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. e du/thir dc ir c uit_1999/46Filed 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 19103-2799John 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.

2OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

AMP Incorporated brought suit under the Pennsylvani a Business Corporation Law ("PBCL"), 15 Pa. Cons. Sta t. Ann. S 2501 et seq. (West 1995), alleging that 20,0 00,100 shares of AMP stock acquired by AlliedSignal, Inc., amounting to 9.1% of outstanding AMP stock, are con trol shares within the meaning of the portion of the PBC L commonly known as the Control Share Acquisitions Statute, 15 Pa. Cons. Stat. Ann. SS 2561-68 (the "S tatute"). AMP charged that because of a voting disqualificati on in the Statute, AlliedSignal could not vote those shares. The district court, construing the Statute, concluded t hat, although AlliedSignal's acquisition totaled less th an 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 provid ed 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-s hare acquisition" triggered upon actual acquisition of a t least 20% of the outstanding shares by an acquiring perso n 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. I ts principal place of business is in Harrisburg, Penns ylvania, and it is a registered corporation within the meani ng of

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

et seq. Allied Signal is a Delaware corporation wit h its principal place of business in Morristown, New Jers ey, and is the beneficial owner of 20,000,100 AMP shares, o r 9.1% of AMP's outstanding stock, having bought those sha res intending to acquire AMP. Allied Signal is an advan ced technology and manufacturing company with worldwide operations in the aerospace, automotive and enginee red
materials businesses.

In August 1998, Allied Signal began to make overtur es to AMP for a negotiated merger transaction. On August 4, 1998, Allied Signal announced that it would commenc e 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 Securiti es Exchange Commission setting forth the terms of the tender
offer and other information.

On August 21, 1998, the AMP directors formally reje cted 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 is sues, so that the district court had jurisdiction under 28 U .S.C. SS 1331, 1332, and 1367. In light of AMP's oppositi on, AlliedSignal amended its offer to reduce the number of shares it sought to 40,000,000, the approximate num ber it could acquire without triggering AMP's then-existin g "poison pill." On September 21, 1998, after AMP's b oard reduced the share ownership threshold for triggerin g 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 AM P 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 amende d tender offer are "control shares" because AlliedSig nal had announced its offer to purchase all AMP shares. Thu s, AMP argued that in view of the statutory voting disqual ification,

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

On October 9, 1998, after the expiration of its ame nded tender offer, AlliedSignal purchased 20,000,000 sha res of AMP stock at a cost of $890 million. Because Allied Signal 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 Complai nt. In particular, it sought a declaratory judgment that AlliedSignal's shares in AMP are "control shares" a s 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. Allie dSignal cross-moved on October 29, 1998, for partial summar y judgment against AMP dismissing Count Four on the grounds that the shares it had acquired were not"co ntrol shares" and that their acquisition thus had not tri ggered a loss of voting rights. A hearing was held on Novemb er 4, 1998, and on November 18, 1998, the district court issued a Memorandum Opinion and Order granting AMP's motio n for partial summary judgment on Count Four and deny ing AlliedSignal's cross-motion. Thus, AlliedSignal, AM P'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 2 2, 1998. AlliedSignal and PMA Acquisition Corporationf iled their notice of appeal on November 23, 1998. We hav e jurisdiction under 28 U.S.C. S 1292(a)(1) and, beca use we

___________________________________________________ ______________

1. The parties agreed at the oral argument before u s that AlliedSignal is the beneficial owner of all of those shares, contra ry to the discussion in the district court's Memorandum Opinion and Order, which stated that "[b]eneficially owned shares . . . carry a rebuttab le presumption that they are control shares," while "[t]here is no such rebu ttable presumption . .

. covering the voting shares actually owned . . . ." We believe that the district court's reading of beneficial ownership wa s incorrect as such ownership clearly includes outright ownership.

5decide this case through the application of legal p rinciples,

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 cour t did not suggest that it predicated the injunction on any ba sis other
than its construction of the Statute.

III. DISCUSSION

Pennsylvania's 1990 Control Share Acquisitions Stat ute, Chapter 25, Subchapter G of the PBCL, 15 Pa. Cons. Stat. Ann. SS 2561-68, requires that tender offers be sub ject to shareholder approval at a meeting. This complex sta tute was one of many similar state laws passed beginning in the 1980s to protect businesses from certain abusive an d manipulative practices of corporate raiders. See S. Wallman and L. Gordon, Pennsylvania's Anti-Raider Legislati on, 4 No. 8 Insights 38 (Aug. 1990).

The Statute treats a person's acquiring voting powe r over 20% of the voting shares of a corporation as a fund amental corporate transaction requiring prior shareholder a pproval. Specifically, while not limiting a purchaser from a cquiring shares, the Statute provides that "control shares" may not be voted until the shareholders grant approval. Con trol shares are defined as voting shares providing a per son with voting power in three specified ranges, beginning w ith 20%. Control shares also include shares owned by an acqu iring person purchased with the intent of making a contro l-share acquisition or purchased within 180 days prior to t hat person's making a control-share acquisition.

We think that the clearest reading of this rather confusingly-drafted statute is that an "acquiring p erson" loses its right to vote its shares when it actually acquires enough shares to bring its total shares beneficiall y owned to or above one of the statutory thresholds of voti ng power, starting at 20%. The parties agree that AlliedSigna l is an "acquiring person" as defined by the statute: a "pe rson who makes or proposes to make a control-share acquisiti on." 15
Pa. Cons. Stat. Ann. S 2562.

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

as

6An acquisition . . . that, but for this subc hapter, would,

when added to all voting power of the person over other voting shares of the corporation . . . entit le the person to cast . . . [votes in these ranges]: (1) a t 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 th ere has not been a "control-share acquisition" in the sense of AlliedSignal's reaching a statutory threshold for i t has not acquired 20% of AMP's shares. Br. at 10. However, i n effect, AMP is arguing that the definition of "control shar es" operates such that an "acquiring person" can have i ts "control shares" stripped of voting power without h aving made an actual "control-share acquisition."

The appeal largely boils down to how "control share s" is defined in section 2562. The two-sentence provision defines

"control shares" as:

Those voting shares of a corporation that, u pon acquisition of voting power over such shares by an acquiring person, would result in a control- share acquisition. Voting shares beneficially owne d by an acquiring person shall also be deemed to be control shares where such beneficial ownership was a cquired by the acquiring person:

(1) within 180 days of the day the person ma kes a control-share acquisition; or

(2) with the intention of making a control-s hare acquisition.

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

The trouble lies in subsection (2) of the second se ntence,
which the district court held to mean that if an ac quiring person has bought shares with the express intention of buying more shares to make a control-share acquisit ion, 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 ba ckward in time, so as to be applied to those shares an acq uiring person buys which, when added to those it already

7purchased, bring its beneficial ownership to the 20 %

threshold. The previously-acquired shares would be "deemed" retroactively to be "control shares" and c overed under subsection (2), when, as here, they were "acq uired . . . with the intention of making a control-share acquisition." Thus, when the acquiring person's hol dings 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 per son now has made a "control-share acquisition." The inclusi on of the
second sentence shows that those last shares which one buys to reach the 20% threshold are not the only on es that are "control shares" subject to the voting disquali fication; rather, all those shares purchased within the previ ous 180 days and those bought at any time in the past with intent to make a "control-share acquisition" are subject t o the disqualification.

In this regard, we point out that the Control Share Acquisitions Statute is set forth in a subchapter i n the PBCL entitled "Control-Share Acquisitions": our con clusion reconciles the statutory definition of "control-sha re acquisition," which sets forth the three acquisitio n 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 i ts view
intent alone could create control shares where ther e is no actual control-share acquisition or where the acqui ring person has accumulated only a small number of share s in the company to be acquired. We recognize, of course , that the definition of "acquiring person" includes a per son who "proposes to make" a control-share acquisition. 15 Pa.
Cons. Stat. Ann. S 2562. The district court used th is definition as evidence that shares one buys with in tent 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 shar es" accords with the definition of "acquiring person" i n that AlliedSignal, which does intend to make a control-s hare acquisition in the future, may be an "acquiring per son"

8without its shares being stripped of voting rights when

numerically they do not even approach the 20% thres hold.

Applicable legislative history is sparse, but we be lieve that the evidence suggests that the Statute was int ended to
"kick in" once an actual threshold has been reached . The

Draftsmen's Comment states that the term "control-s hare acquisition"

utilizes the concept of voting power in thre e specified ranges, beginning with 20%. . . . In many in stances a much lower percentage could be utilized as t he percentage at which control could be affecte d, but for purposes of the subchapter and its general applicability to corporations the 20% thresh old was

selected.

Draftsmen's Comment to S 2562, at 477, 2 Zeiter, Pennsylvania Associations Code and Related Material s (West 1992). We believe that the whole Statute must operate with the definition of "control-share acqui sition" and its specified thresholds kept in mind. The vari ous provisions and definitions must be read together in harmony.

Furthermore, it seems clear that Pennsylvania's Sta tute, like those of other states, was modeled upon Indian a'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 21-243 9.2 The
Draftsmen's Comment to section 2562 shows that the
Draftsmen did have the anti-raider laws of other st ates in mind ("the 20% threshold is within the range of lev els set in similar statutes in other states.").3

AMP admits that under Indiana's law, AlliedSignal w ould 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 El ec. Envtl. Serv., Inc.

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

3. See also April 23, 1990 Pennsylvania Senate Jour nal at 1947 (Comments of Senator Wenger) (statute bars "a raide r who acquires more than 20 percent of a company from voting [its] shar es to change corporate control without the approval of the remai ning shareholders").

9which -- "added to all other shares" -- reach the 2 0%

threshold "immediately after" they are bought. Ind. Code Ann. S 23-1-42-1 (quoted below). AMP has not offere d any indication that the Pennsylvania legislators intend ed 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 Pennsylvan ia
statute was intended to be different from the India na statute because the definitions of "control share" differ. Br. at 29. AMP focuses upon the fact that the Indiana s tatute's definition of "control shares" stops without a seco nd sentence comparable to that in Pennsylvania's Statu te.
"Control shares" are defined in Indiana as:

shares that, except for this chapter, would have voting power with respect to shares of an issuing p ublic corporation that, when added to all other sh ares 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 t he issuing public corporation in the election of direct ors within any of the following ranges of voting power:

(1) One-fifth (1/5) or more but less than on e-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 thi s language differs enough from that in statutes in ot her states to demonstrate that the Pennsylvania legisla ture intended it to operate differently in Pennsylvania. However,
the Indiana statute's definition of "control share

10acquisition" contains language resembling Pennsylva nia

statute's definition of "control shares," for it co vers shares bought within a certain time frame as well as previ ouslybought shares acquired with the intention to reach a threshold. Ind. Code Ann. S 23-1-42-2(b). The India na definition of "control share acquisition" provides that, for purposes of the disenfranchisement provision, "shar es acquired within ninety (90) days or shares acquired pursuant to a plan to make a control share acquisit ion are considered to have been acquired in the same acquis ition." Id. See also CTS Corp. v. Dynamics Corp. of America , 481 U.S. 69, 74, 107 S.Ct. 1637, 1641 (1987) (explainin g operation of Indiana control share acquisitions sta tute).

Finally, as construed by the district court, the St atute 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 acqui sition" 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 perso n"makes a control-share acquisition or a bona fide written of fer to make a control-share acquisition," 15 Pa. Cons. Sta t. 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 p rovide for any amounts of financing of the control-share acqui sition 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 r ights lapse. Id. S 2564(b). Where, as here, there is no o utstanding bona fide written offer, information statement andf inancing arrangement to make a control-share acquisition, i. e., to reach the 20% threshold, section 2565(a) does not p rovide 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

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4. AMP responds that AlliedSignal previously has ma de a written offer, br. at 26, but it is not clear that the existence o f such a prior offer, especially without an information statement and fin ancing arrangements, will enable AlliedSignal to request t he special meeting.

11gradually -- however few at any one time -- would h ave to

continue to petition to have its voting rights rest ored, unless it chose to accelerate the process by consum mating the acquisition within 90 days: such a result is im practical, 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 woul d entrench management in a manner likely to harm the longterm interests of shareholders. These undesirable consequences provide further support for our interp retation of the Statute. First, while under AMP's reading it still would be possible for a bidder such as Allied Signa l to solicit proxies to gain control of the target, as a practical matter, the expense and unlikelihood of winning a p roxy contest without an appreciable number of votes comm itted 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 practi ce of buying a sizeable stake of the company (say 6%) and threatening a control contest to prod management to ward better corporate policy.5 This practice would be el iminated as a practical matter because the shares would lose their voting rights upon acquisition and any credible thr eat to control would be neutralized. Finally, it is diffic ult to reconcile AMP's interpretation of the Statute with the prevailing rule regarding the propriety of corporat e defensive tactics -- viz., that the defensive measu re 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 disenfranc hises even a single share acquired with an intent to cont est 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 D oubt in Using Clout," Boston Globe, June 26, 1997, at C1 (describ ing Price's use of this tactic in merger between Chase Manhattan Corp. and Chemical Banking Corp.).

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

reconciled with the statutory language and avoids t he unreasonable results that AMP's interpretation woul d produce -- results that we cannot believe the Penns ylvania 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 resu lt). If we were to affirm we, in effect, would be holding t hat Pennsylvania's takeover law departs from that of al l other states' takeover laws and that the Pennsylvania Leg islature effected this radical departure without providing a ny clear evidence that it meant to do so. Moreover, it would be
difficult to reconcile that construction of the Sta tute with the available procedure to restore the lost voting rights of control shares in situations -- including the prese nt case -- in which an acquirer gradually purchases stock as i t 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 c reate the same sorts of corporate-control dilemmas for a company being acquired as would a purchase of 20% o r 20.01%. Still, the definition of "control-share acq uisition" here, as elsewhere, clearly specifies a level of ac quisition 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 i ntent to make a control-share acquisition or bought within 1 80 days before the disenfranchising effect of the Statute i s triggered.
We therefore will reverse the district court's orde r of November 18, 1998, granting the motion for partial summary judgment and enjoining AlliedSignal from vo ting its 20,000,010 shares of AMP stock, and will remand the

13matter to the district court for further proceeding s

consistent with this opinion.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

14