634 F.

2d 690

CROUSE-HINDS COMPANY, Plaintiff-CounterclaimDefendant-Appellant,

v.
INTERNORTH, INC., and IN Holdings, Inc.,
Defendants-Counterclaim-Plaintiffs- Appellees.
No. 538, Docket 80-7865.

United States Court of Appeals,

Second Circuit.
Argued Oct. 30, 1980.
Decided Nov. 14, 1980.

Edwin E. McAmis, New York City (Skadden, Arps, Slate, Meagher &
Flom, New York City, Bond, Schoeneck & King, Syracuse, N. Y., of
counsel), for plaintiff-counterclaim-defendant-appellant.
John L. Warden, New York City (Robert J. Katz, D. Stuart Meiklejohn,
William L. Farris, Sullivan & Cromwell, New York City, Donald J.
Kemple, Hancock, Estabrook, Ryan, Shove & Hurst, Syracuse, N. Y., of
counsel), for defendants-counterclaim-plaintiffs-appellees.
Before MOORE and KEARSE, Circuit Judges, and TENNEY, * District
judge.
KEARSE, Circuit 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.1
2

* 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. DefendantCounterclaimant 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 CrouseHinds 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.

5A. The Proposed Merger Between Crouse-Hinds and Belden

6

During the summer of 1980, Crouse-Hinds and Belden entered into

negotiations for a merger.2 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,
1980.3
B. The Tender Offer by InterNorth
8

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.

10

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 CrouseHinds shareholders would receive InterNorth preferred stock for their CrouseHinds common stock. The Tender Offer included the following clause, which
has come to be called the "Belden Condition":

11 Offer is conditioned upon (the Belden merger's) being rejected by the

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
12
13

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.
14

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).4 InterNorth has appealed
from the granting of the injunction; the appellate court has refused to stay the
injunction pending appeal.

15

In the meantime, on September 12, after receiving and reading the Tender
Offer, Witting consulted two law firms which had been counsel to CrouseHinds 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.

16

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.
17

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").5 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,6 Crouse-Hinds
management on September 17 sent a letter to Crouse-Hinds shareholders
recommending that they reject the InterNorth offer.7

D. The Exchange Offer

18

Following the announcement of the Tender Offer, Crouse-Hinds and Belden

entered into a new round of negotiations, and on September 23, the two
companies agreed to a modification of their original merger agreement
("Exchange Agreement"). The preamble to the Exchange Agreement recited
that the InterNorth Tender Offer sought rejection of the proposed merger and
that the boards of directors of Belden and Crouse-Hinds continued to believe
that the merger was in the best interests of their respective stockholders and
therefore desired to take action in furtherance of the merger agreement.

19

The Exchange Agreement divided the originally planned one-step merger

transaction into two parts. First, the Exchange Agreement required CrouseHinds to offer to exchange shares of its common stock for up to 7,733,871
shares (approximately 49%)8 of Belden common stock, at the 1.24 to 1 ratio
contemplated by the original merger agreement. The exchange was to be
followed by a second-step merger on the same terms. Crouse-Hinds and Belden
covenanted to use their best efforts to consummate the merger, and CrouseHinds agreed to vote its newly-acquired Belden shares for the merger. The
Crouse-Hinds shares issued in exchange for the tendered Belden shares would
not be entitled to vote on the proposed merger.9

20

The offer was to become effective on October 3 and remain open until October
31. Belden stockholders who tendered before October 21 would have the right

to have their shares accepted on a pro rata basis. The right to withdraw
previously tendered shares would expire on October 24.10 The shareholder
votes on the merger would be conducted at special shareholders' meetings
called for November 13 (for CrouseHinds)11 and for November 26 (for
Belden). Crouse-Hinds would be relieved of its contractual obligation to
purchase the Belden shares if it is enjoined from doing so for 45 days.
21

The Exchange Agreement would place several restrictions (commonly called

"standstill provisions") on Crouse-Hinds's use and disposition of its newlyacquired Belden shares in the events that (a) it acquired more than 350,000
Belden shares and (b) the merger was rejected by shareholders or opposed by
anyone who owned 40% or more of the common stock of either company. The
restrictions included barring Crouse-Hinds from purchasing additional Belden
shares and from seeking additional representation on Belden's board; requiring
Crouse-Hinds to vote its Belden shares in the same manner as the majority of
the remaining Belden stockholders; and giving Belden a right of first refusal,
for nine months after the restrictions took effect, on any Belden shares that
Crouse-Hinds wished to sell.

22

Although the Belden board approved the Exchange Agreement with CrouseHinds and viewed it as a step to facilitate the proposed merger, it refrained from
recommending that Belden stockholders exchange their shares with CrouseHinds.12 In part at least, Belden's decision not to recommend the exchange
rested on the inability of its investment banker, Goldman Sachs, to render a
fairness opinion on the Exchange Offer because InterNorth's opposition had
threatened the planned merger.

23

Pursuant to the Exchange Agreement, Crouse-Hinds commenced the Exchange

Offer on October 3. Its prospectus in connection with the Exchange Offer
summarized the purpose of the offer as follows:

24 Boards of Directors of Crouse-Hinds and Belden approved the execution of the

The
Exchange Agreement in order to facilitate consummation of the Merger in light of
the IN Offer and to discourage IN from continuing with the IN Offer. Since CrouseHinds 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 IN would have to pay and the amount of IN 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 IN from renewing the IN Offer.13

25

Again, in describing its purpose and its plans for Belden, Crouse-Hinds stated
that the purpose of the offer was to acquire Belden sharesas a first step in
acquiring the entire equity interest in Belden pursuant to the Merger
Agreement. Under Delaware law, approval of a majority of all outstanding
Belden Shares will be required to effect the Merger. 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 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 IN would have to pay and the amount of IN 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 IN from continuing with the IN Offer.

E. The Present Litigation

26

The present lawsuit was commenced by Crouse-Hinds against InterNorth on

September 22 in the United States District Court for the Northern District of
New York. The complaint alleged that the Tender Offer violated various
provisions of the federal securities laws and the New York Business
Corporation Law.14 Crouse-Hinds sought an injunction restraining InterNorth
from, inter alia, acquiring any Crouse-Hinds stock and soliciting or obtaining
any proxies for the voting of Crouse-Hinds stock. Its motion for preliminary
injunctive relief is presently sub judice.

27

On October 3, the day the Exchange Offer became effective, InterNorth filed
its answer and the first of two counterclaims, alleging that the Exchange Offer
lacked any valid business purpose, and that it was unfair to Crouse-Hinds
shareholders because the "standstill" provisions that would become effective if
the merger were not approved would inflict such substantial losses on CrouseHinds that any rational shareholder would vote to approve the merger.15 This
counterclaim seeks an injunction enjoining Crouse-Hinds from purchasing any
shares of Belden stock, by its Exchange Offer or otherwise. Jurisdiction of the
counterclaim is predicated on diversity of citizenship and principles of ancillary
jurisdiction.

28

InterNorth immediately sought a preliminary injunction against Crouse-Hinds's

purchasing any shares pursuant to the Exchange Offer, and the district court
ordered Crouse-Hinds to show cause on October 7 why such a preliminary
injunction should not be entered on October 24, the date on which Belden stock
tenders would become irrevocable. Crouse-Hinds opposed the injunction and
cross-moved to dismiss the counterclaims on jurisdictional, procedural and

substantive grounds. Crouse-Hinds argued (a) that the court did not have
ancillary jurisdiction over the counterclaims because the counterclaims were
permissive rather than compulsory; (b) that the court lacked diversity
jurisdiction because Belden, a Delaware corporation, was an indispensable
party to the counterclaims, and if it were present there would be no diversity
since InterNorth is also a Delaware corporation; (c) that InterNorth lacked
standing to prosecute its counterclaims in its own right as a shareholder, or
derivatively, or as a tender offeror; and (d) that the counterclaim should be
dismissed as a matter of law because Crouse-Hinds's directors' actions in
authorizing the Exchange Offer were protected by the business judgment rule.
F. The District Court's Decision
29

In connection with InterNorth's injunction motion, the district court received

several affidavits, excerpts from depositions, and a number of documents,
including the merger agreement, the Exchange Agreement, the Exchange Offer
prospectus and Crouse-Hinds's Schedule 14D-9. Two of the affidavits were
submitted by investment bankers, one on each side, assessing the financial
worth of the Exchange Offer. One affidavit was submitted by an attorney for
Crouse-Hinds. Three affidavits were submitted by attorneys for InterNorth,
principally stating InterNorth's contentions that the motivation of CrouseHinds's board for the Exchange Offer was solely to perpetuate its own control
of the company, and that InterNorth would suffer irreparable injury if the
Exchange Offer were consummated; one of these affidavits set forth a
deposition answer by InterNorth Chairman Segnar quoting Witting as having
stated in the September 12 telephone conversation that Crouse-Hinds was
"prepared to give (InterNorth) a handful" on its Tender Offer. And an affidavit
was submitted by Witting, describing the consideration given by the CrouseHinds board to the Tender Offer and the reasons it decided to oppose that offer.
No other affidavits were submitted. No live testimony was offered.

30

In an order entered on October 23, with a detailed opinion filed on October 25,
the district court denied Crouse-Hinds's motion to dismiss, and granted
InterNorth's motion for a preliminary injunction barring Crouse-Hinds from
acquiring any shares of Belden pursuant to the Exchange Offer.

31

The court rejected Crouse-Hinds's jurisdiction arguments on the ground that it

had ancillary jurisdiction over the counterclaims because both the original
claims and the counterclaims grew out of the same transaction, i. e., "the fight
for the corporate control of Crouse-Hinds." (Opinion at 16). In light of this
holding the court found it unnecessary to determine whether it also had
diversity jurisdiction. Nevertheless, it indicated that it disagreed with Crouse-

Hinds's contention that Belden was an indispensable party, because it saw a

threshold question as to whether or not Crouse-Hinds had "authority" to enter
into the Exchange Agreement; if it did not, Belden would have no contractual
rights. (Id. at n.14.) The court also held that InterNorth had standing as a
Crouse-Hinds shareholder to challenge alleged improper acts by the CrouseHinds board of directors. (Id. at 23).
32

Turning to the merits of InterNorth's counterclaims, the district court found that
there was "certainly" evidence that in entering into the Exchange Agreement,
the Crouse-Hinds board had acted to preserve its own control, because the
board was to remain in office following consummation of the Belden merger.
(Id. at 36.) Interpreting this Court's recent decision in Treadway Companies v.
Care Corporation, 638 F.2d 357 (2d Cir. 1980), to mean that a director is
"interested" in a merger for purposes of the business judgment rule if he will
remain in office after consummation of the merger, the court concluded that the
Crouse-Hinds board was "interested" in the Exchange Offer (Opinion at 36,
38), and ruled that the burden therefore shifted to the Crouse-Hinds directors to
prove that the Exchange Agreement was fair and reasonable (id.). The court
ruled that the business judgment rule and principles of negligence required
Crouse-Hinds to "reconsider" the proposed Belden merger in light of the
InterNorth Tender Offer, and concluded that Crouse-Hinds had not met its
burden, because it relied merely on the pre-Tender Offer evaluation of the
Belden merger as reasonable. (Id. at 37). The court found that

33
(a)lthough
the independent investment advice sought and proffered by Crouse-Hinds
is certainly some proof of its effort to reach an objective determination about the
merits of InterNorth's tender offer, in view of the strength of the evidence to the
contrary, and of applicable case law, the Court does not believe that (Crouse-Hinds)
has sustained its burden of proof under the business judgment (rule).
34

(Id. at 38.) The court concluded "that in the present case there is no legitimate
business purpose served by the exchange of stock between Crouse-Hinds and
Belden." (Id. at 39.)

35

As to irreparable injury, the court stated as follows:

36

While this Court does not believe that the Crouse-Hinds-Belden exchange offer
would amount to a waste of Crouse-Hinds corporate assets it does believe that
the offer, if allowed to proceed to fruition, would have resulted in a dilution of
shareholders' equity and a disenfranchisement of the present Crouse-Hinds
shareholders. According to both parties, the fruition of the exchange offer
would also have resulted in rendering the present InterNorth tender offer moot.

Such a deprivation of opportunity to the shareholders of both Crouse-Hinds and

InterNorth constitutes irreparable injury to both.
37

(Id. at 41.)

38

The court concluded that InterNorth had satisfied the requirements for a
preliminary injunction by showing irreparable injury, sufficiently serious
questions going to the merits of its first counterclaim16 to make them a fair
ground for litigation, and the balance of hardships tipping decidedly to
InterNorth. (Id.) E. g., Seaboard World Airlines, Inc. v. Tiger International,
Inc., 600 F.2d 355, 359-60 (2d Cir. 1979).

II
39

On this appeal Crouse-Hinds renews its challenges to the district court's

jurisdiction and to InterNorth's standing to maintain its counterclaims, and
contends that the district court erred in each of its conclusions as to InterNorth's
satisfaction of the requirements for a preliminary injunction. We deal here
principally with the questions of the court's jurisdiction and its assessment of
the merits of InterNorth's counterclaim.

A. Federal Jurisdiction of the Counterclaims

40
41

InterNorth asserts that the district court has ancillary jurisdiction over the
subject matter of its counterclaims on the ground that those counterclaims are
compulsory because they arise out of the transaction that is the subject matter
of Crouse-Hinds's complaint. The district court properly accepted this
contention.

42

Ancillary jurisdiction is a concept which, inter alia, allows a federal court to

adjudicate a compulsory counterclaim that does not independently meet the
requirements for invocation of its jurisdiction. Crouse-Hinds contends that the
court has no ancillary jurisdiction here because the counterclaims are not
compulsory within the meaning of Fed.R.Civ.P. 13(a), which provides in
relevant part as follows:

43

Compulsory Counterclaims. A pleading shall state as a counterclaim any claim

which at the time of serving the pleading the pleader has against any opposing
party, if it arises out of the transaction or occurrence that is the subject matter of
the opposing party's claim and does not require for its adjudication the presence
of third parties of whom the court cannot acquire jurisdiction. But the pleader

need not state the claim if (1) at the time the action was commenced the claim
was the subject of another pending action ....
44

Crouse-Hinds relies chiefly on two theories to support this contention. First, it

contends that since the complaint challenges the Tender Offer for CrouseHinds stock and the counterclaim challenges the Exchange Agreement relating
to Belden stock, the transactions at issue are not the same. Second, it argues
that the InterNorth attack on the Exchange Agreement need not be asserted as a
counterclaim here because its adjudication would require the presence of a
party over which the court cannot assert jurisdiction.17

45

We agree with the district court's conclusion that the claim and the
counterclaim arise out of the same transaction. The leading case on ancillary
jurisdiction is Moore v. New York Cotton Exchange, 270 U.S. 593, 46 S.Ct.
367, 70 L.Ed. 750 (1926), in which the plaintiff sued the Cotton Exchange,
contending that it had wrongfully refused to provide plaintiff with quotations;
the Cotton Exchange asserted a counterclaim, seeking an injunction against the
plaintiff's purloining quotations from it. Obviously the refusal to deal and the
alleged theft were not the same transaction in the routine sense of the word. But
the Supreme Court held the counterclaim compulsory, stating as follows:

46

"Transaction" is a word of flexible meaning. It may comprehend a series of

many occurrences, depending not so much upon the immediateness of their
connection as upon their logical relationship. The refusal to furnish the
quotations is one of the links in the chain which constitutes the transaction
upon which appellant here bases its cause of action. It is an important part of
the transaction constituting the subject-matter of the counterclaim. It is the one
circumstance without which neither party would have found it necessary to seek
relief. Essential facts alleged by appellant enter into and constitute in part the
cause of action set forth in the counterclaim. That they are not precisely
identical, or that the counterclaim embraces additional allegations, as, for
example, that appellant is unlawfully getting the quotations, does not matter. To
hold otherwise would be to rob this branch of the rule of all serviceable
meaning, since the facts relied upon by the plaintiff rarely, if ever, are, in all
particulars, the same as those constituting the defendant's counterclaim.

47

270 U.S. at 610, 46 S.Ct. at 371.

48

The logical relationship between the Exchange Offer and the Tender Offer is
plain. Both Offers seek to affect consummation of the proposed merger between
Crouse-Hinds and Belden: one seeks to further it, and the other seeks to thwart

it. Crouse-Hinds concedes that the Exchange Offer was conceived as a

response to the Tender Offer's threat to the merger. The "Belden Condition"
imposed by the Tender Offer is the subject of several counts of Crouse-Hinds's
complaint; at the same time it is a highly relevant factor in Crouse-Hinds's
defense to the counterclaims' attack on the decision to make the Exchange
Offer. We find no error in the district court's conclusion that the two claims
have a clear logical relationship and an adequate factual overlap to warrant
classification of the counterclaim as compulsory. See Federman v. Empire Fire
& Marine Insur. Co., 597 F.2d 798, 811-12 (2d Cir. 1979).
49

On the basis of the record as it now stands, we also reject Crouse-Hinds's

argument that InterNorth's counterclaims are not compulsory because of the
absence of Belden. We see no indication in the record that the court "cannot"
acquire personal jurisdiction over Belden. We cannot leave this subject,
however, without noting our disagreement with the district court's conclusion
that the presence of Belden is not necessary for the adjudication of InterNorth's
counterclaims. The counterclaims seek to enjoin Crouse-Hinds's performance
of the Exchange Agreement, to which Belden is a party and in reliance on
which, we are informed, Belden has materially altered its financial structure.18
The district court's view that the existence of Belden's contractual rights is
dependent on a determination of Crouse-Hinds's "authority" to enter into the
Exchange Agreement appears to misconstrue the nature of the claim actually
asserted by InterNorth. The basis for the challenge to the Exchange Agreement
is not that the Agreement was beyond the power or corporate authority of
Crouse-Hinds or its directors; there is no question that a contract was entered
into. Rather, InterNorth's substantive contention is that the contract is unfair;
and its procedural contention is that under the business judgment rule the
burden has shifted to the directors to prove the contract fair. (It should be noted
that the business judgment rule has no application to contracts that are beyond
the corporation's authority. See 2 Fletcher, Cyclopedia of the Law of Private
Corporations 505 (perm. ed. 1969).) Since there is no question that the
Exchange Agreement is a contract that was within the powers of the
corporation, and since Belden's rights thereunder would clearly be prejudiced if
the relief sought by InterNorth were to be granted, Belden's presence is
required. Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102,
110, 88 S.Ct. 733, 19 L.Ed.2d 936 (1968); Shields v. Barrow, 58 U.S. 130, 13940, 17 How. 130, 139-40, 15 L.Ed. 158 (1854); Lomayaktewa v. Hathaway,
520 F.2d 1324, 1325 (9th Cir. 1975), cert. denied, 425 U.S. 903, 96 S.Ct. 1492,
47 L.Ed.2d 752 (1976) ("No procedural principle is more deeply imbedded in
the common law than that, in an action to set aside a lease or a contract, all
parties who may be affected by the determination of the action are
indispensable").

B. The Likely Merits of the Counterclaim

50

The standard in this Circuit for the granting of a preliminary injunction requires
the moving party to show

51 irreparable harm and (b) either (1) likelihood of success on the merits or (2)
"(a)
sufficiently serious questions going to the merits to make them a fair ground for
litigation and a balance of hardships tipping decidedly toward the party requesting
the preliminary relief."
52

Seaboard World Airlines, Inc. v. Tiger International, Inc., supra, 600 F.2d at
359, quoting Jackson Dairy Inc. v. H. P. Hood & Sons, 596 F.2d 70, 72 (2d Cir.
1979). Putting aside questions of injury and hardship, which we need not reach
here, it is clear that under this test a party is not entitled to injunctive relief if he
does not show either a likelihood of success on the merits of his claim or such
substantial questions going to the merits as to make them fair ground for
litigation. Our review of the record convinces us that InterNorth made neither
showing, and that the granting of injunctive relief was an abuse of the district
court's discretion.19

53

The InterNorth claim that the district court found presented substantial
questions for litigation is the contention that the Exchange Offer has no valid
business purpose and is designed merely to perpetuate Crouse-Hinds's
management in office. The starting point for analysis of an attack by a
shareholder on a transaction of the corporation is the business judgment rule.
The New York Court of Appeals has recently stated the rule as follows:(The
business judgment rule) bars judicial inquiry into actions of corporate directors
taken in good faith and in the exercise of honest judgment in the lawful and
legitimate furtherance of corporate purposes. "Questions of policy of
management, expediency of contracts or action, adequacy of consideration,
lawful appropriation of corporate funds to advance corporate interests, are left
solely to their honest and unselfish decision, for their powers therein are
without limitation and free from restraint, and the exercise of them for the
common and general interests of the corporation may not be questioned,
although the results show that what they did was unwise or inexpedient."
(Pollitz v. Wabash R.R. Co., 207 N.Y. 113, 124, 100 N.E. 721.)

54

It appears to us that the business judgment doctrine, at least in part, is grounded

in the prudent recognition that courts are ill equipped and infrequently called on
to evaluate what are and must be essentially business judgments. The authority
and responsibilities vested in corporate directors both by statute and decisional
law proceed on the assumption that inescapably there can be no available

objective standard by which the correctness of every corporate decision may be

measured, by the courts or otherwise. Even if that were not the case, by
definition the responsibility for business judgments must rest with the corporate
directors; their individual capabilities and experience peculiarly qualify them
for the discharge of that responsibility. Thus, absent evidence of bad faith or
fraud (of which there is none here) the courts must and properly should respect
their determinations.
55

Auerbach v. Bennett, 47 N.Y.2d 619, 629-31, 419 N.Y.S.2d 920, 926-27, 393
N.E.2d 994 (1979); compare Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720
(Del.1971). In Treadway Companies v. Care Corp., supra, this Court
summarized the workings of the business judgment rule as follows:

56

Under the business judgment rule, directors are presumed to have acted
properly and in good faith, and are called to account for their actions only when
they are shown to have engaged in self-dealing or fraud, or to have acted in bad
faith. Once a plaintiff demonstrates that a director had an interest in the
transaction at issue, the burden shifts to the director to prove that the
transaction was fair and reasonable to the corporation. Daloisio v. Peninsula
Land Co., supra, 127 A.2d at 893; Geddes v. Anaconda Copper Co., 254 U.S.
590, 599, 41 S.Ct. 209, 212, 65 L.Ed. 425 (1921). Only if the director carries
this burden will the transaction be upheld. The initial burden of proving the
director's interest or bad faith, however, always rests with the plaintiff.

57

At 382 (emphasis added).

58

We find no basis in the present case for the district court's conclusion that
InterNorth carried its burden of demonstrating self-interest or bad faith on the
part of the Crouse-Hinds directors. As his starting point, the district judge gave
extended consideration to the decision in Treadway, in which we found that
because the Treadway directors, other than the chairman, were not to remain in
office after the merger, perpetuation of their control could hardly have been
their motivation for actions in furtherance of the merger. (See id. at 383.)
Unfortunately, the district judge inferred from this that a quite different
proposition must also be true-i.e., that if the directors are to remain on the
board after the merger, perpetuation of their control must be presumed to be
their motivation. This inference has no basis in either law or logic.20 Treadway
did not disturb the normal requirement that a complaining shareholder present
evidence of the directors' interest in order to shift the burden of proof to them.21

59

Such evidence as was offered by InterNorth to support the contention that the

Exchange Agreement was intended solely to perpetuate the Crouse-Hinds

directors' control must be viewed in the context of the two most striking aspects
of this controversy. First, the Crouse-Hinds directors had negotiated the
proposed merger with Belden in the belief that the merger was in the best
interests of Crouse-Hinds. They had no indication at that time that InterNorth
had any interest in Crouse-Hinds. Their good faith and lack of "interest" in
entering into the merger agreement are unchallenged. (Indeed, their bona fides
could not be attacked by InterNorth, because it was not a Crouse-Hinds
shareholder when the proposed merger agreement was entered into.
Fed.R.Civ.P. 23.1(1); N.Y.Bus.Corp.Law 626 (McKinney's 1963); Wolf v.
Frank, 477 F.2d 467, 476 (5th Cir.), cert. denied, 414 U.S. 975, 94 S.Ct. 287,
38 L.Ed.2d 218 (1973); Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 734-36
(3d Cir. 1970), cert. denied, 401 U.S. 974, 91 S.Ct. 1190, 28 L.Ed.2d 323
(1971)). And the merger agreement required the Crouse-Hinds board to
recommend approval by the shareholders.22 Second, the InterNorth Tender
Offer was expressly conditioned on the rejection or abandonment of the agreedupon merger. There can be no genuine question that the Exchange Offer would
increase the likelihood of consummation of the merger, since the Exchange
Agreement requires Crouse-Hinds to vote all Belden shares acquired pursuant
to the Exchange Offer in favor of the merger. In these circumstances, CrouseHinds's directors' attribution of the Exchange Offer to the facilitation of the
merger they had negotiated is patently credible, at least in the absence of
substantial evidence that their motives lie elsewhere.
60

The record support here for the contention and conclusion that the motivation
for the Exchange Agreement was retention of control is unusually sparse, if not
nonexistent. No live testimony whatever was offered below, even though
subjective issues such as motivation are particularly inappropriate for decision
on the basis of a documentary presentation. S.E.C. v. Frank, 388 F.2d 486, 492
(2d Cir. 1968); cf. Robertson v. Seidman & Seidman, 609 F.2d 583, 591 (2d
Cir. 1979). No depositions were taken by InterNorth of Crouse-Hinds officials
on the subject of motivation. Witting's affidavit-the only affidavit of anyone
other than an attorney or an investment banker-contains no support for a finding
of control motivation. What InterNorth relies on is (a) Witting's statement,
upon hearing about the Tender Offer and the "Belden Condition," that CrouseHinds would resist the Tender Offer,23 and (b) the statements in the Exchange
Offer prospectus as to the goal of the Exchange Offer.24 What Witting said,
according to InterNorth's Chairman, was, "We are prepared to give you a
handful." This statement plainly says nothing about retention of control. What
the prospectus said is that the Exchange Offer seeks (1) to facilitate the merger
with Belden and (2) to discourage the InterNorth Tender Offer. But it must be
recognized that InterNorth's imposition of the "Belden Condition" had made

these purposes merely opposite sides of the same coin.

61

Thus, none of the proffered statements is sufficient to show director "interest"

of the sort that is needed under the business judgment rule to shift the burden of
proof to the directors. In short, when the tender offeror has presented the target
company with an obvious reason to oppose the tender offer, the offeror cannot,
on the theory that the target's management opposes the offer for some other,
unstated, improper purpose, obtain an injunction against the opposition without
presenting strong evidence to support its theory. We find no such evidence
here.

62

We reverse so much of the district court's order as granted InterNorth's motion

for a preliminary injunction and dismiss the appeal from the remainder of that
order for want of appellate jurisdiction.

The Honorable Charles H. Tenney, Senior Judge of the United States District
Court for the Southern District of New York, sitting by designation

Judge Munson's order also denied a motion by Crouse-Hinds to dismiss the

InterNorth counterclaims, and Crouse-Hinds purports to appeal from that
portion of the order as well. The denial of a motion to dismiss is not normally
appealable, Catlin v. United States, 324 U.S. 229, 236, 65 S.Ct. 631, 635, 89
L.Ed. 911 (1945); E.E.O.C. v. American Express Co., 558 F.2d 102, 103 (2d
Cir. 1977), and we decline to exercise pendent appellate jurisdiction over that
part of the order

During the spring of 1980 Belden had been invited to enter into merger
negotiations by Ampco-Pittsburgh Corporation. Belden declined, and shortly
commenced serious negotiations with Crouse-Hinds. Chris J. Witting, CrouseHinds's Chairman and Chief Executive Officer, had been a Belden director for
seven years, and similar but "less serious" discussions had taken place between
the companies in the past

On September 11, 1980, InterNorth purchased 100 shares of Crouse-Hinds

stock

The Illinois court found, inter alia, that InterNorth had determined as early as
April 1980 that it would attempt to acquire Crouse-Hinds, and that InterNorth's
President had attempted to induce Crouse-Hinds's President to breach the
merger agreement, in part by assuring him that if the Tender Offer were
successful he would retain his job

The reasons set out in the Schedule 14D-9 for Crouse-Hinds's negative
recommendation included: Lazard Freres' conclusion that the $40 per share
offering price was inadequate (the closing price on September 11, the day
before the InterNorth announcement had been $38 per share; since the Tender
Offer the market price has been above $40 per share); the board's determination
that the company and its shareholders would be better served by the company's
remaining independent; that, based on past performance, earning projections,
and the state of the national economy, the present is an inopportune time to sell
the company; that the intended acquisition by InterNorth was subject to a
number of conditions and that projected future returns on InterNorth preferred
shares compared unfavorably to that on Crouse-Hinds shares; that the merger
with Belden, which would be precluded under "the Belden Condition" is in
Crouse-Hinds's best interests; and uncertainty over whether ultimate
consummation of the acquisition should be resolved by appropriate litigation

SEC Rule 14e-2, 17 C.F.R. 240.14e-2 (1980), provides in pertinent part:

Rule 14e-2. Position of Subject Company with Respect to a Tender Offer.
(a) Position of subject company. As a means reasonably designed to prevent
fraudulent, deceptive or manipulative acts or practices withing (sic) the
meaning of Section 14(e) of the Act, the subject company, no later than 10
business days from the date the tender offer is first published or sent or given,
shall publish, send or give to security holders a statement disclosing that the
subject company:
(1) Recommends acceptance or rejection of the bidder's tender offer;
(2) Expresses no opinion and is remaining neutral toward the bidder's tender
offer; or
(3) Is unable to take a position with respect to the bidder's tender offer.
Such statement shall also include the reason(s) for the position (including the
inability to take a position) disclosed therein.

In addition to the actions described in the text, on September 19, Crouse-Hinds

asked the Attorney General of the State of New York to investigate the Tender
Offer under the New York Security Takeover Disclosure Act. Crouse-Hinds
alleged that in June 1980 InterNorth had made an offering of debentures in
order to raise funds for the Tender Offer and had improperly failed to mention
Crouse-Hinds as target. (See note 4 supra.) On September 26 the Attorney
General issued a temporary injunctive order against the Tender Offer; he has
held two days of hearings and currently has the matter under consideration

In addition, on September 23, Crouse-Hinds asked the Federal Energy

Regulatory Commission to investigate the Tender Offer. Its petition to that
agency alleges that the Tender Offer seeks to divert nearly $500 million from
InterNorth's regulated energy business into an unrelated enterprise and thus
constitutes an unreasonable practice proscribed by 5 of the Natural Gas Act.
Finally, Crouse-Hinds refused to make a list of its shareholders available to
InterNorth, a refusal that has led to litigation in the New York State courts. See
note 11 infra.
8

This figure could be reduced to approximately 39% because Belden planned to

call all of its outstanding 8% convertible subordinated debentures

In order to accomplish the Exchange Offer and subsequent merger, CrouseHinds shareholders would have to vote to amend the certificate of incorporation
to increase the number of authorized shares. A vote on this authorization was
scheduled for the next shareholders' meeting

10

We are informed that by October 23 the Exchange Offer had already been
oversubscribed

11

On October 30, 1980, a New York appellate court stayed the November 13
meeting pending decision of InterNorth's appeal of a lower court's denial of
access to Crouse-Hinds's shareholders' list. The list apparently was made
available to InterNorth on October 31, and on November 7 the order staying
the November 13 shareholders' meeting was vacated. See In re IN Holdings,
Inc., Index No. 19464/80 (Sup.Ct.N.Y.Co.)

12

The Crouse-Hinds Prospectus in connection with the Exchange Offer stated as

follows:
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,
among other things, of the opposition of IN. Accordingly, the Belden Board has
made no recommendation as to whether or not its 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.

13

The Prospectus also disclosed the statistics underlying these statements. As of

September 16, 1980, there were 12,233,733 Crouse-Hinds shares outstanding,
363,376 reserved for conversion of preferred stock, and 331,302 reserved for

stock options. 6,700,000 shares (the number sought by InterNorth's Tender

Offer) represents approximately 52% of these outstanding or reserved shares. If
2,150,000 shares were issued pursuant to the Exchange Offer, 6,700,000 shares
would amount to approximately 44%
14

The original complaint alleged violations of 14(a), 14(d), and 14(e) of the
Securities Exchange Act of 1934, 15 U.S.C. 78n(a), 78n(d) and 78n(e) and
5 of the Securities Act of 1933, 15 U.S.C. 77c, as well as the S.E.C. rules and
regulations promulgated thereunder. It also alleged violations of New York
General Business Law, Article 23-A (the Martin Act). An amended complaint,
dated September 24, added allegations under 7, 8, and 16 of the Clayton Act,
15 U.S.C. 18, 19 and 26

15

On October 8, InterNorth filed a second counterclaim, which alleged that

Crouse-Hinds had violated the Delaware Tender Offers Act, 8 Del.Code Ann.
203, which requires that a Delaware corporation that is the target of a tender
offer be given written notice of the intended offer "(n)ot less than 20 nor more
than 60 days" before the date the offer is to be made. Crouse-Hinds had given
Belden formal written notice on September 22, eleven days prior to the
effective date of the Exchange Offer, noting that it did not concede the
constitutionality of the Delaware provision, and stating that the notice merely
confirmed prior discussions between the parties (and hence notice of the
possibility of the Exchange Offer) on September 13, 1980. InterNorth alleged
that
(t)he sole purpose of such violation of law is to destroy defendants' opportunity
to have the (InterNorth) Offer considered by the Crouse-Hinds shareholders
before they are effectively committed, by virtue of the consummation of the
Exchange Offer, to the Belden proposal.

16

The court found InterNorth's other contentions, including its claim of waste and
its claim that the amount of notice given to Belden violated Delaware law, were
either unsupported or too speculative to warrant preliminary injunctive relief.
(Id. at 40.) We see no reason to disturb these conclusions

17

Crouse-Hinds also argues that the counterclaim is the subject of the Illinois
action and hence need not be pleaded here. While the Illinois court's order
described the merger agreement as "dated September 8, 1980 and amended
September 23, 1980" we see no indication that propriety of the amendment, i.
e., the Exchange Agreement, was the "subject of" that action

18

In partial performance of its obligations under the Exchange Agreement,

Belden has commenced the redemption of its outstanding convertible
debentures

19

As there was no evidentiary hearing in the district court and the injunction was
granted on the basis of documents, deposition excerpts and affidavits, we are
not limited to reviewing the district court's exercise of discretion but have the
power to make a "full review." Jack Kahn Music Co. v. Baldwin Piano &
Organ Co., 604 F.2d 755, 758 (2d Cir. 1979). Given the record on which the
decision was based, however, we have no doubt that the court's discretion was
abused

20

The proposition that "A implies B" is not the equivalent of "non-A implies nonB," and neither proposition follows logically from the other. The process of
inferring one from the other is known as "the fallacy of denying the
antecedent." J. Cooley, A Primer of Formal Logic 7 (1942)

21

In Treadway, for example, the conclusion that Treadway's chairman was

"interested," was not based simply on the fact that he would remain in office
following the merger. Rather, we noted that
(t)here was ample evidence to support a finding that Lieblich acted improperly,
and determined, for his own selfish reasons and without giving the matter fair
consideration, to oppose a Care takeover at all costs. 50

50

Most notable was the fact that Lieblich's view of the dollar value of the Fair
Lanes merger proposal was apparently not affected in any way by his learning
that, contrary to his prior assumption, certain Fair Lanes assets were to be
excluded from the deal
At ----.
Further, it must be recognized that the focus on control motivation in Treadway
and other authorities cited by InterNorth was necessitated by the special
circumstances of a sale of corporate stock that would alter the voting power of
the stockholders. InterNorth relies on these cases, involving sales similar to that
in Treadway, or selective redemption of stock, or use of corporate funds to buy
out an insurgent, and argues that the Crouse-Hinds Exchange Offer is
"functionally identical." In fact it is not. In the cases relied on by InterNorth the
actual voting percentages of "friendly" stockholders were increased and the
voting percentages of "unfriendly" stockholders were reduced or eliminated.
The present case is materially different. The Crouse-Hinds Exchange Offer
neither increases nor decreases the voting power of any Crouse-Hinds
shareholder in any relevant respect, since the Crouse-Hinds shares issued for
the exchange will not be entitled to vote on the proposed merger. To the extent
that the consummation of both the exchange and the merger will require an
increase in Crouse-Hinds's authorized stock, such an increase is to be voted on
by Crouse-Hinds shareholders.

InterNorth argues also that even if Crouse-Hinds shareholders are not actually
disenfranchised, they will be coerced to vote for the merger because if they
reject the merger the "standstill provisions" of the Exchange Agreement will
result in a waste of Crouse-Hinds's assets. The district court refused to base the
injunction on this theory, rejecting the contention that the Exchange Offer
would amount to waste. See Opinion at 40-41. There is adequate evidence in
the record to support its rejection.
22

We know of no support for the district court's view (Opinion at 37) that the
Crouse-Hinds directors were required to "reconsider" the merger agreement
that had been entered into and that they were contractually bound to
recommend to shareholders. See Casey v. Woodruff, 49 N.Y.S.2d 625, 646
(Sup.Ct.N.Y.Co.1944)

23

There is no statement in the Tender Offer that InterNorth would install a new
Crouse-Hinds management; indeed, the Tender Offer states InterNorth has no
such plans. InterNorth argues that if all its plans proceed to their intended
conclusion, Crouse-Hinds will be a subsidiary company, with its board having
to report to InterNorth, and that the Crouse-Hinds board would not be happy
running a mere subsidiary company. This is far too meager a basis for a shifting
of the burden of proof or the granting of a preliminary injunction

24

The fact that the initial decision to oppose the Tender Offer was made in four
days does not prove that either that decision or the subsequent Exchange
Agreement stemmed from a control motivation. Such decisions are required to
be made promptly, see SEC Rule 14e-2, 17 C.F.R. 240.14e-2 (1980), and are
normally made quickly; and the district court recognized that this decision was
not made without Crouse-Hinds's having consulted its expert advisers in an
effort to be objective. We note further that the Exchange Agreement, which is
of course the precise target of the counterclaims, was not entered into until
eleven days after announcement of the Tender Offer