Appeal from an order of the United States District Court for the Northern District of New York, Howard G. Munson, Chief Judge, denying plaintiff's motion to dismiss counterclaims and granting a preliminary injunction restraining plaintiff from purchasing any shares of the Belden Corporation pursuant to an exchange offer dated October 3, 1980. Reversed in part, dismissed in part.
Before Moore and Kearse, Circuit Judges, and Tenney,*fn* District judge.
This is an expedited appeal by Plaintiff-Counterclaim-Defendant Crouse-Hinds Company ("Crouse-Hinds") from an order of the United States District Court for the Northern District of New York, Howard G. Munson, Chief Judge, which, inter alia, granted the motion of Defendants-Counterclaim-Plaintiffs InterNorth, Inc. and IN Holdings, Inc. (collectively "InterNorth"), for a preliminary injunction preventing Crouse-Hinds from performing an agreement with the Belden Corporation ("Belden") pursuant to which Crouse-Hinds was to offer to purchase a portion of Belden's outstanding stock in exchange for stock of Crouse-Hinds. We find that in assessing the likely merits of InterNorth's counterclaim the district court improperly allocated the burden of proof. Accordingly, we reverse so much of the order as granted the preliminary injunction.*fn1
Plaintiff Crouse-Hinds is a New York corporation with headquarters in Syracuse, New York. It is the largest United States manufacturer of high quality electrical products designed for heavy-duty use. Defendant-Counterclaimant InterNorth is a Delaware corporation with its principal office in Omaha, Nebraska. It is engaged in the exploration for and the production, transmission and sale of natural gas and other energy products.
Belden is a Delaware corporation with its executive offices in Geneva, Illinois. It is engaged in the production and sale of wires, cables and cords, and the distribution of electrical equipment. It is not a party to this lawsuit.
This appeal is part of a fast-moving series of events relating to the announcement on September 9, 1980, of a proposed merger between Crouse-Hinds and Belden; the announcement by InterNorth on September 12, 1980, of a tender offer for a majority of the stock of Crouse-Hinds ("Tender Offer"); and the announcement by Crouse-Hinds and Belden on September 23, 1980, of a modification of the merger agreement, pursuant to which Crouse-Hinds offered to acquire a portion of Belden's outstanding stock in exchange for Crouse-Hinds stock ("Exchange Offer"). InterNorth contends that the Exchange Offer violates various provisions of state law. The major events do not appear to be in dispute.
A. The Proposed Merger Between Crouse-Hinds and Belden
During the summer of 1980, Crouse-Hinds and Belden entered into negotiations for a merger.*fn2 As a result of the negotiations, on September 8, 1980, the boards of directors of Crouse-Hinds and Belden approved an agreement by which Belden would be merged into a Crouse-Hinds subsidiary; the exchange ratio was to be 1.24 shares of Crouse-Hinds stock for each share of Belden stock. The merger required the approval of a majority of the shareholders of Crouse-Hinds, N.Y.Bus.Corp.Law §§ 801, 803 (McKinney's Supp.1979), and a majority of the stockholders of Belden, 8 Del.Code Ann. §§ 251, 252. See New York Stock Exchange Company Manual, A 283-84. Stockholder meetings to vote on the merger were to be scheduled at a future date and the agreement required both boards to recommend to their respective stockholders "that they consider and approve" the merger. The merger agreement was announced to the public on September 9.
InterNorth does not assert any challenge to the bona fides of the negotiations that led to the proposed merger. Nor would it have standing to mount such a challenge; it did not become a shareholder of Crouse-Hinds until September 11, 1980.*fn3
B. The Tender Offer by InterNorth
Unknown to Crouse-Hinds and Belden, InterNorth, for more than a year prior to September 9, had been conducting studies of candidates for possible acquisition. According to the deposition testimony of an InterNorth official, during the week of September 2, InterNorth's Management Committee had decided to recommend the acquisition of Crouse-Hinds to the board of directors for consideration at its September 9 meeting.
Notwithstanding the announcement on September 9 by Crouse-Hinds and Belden of their proposed merger, the InterNorth board decided to accept the recommendation of the Management Committee and to commence a tender offer for Crouse-Hinds stock. Belden, however, had not been the object of any previous InterNorth acquisition study, and InterNorth was not interested in acquiring Belden. (After learning of the intended merger, InterNorth consulted Standard & Poor's and Moody's to ascertain Belden's line of business, but made no further investigation.) Thus, InterNorth decided to make its tender offer conditional on the abandonment or rejection of the proposed merger.
On September 12, InterNorth announced its offer to purchase 6,700,000 shares (approximately 54%) of Crouse-Hinds's stock at $40 a share. This purchase was to be followed by a second-step merger, in which the remaining Crouse-Hinds shareholders would receive InterNorth preferred stock for their Crouse-Hinds common stock. The Tender Offer included the following clause, which has come to be called the "Belden Condition":
The Offer is conditioned upon (the Belden merger's) being rejected by the shareholders of either (Crouse-Hinds) or Belden or the termination of such merger agreement by the parties thereto.
C. The Initial Reactions to the Tender Offer
Crouse-Hinds first learned of the Tender Offer in a telephone call at 6:30 a.m. on September 12 from Samuel F. Segnar, President and Chief Executive Officer of InterNorth, to Chris J. Witting, Crouse-Hinds's Chairman and Chief Executive Officer. Segnar identified himself, explained InterNorth's organizational structure, and informed Witting that InterNorth's board had authorized the Tender Offer for Crouse-Hinds. Segnar told Witting that the offer would appear in that morning's edition of the Wall Street Journal. Witting asked some questions about InterNorth, and indicated, according to Segnar, that Crouse-Hinds would resist the Tender Offer.
Resistance was forthcoming on all fronts. The first formal step was taken by Belden. On September 15, Belden filed suit against InterNorth in an Illinois state court, alleging that InterNorth had tortiously interfered with Belden's business opportunities (the "Illinois action"). On September 16, the Illinois Court issued a temporary restraining order against the Tender Offer. On September 30, after four days of evidentiary hearings, the court issued a preliminary injunction enjoining InterNorth from taking any further action to proceed with the Tender Offer or with any other tender offer for Crouse-Hinds stock, and from interfering with "the Plan and Agreement of Merger ... dated September 8, 1980 and amended September 23, 1980." The injunction was to remain in effect until the Crouse-Hinds and Belden shareholders had voted on the proposed merger, provided that the voting took place and the results were announced prior to December 1, 1980. Belden Corp. v. InterNorth, Inc., No. 80 Ch. 6465 (Ill.Cir.Ct. Cook Co., October 1, 1980).*fn4 InterNorth has appealed from the granting of the injunction; the appellate court has refused to stay the injunction pending appeal.
In the meantime, on September 12, after receiving and reading the Tender Offer, Witting consulted two law firms which had been counsel to Crouse-Hinds over the years; and he instructed Lazard Freres, its long-standing financial adviser which had worked with Crouse-Hinds on the merger agreement, to analyze the Tender Offer from a financial point of view. Other directors of Crouse-Hinds were contacted, notified of a special meeting to be held on September 16, and advised not to formulate conclusions as to the adequacy of the Tender Offer until all of the pending analyses were completed. The collection and analysis of data with respect to InterNorth and its Tender Offer proceeded over the weekend of September 13-14, and on September 15 Lazard reported to Witting that the Tender Offer was inadequate from a financial point of view. On September 16 Crouse-Hinds's board met with the company's legal and financial advisers. On the advice of counsel, the board first considered the merits of InterNorth's offer, independent of its effect on the merger to which the board was already committed. Based in part on the opinion of Lazard, the board decided to recommend that Crouse-Hinds shareholders reject the Tender Offer.
At that meeting Lazard also reaffirmed its previous advice that the Belden merger would benefit and enhance the value of Crouse-Hinds, and advised the board that the Tender Offer's goal of preventing that merger confirmed the view that the Tender Offer itself was financially inadequate. The board concurred in this judgment, reaffirming its belief that consummation of the proposed merger would strengthen Crouse-Hinds financially and offer it the opportunity to establish itself in new markets. The board therefore commenced to discuss ways to facilitate the consummation of the merger in light of InterNorth's opposition, and instructed management and counsel to explore, if appropriate, possible modifications to the merger agreement. No modifications were approved at that time, although the possibility of an exchange offer for Belden shares was discussed.
The board's reasons for its determination that the Tender Offer was not in Crouse-Hinds's best interests were set out in a Schedule 14D-9 statement filed with the Securities and Exchange Commission ("SEC").*fn5 In conformity with SEC rules that a target company report to its shareholders within 10 days the company's position, if any, with respect to a tender offer,*fn6 Crouse-Hinds management on ...