Alghny Energy Inc v. DQE Inc ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
3-11-1999
Alghny Energy Inc v. DQE Inc
Precedential or Non-Precedential:
Docket 98-3586
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Filed March 11, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 98-3586
ALLEGHENY ENERGY, INC.
Appellant
v.
DQE, INC.
Appellee
On Appeal from the United States District Court
for the Western District of Pennsylvania
D.C. No. 98-CV-1639
District Judge: Hon. Robert J. Cindrich
Argued January 15, 1999
BEFORE: GREENBERG AND RENDELL, Circuit Judges
and POLLAK, District Judge*
(Filed: March 11, 1999)
D. Stuart Meiklejohn
John L. Hardiman (argued)
Fraser L. Hunter, Jr.
Timothy E. DiDomenico
Sullivan and Cromwell
125 Broad Street
New York, New York 10004
_________________________________________________________________
*Honorable Louis H. Pollak, United States District Judge for the Eastern
District of Pennsylvania, sitting by designation.
William M. Wycoff
David E. White
Thorp, Reed & Armstrong
One Riverfront Center
Pittsburgh, PA 15222
Attorneys for Appellant
Douglas M. Kraus (argued)
Seth M. Schwartz
Skadden, Arps, Slate, Meagher &
Flom
919 Third Avenue
New York, New York 10022
Jennifer Wilson Hewitt
Doepken, Keevican & Weiss
58th floor, USX Tower
600 Grant Street
Pittsburgh, PA 15219
Attorneys for Appellee
OPINION OF THE COURT
POLLAK, District Judge.
This is a diversity case in which an interlocutory appeal
has been taken from the denial of a preliminary injunction.
The appeal presents a question of Pennsylvania law. The
question is whether, on the particular facts of this case, the
loss by one publicly traded corporation of a contractual
opportunity to acquire another publicly traded corporation
through a corporate merger constitutes irreparable harm.
In concluding that the plaintiff -- the would-be acquiring
corporation -- was not entitled to a preliminary injunction
compelling specific performance of the merger agreement,
the district court ruled that if the plaintiff prevailed on the
merits it would have an adequate remedy at law in the form
of an action for damages. Plaintiff's contention that the loss
of the numerous expected benefits of the merger was not
quantifiable as damages, and hence constituted irreparable
injury, was rejected by the district court. On this appeal,
2
plaintiff renews that contention. We conclude that, in the
context of this case, plaintiff's contention is soundly based.
Accordingly, we will vacate the judgment of the district
court and remand for further proceedings.
I. Facts and Procedural History
Allegheny Energy, Inc. ("Allegheny")1 and DQE, Inc.
("DQE") -- both of which are utility companies whose
shares are traded on the New York Stock Exchange --
entered into a merger agreement on April 7, 1997. The
agreement envisioned a combined company in which DQE
would be a wholly-owned subsidiary of Allegheny. Allegheny
is a utility holding company that provides electricity
generation, transmission and distribution, chiefly in
Pennsylvania, Maryland and West Virginia; its principal
operating subsidiary is West Penn, a franchised electric
service provider in western Pennsylvania. DQE is also a
utility holding company; its principal operating subsidiary
is Duquesne, a franchised provider in western
Pennsylvania.
The merger agreement describes the context in which the
agreement was signed:
The electric utility industry throughout the United
States is in the early stages of dramatic changes that
are intended to bring competition to what has been,
since the electric industry's inception, a collection of
regional monopolies. These changes have been brought
about in part through the adoption of the Energy Policy
Act of 1992 and through orders 888 and 889 of the
FERC [Federal Energy Regulatory Commission]. In
addition, in Pennsylvania, where DQE has all of its
electric utility business and [Allegheny] has a
_________________________________________________________________
1. Several of the documents in the appendix provided to this court
identify Allegheny as "Allegheny Power Systems, Inc." or "APS". The
Pennsylvania Public Utility Commission has noted that "APS has
changed its name to Allegheny Energy, Inc." Order on Reconsideration,
Pennsylvania Public Utility Commission Docket # A-110150F.0015 (July
23, 1998), at n.1. We have substituted "[Allegheny]" for "Allegheny Power
Systems, Inc." or "APS" wherever we have cited documents employing the
erstwhile corporate name or its acronym.
3
substantial portion of its electric utility business, the
trend to bring about competition led to the enactment
in late 1996 of the Electricity Generation Customer
Choice and Competition Act, 66 Pa. Cons. Stat. S 2801
et seq. (the "Pennsylvania Restructuring Legislation"),
which provides, among other things, for a phase in of
competition for retail electric customers in
Pennsylvania and an opportunity for recovery of certain
capital costs ("stranded costs") incurred by utilities in
a regulated environment that are not likely to be
recoverable through prices charged in a competitive
environment.
A81. The Pennsylvania Restructuring Legislation
empowered the Pennsylvania Utilities Commission ("PUC")
"to determine the level of transition of stranded costs for
each electric utility and to provide a mechanism, the
competitive transition charge, for recovery of an appropriate
amount of such costs . . . ." 66 P.S.A. S 2802 (15) (1997).2
The Joint Proxy Statement prepared by Allegheny and
DQE -- a statement sent to shareholders of both
corporations prior to the shareholder votes of May, 1997
approving the merger agreement -- described several
strategic benefits of the merger. In particular, the Joint
Proxy Statement noted that the Allegheny Board of
Directors had identified the following reasons for the
merger:
(i) the Merger would better position [Allegheny] to
take advantage of changes in the electric utility
industry by expanding its service territory and number
of customers served by combining its existing service
territories with DQE's contiguous service territories;
_________________________________________________________________
2. The competitive transition charge ("CTC") -- intended to recompense
utilities for "stranded costs" -- is paid by customers. In addition to
allowing customers to purchase electricity from the generator of their
choice and empowering the PUC to assess a CTC appropriate to each
utility's stranded costs, the restructuring legislation requires utilities
to
"unbundle" their services. Before the restructuring legislation, the PUC
set a single electric rate reflecting generation, transmission, and
delivery
of electricity; the restructuring legislation will eventually require all
customers to pay two (unbundled) rates: a negotiated rate for electricity
generation, and a set rate for electricity transmission and delivery.
4
(ii) [Allegheny] management has historically been
better than its peer companies at managing electric
generation, transmission and distribution and its belief
that the Merger would permit the combined
management to utilize this expertise over greater
amounts of generation and distribution;
(iii) based upon reports from its outside advisors and
[Allegheny] management and publicly available
materials regarding DQE, DQE management has
historically been better than its peer companies in
developing unregulated businesses and the [Allegheny]
Board's belief that the Merger would permit the
combined management to utilize this expertise as a
part of a bigger, financially stronger enterprise;
(iv) the terms of the recently enacted Pennsylvania
restructuring legislation and the significant mitigation
efforts already undertaken by DQE would permit DQE
to recover such stranded costs associated with DQE's
investment in the Nuclear Facilities as determined to
be just and reasonable by the PAPUC; and
(v) the synergies estimated by the managements of
[Allegheny] and DQE appear to be achievable.
A82. Similarly, the Joint Proxy Statement noted that the
DQE Board of Directors had identified the following reasons
for the merger:
(i) the Merger will allow the combined company to
. . . have the critical mass necessary to compete in a
deregulated utility environment;
(ii) the estimated synergies from the Merger should
improve DQE's financial performance due to savings
from the elimination of duplicate activities and by
creating improved operating efficiencies and lower
capital costs;
(iii) the Merger will permit stockholders of DQE to
benefit from the combined company's ability to take
advantage of future strategic opportunities and to
reduce its exposure to changes in economic conditions
in any segment of its business;
5
(iv) the combined service territories of DQE and
[Allegheny] will be more geographically diverse than the
service territory of DQE alone, reducing DQE's
exposure to changes in economic competitive or
climatic conditions as well as providing a larger
regional platform from which to expand DQE's
customer base;
(v) [Allegheny]'s winter-peaking, low-cost, efficient
operations, and suburban and rural customer base,
will complement DQE's summer-peaking operations
and urban customer base;
(vi) DQE's current customers will receive a wider
range of energy-related products and services; and
(vii) DQE's mix of regulated and unregulated energy
products and services provides a strategic fit with
[Allegheny]'s core businesses.
A83.
Section 6.1 of the merger agreement has provided rules
for the period between the signing of the agreement and
consummation of the merger -- a consummation contingent
both on the stockholder approvals referred to above and on
approvals by the relevant regulatory boards.3 Among the
interim rules is a prohibition on any action "that would
prevent the Merger from qualifying for ``pooling of interests'
accounting treatment." A31.4
_________________________________________________________________
3. Section 6.1 states that each company must operate "in the ordinary
and usual course" of business and "use its best efforts" to "preserve its
business organization intact and maintain its existing relations and
goodwill." Moreover, it generally prohibits either party from unilaterally
repurchasing stock, encumbering assets, changing stock-based
compensation plans, or changing any compensation and benefit plan.
See A30-31.
4. Under certain circumstances, stock-for-stock mergers may be
structured to take advantage of an accounting method-- pooling of
interests accounting treatment -- that provides financial advantages to
the newly combined company by permitting the absorbed corporation's
assets to be recorded at book value. See Daniel W. Jones & Val R.
Bitton, Accounting for Business Combinations, in D.R. Carmichael et al.,
ACCOUNTANTS' HANDBOOK 6.2-.3 (7th ed. 1991). Valuing the absorbed
6
Other agreement provisions allow either party to abort
the agreement prior to consummation under certain
conditions. Most prominent is Section 8.2(a), under which
Allegheny and DQE each reserved the right to terminate the
contract on October 5, 1998 in the event that the merger
was not consummated by that date. However, under
Section 8.2(a), the October 5, 1998 date is automatically
moved forward six months, to April 5, 1999, if, on October
5, 1998, certain conditions have been met, among them
that "each of the other conditions to the consummation of
the Merger . . . has been satisfied or waived or can readily
be satisfied . . . ." A42.5
_________________________________________________________________
corporation's assets at book value permits two savings: the combined
company avoids recording the absorbed corporation's goodwill and
avoids recording the (often higher) fair market value of the absorbed
corporation's assets. Charles H. Meyer, ACCOUNTING AND FINANCE FOR
LAWYERS IN A NUTSHELL 311-13 (1995). The combined company is thus
freed from the requirement of amortizing the greater costs against its
earnings over the ensuing years. Id. A combined corporation emerging
from a merger accounted for under the pooling of interests method
therefore would report higher annual earnings than the same
corporation emerging from a merger accounted for under the traditional
purchase method. Id.
In order to qualify for pooling of interests accounting treatment, a
merger must meet several conditions. Those requirements fall into three
groups: (1) characteristics of the combining companies; (2) manner of the
combination; and (3) absence of pre- and post-combination transactions.
Accounting Principles Board Opinion No. 16, "Business Combinations"
(1970). See also generally AICPA Accounting Interpretations of APB
Opinion No. 16. The third group of requirements is at issue in this case.
The APB Opinion and Interpretations identify a number of actions that
can frustrate pooling of interests accounting treatment if taken after the
signing of a merger agreement and before consummation of the merger.
Many of those actions can be taken unilaterally, and several -- such as
a new stock award plan for officers and directors-- can occur without
prior public announcement.
5. Section 8.1 permits termination by mutual written consent of both
boards of directors. Section 8.3 permits Allegheny to terminate the
agreement under certain circumstances, including a material breach by
DQE that cannot be cured within thirty days. Section 8.4 permits DQE
to terminate the agreement under certain circumstances, including a
material breach by Allegheny that cannot be cured within thirty days.
A42.
7
On August 1, 1997 (about four months after the merger
agreement was signed), pursuant to the Pennsylvania
restructuring legislation, Duquesne and West Penn-- the
parties' major operating subsidiaries -- eachfiled
restructuring plans with the PUC, and the two filed joint
applications for PUC and Federal Energy Regulatory
Commission ("FERC") approval of the merger. Almost eight
months later, on March 25, 1998, PUC administrative law
judges issued recommendations in the Duquesne and West
Penn restructuring cases. On May 29, 1998, the PUC
modified the administrative law judges' recommendations in
the two cases. West Penn was disallowed approximately $1
billion of the $1.6 billion in allegedly stranded costs that it
had requested.6
In a July 23, 1998 Order, the PUC held that the merged
company would have to prove that it had mitigated its
market power at a market power hearing to be held in the
year 2000. Should the merged company fail at that time to
establish that it had mitigated its market power, the PUC
would order it to divest itself of 2500 megawatts of
generation by July 1, 2000. Order on Reconsideration,
Pennsylvania Public Utility Commission Docket # A-
110150F.0015 (July 23, 1998), at 10.
The FERC -- which like the PUC has jurisdiction over
market power issues -- also found certain elements of the
parties' joint proposal related to market power to be
inadequate. On September 16, 1998, the FERC ordered the
companies either to divest DQE's Cheswick plant prior to
the merger or to submit to a hearing on market power
mitigation. A329.
DQE was concerned with what it viewed as the "material
adverse effects" of the PUC Order in the West Penn case,
the PUC market power order, and the FERC market power
order. On October 5, 1998, DQE informed Allegheny that,
pursuant to Section 8.2(a) of the merger agreement, it was
terminating the agreement.7 Allegheny immediately filed a
_________________________________________________________________
6. See note 2, supra.
7. As noted in text and footnote at note 5, supra, Section 8.2(a)
authorized either party to terminate the agreement if the merger was not
8
complaint in the United States District Court for the
Western District of Pennsylvania, seeking specific
performance of the merger agreement, and -- fearing that
DQE would take action to scuttle pooling of interests
accounting treatment -- filed an accompanying motion
seeking both a temporary restraining order and a
preliminary injunction "enjoining DQE from taking any
action that it is precluded from taking without Allegheny's
consent under Section 6.1 of the Merger Agreement" until
Allegheny's claim for specific performance was decided.
A401.
The District Court heard argument on the motion on
October 5 and October 26. After considering testimony and
certain affidavits, the District Court denied both the
temporary restraining order and the preliminary injunction.
The District Court began its analysis by observing that
Allegheny had presented "persuasive" arguments that it had
a reasonable likelihood of success on the merits of its claim
that it was entitled to specific performance. Order at 3. The
court then turned to the question whether Allegheny had
demonstrated that it would suffer irreparable harm absent
_________________________________________________________________
consummated by October 5, 1998, but also made provision for automatic
extension of the October date to April 5, 1999. Section 8.2(a) required
that the October 5, 1998 deadline be automatically extended to April 5,
1999 if certain conditions were met, among them that"(ii) each of the
other conditions to the consummation of the Merger set forth in Article
VII has been satisfied or waived or can readily be satisfied." A42. DQE
asserted that Allegheny triggered DQE's Section 8.2(a) termination right
by failing to meet Section 7.3(a), one of the consummation conditions set
forth in Article VII. Section 7.3(a) conditions the merger on the fact
that
all "representations and warranties . . . set forth in this Agreement
shall
be true and correct as of the date of this Agreement and as of the
Closing Date . . . ." A41. DQE claims that Allegheny failed to meet
Section 7.3(a) because one of its representations or warranties, Section
5.1(f), was no longer true. Section 5.1(f) states that "since the Audit
Date
. . . there has not been (i) any change in the financial condition,
properties, business or results of operations . . .[or] developments
affecting it of which its management has knowledge that . . . is
reasonably likely to have a Material Adverse Effect on it . . . ." A23. In
DQE's view, the regulatory rulings were likely to have a material adverse
effect on Allegheny's business.
9
the injunction. The court thought damages would be an
adequate legal remedy for breach of the merger agreement
because "[b]usiness valuation experts are routinely called
upon to value business mergers." Accordingly, the court
concluded that not granting the requested preliminary
injunction would not cause Allegheny irreparable injury. Id.
at 4. The court further found that granting an injunction
would entail "the possibility of harm to DQE." Id. at 5.
Finally, the court found that the public interest "weighs
substantially against the granting of injunctive relief"
primarily for two reasons: (a) the court believed it would
have "to become involved in the business affairs" of the
parties and; (b) the court believed that "unintended
collision with regulatory agencies and their statutory
mandates" loomed as a possibility. Id. at 5-6. Allegheny
appealed under 28 U.S.C. S 1292(a)(1).
II. Preliminary Injunction Standard
"Four factors," as we have recently had occasion to
observe,
govern a district court's decision whether to issue a
preliminary injunction: (1) whether the movant has
shown a reasonable probability of success on the
merits; (2) whether the movant will be irreparably
injured by denial of the relief; (3) whether granting
preliminary relief will result in even greater harm to the
nonmoving party; and (4) whether granting the
preliminary relief will be in the public interest.
American Civil Liberties Union of New Jersey v. Black Horse
Pike Regional Bd. of Educ., 84 F.3d 1471, 1477 n.2 (3d Cir.
1996) (en banc). See also Council of Alternative Political
Parties v. Hooks, 121 F.3d 876, 879 (3d Cir. 1997). A
district court should endeavor to "balance[ ] these four . . .
factors to determine if an injunction should issue."
American Civil Liberties Union of New Jersey, 84 F.3d at1477 n.2.
Our review of a district court's denial of a preliminary
injunction is limited to determining "whether there has
been ``an abuse of discretion, a clear error of law, or a clear
mistake on the facts.' " McKeesport Hosp. v. Accreditation
10
Council for Graduate Med. Educ., 24 F.3d 519, 523 (3d Cir.
1994) (citing Hoxworth v. Blinder, Robinson & Co., 903 F.2d
186, 198 (3d Cir. 1990)).
III. Specific Performance and Irreparable Harm
A. Choice of Law
This diversity case is governed by Pennsylvania law. In
their merger agreement, the parties agreed that "this
agreement shall be deemed to be made in, and in all
respects shall be interpreted, construed and governed by
and in accordance with the law of, the Commonwealth of
Pennsylvania without regard to the conflict of law principles
thereof." A45 (complete capitalization omitted). The parties'
contractual choice of law does not appear arbitrary: one of
the two parties is a Pennsylvania corporation, and
Pennsylvania is the state in which the parties' chief
subsidiaries -- West Penn and Duquesne -- conduct their
principal operations.8
Notwithstanding that Pennsylvania law governs this case,
the briefs on appeal and the oral arguments before this
court have not focused on Pennsylvania cases, presumably
for the reason that counsel for both parties have found the
case law from other jurisdictions to touch more closely than
the Pennsylvania cases on the particular factual scenario
presented by this litigation. We too have found no
Pennsylvania cases that closely mirror the dispute between
Allegheny and DQE. But our review of the pertinent
Pennsylvania cases persuades us that the dispute at bar
may be properly addressed within the general framework of
those cases -- resting as they do on broadly familiar
principles. And so, in the discussion which follows, we
commence our analysis with those Pennsylvania cases. We
_________________________________________________________________
8. Had the parties not stipulated that their agreement is to be governed
by Pennsylvania law "without regard to the conflict of law principles
thereof," the Erie doctrine would have required the application of
Pennsylvania law, Erie R. Co. v. Tompkins, 304 U.S. 34 (1938), but with
the inclusion of Pennsylvania conflict of laws principles. Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).
11
then turn to consider the pertinent case law on which the
parties have chiefly relied -- i.e., case law from other
jurisdictions: taken as a whole, those cases -- some of
which are, indeed, factually more akin to the present
dispute than the Pennsylvania cases -- build upon the
broad foundational principles that inform the Pennsylvania
cases. We feel comfortable in concluding, therefore, that
lessons drawn from non-Pennsylvania cases have proper
application to the Pennsylvania dispute before the court.
We begin with a consideration of the law of specific
performance -- in Pennsylvania first, and then more
broadly. After addressing the question whether specific
performance would be the appropriate remedy for the
breach of contract alleged in this case, we inquire whether
an affirmative answer to that question mandates afinding
of irreparable harm.
B. Specific Performance
i.
Allegheny argues that it is entitled to specific
performance -- not just money damages -- because of "the
inherent uniqueness of a company sought to be acquired,
and the irreparable harm suffered by the party acquiring
the company by the loss of the opportunity to own or
control that business." Pl. Br. at 22 (citing Peabody Holding
Co., Inc. v. Costain Group PLC, 813 F. Supp. 1402, 1421
(E.D. Mo. 1993)). DQE disagrees, arguing that corporate
combinations are regularly valued.
Pennsylvania law conforms to the general rules regarding
the availability of specific performance. "Specific
performance should only be granted . . . where no adequate
remedy at law exists." Clark v. Pennsylvania State Police,
436 A.2d 1383, 1385 (Pa. 1981) (citing Roth v. Hartl, 75
A.2d 583 (Pa. 1970)). "Equitable jurisdiction to grant
specific performance," the Pennsylvania Supreme Court
observed in 1986, "depends upon the ``inadequacy' of the
remedy at law." Petry v. Tanglwood Lakes, Inc., 522 A.2d
1053, 1056 (Pa. 1986). Seventy years earlier the court had
stated the principle in the following terms: "The mere fact
12
that a remedy at law exists is not sufficient to oust
equitable jurisdiction; the question is whether the remedy
is adequate or complete." Edison Illuminating Co. v. Eastern
Pa. Power Co., 98 A. 652, 655 (Pa. 1916). With respect to
what constitutes an adequate remedy at law, the
Pennsylvania Supreme Court has observed that "[a]n action
for damages is an inadequate remedy when there is no
method by which the amount of damages can be accurately
computed or ascertained." Clark, 436 A.2d at 1385 (citing
Strank v. Mercy Hospital of Johnstown, 117 A.2d 697 (Pa.
1955)). Damages cannot be accurately ascertained"where
the subject matter of an agreement is an asset that is
unique or one such that its equivalent cannot be purchased
on the open market." Tomb v. Lavalle, 444 A.2d 666, 668
(Pa. Super. Ct. 1981).9
These general rules are unremarkable. But the parties
have not cited, nor has our research disclosed, any
published Pennsylvania opinion discussing the applicability
of these general rules to a situation presenting the same
characteristics as the case at bar -- i.e., a dispute arising
out of the alleged breach of a merger agreement between
two publicly traded companies. Accordingly, we look for
guidance to the handful of Pennsylvania cases in which the
general rules have been applied to closely cognate
situations: broken agreements for the acquisition of an
existing business or the development of a business
opportunity.
In Cochrane v. Szpakowski, 49 A.2d 692 (Pa. 1946), the
court upheld an award of specific performance of a contract
for the sale of a restaurant and liquor business, finding
that "a similar restaurant and liquor business to the one in
question could not be purchased in the market, and
therefore could not be reproduced by money damages." Id.
at 361. "In this connection," the court continued,
the learned chancellor properly said: ``The contract
involved here is one for the sale of a certain restaurant
_________________________________________________________________
9. A good need not be inherently unique; it may become unique by virtue
of its context. See Unatin 7-Up Co., Inc. v. Solomon, 39 A.2d 835 (Pa.
1944) (impossible to value access to sugar or machinery for the
manufacture of soft drinks during wartime quota system).
13
and liquor dispensing establishment at a definite
location, and the possession of the premises on which
the same is located. There are no other premises nor is
there any other restaurant which is exactly like the one
involved here, and it would, for all practical purpose,
be impossible for . . . [appellee] to prove what money he
would lose if . . . [appellant] were permitted to breach
this contract . . . .
Id. at 361-62 (ellipses and bracketed terms in original).
In Easton Theaters, Inc. v. Wells Fargo Land and
Mortgage Co., Inc., 401 A.2d 1333 (Pa. Super. 1979), a
lessee sought specific performance of a landlord's
agreement to build a movie theater for it on property
adjacent to the landlord's shopping center. The Superior
Court found that future profits would be impossible to
calculate accurately and that the landlord had not shown
that similar substitute properties were available to the
lessee. Accordingly, the court affirmed the trial court's
order of specific performance. The Supreme Court appears
to have approved the reasoning of Easton Theaters in Petry
v. Tanglwood Lakes, Inc., 522 A.2d 1053 (Pa. 1986). In
Petry, the court affirmed the denial of a plaintiff's claim for
specific performance of a developer's contractual promise to
build a lake adjacent to plaintiff's property.10 Finding that
"damages here can be readily computed or ascertained,"
522 A.2d at 1056, the court noted that:
This case is not similar to Goldman v. McShain, 432 Pa.
61, 247 A.2d 455 (1968), where a theater operator was
permitted to sue a landowner and builder for specific
_________________________________________________________________
10. It did so because, inter alia, the local condominium association had
entered into a settlement with the developer requiring him to develop a
recreational area on the site of the unbuilt lake. Thus, "[s]pecific
enforcement of the covenant or building contract here at issue impinges
on the rights and interests of other lot owners . . . . it is difficult to
see
how a purchaser in a condominium, or in a common development such
as this, can reasonably argue that he or she purchased relying on, or is
entitled to insist on, the absolute right to enforce specifically all
executory agreements and promises originally made pertaining to the
development, regardless of the wishes and rights of a majority of the
other owners." 522 A.2d at 1057.
14
performance of a contract for the erection and
operation of a theater. In that sort of case, involving
what essentially amounts to a joint business venture,
future business profits are of necessity speculative and
difficult to determine.
In a footnote, the court acknowledged that its lost profits
point is not discussed directly in Goldman, but see
Easton Theaters, Inc., v. Wells Fargo Land and
Mortgage Co., Inc., 235 Pa. Superior Ct. 334, 401 A.2d
1333 (1979), where a lessee sought to compel a
landlord, by specific performance, to build a theater on
its (the landlord's) shopping center property. Superior
Court thought that the agreement was specifically
enforceable, not only because future profits would be
impossible to calculate accurately, but also because
the landlord had not shown that other similar
properties would be available to the lessee as a
substitute.
Id. at 1056 n.7.11
_________________________________________________________________
11. In our court, the most analogous Pennsylvania case arose in a
setting that was the obverse of the case at bar, in the sense that the
plaintiff seeking injunctive relief was the prospective seller who sought
to
compel specific performance of an agreement to purchase plaintiff's
business that the buyer had declined to consummate. The District Court
had found that the buyer's principal purpose in acquiring the company
was to obtain certain of the trucking company's regulated transportation
rights. Determining that " ``an award of damages would be inappropriate
because it would be very difficult to determine the value' " of the
regulated transportation rights, this court upheld the District Court's
grant of specific performance. Kroblin Refrigerated Xpress, Inc. v.
Pitterich, 805 F.2d 96, 103-04 (3d Cir. 1986) (citing district court slip
opinion at 43). Cf. Girard Bank v. John Hancock Mutual Life Ins. Co., 524
F. Supp. 884, 895, 896 (E.D. Pa. 1981), aff'd, 688 F.2d 820 (3d Cir.
1982) (unpublished) (ordering specific performance of agreement in
which insurance companies were to pay Girard in exchange for turning
over security interests in boxcars on ground that measuring damages
would be impossible because "[a]ny calculation of damages would require
a complex inquiry into an assessment of the depreciated value of the
boxcars, the changes in market price, the individual conditions of the
boxcars, the adjustments for costs and expenses incurred during the
management of the boxcars, as well as an accounting for the gross and
net earnings of each boxcar.").
15
ii.
We turn now to a review of cases from other jurisdictions.
In C&S/Sovran Corp. v. First Fed. Savings Bank of
Brunswick, 463 S.E.2d 892 (Ga. 1995), First Federal and
C&S/Sovran -- banks whose shares were publicly traded --
had executed an agreement by which First Federal would
be merged into C&S/Sovran in exchange for shares of
C&S/Sovran stock. Three days before the deadline for
consummation of the merger, First Federal filed suit in
state court seeking specific performance and damages for
breach of contract. Following trial, a jury found that
C&S/Sovran had breached the merger agreement.
C&S/Sovran moved for post-trial summary judgment on
First Federal's specific performance claim, but the court
denied the motion and "ordered C&S/Sovran to prepare
and file all applications with Federal and State regulatory
authorities necessary to accomplish the merger," as well as
to take other steps necessary to consummate the merger.
Id. at 894. The Supreme Court of Georgia upheld the order
of specific performance.
C&S/Sovran is the only opinion cited by counsel, or
found by this court, which has addressed the applicability
of the general rules of specific performance to a dispute
arising out of the alleged breach of a merger agreement
between two publicly traded companies. A number of other
opinions, however, have considered grants of specific
performance in cases falling within the broader category of
broken agreements for the acquisition of an existing
business or the development of a business opportunity. The
First Circuit, applying Maine law, has upheld a grant of
specific performance in the context of a buyer's claim
arising from a breached contract for the sale of a minor
league baseball franchise. Triple-A Baseball Club Assocs. v.
Northeastern Baseball, Inc., 832 F.2d 214 (1st Cir. 1987).
Speaking through Judge Bownes, the First Circuit noted
that every court inside or outside of Maine to have
addressed the issue of a breach of contract to sell a
franchise had concluded that specific performance was an
appropriate remedy. Id. at 223. Finding that a baseball
franchise was a unique business, id. at 224, and that
measuring lost profits would be difficult, id. at 225, the
16
court reversed the district court and remanded the case for
the entry of a decree of specific performance ordering the
sale, id. at 228. See also Wooster Republican Printing Co. v.
Channel 17, Inc., 533 F. Supp. 601, 621 (W.D. Mo. 1981)
(applying Missouri law and ordering specific performance of
breached contract to sell television station from one closely
held corporation to another after finding that television
station was "unique").12
The Seventh Circuit read Illinois law in like fashion in
Medcom Holding Co. v. Baxter Travenol Laboratories, Inc.,
984 F.2d 223 (7th Cir. 1993). Considering an appeal from
a district court order that a seller convey all of the shares
in a wholly-owned subsidiary to a buyer that had
contracted for them, the court noted that "a contract for the
sale of corporate stock not publicly traded can be
specifically enforced on the ground that valuation is
imprecise without an active market for the stock.
Furthermore, specific performance is also appropriate for
breach of a contract to sell a business because a business
is a unique asset." Id. at 227.13
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12. The court found the television station unique on the basis of expert
testimony at trial, which established that the station "presents an
unusual potential for future growth in a stable and growing market.
Because of its potential for expansion with proper management and
infusion of capital, its relative position in the local and national
markets,
its network affiliation, its licensing and frequency, and its physical
assets, among other things, Channel Seventeen is unique." Wooster
Republican Printing Co., 533 F.Supp. at 621. See also Peabody Holding
Co., Inc. v. Costain Group PLC, 813 F. Supp. 1402, 1421 (E.D. Mo. 1993)
(granting injunction to block sale of business to third party that would
have breached contract to sell business to plaintiff because: (1)
agreement "expressly acknowledged ``irreparable damage' to Peabody in
the event of breach" (2) Costain's "coal businesses are unique, including
the management contracts and equity interests in existing and potential
mining properties" (3) breach of contract to sell business does
irreparable harm to frustrated buyer by virtue of "loss of the opportunity
to own or control that business.").
13. The court turned from its general statement that "a business is a
unique asset" to a description of the ways in which the subsidiary was
unique: the plaintiff's "founder . . . is in the business of purchasing
companies in order to ``turn them around.' He purchased Medcom even
though it had been losing money for several years. In purchasing
17
The Delaware Court of Chancery has engaged in a similar
analysis. In True North Comm., Inc. v. Publicis, S.A., 711
A.2d 34, 44-45 (Del. Ch. 1997), aff'd, 705 A.2d 244 (Del.
1997), the court considered a controversy arising out of a
soured joint venture agreement. Seeking to disentangle
themselves, the two corporations that had entered into the
joint venture agreement signed a subsequent agreement
requiring each to assist its former partner in qualifying for
pooling of interests accounting treatment in the event that
the other sought to merge with a third party. When True
North attempted to acquire a third party and to do so via
pooling of interests, Publicis failed to provide the promised
support. In concluding that specific performance was
appropriate, the court noted that the dissolution agreement
stipulated that injunctive relief would be available in the
case of a breach. "Even without the contract language
conceding the irreparable nature of the injury," the court
continued, "it is nevertheless clear that True North will
suffer irreparable harm if Publicis is not enjoined" because
"Publicis' opposition efforts threaten to destroy the [third
party] merger, which is a unique acquisition opportunity for
True North." Id. at 44-45.14
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businesses, Manley looked for the right ``building blocks.' Without all the
blocks, it is conceivable that the chances of a successful ``turnaround'
might be lowered. [The subsidiary] could well be one of those building
blocks necessary to turn Medcom around." Medcom Holding Co, 984 F.2d
at 227 (deposition citations omitted).
14. The court did not explain why it deemed the enterprise True North
was to acquire to be "a unique acquisition opportunity," but it did
characterize that enterprise as "an international communications
company with advertising and public relations agencies . . . around the
world." Id. at 37.
Courts have found specific performance appropriate where a buyer has
been frustrated in attempting to exercise a contractual right to purchase
or maintain a controlling (or even significant but non-controlling)
interest
in an enterprise. See Baggett v. Cyclopss Med. Sys., Inc., 935 P.2d 1265,
1271 (Utah Ct. App. 1997), cert. denied, 940 P.2d 1224 (Utah 1997)
(plaintiffs "view the shares as a means of control or influence over [the
business], and not merely as instruments of financial investment"); King
v. Stevenson, 445 F.2d 565, 572 (7th Cir. 1971) (affirming specific
18
These cases could be interpreted as imposing upon a
plaintiff (the would-be acquirer) the burden of showing with
some particularity that the business to be acquired is either
inherently unique or offers a unique opportunity to the
buyer. However, the cases go into little detail chronicling
the attributes of uniqueness. Moreover, no case that has
come to our attention has found a business either not
unique or not offering a unique opportunity to the buyer.
This militates against treating the plaintiff 's burden as an
onerous one. We turn now to the question whether, in the
case at bar, Allegheny has met that burden.
iii.
We think it clear that the agreed-upon Allegheny-DQE
merger constitutes a unique, non-replicable business
opportunity for Allegheny. The Joint Proxy Statementfiled
with the SEC and mailed to both corporations' shareholders
describes several respects in which the integration of DQE
and Allegheny could be expected to produce particular
benefits: the contiguity of Allegheny's and DQE's service
territories; DQE's particular expertise -- "better than its
peer companies" -- in "developing unregulated businesses";
the complementarity of Allegheny's "winter-peaking, low-
cost, efficient operations, and suburban and rural customer
base" with DQE's "summer-peaking operations and urban
customer base"; the "strategic fit" of DQE's "regulated and
unregulated energy products and services" and Allegheny's
"core businesses"; "the combined company's ability to take
advantage of future strategic opportunities and to reduce
its exposure to changes in economic conditions in any
segment of its business"; and the expectation that the
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performance of stock option agreement permitting majority shareholder
to purchase shares from minority shareholder because "this block of
stock was sufficiently important to [plaintiff] as president and
developer"
of company). Cf. Mid-Continent Tel. Corp. v. Home Tel. Co., 319 F. Supp.
1176, 1197 (N.D. Miss. 1970) (specific performance inappropriate where
decree would not be sufficiently "definite and workable" despite general
state rule that "[s]pecific performance is an ordinary remedy for breach
of contract to convey corporate shares where the shares may constitute
a controlling interest in a unique corporation").
19
"combined company [would] . . . have the critical mass
necessary to compete in a deregulated utility environment."
In the measured prose of the Joint Proxy Statement, "the
synergies estimated by the managements of [Allegheny] and
DQE appear to be achievable." DQE has not undertaken to
identify any available merger partner, other than itself,
whose acquisition by Allegheny would yield even one, let
alone all, of these very considerable business opportunities.
Accordingly, if DQE has breached the merger agreement,
Allegheny is entitled to specific performance.
C. The Relationship Between Specific Perform ance and
Irreparable Harm
We now turn to a consideration of the harm that could
befall Allegheny if a preliminary injunction were denied and
DQE were to take any action destroying the possibility that
the accounting aspects of the merger could be achieved
pursuant to pooling of interests accounting. If the loss of
pooling accounting were to block the ultimate
consummation of the merger, Allegheny would suffer
irreparable harm from the loss of the opportunity to control
DQE. As the specific performance inquiry has shown, that
loss could not be adequately recompensed through
monetary damages.
If the merger is consummated despite the loss of pooling
of interests accounting, Allegheny would suffer irreparable
harm because DQE -- by then a part of Allegheny-- would
no longer be able to recompense Allegheny for the difference
between the value of the merger under pooling of interests
accounting and the value of the merger under purchase
accounting. DQE contends that the loss of pooling of
interests accounting treatment would not be irreparable
because the District Court could recompense Allegheny for
any economic losses it suffered from loss of pooling of
interests accounting treatment by adjusting the merger
exchange ratio to give Allegheny's shareholders a greater
share of ownership of the combined company. Because the
loss of pooling of interests accounting treatment triggers
losses that are themselves economic in nature and
susceptible to financial valuation, DQE argues, DQE
shareholders could fully recompense Allegheny for DQE's
20
breach by giving Allegheny a greater share of the combined
company, thus vitiating the irreparable nature of the harm.
However, Pennsylvania's Business Corporation Law does
not permit changes in the consideration for a merger, once
shareholder approval has been given, without a new
shareholder vote. 15 P.S.A. S 1922 (b) states in relevant
part that:
A plan of merger or consolidation may contain a
provision that the boards of directors of the constituent
corporations may amend the plan at any time prior to
its effective date, except that an amendment made
subsequent to the adoption of the plan by the
shareholders of any constituent corporation shall not
change: (1) The amount or kind of shares, obligations,
cash, property or rights to be received in exchange for
or on conversion of all or any of the shares of the
constituent corporation.
Section 1922(b) constitutes one of the "rules of decision"
guiding this court sitting in diversity. 28 U.S.C. S 1652. Erie
R. Co. v. Tompkins, 304 U.S. 64 (1938).
D. DQE's Arguments Against Irreparable Harm
Under These Facts
DQE offers several reasons why its alleged breach should
not give rise to Allegheny's requested specific performance
or, if specific performance is appropriate, why the District
Court was nevertheless correct in determining that
Allegheny would not suffer irreparable harm if the
preliminary injunction is denied. DQE's principal
arguments are as follows:
(i) DQE argues that "injunctive relief . . . has only been
granted in a corporate merger case where either (1) the
contract contains an express provision reciting that
damages would not be an adequate remedy for a breach
and permitting the parties to seek injunctive relief and
specific performance, or (2) the ``target' company is non-
public or closely-held thereby rendering it difficult to
value." Def. Br. at 17-18 (emphasis in original). However,
DQE cites no case holding -- or even stating in dictum --
that specific performance is not available unless the merger
21
contains an express provision permitting the parties to seek
specific performance or the target is "non-public or closely-
held." DQE's assertion that no such case has granted
specific performance is thus no more than an assertion that
no such case has yet arisen. It may be sufficient, for the
purposes of the irreparable harm inquiry, that there is a
contractual provision permitting specific performance15 or
that a target is "non-public or closely-held," but the
Pennsylvania Supreme Court has never held either to be a
necessary predicate to irreparable harm. We see no ground
for supposing that the Commonwealth's highest court
would craft such a rigid rule.
(ii) DQE points to Section 8.5(b) of the merger
agreement, which provides Allegheny with a merger
termination fee not to exceed $50 million in the event that
DQE terminates the contract in order to accept a better
offer. See A43-44. DQE notes that "this provision is
admittedly not triggered by a breach or other termination,"
but argues that the provision "reflects Allegheny's
agreement and understanding that any ``injury' stemming
from its loss of the opportunity to merge with DQE may
adequately be compensated through the payment of
money." Def. Br. at 24. Pennsylvania law forecloses the
argument that this provision of its own force precludes
specific performance. As the Pennsylvania Supreme Court
has stated, the presence of a liquidated damages provision
in a contract "will not restrict the remedy thereto [i.e., to
liquidated damages] or bar specific performance unless the
language of the part of the agreement in question, or of the
entire agreement . . . shows a contrary intent." Roth v.
Hartl, 75 A.2d 583, 586 (Pa. 1950).16 Section 8.5(b) speaks
_________________________________________________________________
15. Cf. True North Comm., Inc., v. Publicis, S.A., 711 A.2d 34, 44-45
(Del.
Ch.), aff'd, 705 A.2d 244 (Del. 1997) ("Even without the contract
language conceding irreparable injury . . . it is nonetheless clear that
True North will suffer irreparable harm if Publicis is not enjoined from
pursuing its activities in opposition to the merger.").
16. Peabody Holding Co., Inc. v. Costain Group P.L.C., 813 F. Supp. 1402,
1421 (E.D. Mo. 1993) is also instructive:
Defendants argue, however, that the $5 million liquidated damages
provision . . . provides a reasonable estimate of the damages
22
only to the termination fee payable upon the unsolicited
receipt of a superior merger offer. See A43. It states that "In
the event that this Agreement is terminated (x ) by the
Company pursuant to Section 8.3(a) (or 6.2), or (y) by
Parent pursuant to Section 8.4(b)(i) or (iii), or (z) by the
Company or Parent pursuant to Section 8.2(d), then the
Company" shall pay a termination fee not to exceed $50
million. A43. Section 8.3(a) states that "This Agreement
may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after
the approval by stockholders of the Company . . . by action
of the board of directors of the Company: (a) subject to and
in accordance with the provisions of Section 6.2;" A42.
Section 6.2 concerns acquisition proposals by third parties.
A32-33. Likewise, Section 8.4(b)(i) states that "This
Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or
after the approval by stockholders of Parent . . . by action
of the board of directors of Parent: (a) subject to and in
accordance with the provisions of Section 6.2 . . . ." A43.
We do not read Section 8.5(b) -- which governs the fee
payable upon a termination of the merger agreement
arising from an unsolicited receipt of a superior merger
offer -- to evince an intent to bar specific performance for
_________________________________________________________________
Peabody would suffer. The Court disagrees with defendants. It is
clear, plainly on the face of S4.1(d) of the [stock purchase
agreement], that the liquidated damages provision applies only to
situations where no sale is consummated between Peabody and
Costain based solely upon the existence of an unsolicited proposal
which is superior to Peabody's. In such a circumstance, Peabody
has protected itself in case it cannot meet the superior offer.
This
does not mean, however, that the provision states an adequate
remedy for circumstances where there is no unsolicited bid superior
to Peabody's and Costain has breached the [stock purchase
agreement]. Peabody needs no monetary protection in such a
circumstance because Costain has no right to terminate the
contract in pursuit of the better unsolicited offer. Thus, it is
the
opinion of this Court that Peabody will suffer irreparable harm . .
. .
The court therefore granted specific performance. Id. at 1422-23.
23
breaches of the merger agreement unrelated to an
unsolicited receipt of a superior merger offer. 17
(iii) DQE argues that the benefits of this merger can be
valued. It points out that the parties have already jointly
valued one of the more important merger benefits-- the
"synergies" that would arise from the merger: the Joint
Proxy Statement filed with the SEC and mailed to both
corporations' shareholders stated that the companies"have
jointly studied the estimated synergies arising out of a
combination of their companies. The companies estimated
that the Merger could result in savings of approximately $1
billion over the 10-year period from 1998 to 2008, taking
into account the costs estimated to be necessary to achieve
such synergies." A83. Moreover, DQE contends that the
other benefits of the merger identified by Allegheny "are not
elusive metaphysical concepts, but rather standard
business phenomena that have long been quantified and
valued by economists, investment bankers and other
experts in commercial cases such as this." Def. Br. at 26.
But DQE has not attempted to value the other (i.e., non-
synergy) strategic benefits outlined in the Joint Proxy
Statement. See A83. DQE's failure even to attempt a
valuation of those other strategic benefits is telling.18
(iv) DQE claims that Allegheny can bid on DQE's
generating assets (which, according to DQE, are soon to
appear on the block), and thus achieve one of the stated
goals of the merger, "increas[ing] its generating capacity by
almost one-third . . . ensuring that Allegheny will have the
critical mass to compete in the generation market against
its larger regional competitors." Pl. Br. at 12 (cited in Def.
Br. at 28-29). Moreover, DQE argues, Allegheny can solicit
_________________________________________________________________
17. Nor is DQE aided by its recital of statements from Allegheny officials
attesting to the financial harm that the failure of the merger would cause
Allegheny. See, e.g., Def. Br. at 25-26. That Allegheny's officers once
thought that they would pursue damages for breach simply does not
speak to the issue of whether a fact-finder could calculate those
damages with any accuracy.
18. Indeed, even the synergies valuation in the proxy statement hedges:
the companies "estimated that the Merger could result in savings of
. . . ." A83 (emphasis added).
24
DQE's customers under Pennsylvania's newly deregulated
energy market. But "critical mass" is only one of several
merger benefits identified by the parties, and the statutory
right to attempt to serve customers is not the equivalent of
having a preexisting business relationship with them.
(v) DQE argues that Allegheny could merge with other
utility companies. It offers no suggestions as to which other
companies are "exactly like the one involved here,"
Szpakowski, 49 A.2d at 362, i.e., which other companies
would demonstrably provide Allegheny with the benefits
that it will lose if this merger agreement is not
consummated.
Conclusion
For the reasons set forth above, we hold that Allegheny
would be at serious risk of irreparable harm if preliminary
injunctive relief were withheld. We will, therefore, vacate
the judgment denying the preliminary injunction and
remand the case to the District Court for further
proceedings consistent with this opinion. On remand, the
District Court should reassess -- in light of this opinion --
the three remaining factors in the four-factor determination
of whether a preliminary injunction should issue.19
We do not read the District Court as having conclusively
decided whether Allegheny has a reasonable likelihood of
success on the merits. We appreciate that the District
Court characterized "Allegheny's submissions on this issue
[as] persuasive," Memorandum Order at 3, but do not
understand this characterization as intended to be fully
dispositive of that complex question. Accordingly, we think
the District Court should again assess the question of
Allegheny's likelihood of success on the merits.
_________________________________________________________________
19. The district court heard oral argument and considered the parties'
submissions and supporting expert witness affidavits. With the
advantage of hindsight, we note that an evidentiary hearing in which the
parties' experts were subject to cross-examination from opposing counsel
might have benefitted the district court. Particularly where opposing
affidavits duel for the key to a dispositive issue, affidavits often prove
a
poor substitute for live testimony.
25
Likewise, the District Court should undertake to
determine whether "whether granting preliminary relief will
result in even greater harm to the nonmoving party" than
the irreparable harm that denying preliminary relief would
cause to the moving party. American Civil Liberties Union of
New Jersey v. Black Horse Pike Regional Bd. of Educ., 84
F.3d 1471, 1477 n.2 (3d Cir. 1996) (en banc). The question
to be addressed is not whether DQE "would suffer some
harm," Memorandum Order at 4, or whether "there is a
possibility of harm," id. at 5, but which of two potential
harms -- Allegheny's or DQE's -- is greater.
Finally, the District Court should reconsider whether its
reasons for finding that the public interest "weighs
substantially against the granting of injunctive relief," are
supported in our case law. In so doing, the District Court
should determine whether its belief that the injunction
would require "the court to become involved in the business
affairs" of the parties presents a recognized rationale for a
finding that a preliminary injunction would be against the
public interest. In reassessing its belief that the injunction
"could have an adverse effect through unintended collision
with regulatory agencies and their statutory mandates" and
thus run counter to the public interest, the District Court
should bear in mind that three state regulatory agencies
and two federal regulatory agencies have approved the
merger, each finding that it is in the public interest; no
state or federal agency has determined that the merger is
not in the public interest. Cf. Schulz v. United States Boxing
Ass'n, 105 F.3d 127, 134 (3d Cir. 1997) ("In determining [a
state's] public policy, we turn to the enactments of the state
legislature as an authoritative source.").
Combining its reanalysis of these three factors with this
opinion's holding on the fourth, the District Court should
endeavor to "balance[ ] these four . . . factors to determine
if an injunction should issue." American Civil Liberties
Union of New Jersey, 84 F.3d at 1477 n.2.
Accordingly, the judgment of the District Court denying a
preliminary injunction is vacated and the case remanded
for further proceedings consistent with this opinion.
26
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
27