The total consideration paid to Merchants stockholders consists of approximately $82.85 million cash and 4.68 million shares of Community Bank System common stock, par value $1.00 per share ("Community Common Stock").

Community Bank System also issued replacement organizer warrants (the "Replacement Organizer Warrants") to the holders of Merchants' Replacement Organizer Warrants which were originally issued in December 2015 by Merchants in connection with its acquisition of NUVO Bank & Trust Company.  The Replacement Organizer Warrants, which expire in 2018, grant the holders the right to purchase an aggregate of approximately 31,918 shares of Community Common Stock at an adjusted exercise price of $42.98 per share.  The foregoing description of the Replacement Organizer Warrants does not purport to be complete and is qualified in its entirety by reference to the form of Replacement Organizer Warrant Certificate, which is attached hereto as Exhibit 4.1.

Under the terms of the Merger Agreement, Merchants stockholders were entitled to elect the form of merger consideration to be received in the transaction.  Each stockholder who submitted a completed Letter of Election and Transmittal prior to the election deadline of May 9, 2017 had the ability to elect to receive, for each share of Merchants common stock, either (i) $40.00 in cash (the "Cash Consideration"), (ii) 0.9630 shares of Community Common Stock, par value $1.00 per share, and cash in lieu of fractional shares, if any (the "Stock Consideration"), or (iii) a combination of $12.00 in cash and 0.6741 shares of Community Common Stock, and cash in lieu of fractional shares, if any (the "Mixed Election Consideration," and together with the Cash Consideration and the Stock Consideration, the "Merger Consideration").  Both the Cash Consideration and the Stock Consideration were subject to proration and adjustment procedures to ensure that the total amount of cash paid, and the total number of shares of Community Common Stock issued, in the Merger to Merchants stockholders, as a whole, will equal as nearly as practicable the total amount of cash and number of shares that would have been paid and issued if all of the Merchants stockholders received the Mixed Election Consideration (equating to an overall proration to approximately 70% stock and 30% cash).

Most of the Merchants stockholders who submitted election forms by the election deadline made the "all stock" election to receive their merger consideration solely in the form of shares of Community Common Stock. As a result of the elections of Merchants stockholders, and in accordance with the allocation and proration mechanisms of the Merger Agreement, the Merger Consideration has been allocated as follows:

 

·	Those stockholders who elected to receive the Stock Consideration in the merger will receive, for each share of Merchants common stock with respect to which such election was made, a combination of 0.6811 shares of Community Common Stock and $11.71 in cash;

Item 2.03

Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of Registrant.

 

In connection with the Merger, and pursuant to a First Supplemental Indenture, dated as of May 12, 2017, by and among Community Bank System, Merchants and Wilmington Trust Company, as trustee (the "First Supplemental Indenture"), Community Bank System assumed Merchants' rights, duties and obligations under the Indenture, dated as of December 15, 2004, between Merchants and Wilmington Trust Company, as trustee (the "Indenture"), with respect to the due and punctual payment of principal and premium, if any, and interest on $20,619,000 in original issuance amount of the Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures due 2034 issued by Merchants under the Indenture.

 

The foregoing description of the First Supplemental Indenture does not purport to be complete and is qualified in its entirety by reference to the First Supplemental Indenture which is filed as Exhibit 4.2 hereto, and is incorporated herein by reference.

 

On May 12, 2017, in connection with the Merger and pursuant to the terms of the Merger Agreement, the Board of Directors of Community Bank System expanded the size of the Board of Directors to appoint two former Merchants directors, Jeffrey L. Davis and Raymond C. Pecor, III.  Messrs. Davis and Pecor have also been appointed to the Board of Directors of Community Bank.