The opinion of the court was delivered by: MUNSON
For the second time in two years, Syracuse, New York, and the surrounding area, has been the site of a major battle for corporate control. See Carrier Corp. v. United Technologies Corp., (1978-2 Transfer Binder) Trade Cas. (CCH) P 62,393 (N.D.N.Y. Dec. 6, 1978), aff'd, (1978-2 Transfer Binder) Trade Cas. (CCH) P 62,405 (2d Cir. Dec. 18, 1978). In this instance, the struggle is for control of the Crouse-Hinds Company, which is the target of a hostile takeover attempt by InterNorth, Inc. and I N Holdings, Inc. (sometimes referred to collectively as InterNorth). These battles cut deep in this relatively small community, whose identity has been tied in no small measure to the security of local ownership of private enterprise. For this reason, most people in this community perceive these battles more in terms of their threat to such commonly shared values than their possible effect on financial security.
While the typical battle for corporate control eventually finds its way into the courts, applicable laws in this area do not mandate a judicial assessment of the local repercussions of such struggles. Rather, under the present legislative scheme, a court is to act as a referee, whose duty it is to supervise the fight, and make certain that the contestants remain loyal to their benefactors the shareholders. Should loyalties ever become divided, then the courts are required to intervene and realign the interests. Today the Court is required to perform just this task.
Presently before the Court is a motion by counterclaim-plaintiff InterNorth, Inc., for a preliminary injunction to enjoin counterclaim-defendant Crouse-Hinds from proceeding with an exchange of its stock with the Belden Corporation. A motion has additionally been made by Crouse-Hinds to dismiss InterNorth's counterclaim. Oral argument was heard by the Court on these motions on October 21, 1980, which was also the last day of the presentation of evidence in an involved and lengthy hearing on counterclaim-defendant's motion for injunctive relief to block a takeover attempt by InterNorth. A brief description of the protagonists and the factual background to this lawsuit follows.
Crouse-Hinds Company is a New York corporation with its headquarters in Syracuse, New York. The Company is engaged in the manufacture and marketing of electrical products consisting of electrical construction materials such as load centers, circuit breakers, meter mounts and safety switches; indoor and outdoor lighting fixtures and aviation ground lighting equipment; electrical wiring devices, specialty switches, and industrial controls; vehicular traffic control systems; and electrical distribution equipment, including switchboards, panelboards, switch gear, motor control centers, and bus ducts. Its assets as of December 31, 1979, totaled $ 152,475,000.00, and its gross revenues for the year ending December 31, 1979 were $ 372,274,000.00. Crouse-Hinds is the largest United States manufacturer of high quality electrical products, which are designed especially to provide mechanical protection against heavy or abusive service, and are principally used by heavy industries.
InterNorth, Inc. was incorporated under the laws of Delaware under the name Northern Natural Gas Company, whose name was changed to InterNorth in March of this year. Its principal offices are located in Omaha, Nebraska. I N Holdings, Inc. is a wholly owned subsidiary of InterNorth, Inc. and was created for purposes of the Crouse-Hinds acquisition. InterNorth operates as a parent corporation with five major operating companies. These divisions are referred to as Natural Gas, Liquid Fuels, Petrochemicals, Exploration and Production, and Coal. Natural Gas is engaged in the transmission and sale of natural gas to utilities serving 1,094 communities in seven midwestern states, and the retail distribution of natural gas in 319 cities and towns. Liquid Fuels is engaged in the acquisition, production, storage, transportation and marketing of natural gas liquids and petroleum products. Petrochemicals produces and markets plastic resins, plastic products and antifreeze-coolants. A significant portion of the feedstocks for Liquid Fuels and Petrochemicals is derived from the natural gas stream of Natural Gas. Appropriately entitled, Exploration and Production conducts exploration and production activities primarily to provide supplies of natural gas for Natural Gas's pipeline system, and to develop liquid hydrocarbon supplies for use in other operations of InterNorth. Coal has acquired some recoverable coal reserves and is engaged in the mining and marketing of coal from two mines. As of December 31, 1979, InterNorth had investment in property, plant, and equipment of more than $ 3 billion. Its gross revenues for the year ending December 31, 1979 were.$ 2.5 billion.
The third active participant in this takeover drama is the Belden Corporation, an Illinois corporation, which is headquartered in Geneva, Illinois. Belden is engaged in the manufacture and sale of wire, cable and cords, and the distribution of electrical apparatus and equipment, through a wholly-owned network of industrial-electrical supply and renewal part centers. As of December 31, 1979, Belden had assets of approximately $ 140 million. Belden's consolidated sales for the year ending December 31, 1979 were $ 291,354,000.00.
In July of 1980, Belden found itself the unwilling subject of a takeover attempt by the Ampco-Pittsburgh Corporation. This fact, and Belden's hostile reception, came to the attention of Crouse-Hinds, whose Chairman of the Board and Chief Executive Officer, Chris J. Witting, has been a director of Belden for the past seven years. Amicable and serious negotiations were subsequently commenced by Crouse-Hinds and Belden, with a view toward a "defensive" merger of the two companies.
On September 8, 1980, the Boards of Directors of Crouse-Hinds and Belden approved a merger agreement, and a public announcement to this effect was made the next day. Under the terms of the agreement, Belden is to merge with a Crouse-Hinds subsidiary the Coppertime Corporation based on an exchange ratio of one share of Belden for every 1.24 shares of Crouse-Hinds. The terms of the merger agreement would require Crouse-Hinds to issue approximately 3.4 million shares of its stock. Moreover, the merger would be subject to the approval of shareholders of both Crouse-Hinds and Belden. The merger agreement had been arrived at after considerable study and consultation by the Boards of Directors of both Crouse-Hinds and Belden with investment bankers and other experts. Each Board believed that the merger would serve the best interests of their Companies, and they therefore recommended that the merger agreement be ratified by the Crouse-Hinds and Belden shareholders. The decisions to merge by the Boards of Directors of Crouse-Hinds and Belden, and to recommend the merger to their shareholders, were made without any foreknowledge of the events to come.
The September 9, 1980 announcement of the Crouse-Hinds and Belden merger came as an unwanted surprise to InterNorth, which was at the final stage of the preparations for its tender offer to Crouse-Hinds' shareholders. InterNorth's tender offer for Crouse-Hinds marked the culmination of over a year of sophisticated analysis of possible acquisition candidates. Crouse-Hinds had been selected by InterNorth as best able to fulfill InterNorth's new diversification strategy, and its hope for continued financial vitality. For purposes of the present discussion, it suffices to say that shortly after learning of the Crouse-Hinds-Belden merger, InterNorth decided it did not want to tender for a Crouse-Hinds Company with a "Belden subsidiary."
Still, on the same day that the Crouse-Hinds and Belden merger was announced, the Board of Directors of InterNorth authorized the tender offer for Crouse-Hinds. A central condition of the merger was the termination or shareholder rejection of the Crouse-Hinds-Belden merger agreement.
Two days later, on September 11, 1980, InterNorth purchased one hundred shares of Crouse-Hinds stock on the New York Stock Exchange. On September 12, 1980, InterNorth publicly announced a tender offer for 6,700,000 shares of Crouse-Hinds common stock, or approximately 54% of the total shares outstanding, at a price of $ 40 per share. As planned, the cash tender offer was to be followed by a "second-step" merger of InterNorth and Crouse-Hinds in which the remaining Crouse-Hinds shareholders would be issued InterNorth preferred stock in exchange for their Crouse-Hinds common stock.
Just as the Crouse-Hinds-Belden merger agreement was not favorably received by InterNorth, the InterNorth tender offer was unwelcomed news in the board rooms of Crouse-Hinds and Belden. In Belden's view, InterNorth's tender offer was designed and intended to defeat the Belden merger, and thus deprive Belden and its shareholders of the concomitant business advantages that would flow to them from the combination of Crouse-Hinds and Belden. To protect its interests, on September 15, 1980, Belden brought an action against InterNorth in Illinois Circuit Court, and by an amended complaint, sought injunctive relief from InterNorth's allegedly tortious interference with the Crouse-Hinds-Belden merger. A temporary restraining order was entered by the court in that action, which enjoined InterNorth from proceeding with its tender offer. After a hearing, the court granted a second motion by Belden for a preliminary injunction, and further enjoined InterNorth from pursuing its tender offer pending a vote by Crouse-Hinds and Belden shareholders on the proposed merger agreement or until December 1, 1980, whichever is earlier. The Illinois court, moreover, ordered that the Crouse-Hinds and Belden shareholders must vote on the proposed merger prior to December 1, 1980. Belden Corp. v. InterNorth, Inc., 90 Ill.App.3d 547, 45 Ill.Dec. 765, 413 N.E.2d 98 (Ill.Cir.Ct. Cook Co., October 1, 1980). On October 2, 1980, InterNorth filed a motion in the Illinois Appellate Court and asked for a stay of the injunction pending an emergency appeal, and this application was subsequently denied.
On September 16, 1980, four days after InterNorth announced its tender offer, the Crouse-Hinds Board of Directors met and decided that the InterNorth offer was inadequate, and not in the best interests of Crouse-Hinds and its shareholders. Consequently, the Board recommended that the Crouse-Hinds shareholders reject InterNorth's offer. The basis of the Crouse-Hinds Board of Directors' decision is described in a Schedule 14D-9 statement filed with the Securities and Exchange Commission, and is outlined in greater detail in the margin.
In part, the Board relied on an opinion by Lazard Freres & Co., that InterNorth's offered consideration was inadequate, the past performance and future earnings prospects of Crouse-Hinds, Crouse-Hinds' desire to complete the Crouse-Hinds and Belden merger, and the genuineness of InterNorth's intention to consummate its merger with Crouse-Hinds. On September 22, 1980, Crouse-Hinds filed this action
seeking injunctive relief on the grounds that the InterNorth tender offer was violative of federal securities laws and the New York Business Corporation Law. By amendment to the complaint, Crouse-Hinds also asserted that the tender offer was illegal under the federal antitrust laws. Crouse-Hinds promptly moved for injunctive relief, and on October 7, 1980, this Court commenced an extensive hearing on this motion. The matter is presently sub judice.
In an effort to further protect the proposed Crouse-Hinds and Belden merger, Crouse-Hinds and Belden entered into additional negotiations, which resulted in an amendment to their original merger agreement on September 23, 1980. The amendment mandates that Crouse-Hinds would make the exchange offer, and provides for the issuance of Crouse-Hinds common stock in exchange for up to 1,733,871 shares of Belden common stock at the same 1.24:1 exchange ratio agreed to in the original merger agreement. If the exchange offer is successful, Crouse-Hinds will acquire 49% of the outstanding Belden shares. However, Belden also planned to call all of its outstanding 8%
convertible subordinated debentures, which could reduce this percentage to 39%. Subject to approval by the shareholders of both companies, the exchange offer will be followed by a merger of Belden with Crouse-Hinds, as originally intended. The exchange offer was commenced on October 3, 1980, and will remain open until October 31, 1980, unless extended or enjoined. Pursuant to federal securities regulations, Crouse-Hinds is permitted to purchase shares tendered on and after October 24, 1980.
Under the terms of the exchange agreement, should Crouse-Hinds acquire more than 350,000 shares of Belden under the exchange, or in the event that the merger is threatened by a large shareholder (presumably InterNorth) or not approved by the Crouse-Hinds and Belden shareholders, then the exchange agreement provides a variety of "stand still" restrictions on the resale of Crouse-Hinds' newly acquired Belden stock. Included among the restrictions are the following: (a) Crouse-Hinds cannot purchase additional Belden shares; (b) Crouse-Hinds will not seek additional representation on Belden's Board of Directors; (c) Crouse-Hinds shareholders will vote their shares in the same manner as the majority of Belden shareholders; (d) Crouse-Hinds cannot sell any Belden shares for a period of nine months after these restrictions become applicable unless Belden is given an opportunity to purchase such shares; (e) if Crouse-Hinds decides to distribute its Belden shares or exchange Crouse-Hinds shares for Belden shares, then no shareholder shall receive more than 5% of Belden shares held by Crouse-Hinds at the time of distribution or exchange unless such shareholder was the holder of more than 5% of the outstanding Crouse-Hinds shares as of the date of the exchange agreement; (f) Belden has the right, for a period of nine months after such restriction becomes applicable, to purchase all Belden shares held by Crouse-Hinds for a consideration equal to the per share value which any third party shall have offered to pay for all outstanding Belden shares; (g) the agreement may be terminated at any time prior to the acquisition of shares of Belden by mutual consent of the Boards of Directors of Belden and Crouse-Hinds and shall terminate upon the earlier of: (1) sale of all shares of Belden held by Crouse-Hinds, or (2) five years after the date of the agreement.
The purpose of the exchange offer is in no way concealed by Crouse-Hinds. According to the prospectus that Crouse-Hinds issued in connection with the exchange offer, the purpose of the exchange offer is to acquire Belden shares
as a first step in acquiring the entire equity interest in Belden pursuant to the Merger Agreement.... The issuance of a substantial number of Crouse-Hinds Shares pursuant to the Offer would also facilitate the Merger in that it would increase the amount of I N Securities it would have to issue in order to achieve its stated purpose of acquiring Crouse-Hinds, which in turn may have the effect of dissuading I N from continuing with the I N Offer.
Prospectus, p. 23. Elsewhere in the same document it is stated:
The Boards of Directors of Crouse-Hinds and Belden approved the execution of the Exchange Agreement in order to facilitate consummation of the Merger in light of the I N (InterNorth) Offer and to discourage I N from continuing with the I N Offer. Since Crouse-Hinds will vote all Belden Shares it acquires pursuant to the Offer in favor of the Merger, the acquisition of a substantial number of Belden Shares pursuant to the Offer will increase the likelihood of approval of the Merger by Belden's shareholders. The issuance of a substantial number of Crouse-Hinds Shares pursuant to the Offer would also facilitate the Merger in that it would increase the amount of cash which I N would have to pay and the amount of I N securities it would have to issue in order to achieve its stated purpose of acquiring Crouse-Hinds, which in turn may have the effect of dissuading I N from renewing the I N Offer. Id. at p. 5.
The Prospectus also reveals the statistics that form the basis of Crouse-Hinds' hopes. As of September 16, 1980, there were 12,233,733 Crouse-Hinds shares outstanding, 363,376 Crouse-Hinds shares reserved for issuance upon conversion of Crouse-Hinds' preferred stock, and 331,302 Crouse-Hinds' shares reserved for issuance upon exercise of stock options. If InterNorth purchases 6,700,000 Crouse-Hinds shares pursuant to the InterNorth offer, it would own approximately 52% of the 12,928,411 Crouse-Hinds shares outstanding or reserved for issuance. However, if all 2,150,000 Crouse-Hinds shares are issued pursuant to the exchange agreement, then InterNorth's percentage would be reduced to approximately 44%.
While the Belden Board of Directors approved the exchange agreement because it would facilitate the merger with Crouse-Hinds, they would not recommend the exchange agreement to Belden shareholders. The Belden Board made the following statement on this issue.
The Board of Directors of Belden recognizes that there is uncertainty as to whether the Merger will be effected in accordance with its terms because of, among other things, the opposition of I N. Accordingly, the Belden Board has made no recommendation as to whether or not shareholders should tender their shares for exchange and each shareholder is advised to review this Prospectus carefully to make his or her own decision. The Belden Board, however, approved the Exchange Agreement because in its judgment the Offer facilitates the Merger and gives those shareholders desiring to exchange Belden Shares for Crouse-Hinds Shares the opportunity to do so.
Prospectus, p. 14. In part, the Belden Board of Directors' decision not to recommend the exchange was attributable to the fact that its investment banker, Goldman Sachs, could not express any opinion "as to the fairness of the Offer to Belden's shareholders as a transaction separate and apart from the Merger," because of its uncertainty as to whether the merger would be effected due to the opposition of InterNorth. Prospectus, at p. 14.
To complete this background discussion, it should be noted that two procedural requirements must be complied with by Crouse-Hinds before it would legally be able to consummate the stock exchange with Belden, and whether these requirements have been satisfied by Crouse-Hinds is disputed by InterNorth. First, Crouse-Hinds has yet to amend its certificate of incorporation in order to permit it to issue the 5.5 million shares contemplated by the merger agreement. At present, the certificate only allows Crouse-Hinds to issue 18 million shares of stock. The sum total of the present shares outstanding and the shares to be issued under the proposed merger and exchange would exceed this figure. A vote on this issue is scheduled for the next Crouse-Hinds shareholders' meeting. Second, the Delaware General Corporation law requires that a statement of intention to make a tender offer must be delivered at least 20 days prior to commencement of a tender offer, and that a tender offer must remain open for a period of at least 20 days after it is first made, during which period shareholders may withdraw any tendered securities. The Delaware statute also provides that any revised or amended tender offer which changes the amount or type of consideration offered, or the number of equity securities for which the tender offer is made, shall remain open for an additional period of at least ten days following the amendment. Thus, under the Delaware statute, no exchange of tendered securities may be made during such 20 and 10 day periods. On September 22, 1980, and "without conceding the constitutionality of the Delaware statute," Crouse-Hinds delivered to Belden formal written notice of its intention to make the exchange, "which notice confirmed prior discussions between the parties (and consequently notice of the possibility of the Offer) on September 13, 1980." Prospectus, p. 23.
InterNorth filed an answer and counterclaim in this action on October 3, 1980. That same day, and based on its counterclaim, it applied to this Court for a temporary restraining order against the exchange offer being made by Crouse-Hinds for the stock of Belden. In an Order dated October 4, 1980, the Court held that, although InterNorth had "shown sufficiently serious questions going to the merits as to make them fair grounds for litigation," it had not demonstrated that "as a shareholder of Crouse-Hinds, it will suffer immediate and irreparable injury, loss or damage if the Exchange Offer is not enjoined at this time." InterNorth's request for a temporary restraining order was denied, but the Court ordered Crouse-Hinds to show cause on October 7, 1980, why a preliminary injunction should not be entered on October 24, 1980, the earliest date, pursuant to the terms of the exchange offer, on which Crouse- Hinds could exchange for Belden shares.
Stated in brief, counterclaim-plaintiff InterNorth claims that the Crouse-Hinds exchange for Belden stock is designed solely by the Board of Directors of Crouse-Hinds as a means to retain their corporate control of Crouse-Hinds in the face of InterNorth's tender offer. As such, InterNorth asserts that the exchange is without valid corporate purpose and designed solely to defeat InterNorth's tender offer (due to the "Belden condition" of that tender offer) and violates the business judgment rule. In addition, InterNorth maintains that, due to the restrictive "stand still" provisions of the exchange, large-scale corporate waste will result if Crouse-Hinds shareholders ultimately choose to vote against the merger with Belden. InterNorth further argues that the exchange will effectively deprive InterNorth and other Crouse-Hinds shareholders of their right to vote on the merger. Finally, InterNorth says that the exchange violates applicable provisions of Delaware law.
Crouse-Hinds vigorously opposes InterNorth's motion and has moved to dismiss InterNorth's counterclaim. According to Crouse-Hinds, this Court lacks subject matter jurisdiction over the counterclaim because it is permissive and not compulsory; and not supported by ancillary jurisdiction. Moreover, Crouse-Hinds claims that the counterclaim should be dismissed for failing to join Belden, which, it is maintained, is an indispensable party to this counterclaim. Crouse-Hinds further asserts that InterNorth lacks the capacity to bring this action which it describes as a "shareholder derivative action." Despite these procedural arguments, if the Court does reach the merits of InterNorth's counterclaim, Crouse-Hinds claims that its Board of Directors is protected by the business judgment rule. The Court will now turn to a more detailed examination of these arguments. But, before the Court can address the merits of InterNorth's motion for a preliminary injunction, it must first consider Crouse-Hinds' arguments with respect to subject matter jurisdiction, indispensable parties, and standing. If any of these questions ought to be resolved in favor of Crouse-Hinds, then the Court need not reach the merits of InterNorth's motion and Crouse-Hinds' motion to dismiss should be granted.
Crouse-Hinds' first argument addresses the issue of whether this Court has the power to assert subject matter jurisdiction over InterNorth's counterclaim. In the instant case, the Court's ability to consider InterNorth's counterclaim, in Crouse-Hinds' view, turns on the characterization of this claim as a "compulsive" or "permissive" counterclaim. Fed.R.Civ.P. 13(a) and (b). The Court will further summarize the parties' arguments on this ...