1999 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

2-23-1999

AMP Inc v. Allied Signal Corp

Precedential or Non-Precedential:

Docket 98-2019

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Recommended Citation

"AMP Inc v. Allied Signal Corp" (1999). 1999 Decisions. Paper 46.

http://digitalcommons.law.villanova.edu/thirdcircuit_1999/46
Filed February 18, 1999 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 98-2019 

AMP INCORPORATED 

v. 

ALLIEDSIGNAL CORPORATION; 

PMA ACQUISITION CORPORATION 

AlliedSignal, Inc. and PMA 

Acquisition Corporation, 

 Appellants 

On Appeal from the United States District Court 

for the Eastern District of Pennsylvania 

(D.C. Civ. No. 98-4405) 

District Judge: Honorable James T. Giles 

Argued January 20, 1999 

BEFORE: GREENBERG, ALITO, and McKEE, 

Circuit Judges 

(Filed: February 18, 1999) 

 Jon A. Baughman (argued) 

 Seth A. Abel 

 Peter O. Clauss 

 Pepper, Hamilton & Scheetz 

 18th & Arch Streets 

 3000 Two Logan Square 

 Philadelphia, PA 19103-2799 
 John G. Harkins, Jr. 

 Gay P. Rainville 

 Eleanor M. Illoway 

 Harkins Cunningham 

 2005 Market Street 

 2800 One Commerce Square 

 Philadelphia, PA 19103 

 Attorneys for AMP Incorporated 

 Alexander R. Sussman (argued) 

 Fried, Frank, Harris, Shriver & 

 Jacobson 

 One New York Plaza 

 New York, NY 10004 

 Arlin M. Adams 

 Schnader, Harrison, Segal & 

 Lewis 

 1600 Market Street 

 Suite 3600 

 Philadelphia, PA 19103 

 Mary A. McLaughlin 

 George G. Gordon 

 Dechert, Price & Rhoads 

 1717 Arch Street 

 400 Bell Atlantic Tower 

 Philadelphia, PA 19103 

 Attorneys for AlliedSignal, Inc. and 

 PMA Acquisition Corp. 

 2 
OPINION OF THE COURT 

GREENBERG, Circuit Judge. 

I. INTRODUCTION 

AMP Incorporated brought suit under the Pennsylvania 

Business Corporation Law ("PBCL"), 15 Pa. Cons. Stat. 

Ann. S 2501 et seq. (West 1995), alleging that 20,000,100 

shares of AMP stock acquired by AlliedSignal, Inc.,

amounting to 9.1% of outstanding AMP stock, are control 

shares within the meaning of the portion of the PBCL 

commonly known as the Control Share Acquisitions 

Statute, 15 Pa. Cons. Stat. Ann. SS 2561-68 (the "Statute"). 

AMP charged that because of a voting disqualification in the 

Statute, AlliedSignal could not vote those shares. The 

district court, construing the Statute, concluded that, 

although AlliedSignal's acquisition totaled less than 20% of 

the outstanding AMP stock, the numerical threshold for the 

voting disqualification, the Statute requires that shares 

bought with the intent to make a "control share 

acquisition" as defined by the Statute are"control shares," 

and so lose voting rights unless restored as provided in the 

Statute. Therefore, the court enjoined AlliedSignal from 

voting its shares. AlliedSignal and its subsidiary used in 

acquiring AMP shares, PMA Acquisition Corporation, 

appeal. We conclude that there must be a "control-share 

acquisition" triggered upon actual acquisition of at least 

20% of the outstanding shares by an acquiring person 

before voting shares may be deemed "control shares." 

Consequently, we will reverse. 

II. FACTUAL AND PROCEDURAL HISTORY 

AMP is a Pennsylvania corporation which designs, 

manufactures and, on a worldwide basis, markets 

electronic, electrical and electro-optic connection devices, 

interconnection systems and connector assemblies. Its 

principal place of business is in Harrisburg, Pennsylvania, 

and it is a registered corporation within the meaning of 

 3 
section 2502 of the PBCL, 15 Pa. Cons. Stat. Ann.S 2501 

et seq. Allied Signal is a Delaware corporation with its 

principal place of business in Morristown, New Jersey, and 

is the beneficial owner of 20,000,100 AMP shares, or 9.1% 

of AMP's outstanding stock, having bought those shares 

intending to acquire AMP. Allied Signal is an advanced 

technology and manufacturing company with worldwide

operations in the aerospace, automotive and engineered 

materials businesses. 

In August 1998, Allied Signal began to make overtures to 

AMP for a negotiated merger transaction. On August 4, 

1998, Allied Signal announced that it would commence an 

unsolicited tender offer for all of the outstanding shares of 

the common stock of AMP and would seek to merge the two 

companies. On August 10, 1998, Allied Signal filed a tender 

offer statement on Schedule 14D-1 with the Securities 

Exchange Commission setting forth the terms of the tender 

offer and other information. 

On August 21, 1998, the AMP directors formally rejected 

AlliedSignal's offer, and filed a complaint in the district 

court against AlliedSignal and PMA Acquisition 

Corporation. While this appeal involves only state law 

issues, the overall action also includes federal issues, so 

that the district court had jurisdiction under 28 U.S.C. 

SS 1331, 1332, and 1367. In light of AMP's opposition, 

AlliedSignal amended its offer to reduce the number of 

shares it sought to 40,000,000, the approximate number it 

could acquire without triggering AMP's then-existing 

"poison pill." On September 21, 1998, after AMP's board 

reduced the share ownership threshold for triggering the 

"poison pill" from 20% to 10%, AlliedSignal amended its 

offer again to reduce the number of shares sought, this 

time to 20,000,000, or approximately 9.1% of all AMP 

shares outstanding. The next day AMP amended its 

complaint to add, among other charges, Count Four, the 

subject of this appeal. 

In Count Four AMP alleged that the shares which 

AlliedSignal proposed to buy pursuant to the amended 

tender offer are "control shares" because AlliedSignal had 

announced its offer to purchase all AMP shares. Thus, AMP 

argued that in view of the statutory voting disqualification, 

 4 
AlliedSignal could not vote the shares it proposed to buy. 

On October 9, 1998, after the expiration of its amended 

tender offer, AlliedSignal purchased 20,000,000 shares of 

AMP stock at a cost of $890 million. Because AlliedSignal 

earlier had purchased 100 shares of AMP stock, 

AlliedSignal was and is now the beneficial owner of

20,000,100 shares of AMP stock or 9.1% of AMP's 

outstanding shares.1 

On October 15, 1998, AMP moved for partial summary 

judgment on Count Four of its first Amended Complaint. In 

particular, it sought a declaratory judgment that 

AlliedSignal's shares in AMP are "control shares" as defined 

by the Control Share Acquisitions Statute and an 

injunction barring AlliedSignal from voting any AMP shares 

unless and until AlliedSignal obtains a restoration of its 

voting rights in accordance with the Statute. AlliedSignal 

cross-moved on October 29, 1998, for partial summary 

judgment against AMP dismissing Count Four on the 

grounds that the shares it had acquired were not"control 

shares" and that their acquisition thus had not triggered a 

loss of voting rights. A hearing was held on November 4, 

1998, and on November 18, 1998, the district court issued 

a Memorandum Opinion and Order granting AMP's motion 

for partial summary judgment on Count Four and denying 

AlliedSignal's cross-motion. Thus, AlliedSignal, AMP's 

largest shareholder, cannot vote its shares of AMP with 

respect to the consent solicitation as well as any issues 

voted upon at the annual 1999 shareholders meeting,

including a potential merger between AMP and Tyco 

International, Ltd., announced by AMP on November 22, 

1998. AlliedSignal and PMA Acquisition Corporationfiled 

their notice of appeal on November 23, 1998. We have 

jurisdiction under 28 U.S.C. S 1292(a)(1) and, because we 

_________________________________________________________________ 

1. The parties agreed at the oral argument before us that AlliedSignal is 

the beneficial owner of all of those shares, contrary to the discussion in 

the district court's Memorandum Opinion and Order, which stated that 

"[b]eneficially owned shares . . . carry a rebuttable presumption that 

they 

are control shares," while "[t]here is no such rebuttable presumption . . 

. 

covering the voting shares actually owned . . . ." We believe that the 

district court's reading of beneficial ownership was incorrect as such 

ownership clearly includes outright ownership. 

 5 
decide this case through the application of legal principles, 

we exercise plenary review. See AT&T Co. v. Winback and 

Conserve Program, Inc., 42 F.3d 1421, 1427 (3d Cir. 1994). 

In this regard, we point out that the district court did not 

suggest that it predicated the injunction on any basis other 

than its construction of the Statute. 

III. DISCUSSION 

Pennsylvania's 1990 Control Share Acquisitions Statute, 

Chapter 25, Subchapter G of the PBCL, 15 Pa. Cons. Stat. 

Ann. SS 2561-68, requires that tender offers be subject to 

shareholder approval at a meeting. This complex statute 

was one of many similar state laws passed beginning in the 

1980s to protect businesses from certain abusive and 

manipulative practices of corporate raiders. See S. Wallman 

and L. Gordon, Pennsylvania's Anti-Raider Legislation, 4 

No. 8 Insights 38 (Aug. 1990). 

The Statute treats a person's acquiring voting power over 

20% of the voting shares of a corporation as a fundamental 

corporate transaction requiring prior shareholder approval. 

Specifically, while not limiting a purchaser from acquiring 

shares, the Statute provides that "control shares" may not 

be voted until the shareholders grant approval. Control 

shares are defined as voting shares providing a person with 

voting power in three specified ranges, beginning with 20%. 

Control shares also include shares owned by an acquiring 

person purchased with the intent of making a control-share 

acquisition or purchased within 180 days prior to that 

person's making a control-share acquisition. 

We think that the clearest reading of this rather 

confusingly-drafted statute is that an "acquiring person" 

loses its right to vote its shares when it actually acquires 

enough shares to bring its total shares beneficially owned 

to or above one of the statutory thresholds of voting power, 

starting at 20%. The parties agree that AlliedSignal is an 

"acquiring person" as defined by the statute: a "person who 

makes or proposes to make a control-share acquisition." 15 

Pa. Cons. Stat. Ann. S 2562. 

A "control-share acquisition" is defined in section 2562 

as 

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 An acquisition . . . that, but for this subchapter, would, 

 when added to all voting power of the person over other 

 voting shares of the corporation . . . entitle the person 

 to cast . . . [votes in these ranges]: (1) at least 20% but 

 less than 33 1/3%, (2) at least 33 1/3% but less than 

 50%, or (3) 50% or more. 

AMP concedes that under the statutory definition there has 

not been a "control-share acquisition" in the sense of 

AlliedSignal's reaching a statutory threshold for it has not 

acquired 20% of AMP's shares. Br. at 10. However, in effect, 

AMP is arguing that the definition of "control shares" 

operates such that an "acquiring person" can have its 

"control shares" stripped of voting power without having 

made an actual "control-share acquisition." 

The appeal largely boils down to how "control shares" is 

defined in section 2562. The two-sentence provision defines 

"control shares" as: 

 Those voting shares of a corporation that, upon 

 acquisition of voting power over such shares by an 

 acquiring person, would result in a control-share 

 acquisition. Voting shares beneficially owned by an 

 acquiring person shall also be deemed to be control 

 shares where such beneficial ownership was acquired 

 by the acquiring person: 

 (1) within 180 days of the day the person makes a 

 control-share acquisition; or 

 (2) with the intention of making a control-share 

 acquisition. 

15 Pa. Cons. Stat. Ann. S 2562 (emphasis added). 

The trouble lies in subsection (2) of the second sentence, 

which the district court held to mean that if an acquiring 

person has bought shares with the express intention of 

buying more shares to make a control-share acquisition, 

those shares already acquired are "control shares." But the 

use of the past tense in the second sentence --"was

acquired . . . . with the intention" -- and the use of the 

word "deemed," suggest that the subsection looks backward 

in time, so as to be applied to those shares an acquiring 

person buys which, when added to those it already 

 7 
purchased, bring its beneficial ownership to the 20% 

threshold. The previously-acquired shares would be 

"deemed" retroactively to be "control shares" and covered 

under subsection (2), when, as here, they were "acquired 

. . . with the intention of making a control-share 

acquisition." Thus, when the acquiring person's holdings 

actually reach the 20% threshold, all of the stock it has 

acquired, even that acquired before it reached the 

threshold, is deemed "control share" stock, since, under the 

first sentence of the definition, the acquiring person now 

has made a "control-share acquisition." The inclusion of the 

second sentence shows that those last shares which one 

buys to reach the 20% threshold are not the only ones that 

are "control shares" subject to the voting disqualification; 

rather, all those shares purchased within the previous 180 

days and those bought at any time in the past with intent 

to make a "control-share acquisition" are subject to the 

disqualification. 

In this regard, we point out that the Control Share

Acquisitions Statute is set forth in a subchapter in the 

PBCL entitled "Control-Share Acquisitions": our conclusion 

reconciles the statutory definition of "control-share 

acquisition," which sets forth the three acquisition 

thresholds, with the rather complicated definition of 

"control shares." The district court's construction of 

"control shares" is difficult to harmonize with the 20%, 

33 1/3% and 50% acquisition triggers, since under its view 

intent alone could create control shares where there is no 

actual control-share acquisition or where the acquiring 

person has accumulated only a small number of shares in 

the company to be acquired. We recognize, of course, that 

the definition of "acquiring person" includes a person who 

"proposes to make" a control-share acquisition. 15 Pa. 

Cons. Stat. Ann. S 2562. The district court used this 

definition as evidence that shares one buys with intent to 

make a later control-share acquisition are control shares. 

Nevertheless, we believe that the critical issue is how to 

reconcile the definitions of "control shares" and "controlshare acquisition." Our definition of "control shares" 

accords with the definition of "acquiring person" in that 

AlliedSignal, which does intend to make a control-share 

acquisition in the future, may be an "acquiring person" 

 8 
without its shares being stripped of voting rights when 

numerically they do not even approach the 20% threshold. 

Applicable legislative history is sparse, but we believe 

that the evidence suggests that the Statute was intended to 

"kick in" once an actual threshold has been reached. The 

Draftsmen's Comment states that the term "control-share 

acquisition" 

 utilizes the concept of voting power in three specified 

 ranges, beginning with 20%. . . . In many instances a 

 much lower percentage could be utilized as the 

 percentage at which control could be affected, but for 

 purposes of the subchapter and its general 

 applicability to corporations the 20% threshold was 

 selected. 

Draftsmen's Comment to S 2562, at 477, 2 Zeiter, 

Pennsylvania Associations Code and Related Materials 

(West 1992). We believe that the whole Statute must

operate with the definition of "control-share acquisition" 

and its specified thresholds kept in mind. The various 

provisions and definitions must be read together in

harmony. 

Furthermore, it seems clear that Pennsylvania's Statute, 

like those of other states, was modeled upon Indiana's, 

which is triggered by actual share acquisitions of 20% of 

outstanding stock. See, e.g., Ind. Code Ann.S 23-1-42-1; 

N.C. Gen. Stat. S 55-9A-01; Neb. Rev. Stat.S 21-2439.2 The 

Draftsmen's Comment to section 2562 shows that the 

Draftsmen did have the anti-raider laws of other states in 

mind ("the 20% threshold is within the range of levels set 

in similar statutes in other states.").3 

AMP admits that under Indiana's law, AlliedSignal would 

prevail. Br. at 29. Indiana explicitly covers those shares 

_________________________________________________________________ 

2. Under Pennsylvania law, we may consider similar statutes of other 

jurisdictions in construing the Statute. General Elec. Envtl. Serv., Inc. 

v. 

Envirotech Corp., 763 F. Supp. 113, 118-19 (M.D. Pa. 1991). 

3. See also April 23, 1990 Pennsylvania Senate Journal at 1947 

(Comments of Senator Wenger) (statute bars "a raider who acquires more 

than 20 percent of a company from voting [its] shares to change 

corporate control without the approval of the remaining shareholders"). 

 9 
which -- "added to all other shares" -- reach the 20% 

threshold "immediately after" they are bought. Ind. Code 

Ann. S 23-1-42-1 (quoted below). AMP has not offered any 

indication that the Pennsylvania legislators intended a 

departure from the norm of Indiana and other states, which 

require reaching an actual threshold before voting shares 

are disenfranchised. AMP argues that the Pennsylvania 

statute was intended to be different from the Indiana 

statute because the definitions of "control share" differ. Br. 

at 29. AMP focuses upon the fact that the Indiana statute's 

definition of "control shares" stops without a second 

sentence comparable to that in Pennsylvania's Statute. 

"Control shares" are defined in Indiana as: 

 shares that, except for this chapter, would have voting 

 power with respect to shares of an issuing public 

 corporation that, when added to all other shares of the 

 issuing public corporation owned by a person or in 

 respect to which that person may exercise or direct the 

 exercise of voting power, would entitle that person, 

 immediately after acquisition of the shares (directly or 

 indirectly, alone or as a part of a group), to exercise or 

 direct the exercise of the voting power of the issuing 

 public corporation in the election of directors within 

 any of the following ranges of voting power:

 (1) One-fifth (1/5) or more but less than one-third (1/3) 

 of all voting power. 

 (2) One-third (1/3) or more but less than a majority of 

 all voting power. 

 (3) A majority or more of all voting power. 

Ind. Code Ann. S 23-1-42-1. 

Inasmuch as AMP recognizes that under the Indiana 

statute, AlliedSignal's stock would not be control shares, 

AMP's argument hinges upon the Pennsylvania statute's 

inclusion of subsection (2) of the second sentence of the 

definition of "control shares": AMP argues that this 

language differs enough from that in statutes in other 

states to demonstrate that the Pennsylvania legislature 

intended it to operate differently in Pennsylvania. However, 

the Indiana statute's definition of "control share 

 10 
acquisition" contains language resembling Pennsylvania 

statute's definition of "control shares," for it covers shares 

bought within a certain time frame as well as previouslybought shares acquired with the intention to reach a 

threshold. Ind. Code Ann. S 23-1-42-2(b). The Indiana 

definition of "control share acquisition" provides that, for 

purposes of the disenfranchisement provision, "shares 

acquired within ninety (90) days or shares acquired

pursuant to a plan to make a control share acquisition are 

considered to have been acquired in the same acquisition." 

Id. See also CTS Corp. v. Dynamics Corp. of America, 481 

U.S. 69, 74, 107 S.Ct. 1637, 1641 (1987) (explaining 

operation of Indiana control share acquisitions statute). 

Finally, as construed by the district court, the Statute 

provides no way for a beneficial owner stripped of voting 

power but not yet having met one of the thresholds 

specified in the definition of "control-share acquisition" to 

regain voting rights. Here, for example, under the district 

court's opinion, AlliedSignal has become the owner of 

"control shares" but has not made a "control-share 

acquisition." Under the Statute, a special meeting to restore 

voting rights will be called if the acquiring person"makes a 

control-share acquisition or a bona fide written offer to 

make a control-share acquisition," 15 Pa. Cons. Stat. Ann. 

S 2565(a)(3), "files an information statement fully

conforming to section 2566," id. S 2565(a)(1), and has 

"entered into a definitive financing agreement to provide for 

any amounts of financing of the control-share acquisition 

not to be provided" by it. Id. S 2565(d)(2)(i). The acquirer 

then has 90 days after restoration of voting rights to 

consummate the control-share acquisition or those rights 

lapse. Id. S 2564(b). Where, as here, there is no outstanding 

bona fide written offer, information statement andfinancing 

arrangement to make a control-share acquisition, i.e., to 

reach the 20% threshold, section 2565(a) does not provide 

a clear process through which voting rights can be 

reinstated by other shareholders. 15 Pa. Cons. Stat. Ann. 

S 2565(a).4 Moreover, an acquiring person who buys shares 

_________________________________________________________________ 

4. AMP responds that AlliedSignal previously has made a written offer, 

br. at 26, but it is not clear that the existence of such a prior offer, 

especially without an information statement and financing 

arrangements, will enable AlliedSignal to request the special meeting. 

 11 
gradually -- however few at any one time -- would have to 

continue to petition to have its voting rights restored, 

unless it chose to accelerate the process by consummating 

the acquisition within 90 days: such a result is impractical, 

as well as having the undesired effect of hastening tender 

offers rather than delaying them. 

A reading contrary to ours, in addition to creating the 

unreasonable results identified above, would burden the 

market for corporate control substantially and would 

entrench management in a manner likely to harm the longterm interests of shareholders. These undesirable 

consequences provide further support for our interpretation 

of the Statute. First, while under AMP's reading it still 

would be possible for a bidder such as Allied Signal to 

solicit proxies to gain control of the target, as a practical 

matter, the expense and unlikelihood of winning a proxy 

contest without an appreciable number of votes committed 

to the solicitor's position effectively eliminates this type of 

challenge to the control of management. Second, AMP's 

reading almost certainly would eliminate the practice of 

buying a sizeable stake of the company (say 6%) and

threatening a control contest to prod management toward 

better corporate policy.5 This practice would be eliminated 

as a practical matter because the shares would lose their 

voting rights upon acquisition and any credible threat to 

control would be neutralized. Finally, it is difficult to 

reconcile AMP's interpretation of the Statute with the 

prevailing rule regarding the propriety of corporate 

defensive tactics -- viz., that the defensive measure must 

be reasonable in relation to the threat posed. See Unocal 

Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985). 

We believe that a defensive measure that disenfranchises 

even a single share acquired with an intent to contest 

control of the company would not pass this test of 

proportionality. 

_________________________________________________________________ 

5. See Steven Bailey and Steven Syre,"Playing Tough Guy to Get the 

Deals Done: Value Investor Michael Price Shows No Doubt in Using 

Clout," Boston Globe, June 26, 1997, at C1 (describing Price's use of this 

tactic in merger between Chase Manhattan Corp. and Chemical Banking 

Corp.). 

 12 
Thus, AlliedSignal's interpretation of the Statute can be 

reconciled with the statutory language and avoids the 

unreasonable results that AMP's interpretation would 

produce -- results that we cannot believe the Pennsylvania 

Legislature intended. Lehigh Valley Coop. Farmers v. 

Commonwealth of Pa., 447 A.2d 948, 950-51 (Pa. 1982) (in 

construing statute, court may presume that General 

Assembly did not intend absurd or unreasonable result). If 

we were to affirm we, in effect, would be holding that 

Pennsylvania's takeover law departs from that of all other 

states' takeover laws and that the Pennsylvania Legislature 

effected this radical departure without providing any clear 

evidence that it meant to do so. Moreover, it would be 

difficult to reconcile that construction of the Statute with 

the available procedure to restore the lost voting rights of 

control shares in situations -- including the present case -- 

in which an acquirer gradually purchases stock as it moves 

towards the 20% threshold. 

It is true that a purchase of 19.99% of shares --or 17%, 

or, perhaps, 9.1% -- by an "acquiring person" may create 

the same sorts of corporate-control dilemmas for a 

company being acquired as would a purchase of 20% or 

20.01%. Still, the definition of "control-share acquisition" 

here, as elsewhere, clearly specifies a level of acquisition to 

be reached before a shareholder suffers the serious

disability of losing voting rights. 

IV. CONCLUSION 

We conclude that the Pennsylvania Control Share 

Acquisitions Statute requires an "acquiring person" to 

purchase shares such that its total ownership of 

outstanding shares amounts to or exceeds the level of 20% 

(or 33 1/3 or 50%, as the case may be), when those shares 

include previously-acquired shares bought with an intent to 

make a control-share acquisition or bought within 180 days 

before the disenfranchising effect of the Statute is triggered. 

We therefore will reverse the district court's order of 

November 18, 1998, granting the motion for partial 

summary judgment and enjoining AlliedSignal from voting 

its 20,000,010 shares of AMP stock, and will remand the 

 13 
matter to the district court for further proceedings 

consistent with this opinion. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 14