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. e du/thir dc ir c uit_1999/61Filed 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 inj unction. The appeal presents a question of Pennsylvania law. The question is whether, on the particular facts of thi s case, the loss by one publicly traded corporation of a contra ctual opportunity to acquire another publicly traded corp oration through a corporate merger constitutes irreparable harm. In concluding that the plaintiff -- the would-be ac quiring corporation -- was not entitled to a preliminary in junction compelling specific performance of the merger agree ment, the district court ruled that if the plaintiff prev ailed on the merits it would have an adequate remedy at law in t he form of an action for damages. Plaintiff's contention th at the loss of the numerous expected benefits of the merger was not quantifiable as damages, and hence constituted irre parable injury, was rejected by the district court. On this appeal,

2plaintiff renews that contention. We conclude that, in the

context of this case, plaintiff's contention is sou ndly based. Accordingly, we will vacate the judgment of the dis trict 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 whos e shares are traded on the New York Stock Exchange -- entered into a merger agreement on April 7, 1997. T he agreement envisioned a combined company in which DQ E would be a wholly-owned subsidiary of Allegheny. Al legheny is a utility holding company that provides electric ity generation, transmission and distribution, chiefly in Pennsylvania, Maryland and West Virginia; its princ ipal operating subsidiary is West Penn, a franchised ele ctric service provider in western Pennsylvania. DQE is al so a utility holding company; its principal operating su bsidiary 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 th e United States is in the early stages of dramatic ch anges that are intended to bring competition to what ha s been, since the electric industry's inception, a c ollection of regional monopolies. These changes have been brought about in part through the adoption of the En ergy Policy Act of 1992 and through orders 888 and 889 o f the FERC [Federal Energy Regulatory Commission]. In addition, in Pennsylvania, where DQE has all of its electric utility business and [Allegheny] ha s a

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1. Several of the documents in the appendix provide d to this court identify Allegheny as "Allegheny Power Systems, Inc ." or "APS". The Pennsylvania Public Utility Commission has noted th at "APS has changed its name to Allegheny Energy, Inc." Order o n Reconsideration, Pennsylvania Public Utility Commission Docket # A-1 10150F.0015 (July 23, 1998), at n.1. We have substituted "[Allegheny] " for "Allegheny Power Systems, Inc." or "APS" wherever we have cited docu ments employing the erstwhile corporate name or its acronym.

3substantial portion of its electric utility business, the

trend to bring about competition led to the enactment in late 1996 of the Electricity Generation C ustomer Choice and Competition Act, 66 Pa. Cons. Sta t. S 2801 et seq. (the "Pennsylvania Restructuring Leg islation"), which provides, among other things, for a ph ase 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 comp etitive

environment.

A81. The Pennsylvania Restructuring Legislation empowered the Pennsylvania Utilities Commission ("P UC")

"to determine the level of transition of stranded c osts for each electric utility and to provide a mechanism, t he competitive transition charge, for recovery of an a ppropriate 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, th e Joint Proxy Statement noted that the Allegheny Board of Directors had identified the following reasons for the

merger:

(i) the Merger would better position [Alleg heny] to take advantage of changes in the electric ut ility industry by expanding its service territory and number of customers served by combining its existin g service territories with DQE's contiguous service te rritories;

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2. The competitive transition charge ("CTC") -- int ended to recompense utilities for "stranded costs" -- is paid by custom ers. In addition to allowing customers to purchase electricity from the generator of their choice and empowering the PUC to assess a CTC appro priate to each utility's stranded costs, the restructuring legisla tion requires utilities

to "unbundle" their services. Before the restructuring legislation, the PUC set a single electric rate reflecting generation, t ransmission, and delivery of electricity; the restructuring legislation will eventually require all customers to pay two (unbundled) rates: a negotiate d rate for electricity generation, and a set rate for electricity transmis sion and delivery.

4(ii) [Allegheny] management has historicall y been

better than its peer companies at managing e lectric generation, transmission and distribution an d its belief that the Merger would permit the combined management to utilize this expertise over gr eater amounts of generation and distribution;

(iii) based upon reports from its outside a dvisors and [Allegheny] management and publicly availabl e materials regarding DQE, DQE management has historically been better than its peer compa nies in developing unregulated businesses and the [A llegheny] Board's belief that the Merger would permit the combined management to utilize this expertis e as a part of a bigger, financially stronger enter prise;

(iv) the terms of the recently enacted Penn sylvania restructuring legislation and the significan t mitigation efforts already undertaken by DQE would perm it DQE

to recover such stranded costs associated wi th DQE's

investment in the Nuclear Facilities as dete rmined to be just and reasonable by the PAPUC; and

(v) the synergies estimated by the manageme nts of [Allegheny] and DQE appear to be achievable.

A82. Similarly, the Joint Proxy Statement noted tha t the DQE Board of Directors had identified the following reasons for the merger:

(i) the Merger will allow the combined comp any to . . . have the critical mass necessary to co mpete in a deregulated utility environment;

(ii) the estimated synergies from the Merge r should improve DQE's financial performance due to s avings from the elimination of duplicate activities and by creating improved operating efficiencies and lower capital costs;

(iii) the Merger will permit stockholders o f 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 c onditions in any segment of its business;

5(iv) the combined service territories of DQ E and

[Allegheny] will be more geographically dive rse than the service territory of DQE alone, reducing DQE 's exposure to changes in economic competitive or climatic conditions as well as providing a l arger 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 operati ons and urban customer base;

(vi) DQE's current customers will receive a wider range of energy-related products and service s; and

(vii) DQE's mix of regulated and unregulate d energy products and services provides a strategic f it with [Allegheny]'s core businesses.

A83.

Section 6.1 of the merger agreement has provided ru les for the period between the signing of the agreement and consummation of the merger -- a consummation contin gent 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

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3. Section 6.1 states that each company must operat e "in the ordinary

and usual course" of business and "use its best eff orts" to "preserve its business organization intact and maintain its exist ing relations and goodwill." Moreover, it generally prohibits either party from unilaterally repurchasing stock, encumbering assets, changing st ock-based compensation plans, or changing any compensation an d benefit plan.

See A30-31.

4. Under certain circumstances, stock-for-stock mer gers may be structured to take advantage of an accounting metho d-- pooling of interests accounting treatment -- that provides fin ancial advantages to the newly combined company by permitting the absorb ed 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). Valuin g the absorbed

6Other agreement provisions allow either party to ab ort

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 termin ate the contract on October 5, 1998 in the event that the m erger was not consummated by that date. However, under Section 8.2(a), the October 5, 1998 date is automat ically moved forward six months, to April 5, 1999, if, on October 5, 1998, certain conditions have been met, among th em that "each of the other conditions to the consummat ion of the Merger . . . has been satisfied or waived or ca n readily

be satisfied . . . ." A42.5

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corporation's assets at book value permits two savi ngs: the combined company avoids recording the absorbed corporation's goodwill and avoids recording the (often higher) fair market val ue 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 greate r costs against its earnings over the ensuing years. Id. A combined cor poration emerging from a merger accounted for under the pooling of in terests method therefore would report higher annual earnings than the same corporation emerging from a merger accounted for un der the traditional purchase method. Id.

In order to qualify for pooling of interests accoun ting treatment, a merger must meet several conditions. Those requirem ents fall into three groups: (1) characteristics of the combining compan ies; (2) manner of the combination; and (3) absence of pre- and post-combi nation transactions. Accounting Principles Board Opinion No. 16, "Busine ss Combinations" (1970). See also generally AICPA Accounting Interpr etations of APB Opinion No. 16. The third group of requirements is at issue in this case. The APB Opinion and Interpretations identify a numb er of actions that can frustrate pooling of interests accounting treat ment if taken after the signing of a merger agreement and before consummati on of the merger. Many of those actions can be taken unilaterally, an d 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 writte n 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. Sectio n 8.4 permits DQE to terminate the agreement under certain circumstan ces, including a material breach by Allegheny that cannot be cured w ithin thirty days.

A42.

7On August 1, 1997 (about four months after the merg er

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 W est Penn restructuring cases. On May 29, 1998, the PUC modified the administrative law judges' recommendat ions in the two cases. West Penn was disallowed approximate ly $1 billion of the $1.6 billion in allegedly stranded c osts that it had requested.6

In a July 23, 1998 Order, the PUC held that the mer ged company would have to prove that it had mitigated i ts market power at a market power hearing to be held i n the year 2000. Should the merged company fail at that t ime to establish that it had mitigated its market power, t he PUC would order it to divest itself of 2500 megawatts o f generation by July 1, 2000. Order on Reconsideratio n,Pennsylvania Public Utility Commission Docket # A110150F.0015 (July 23, 1998), at 10.

The FERC -- which like the PUC has jurisdiction ove r 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 pri or to the merger or to submit to a hearing on market powe r mitigation. A329.

DQE was concerned with what it viewed as the "mater ial

adverse effects" of the PUC Order in the West Penn case, the PUC market power order, and the FERC market pow er order. On October 5, 1998, DQE informed Allegheny t hat, pursuant to Section 8.2(a) of the merger agreement, it was terminating the agreement.7 Allegheny immediately f iled a

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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

8complaint in the United States District Court for t he

Western District of Pennsylvania, seeking specific performance of the merger agreement, and -- fearing that DQE would take action to scuttle pooling of interes ts accounting treatment -- filed an accompanying motio n seeking both a temporary restraining order and a preliminary injunction "enjoining DQE from taking a ny action that it is precluded from taking without All egheny's consent under Section 6.1 of the Merger Agreement" until Allegheny's claim for specific performance was deci ded.

A401.

The District Court heard argument on the motion on October 5 and October 26. After considering testimo ny and certain affidavits, the District Court denied both the temporary restraining order and the preliminary inj unction. 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

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consummated by October 5, 1998, but also made provi sion for automatic extension of the October date to April 5, 1999. Sec tion 8.2(a) required that the October 5, 1998 deadline be automatically extended to April 5, 1999 if certain conditions were met, among them tha t"(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 consu mmation 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 Agreemen t and as of the Closing Date . . . ." A41. DQE claims that Alleghen y failed to meet Section 7.3(a) because one of its representations o r warranties, Section 5.1(f), was no longer true. Section 5.1(f) states t hat "since the Audit

Date . . . there has not been (i) any change in the fina ncial 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 h ave a material adverse effect on Allegheny's business.

9the injunction. The court thought damages would be an

adequate legal remedy for breach of the merger agre ement because "[b]usiness valuation experts are routinely called upon to value business mergers." Accordingly, the c ourt concluded that not granting the requested prelimina ry injunction would not cause Allegheny irreparable in jury. Id. at 4. The court further found that granting an inju nction 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 re lief" primarily for two reasons: (a) the court believed i t would

have "to become involved in the business affairs" o f the parties and; (b) the court believed that "unintende d collision with regulatory agencies and their statut ory mandates" loomed as a possibility. Id. at 5-6. Alle gheny 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 t o issue a preliminary injunction: (1) whether the mova nt has shown a reasonable probability of success on the merits; (2) whether the movant will be irrep arably injured by denial of the relief; (3) whether granting preliminary relief will result in even great er harm to the nonmoving party; and (4) whether granting th e preliminary relief will be in the public int erest.

American Civil Liberties Union of New Jersey v. Bla ck Horse Pike Regional Bd. of Educ., 84 F.3d 1471, 1477 n.2 (3d Cir. 1996) (en banc). See also Council of Alternative Po litical 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 at

1477 n.2.

Our review of a district court's denial of a prelim inary 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. Accred itation

10Council 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 "th is agreement shall be deemed to be made in, and in all respects shall be interpreted, construed and govern ed 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). Th e 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' chi ef subsidiaries -- West Penn and Duquesne -- conduct t heir 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, presu mably for the reason that counsel for both parties have f ound the case law from other jurisdictions to touch more clo sely than the Pennsylvania cases on the particular factual sc enario 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 framew ork of those cases -- resting as they do on broadly famili ar principles. And so, in the discussion which follows , we commence our analysis with those Pennsylvania cases . We

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8. Had the parties not stipulated that their agreem ent 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 prin ciples. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).

11then turn to consider the pertinent case law on whi ch the

parties have chiefly relied -- i.e., case law from other jurisdictions: taken as a whole, those cases -- som e of which are, indeed, factually more akin to the prese nt dispute than the Pennsylvania cases -- build upon t he broad foundational principles that inform the Penns ylvania cases. We feel comfortable in concluding, therefore , that lessons drawn from non-Pennsylvania cases have prop er application to the Pennsylvania dispute before the court.

We begin with a consideration of the law of specifi c performance -- in Pennsylvania first, and then more broadly. After addressing the question whether spec ific 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 afi nding 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 acqui red, and the irreparable harm suffered by the party acqu iring the company by the loss of the opportunity to own o r control that business." Pl. Br. at 22 (citing Peabo dy Holding Co., Inc. v. Costain Group PLC, 813 F. Supp. 1402, 1421 (E.D. Mo. 1993)). DQE disagrees, arguing that corpo rate combinations are regularly valued.

Pennsylvania law conforms to the general rules rega rding the availability of specific performance. "Specific performance should only be granted . . . where no a dequate remedy at law exists." Clark v. Pennsylvania State Police, 436 A.2d 1383, 1385 (Pa. 1981) (citing Roth v. Hart l, 75 A.2d 583 (Pa. 1970)). "Equitable jurisdiction to gr ant specific performance," the Pennsylvania Supreme Cou rt 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 co urt had stated the principle in the following terms: "The m ere fact

12that a remedy at law exists is not sufficient to ou st

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 resp ect 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 n o method by which the amount of damages can be accura tely 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"wh ere the subject matter of an agreement is an asset that is unique or one such that its equivalent cannot be pu rchased on the open market." Tomb v. Lavalle, 444 A.2d 666, 668 (Pa. Super. Ct. 1981).9

These general rules are unremarkable. But the parti es have not cited, nor has our research disclosed, any published Pennsylvania opinion discussing the appli cability of these general rules to a situation presenting th e same characteristics as the case at bar -- i.e., a dispu te arising out of the alleged breach of a merger agreement bet ween two publicly traded companies. Accordingly, we look for guidance to the handful of Pennsylvania cases in wh ich the general rules have been applied to closely cognate situations: broken agreements for the acquisition o f 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, f inding that "a similar restaurant and liquor business to t he 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 c ontract

involved here is one for the sale of a certa in restaurant

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9. A good need not be inherently unique; it may bec ome unique by virtue of its context. See Unatin 7-Up Co., Inc. v. Solomo n, 39 A.2d 835 (Pa. 1944) (impossible to value access to sugar or machi nery for the manufacture of soft drinks during wartime quota sys tem).

13and liquor dispensing establishment at a def inite

location, and the possession of the premises on which the same is located. There are no other prem ises nor is there any other restaurant which is exactly like the one involved here, and it would, for all practic al purpose, be impossible for . . . [appellee] to prove what money he would lose if . . . [appellant] were permitt ed to breach

this contract . . . .

Id. at 361-62 (ellipses and bracketed terms in orig inal).

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 proper ty adjacent to the landlord's shopping center. The Sup erior Court found that future profits would be impossible to calculate accurately and that the landlord had not shown that similar substitute properties were available t o the lessee. Accordingly, the court affirmed the trial c ourt's order of specific performance. The Supreme Court ap pears to have approved the reasoning of Easton Theaters i n 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 p romise to build a lake adjacent to plaintiff's property.10 Fi nding that "damages here can be readily computed or ascertaine d," 522 A.2d at 1056, the court noted that:

This case is not similar to Goldman v. McSha in, 432 Pa. 61, 247 A.2d 455 (1968), where a theater ope rator was permitted to sue a landowner and builder for specific

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10. It did so because, inter alia, the local condom inium association had entered into a settlement with the developer requir ing him to develop a

recreational area on the site of the unbuilt lake. Thus, "[s]pecific enforcement of the covenant or building contract he re 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 de velopment such as this, can reasonably argue that he or she purcha sed relying on, or is entitled to insist on, the absolute right to enforc e specifically all executory agreements and promises originally made p ertaining to the development, regardless of the wishes and rights of a majority of the

other owners." 522 A.2d at 1057.

14performance of a contract for the erection a nd

operation of a theater. In that sort of case , involving what essentially amounts to a joint business venture, future business profits are of necessity spe culative 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 a nd 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 propert y. Superior Court thought that the agreement was specifi cally enforceable, not only because future profits would be impossible to calculate accurately, but also because

the landlord had not shown that other simila r properties would be available to the lessee as a substitute.

Id. at 1056 n.7.11

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11. In our court, the most analogous Pennsylvania c ase arose in a setting that was the obverse of the case at bar, in the sense that the plaintiff seeking injunctive relief was the prospec tive seller who sought

to compel specific performance of an agreement to purc hase plaintiff's business that the buyer had declined to consummate. The District Court had found that the buyer's principal purpose in acq uiring the company was to obtain certain of the trucking company's reg ulated transportation rights. Determining that " `an award of damages wou ld 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) (citi ng district court slip opinion at 43). Cf. Girard Bank v. John Hancock Mut ual 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 exc hange for turning over security interests in boxcars on ground that m easuring damages would be impossible because "[a]ny calculation of d amages would require a complex inquiry into an assessment of the depreci ated value of the boxcars, the changes in market price, the individua l conditions of the boxcars, the adjustments for costs and expenses inc urred during the management of the boxcars, as well as an accounting for the gross and net earnings of each boxcar.").

15ii.

We turn now to a review of cases from other jurisdi ctions. 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 trad ed -- had executed an agreement by which First Federal wo uld be merged into C&S/Sovran in exchange for shares of C&S/Sovran stock. Three days before the deadline fo r consummation of the merger, First Federal filed sui t in state court seeking specific performance and damage s for breach of contract. Following trial, a jury found t hat 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 prepar e and file all applications with Federal and State re gulatory authorities necessary to accomplish the merger," as well as to take other steps necessary to consummate the mer ger. 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 applic ability of the general rules of specific performance to a d ispute arising out of the alleged breach of a merger agree ment between two publicly traded companies. A number of other opinions, however, have considered grants of specif ic performance in cases falling within the broader cat egory of broken agreements for the acquisition of an existin g business or the development of a business opportuni ty. The First Circuit, applying Maine law, has upheld a gra nt of specific performance in the context of a buyer's cl aim arising from a breached contract for the sale of a minor league baseball franchise. Triple-A Baseball Club A ssocs. v. Northeastern Baseball, Inc., 832 F.2d 214 (1st Cir. 1987). Speaking through Judge Bownes, the First Circuit no ted 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 w as an appropriate remedy. Id. at 223. Finding that a base ball franchise was a unique business, id. at 224, and th at measuring lost profits would be difficult, id. at 2 25, the

16court reversed the district court and remanded the case for

the entry of a decree of specific performance order ing the sale, id. at 228. See also Wooster Republican Print ing Co. v. Channel 17, Inc., 533 F. Supp. 601, 621 (W.D. Mo. 1 981) (applying Missouri law and ordering specific perfor mance of

breached contract to sell television station from o ne closely held corporation to another after finding that tele vision station was "unique").12

The Seventh Circuit read Illinois law in like fashi on 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 contra ct 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 appropria te for

breach of a contract to sell a business because a b usiness is a unique asset." Id. at 227.13

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12. The court found the television station unique o n the basis of expert testimony at trial, which established that the stat ion "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 l ocal and national markets, its network affiliation, its licensing and frequenc y, and its physical assets, among other things, Channel Seventeen is un ique." Wooster Republican Printing Co., 533 F.Supp. at 621. See al so 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 t hird party that would have breached contract to sell business to plaintif f because: (1) agreement "expressly acknowledged `irreparable dama ge' to Peabody in the event of breach" (2) Costain's "coal businesses are unique, including the management contracts and equity interests in ex isting and potential mining properties" (3) breach of contract to sell b usiness 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 tha t "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 bu siness of purchasing companies in order to `turn them around.' He purcha sed Medcom even though it had been losing money for several years. In purchasing

17The Delaware Court of Chancery has engaged in a sim ilar

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 o ut of a soured joint venture agreement. Seeking to disentan gle themselves, the two corporations that had entered i nto the joint venture agreement signed a subsequent agreeme nt requiring each to assist its former partner in qual ifying for pooling of interests accounting treatment in the ev ent 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 th e promised support. In concluding that specific performance wa s appropriate, the court noted that the dissolution a greement stipulated that injunctive relief would be availabl e in the case of a breach. "Even without the contract langua ge conceding the irreparable nature of the injury," th e court continued, "it is nevertheless clear that True Nort h will suffer irreparable harm if Publicis is not enjoined " because "Publicis' opposition efforts threaten to destroy t he [third party] merger, which is a unique acquisition opport unity for

True North." Id. at 44-45.14

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businesses, Manley looked for the right `building b locks.' Without all the blocks, it is conceivable that the chances of a suc cessful `turnaround' might be lowered. [The subsidiary] could well be on e of those building blocks necessary to turn Medcom around." Medcom Hol ding Co, 984 F.2d at 227 (deposition citations omitted).

14. The court did not explain why it deemed the ent erprise True North was to acquire to be "a unique acquisition opportun ity," but it did characterize that enterprise as "an international c ommunications company with advertising and public relations agenc ies . . . around the

world." Id. at 37.

Courts have found specific performance appropriate where a buyer has been frustrated in attempting to exercise a contrac tual 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 1 224 (Utah 1997) (plaintiffs "view the shares as a means of control or influence over [the business], and not merely as instruments of financi al investment"); King v. Stevenson, 445 F.2d 565, 572 (7th Cir. 1971) (af firming specific

18These cases could be interpreted as imposing upon a

plaintiff (the would-be acquirer) the burden of sho wing 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 chr onicling the attributes of uniqueness. Moreover, no case tha t has

come to our attention has found a business either n ot unique or not offering a unique opportunity to the buyer. This militates against treating the plaintiff 's bu rden as an onerous one. We turn now to the question whether, i n the case at bar, Allegheny has met that burden.

iii.

We think it clear that the agreed-upon Allegheny-DQ E merger constitutes a unique, non-replicable busines s opportunity for Allegheny. The Joint Proxy Statemen tfiled with the SEC and mailed to both corporations' share holders describes several respects in which the integration of DQE and Allegheny could be expected to produce particul ar benefits: the contiguity of Allegheny's and DQE's s ervice territories; DQE's particular expertise -- "better than its peer companies" -- in "developing unregulated busin esses"; the complementarity of Allegheny's "winter-peaking, lowcost, efficient operations, and suburban and rural customer base" with DQE's "summer-peaking operations and urb an customer base"; the "strategic fit" of DQE's "regul ated and unregulated energy products and services" and Alleg heny'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 a ny segment of its business"; and the expectation that the

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performance of stock option agreement permitting ma jority shareholder to purchase shares from minority shareholder becaus e "this block of stock was sufficiently important to [plaintiff] as president and developer" of company). Cf. Mid-Continent Tel. Corp. v. Home T el. Co., 319 F. Supp. 1176, 1197 (N.D. Miss. 1970) (specific performance inappropriate where decree would not be sufficiently "definite and work able" despite general state rule that "[s]pecific performance is an ordin ary remedy for breach of contract to convey corporate shares where the sh ares may constitute a controlling interest in a unique corporation").

19"combined company [would] . . . have the critical m ass

necessary to compete in a deregulated utility envir onment." In the measured prose of the Joint Proxy Statement, "the synergies estimated by the managements of [Alleghen y] and DQE appear to be achievable." DQE has not undertake n to identify any available merger partner, other than i tself, whose acquisition by Allegheny would yield even one , let alone all, of these very considerable business oppo rtunities. Accordingly, if DQE has breached the merger agreeme nt, Allegheny is entitled to specific performance.

C. The Relationship Between Specific Perform ance a nd Irreparable Harm

We now turn to a consideration of the harm that cou ld befall Allegheny if a preliminary injunction were d enied and DQE were to take any action destroying the possibil ity that the accounting aspects of the merger could be achie ved 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 t o 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 po oling of interests accounting, Allegheny would suffer irr eparable harm because DQE -- by then a part of Allegheny-- w ould no longer be able to recompense Allegheny for the d ifference between the value of the merger under pooling of in terests accounting and the value of the merger under purcha se accounting. DQE contends that the loss of pooling o f interests accounting treatment would not be irrepar able because the District Court could recompense Alleghe ny for any economic losses it suffered from loss of poolin g of interests accounting treatment by adjusting the mer ger exchange ratio to give Allegheny's shareholders a g reater share of ownership of the combined company. Because the loss of pooling of interests accounting treatment t riggers

losses that are themselves economic in nature and susceptible to financial valuation, DQE argues, DQE shareholders could fully recompense Allegheny for D QE's

20breach by giving Allegheny a greater share of the c ombined

company, thus vitiating the irreparable nature of t he harm. However, Pennsylvania's Business Corporation Law do es not permit changes in the consideration for a merge r, once shareholder approval has been given, without a new shareholder vote. 15 P.S.A. S 1922 (b) states in re levant part that:

A plan of merger or consolidation may contai n a provision that the boards of directors of th e 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 th e shareholders of any constituent corporation shall not change: (1) The amount or kind of shares, ob ligations, cash, property or rights to be received in e xchange for or on conversion of all or any of the shares of the constituent corporation.

Section 1922(b) constitutes one of the "rules of de cision" 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 s hould not give rise to Allegheny's requested specific per formance 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 on ly been granted in a corporate merger case where either (1) the contract contains an express provision reciting tha t damages would not be an adequate remedy for a breac h and permitting the parties to seek injunctive relie f and specific performance, or (2) the `target' company i s nonpublic or closely-held thereby rendering it difficu lt to value." Def. Br. at 17-18 (emphasis in original). H owever, DQE cites no case holding -- or even stating in dic tum -- that specific performance is not available unless t he merger

21contains an express provision permitting the partie s to seek

specific performance or the target is "non-public o r closelyheld." DQE's assertion that no such case has grante d specific performance is thus no more than an assert ion that no such case has yet arisen. It may be sufficient, for the purposes of the irreparable harm inquiry, that ther e is a contractual provision permitting specific performan ce15 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 ev ent that DQE terminates the contract in order to accept a be tter offer. See A43-44. DQE notes that "this provision i s admittedly not triggered by a breach or other termi nation," but argues that the provision "reflects Allegheny's agreement and understanding that any `injury' stemm ing 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 precl udes specific performance. As the Pennsylvania Supreme C ourt has stated, the presence of a liquidated damages pr ovision in a contract "will not restrict the remedy thereto [i.e., to liquidated damages] or bar specific performance unl ess the language of the part of the agreement in question, or of the entire agreement . . . shows a contrary intent." Ro th v. Hartl, 75 A.2d 583, 586 (Pa. 1950).16 Section 8.5( b) speaks

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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 withou t the contract language conceding irreparable injury . . . it is n onetheless 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 milli on liquidated damages provision . . . provides a reasonable estima te of the damages

22only to the termination fee payable upon the unsoli cited

receipt of a superior merger offer. See A43. It sta tes 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 Agre ement may be terminated and the Merger may be abandoned a t any time prior to the Effective Time, whether befor e or after the approval by stockholders of the Company . . . b y action of the board of directors of the Company: (a) subje ct 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 "Th is 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 m erger offer -- to evince an intent to bar specific perfor mance for

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Peabody would suffer. The Court disagrees wi th defendants. It is clear, plainly on the face of S4.1(d) of the [stock purchase agreement], that the liquidated damages prov ision applies only to

situations where no sale is consummated betw een Peabody and Costain based solely upon the existence of a n unsolicited proposal which is superior to Peabody's. In such a ci rcumstance, Peabody has protected itself in case it cannot meet the superior offer.

This does not mean, however, that the provision s tates an adequate remedy for circumstances where there is no u nsolicited bid superior to Peabody's and Costain has breached the [s tock purchase agreement]. Peabody needs no monetary protec tion in such a circumstance because Costain has no right to terminate the contract in pursuit of the better unsolicite d offer. Thus, it is

the opinion of this Court that Peabody will suff er irreparable harm . .

. .

The court therefore granted specific performance. I d. at 1422-23.

23breaches of the merger agreement unrelated to an

unsolicited receipt of a superior merger offer. 17

(iii) DQE argues that the benefits of this merger c an 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 J oint Proxy Statement filed with the SEC and mailed to bo th corporations' shareholders stated that the companie s"have jointly studied the estimated synergies arising out of a combination of their companies. The companies estim ated that the Merger could result in savings of approxim ately $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 t he other benefits of the merger identified by Alleghen y "are not elusive metaphysical concepts, but rather standard business phenomena that have long been quantified a nd 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., nonsynergy) strategic benefits outlined in the Joint P roxy Statement. See A83. DQE's failure even to attempt a valuation of those other strategic benefits is tell ing.18

(iv) DQE claims that Allegheny can bid on DQE's generating assets (which, according to DQE, are soo n to appear on the block), and thus achieve one of the s tated goals of the merger, "increas[ing] its generating c apacity by almost one-third . . . ensuring that Allegheny will have the critical mass to compete in the generation market a gainst its larger regional competitors." Pl. Br. at 12 (ci ted in Def. Br. at 28-29). Moreover, DQE argues, Allegheny can solicit

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17. Nor is DQE aided by its recital of statements f rom 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 Alleg heny's officers once thought that they would pursue damages for breach s imply does not speak to the issue of whether a fact-finder could c alculate those damages with any accuracy.

18. Indeed, even the synergies valuation in the pro xy statement hedges: the companies "estimated that the Merger could resu lt in savings of . . . ." A83 (emphasis added).

24DQE's customers under Pennsylvania's newly deregula ted

energy market. But "critical mass" is only one of s everal merger benefits identified by the parties, and the statutory right to attempt to serve customers is not the equi valent of having a preexisting business relationship with the m.

(v) DQE argues that Allegheny could merge with othe r utility companies. It offers no suggestions as to w hich other companies are "exactly like the one involved here," Szpakowski, 49 A.2d at 362, i.e., which other compa nies would demonstrably provide Allegheny with the benef its that it will lose if this merger agreement is not

consummated.

Conclusion

For the reasons set forth above, we hold that Alleg heny would be at serious risk of irreparable harm if pre liminary 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 dete rmination of whether a preliminary injunction should issue.19

We do not read the District Court as having conclus ively decided whether Allegheny has a reasonable likeliho od of success on the merits. We appreciate that the Distr ict Court characterized "Allegheny's submissions on thi s 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.

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19. The district court heard oral argument and cons idered the parties' submissions and supporting expert witness affidavit s. 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. Particula rly where opposing affidavits duel for the key to a dispositive issue, affidavits often prove

a poor substitute for live testimony.

25Likewise, the District Court should undertake to

determine whether "whether granting preliminary rel ief will result in even greater harm to the nonmoving party" than the irreparable harm that denying preliminary relie f 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 q uestion to be addressed is not whether DQE "would suffer so me harm," Memorandum Order at 4, or whether "there is a possibility of harm," id. at 5, but which of two po tential harms -- Allegheny's or DQE's -- is greater.

Finally, the District Court should reconsider wheth er its reasons for finding that the public interest "weigh s substantially against the granting of injunctive re lief," are supported in our case law. In so doing, the Distric t Court should determine whether its belief that the injunc tion would require "the court to become involved in the business affairs" of the parties presents a recognized ratio nale for a finding that a preliminary injunction would be agai nst the public interest. In reassessing its belief that the injunction "could have an adverse effect through unintended co llision with regulatory agencies and their statutory mandat es" and thus run counter to the public interest, the Distri ct Court should bear in mind that three state regulatory age ncies and two federal regulatory agencies have approved t he merger, each finding that it is in the public inter est; no state or federal agency has determined that the mer ger is not in the public interest. Cf. Schulz v. United St ates Boxing Ass'n, 105 F.3d 127, 134 (3d Cir. 1997) ("In determ ining [a state's] public policy, we turn to the enactments o f the state legislature as an authoritative source.").

Combining its reanalysis of these three factors wit h 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 Libe rties Union of New Jersey, 84 F.3d at 1477 n.2.

Accordingly, the judgment of the District Court den ying a preliminary injunction is vacated and the case rema nded for further proceedings consistent with this opinio n.

26A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

27