
Holder, cash will be paid in an amount to which such holder will be entitled
pursuant to Article I of this Plan of Merger. No interest will be due on any
cash payable pursuant to this Plan of Merger, except as may be applicable
pursuant to Article III.
ARTICLE III
DISSENTERS' RIGHTS
Pursuant to a resolution of the Board of Directors, each Nonqualified
Holder may elect to dissent from this Plan of Merger, and obtain payment for his
or her shares of Common Stock, in the manner, with the rights, and subject to
the requirements applicable to dissenting shareholders as provided in Sections
761 through 774 of the Act. No other Holder will have the right to dissent. The
right of a Nonqualified Holder to dissent is subject to the condition that the
Nonqualified Holder comply strictly with Sections 765, 767 and 772 of the Act,
and any Nonqualified Holder who exercises dissenters' rights will be deemed by
such exercise to have agreed to be bound by those sections of the Act. As
provided in Section 765 of the Act, a Nonqualified Holder who wishes to assert
dissenters' rights must deliver to Commercial, before the shareholder vote to
approve this Plan of Merger is taken, a written notice of his or her intent to
demand payment for his or her shares if this Plan of Merger is effectuated. In
addition, the dissenting Nonqualified Holder must not vote his or her shares in
favor of the Plan of Merger proposal.
ARTICLE IV
GENERAL PROVISIONS
4.1 RESOLUTION OF ISSUES.
(a) Commercial (along with any other person or entity to which it
may delegate or assign any responsibility or task with respect thereto) shall
have full discretion and exclusive authority (subject to its right and power to
so delegate or assign such authority) to (i) make such inquiries, whether of any
shareholder(s) or otherwise, as it may deem appropriate for purposes of this
Plan of Merger and (ii) resolve and determine, in its sole discretion, all
ambiguities, questions of fact and interpretive and other matters relating to
this Plan of Merger, including, without limitation, any questions as to the
number of shares of Commercial Common Stock held by any Holder immediately
before the Effective Time. All determinations by Commercial under this Section
4.1(a) shall
be final and binding on all parties, and no person or entity shall have any
recourse against Commercial or any other person or entity with respect thereto.
(b) For purposes of this Plan of Merger, Commercial may in its sole
discretion, but shall not have any obligation to do so, (i) presume that any
shares of Commercial Common Stock held in a discrete account (whether record or
beneficial) are held by a person distinct from any other person, notwithstanding
that the registered or beneficial holder of a separate discrete account has the
same or a similar name as the holder of a separate discrete account; and (ii)
aggregate the shares of Commercial Common Stock held (whether of record or
beneficially) by any person or persons that Commercial determines to constitute
a single Holder for purposes of determining the number of shares of Commercial
Common Stock held by such Holder.
4.2 GOVERNING LAW. This Plan of Merger will be governed and construed in
accordance with the laws of the State of Michigan, without regard to any
applicable conflicts of law.
4.3 ABANDONMENT. At any time prior to the Effective Time, before or after
approval of the Plan of Merger by the shareholders of Merger Co. and Commercial,
Merger Co. and Commercial may abandon this Plan of Merger without further
shareholder action by a written agreement signed by an officer of each of Merger
Co. and Commercial; provided, however, that if a certificate of merger has been
filed, this Plan of Merger may not be abandoned unless a certificate of
abandonment is filed with the Michigan Department of Labor and Economic Growth
within 10 days of the abandonment, but not later than the proposed effective
date. If abandoned, this Plan of Merger will terminate and be of no further
force and effect and no shareholder shall have any rights under this Plan of
Merger.
4.4 AMENDMENT. Subject to compliance with applicable law, this Plan of
Merger may be amended by a written agreement executed by Merger Co. and
Commercial and authorized by their respective Boards of Directors or duly
authorized committees at any time before or after approval of the Plan of Merger
by the shareholders of Merger Co. or Commercial; provided, however, that after
any approval of the transactions contemplated by this Plan of Merger by the
shareholders of Commercial, there may not be, without further approval of such
shareholders, any amendment of this Plan of Merger which (i) alters or changes
the amount or the form of the consideration to be delivered to the holders of
Commercial Common Stock other than as contemplated by this Plan of Merger, (ii)
alters or changes any term of the Articles of Incorporation of the Surviving
Corporation, or (iii) adversely affects the holder of any stock of the
constituent corporations.
THIS AGREEMENT AND PLAN OF MERGER has been executed as of the date first above
written.
CB MERGER COMPANY COMMERCIAL NATIONAL FINANCIAL CORPORATION
By: /s/ Jeffrey S. Barker By: /s/ Jeffrey S. Barker
----------------------------- -------------------------------------
Jeffrey S. Barker, President Jeffrey S. Barker, President
APPENDIX B
Article XIII. Restrictions on Transfer of Stock.
(a) Shareholders desiring to transfer their shares of the common
stock of the corporation shall first present the shares to the corporation for
sale. Commencing with receipt of written notice from a shareholder who wishes to
transfer his or her common stock in the corporation, the corporation shall have
a period of thirty (30) days in which to exercise this right of first refusal.
If this period of time elapses without exercise of the right of first refusal by
the corporation, the shareholder shall be free to transfer the shares to the
party identified in the written notice to the corporation. The corporation may
notify the shareholder before the end of the thirty (30) day period if it
decides it will not be interested in purchasing the shares. Purchase of the
shares shall be for cash, unless another payment plan is acceptable to the
shareholder.
The price to be paid by the corporation for the shares shall
be established between the corporation and the shareholder not lower than the
price per share established by the Board of Directors for the purchase and sale
of corporation stock (transfer price, (b) below) and not higher than the amount
offered to the shareholder, if any, (in a valid and currently unexpired bona
fide offer) for the shares being presented to the corporation for purchase.
(b) The board of directors shall establish from time to time (at
least annually) a transfer price which shall be used by the corporation for the
purchase of common stock offered by existing shareholders. Such price shall be
set to reflect a fair current value for the shares being sold or purchased.
(c) For purposes of this Article XIII, "transfer" means any type of
disposition, including but not limited to a sale, gift, contribution or other
action that would result in a change of the record ownership of any share of
corporation common stock.
(d) Any attempted transfer that is not in compliance with this
Article XIII will be of no effect and will not be recorded on the stock transfer
books of the corporation. This restriction will be binding to the fullest extent
permitted by law and shall be noted conspicuously on stock certificates issued
or transferred after the effective date of the amendment adding this Article to
the Articles of Incorporation.
APPENDIX C
November 17, 2004
Board of Directors
Commercial National Financial Corporation
101 North Pine River Street
P.O. Box 280
Ithaca, MI 48847-0280
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of
view, of the cash consideration of $12.50 per share to be received by the common
shareholders Commercial National Financial Corporation ("Commercial National" or
the "Company") holding fewer than 4,000 shares immediately prior to the
Effective Time as defined in the Proxy Statement relating to the Agreement and
Plan of Merger (the "Transaction"). Shareholders who hold 4,000 or more shares
immediately prior to the Effective Time will be issued new shares, the number of
which will depend on the number of pre-Transaction shares held. Shareholders who
hold fewer than 4,000 shares immediately prior to the Effective Time will, as a
result of the Transaction, no longer be shareholders of the Company and instead
will receive cash in the amount of $12.50 per pre-Transaction share
("Transaction Consideration"). Thereafter, these shareholders shall cease to
have any rights as shareholders of the Company except such rights, if any, as
they may have pursuant to the Michigan Business Corporation Act, and, except as
aforesaid, their sole right shall be the right to receive the Transaction
Consideration as aforesaid, without interest thereon, upon surrender to the
Company of their certificates which theretofore represented shares of Commercial
National Common Stock.
Donnelly Penman & Partners ("Donnelly Penman") is an investment-banking firm of
recognized standing. As part of our investment banking services, we are
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements and valuations for
stock plans, corporate and other purposes. We are acting as financial advisor to
the Company in connection with the Transaction and will receive a fee from the
Company for our services pursuant to the terms of our engagement letter with the
Company, dated as of October 6, 2004 (the "Engagement Letter").
In arriving at our Opinion, we have:
I. Reviewed the Annual Reports of the Company for the years ended December
31, 2002 through 2003 as well as interim financials through October 31,
2004;
II. Reviewed the September 30, 2004 Board of Directors Report;
III. Reviewed the Company's budget for the year ended December 31, 2004 and
financial forecast through September 30, 2006;
IV. Compared certain financial characteristics of the Company to certain
publicly held companies we deemed relevant;
V. Reviewed current banking industry conditions and trends concerning the
valuation of recent mergers and acquisitions;
VI. Conducted discussions with the senior management of the Company concerning
the business and future prospects of the Company;
The Board of Directors
Commercial National Financial Corporation
November 17, 2004
Page 2
VII. Prepared a discounted dividend analysis of the Company based on
projections derived from discussions with and deemed reasonable by
management of the Company; and
VIII. Reviewed such other data, including financial and industry data, performed
such other analyses and taken into account such other matters as we deemed
necessary or appropriate.
In conducting our review and arriving at our opinion, as contemplated under the
terms of our engagement by the Company, we, with the consent of the Company,
relied, without independent investigation, upon the accuracy and completeness of
all financial and other information provided to us by the Company. Donnelly
Penman has further relied upon the assurance of management of the Company that
they are unaware of any facts that would make the information provided by or
available to the Company incomplete or misleading in any respect. With respect
to the financial forecast information discussed with us by the Company, we have
assumed that they have been reasonably prepared in good faith and reflect the
best currently available estimates and judgments of the senior management of the
Company as to the expected future financial performance of the Company. The
Company's management team has undertaken and agreed to advise us promptly if any
information previously provided has become inaccurate or is required to be
updated during the period of our review.
No limitations were imposed by the Company on Donnelly Penman on the scope of
Donnelly Penman's investigation or the procedures to be followed by Donnelly
Penman in rendering this opinion. On November 11, 2004, the Board of Directors
was provided with a Donnelly Penman valuation of the fully marketable,
undiscounted value of a share of Commercial National common stock as of November
11, 2004. Although Donnelly Penman believes the value presented to the board and
subsequent update are reasonable valuations, the actual share valuation for
purposes of this Transaction is at the sole discretion of the Board of
Directors. In addition, Donnelly Penman was not requested to and did not make
any recommendation to the Company's Board of Directors as to the form of the
consideration to be paid to the Company's shareholders. Donnelly Penman was not
requested to opine as to, and this opinion does not address, The Company's
underlying business decision to proceed with or effect the Transaction or the
relative merits of the Transaction compared to any alternative transaction that
might be available to the Company.
Donnelly Penman did not make or obtain any independent evaluation, valuation or
appraisal of the assets or liabilities of the Company, nor were we furnished
with such materials. Donnelly Penman has not reviewed any individual credit
files of the Company and has assumed, without independent verification, that the
aggregate allowances for credit losses for the Company are adequate and
appropriate to cover such losses. Our opinion is necessarily based upon economic
and market conditions and other circumstances as they exist and have been
evaluated by us on the date of our opinion. We do not have any obligation to
update our opinion beyond the November 11, 2004 valuation, unless requested by
the Company in writing to do so, and we expressly disclaim any responsibility to
do so in the absence of any such request. Our services to the Company in
connection with the Transaction have been comprised solely of financial advisory
services, as described in the Engagement Letter.
In our analyses, we have made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of the Company. These assumptions include:
- interest rates are expected to gradually trend upward through 2006
and remain constant thereafter;
- general economic conditions are not expected to improve or
deteriorate significantly from their current state;
- no significant industry regulations or events are expected to occur
that would impair the Company's ability to earn income at the
projected levels; and
The Board of Directors
Commercial National Financial Corporation
November 17, 2004
Page 3
- industry trading and transaction multiples are not projected to
change significantly from the current values.
Any estimates contained in our analyses are not necessarily indicative of future
results or value, which may be significantly more or less favorable than such
estimates. Estimates of values of companies do not purport to be appraisals or
to necessarily reflect the prices at which companies or their securities
actually may be sold. No company or merger utilized in our analyses was
identical to the Company. Accordingly, such analyses are not based solely on
arithmetic calculations; rather, they involve complex considerations and
judgments concerning differences in financial and operating characteristics of
the relevant companies, the timing of the relevant mergers and prospective buyer
interests, as well as other factors that could affect the public trading markets
of companies to which the Company is being compared. The analyses performed by
Donnelly Penman were assigned a weighting based on Donnelly Penman's opinion of
their relative comparability and significance with regard to the specific
characteristics of the Company. The complete valuation provided to the Company
on November 11, 2004, including a comprehensive explanation of methodologies
utilized has been delivered to the Board of Directors of the Company. Additional
copies are available to members of the Board of Directors of the Company and the
Company's management upon request. A summary of this valuation is also presented
in the Proxy Statement under the heading of Opinion of Financial Advisor.
Our opinion is furnished to the Board of Directors of the Company in connection
with its consideration of the proposed Transaction and does not constitute a
recommendation to or any advice to the Board of Directors of the Company or to
any shareholder to take any other action in connection with the Transaction.
Furthermore, this letter should not be construed as creating any fiduciary duty
on the part of Donnelly Penman to any such party. We hereby consent to the
reference to our opinion in the proxy statement relating to the shares of common
stock of the Company to be repurchased in the Transaction and to the inclusion
of the foregoing opinion in the materials relating to the Transaction. In giving
such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, it is our opinion that, as of November 11, 2004,
the Transaction Consideration of $12.50 per share, is fair, from a financial
point of view, to the common shareholders of the Company. This opinion confirms
our oral opinion provided to the Board of Directors of the Company on November
11, 2004.
Very truly yours,
John C. Donnelly
Managing Director
Donnelly Penman & Partners
APPENDIX D
DISSENTERS' RIGHTS STATUTE
450.1761. DEFINITIONS
Sec. 761. As used in sections 762 to 774:
(a) "Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving corporation by merger of that
issuer.
(c) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under section 762 and who exercises that right when and in the
manner required by sections 764 through 772.
(d) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be
inequitable.
(e) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
(f) "Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the
extent of the rights granted by a nominee certificate on file with a
corporation.
(g) "Shareholder" means the record or beneficial shareholder.
450.1762. SHAREHOLDER'S RIGHT TO DISSENT, FAIR VALUE OF SHARES; EXCEPTIONS TO
RIGHT TO DISSENT
Sec. 762.
(1) A shareholder is entitled to dissent from, and obtain payment of the fair
value of his or her shares in the event of, any of the following corporate
actions:
(a) Consummation of a plan of merger to which the corporation is a party
if shareholder approval is required for the merger by section 703a
or 736(5) or the articles of incorporation and the shareholder is
entitled to vote on the merger, or the corporation is a subsidiary
that is merged with its parent under section 711.
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the
sale or exchange, including a sale in dissolution but not including
a sale pursuant to court order.
(d) An amendment of the articles of incorporation giving rise to a right
to dissent pursuant to section 621.
(e) A transaction giving rise to a right to dissent pursuant to section
754.
(f) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the
board provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(g) The approval of a control share acquisition giving rise to a right
to dissent pursuant to section 799.
(2) Unless otherwise provided in the articles of incorporation, bylaws, or a
resolution of the board, a shareholder may not dissent from any of the
following:
(a) Any corporate action set forth in subsection (l)(a) to (e) as to
shares that are listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the national association of securities dealers,
on the record date fixed to vote on the corporate action or on the
date the resolution of the parent corporation's board is adopted in
the case of a merger under section 711 not requiring shareholder
vote under section 713.
(b) A transaction described in subsection (l)(a) in which shareholders
receive cash or shares that satisfy the requirements of subdivision
(a) on the effective date of the merger or any combination thereof.
(c) A transaction described in subsection (l)(b) in which shareholders
receive cash or shares that satisfy the requirements of subdivision
(a) on the effective date of the share exchange or any combination
thereof.
(d) A transaction described in subsection (1)(c) that is conducted
pursuant to a plan of dissolution providing for distribution of
substantially all of the corporation's net assets to shareholders in
accordance with their respective interests within one year after the
date of closing of the transaction, where the transaction is for
cash or shares that satisfy the requirements of subdivision (a) on
the date of closing or any combination thereof.
(3) A shareholder entitled to dissent and obtain payment for his or her shares
pursuant to subsection (1)(a) to (e) may not challenge the corporate
action creating his or her entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(4) A shareholder who exercises his or her right to dissent and seek payment
for his or her shares pursuant to subsection (l)(f) may not challenge the
corporate action creating his or her entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
450.1763.DISSENTERS' RIGHTS; PARTIAL DISSENTER, BENEFICIAL SHAREHOLDER
Sec. 763.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his or her name only if he or she dissents with
respect to all shares beneficially owned by any one person and notifies
the corporation in writing of the name and address of each person on whose
behalf he or she asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to
which he or she dissents and his or her other shares were registered in
the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on his or her behalf only if all of the following apply:
(a) He or she submits to the corporation the record shareholder's
written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights.
2
(b) He or she does so with respect to all shares of which he or she is
the beneficial shareholder or over which he or she has power to
direct the vote.
450.1764. CORPORATE ACTION CREATING DISSENTERS' RIGHTS; VOTE AT SHAREHOLDERS'
MEETING, NOTICE; ACTION Sec. 764. TAKEN WITHOUT SHAREHOLDER VOTE NOTICE
(1) If proposed corporate action creating dissenters' rights under Section 762
is submitted to a vote at a shareholders' meeting, the meeting notice must
state that shareholders are or may be entitled to assert dissenters'
rights under this act and shall be accompanied by a copy of sections 761
to 774.
(2) If corporate action creating dissenters' rights under section 762 is taken
without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in section 766. A
shareholder who consents to the corporate action is not entitled to assert
dissenters' rights.
450.1765. SHAREHOLDER ASSERTING DISSENTER RIGHTS; WRITTEN NOTICE OF INTENT TO
DEMAND PAYMENT FOR SHARES, SUBMISSION PRIOR TO VOTE AT SHAREHOLDER
MEETING
Sec. 765.
(1) If proposed corporate action creating dissenters' rights under section 761
is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must deliver to the corporation before
the vote is taken written notice of his or her intent to demand payment
for his or her shares if the proposed action is effectuated and must not
vote his or her shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) is
not entitled to payment for his or her shares under this act.
450.1766. DELIVERY OF WRITTEN DISSENTERS NOTICE BY CORPORATION; NOTICE CONTENTS
Sec. 766.
(1) If proposed corporate action creating dissenters' rights under section 762
is authorized at a shareholders' meeting, the corporation shall deliver a
written dissenters' notice to all shareholders who satisfied the
requirements of section 765.
(2) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken, and must provide all of the following:
(a) State where the payment demand must be sent and where and when
certificates for shares represented by certificates must be
deposited.
(b) Inform holders of shares without certificates to what extent
transfer of the shares will be restricted after the payment demand
is received.
(c) Supply a form for the payment demand that includes the date of the
first announcement to news media or to shareholders of the terms of
the proposed corporate action and requires that the person asserting
dissenters' rights certify whether he or she acquired beneficial
ownership of the shares before the date.
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the
date the subsection (1) notice is delivered.
3
450.1767. SHAREHOLDERS SENT DISSENTER'S NOTICE; DEMAND FOR PAYMENT,
CERTIFICATION OF BENEFICIAL OWNERSHIP DATE, DEPOSIT OF CERTIFICATES;
RIGHTS RETAINED; FAILURE TO DEMAND PAYMENT
Sec. 767.
(1) A shareholder sent a dissenter's notice described in section 766 must
demand payment, certify whether he or she acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters'
notice pursuant to section 766(2)(c), and deposit his or her certificates
in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his or her share
certificates under subsection (1) retains all other rights of a
shareholder until these rights are canceled or modified by the taking of
the proposed corporate action.
(3) A shareholder who does not demand payment or deposit his or her share
certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his or her shares under this act.
450.1768. TRANSFER OF SHARES WITHOUT CERTIFICATES, RESTRICTION; RIGHTS RETAINED
Sec. 768.
(1) The corporation may restrict the transfer of shares without certificates
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under section 770.
(2) The person for whom dissenters' rights are asserted as to shares without
certificates retains all other rights of a shareholder until these rights
are canceled or modified by the taking of the proposed corporate action.
450.1769. PAYMENT TO DISSENTERS OF ESTIMATED FAIR VALUE OF SHARES PLUS ACCRUED
INTEREST; ACCOMPANYING INFORMATION
Sec. 769.
(1) Except as provided in section 771, within 7 days after the proposed
corporate action is taken or a payment demand is received, whichever
occurs later, the corporation shall pay each dissenter who complied with
section 767 the amount the corporation estimates to be the fair value of
his or her shares, plus accrued interest.
(2) The payment must be accompanied by all of the following:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders'
equity for that year, and if available the latest interim financial
statements.
(b) A statement of the corporation's estimate of the fair value of the
shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under section
772.
450.1770. FAILURE OF CORPORATION TO TAKE PROPOSED ACTION; RETURN OF
CERTIFICATES, RELEASE OF TRANSFER RESTRICTIONS; TAKING ACTION AFTER RETURN AND
RELEASE, NW DISSENTER'S NOTICE
Sec. 770.
(1) If the corporation does not take the proposed action within 60 days after
the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the
transfer restrictions imposed on shares without certificates.
4
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a
new dissenters' notice under section 766 and repeat the payment demand
procedure.
450.1771. ELECTION BY CORPORATION TO WITHHOLD PAYMENT FROM CERTAIN DISSENTERS;
ESTIMATE OF FAIR VALUE OF SHARES, OFFER OF PAYMENT, STATEMENT
Sec. 771.
(1) A corporation may elect to withhold payment required by section 769 from a
dissenter unless he or she was the beneficial owner of the shares before
the date set forth in the dissenters' notice pursuant to section
766(2)(c).
(2) To the extent the corporation elects to withhold payment under subsection
(1), after taking the proposed corporate action, it shall estimate the
fair value of the shares, plus seemed interest, and shall offer to pay
this amount to each dissenter who shall agree to accept it in full
satisfaction of his or her demand. The corporation shall send with its
offer a statement of its estimate of the fair value of the shares, an
explanation of how the interest was calculated, and a statement of the
dissenter's right to demand payment under section 772.
450.1772. ESTIMATE OF FAIR VALUE, WRITTEN NOTICE; DEMAND FOR PAYMENT,
CONDITIONS; WAIVER OF RIGHT TO DEMAND PAYMENT
Sec. 772.
(1) A dissenter may notify the corporation in writing of his or her own
estimate of the fair value of his or her shares and amount of interest
due, and demand payment of his or her estimate, less any payment under
section 769, or reject the corporation's offer under section 771 and
demand payment of the fair value of his or her shares and interest due, if
any one of the following applies:
(a) The dissenter believes that the amount paid under section 769 or
offered under section 771 is less than the fair value of his or her
shares or that the interest due is incorrectly calculated.
(b) The corporation fails to make payment under section 769 within 60
days after the date set for demanding payment.
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer
restrictions imposed on shares without certificates within 60 days
after the date set for demanding payment.
(2) A dissenter waives his or her right to demand payment under this section
unless he or she notifies the corporation of his or her demand in writing
under subsection (1) within 30 days after the corporation made or offered
payment for his or her shares.
450.1773. UNSETTLED DEMAND FOR PAYMENT, APPRAISAL PROCEEDINGS; COMMENCEMENT,
PARTIES, JURISDICTION, APPRAISERS, DISCOVERY RIGHTS, JUDGMENT AMOUNT
Sec. 773.
(1) If a demand for payment under section 772 remains unsettled, the
corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the
proceeding within the 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of the
county in which the corporation's principal place of business or
registered office is located. If the corporation is a foreign corporation
without a registered office or principal place of business in this state,
it shall commence the proceeding in the county in
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this state where the principal place of business or registered office of
the domestic corporation whose shares are to be valued was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in
an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents maybe served by registered or certified mail
or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil
proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment for
the amount, if any, by which the court finds the fair value of his or her
shares, plus interest, exceeds the amount paid by the corporation or for
the fair value, plus accrued interest, of his or her after-acquired shares
for which the corporation elected to withhold payment under section 771.
450.1773a. APPOINTMENT OF REFEREE TO CONDUCT PROCEEDINGS; POWERS AND DUTIES
Sec. 773a.
(1) In a proceeding brought pursuant to section 773, the court may, pursuant
to the agreement of the parties, appoint a referee selected by the parties
and subject to the approval of the court. The referee may conduct
proceedings within the state, or outside the state by stipulation of the
parties with the referee's consent, and pursuant to the Michigan court
rules. The referee shall have powers that include, but are not limited to,
the following:
(a) To hear all pretrial motions and submit proposed orders to the
court. In ruling on the pretrial motion and proposed orders, the
court shall consider only those documents, pleadings, and arguments
that were presented to the referee.
(b) To require the production of evidence, including the production of
all books, papers, documents, and writings applicable to the
proceeding, and to permit entry upon designated land or other
property in the possession or control of the corporation.
(c) To rule upon the admissibility of evidence pursuant to the Michigan
rules of evidence.
(d) To place witnesses under oath and to examine witnesses.
(e) To provide for the taking of testimony by deposition.
(f) To regulate the course of the proceeding.
(g) To issue subpoenas, when a written request is made by any of the
parties, requiring the attendance and testimony of any witness and
the production of evidence including books, records, correspondence,
and documents in the possession of the witness or under his or her
control, at a hearing before the referee or at a deposition convened
pursuant to subdivision (e). In case of a refusal to comply with a
subpoena, the party on whose behalf the subpoena was issued may file
a petition in the court for an order requiring compliance.
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(2) The amount and manner of payment of the referee's compensation shall be
determined by agreement between the referee and the parties, subject to
the court's allocation of compensation between the parties at the end of
the proceeding pursuant to equitable principles, notwithstanding section
774.
(3) The referee shall do all of the following:
(a) Make a record and reporter's transcript of the proceeding.
(b) Prepare a report, including proposed findings of fact and
conclusions of law, and a recommended judgment.
(c) File the report with the court, together with all original exhibits
and the reporter's transcript of the proceeding.
(4) Unless the court provides for a longer period, not more than 45 days after
being served with notice of the filing of the report described in
subsection (3), any party may serve written objections to the report upon
the other party. Application to the court for action upon the report and
objections to the report shall be made by motion upon notice. The court,
after hearing, may adopt the report, may receive further evidence, may
modify the report, or may recommit the report to the referee with
instructions. Upon adoption of the report, judgment shall be entered in
the same manner as if the action had been tried by the court and shall be
subject to review in the same manner as any other judgment of the court.
450.1774. APPRAISAL PROCEEDING; DETERMINATION OF COSTS; ASSESSMENT OF COSTS,
FEES, AND EXPENSES
Sec. 774.
(1) The court in an appraisal proceeding commenced under section 773 shall
determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court
shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment under
section 772.
(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable in the
following manner:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of sections 764 through 772.
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this act.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation,
the court may award to those counsel reasonable fees paid out of the
amounts awarded the dissenters who were benefitted.
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