Allegheny Energy, Inc. v. DQE, Inc.

• Decision Date: 11 March 1999
• Docket Number: No. 98-3586,98-3586
• Citation: 171 F.3d 153
• Parties: ALLEGHENY ENERGY, INC., Appellant, v. DQE, INC., Appellee.
• Court: U.S. Court of Appeals — Third Circuit

Page 153

171 F.3d 153

ALLEGHENY ENERGY, INC., Appellant, v. DQE, INC., Appellee.

No. 98-3586.

United States Court of Appeals Third Circuit.

Argued Jan. 15, 1999.

Decided March 11, 1999.

D. Stuart Meiklejohn, John L. Hardiman (argued), Fraser L. Hunter, Jr., Timothy E. DiDomenico, Sullivan and Cromwell, New York, New York, William M. Wycoff, David E. White, Thorp, Reed & Armstrong, Pittsburgh, PA, for Appellant.

Douglas M. Kraus (argued), Seth M. Schwartz, Skadden, Arps, Slate, Meagher & Flom, New York, New York, Jennifer Wilson Hewitt, Doepken, Keevican & Weiss, Pittsburgh, PA, for Appellee.

Before: GREENBERG and RENDELL, Circuit Judges and POLLAK, District Judge. ^*

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, 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 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. § 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. § 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;

(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;

(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

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

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--each filed 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 # A110150F.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...