The United States Court of Appeals for the Third Circuit recently ruled on the voting disqualification of "control shares" under the Pennsylvania Control Shares Acquisition Statute ("Statute"). Pursuant to the Statute, an acquirer who makes a "control share acquisition," which is defined as 20% or more of the voting shares of the target company, is disqualified from voting "control shares," or all of the shares that comprise the "control share acquisition," until its voting rights are reinstated by shareholder vote. The Statute further defines "control shares" as shares purchased with the intention of making a "control share acquisition."
The Third Circuit held that under the Statute, a shareholder who is planning an unsolicited tender offer is entitled to vote its shares of the target company until the quantity of its voting shares actually reaches the minimum threshold percentage specified in the Statute to constitute a "control share acquisition," and not when the acquirer makes a smaller purchase with the expressed intention of acquiring the company.
AlliedSignal Corporation ("Allied") made an unsolicited tender offer to purchase all of the outstanding shares of AMP Corporation ("AMP"). AMP's Board of Directors rejected the tender offer, and put in place various defensive measures, including a "poison pill" rights plan with a 10% "flip-in" trigger. In response, Allied reduced the number of shares subject to its tender offer and purchased thereunder 9.1% of AMP's outstanding stock. AMP subsequently sought an injunction barring Allied from voting those shares on the theory that they were "control shares" within the meaning of the Statute, even though their volume did not constitute a "control share acquisition" i.e., a minimum of 20% of the outstanding shares. The district court granted the injunction, holding that where "an acquiring person has bought shares with the express intent of buying more shares to make a control share acquisition, those shares already acquired are 'control shares.'"
On appeal, the Third Circuit reversed. Noting that the Statute was "rather confusingly-drafted," the Court stated that the critical issue before it was how to reconcile the term "control share acquisition," which triggers the loss of voting rights upon the acquisition of 20% of the outstanding stock, and "control shares," which is defined to include shares purchased "with the intention of making a control-share acquisition." The Court found it impossible to harmonize these provisions with the district court's and AMP's view that "intent alone c[an] 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." Rather, the Court held that the plain meaning of the statute was that shares previously purchased with the intention to make a control share acquisition could be added to subsequently purchased shares to meet the threshold 20% under the Statute.
Moreover, the Court of Appeals reasoned that the district court's and AMP's reading of the Statute would create "unreasonable results." By way of example, the Court noted that the Statute provides a mechanism for an acquiring person to regain its voting rights, but only upon shareholder approval when the acquiring person makes a "control share acquisition" as defined in the Statute. Under the district court's reading of the Statute, however, the Third Circuit noted that Allied lost its voting rights because it was the owner of "control shares" -- not because it made a "control share acquisition." This interpretation, the Court reasoned,would leave Allied in a "lose/lose" situation, i.e. Allied would be stripped of its voting rights and would be unable to regain those rights until it actually purchased enough shares to constitute a control share acquisition.
Similarly, the Court opined that a contrary reading of the Statute "would burden the market for corporate control substantially and would entrench management in a manner likely to harm the long-term interests of shareholders." As the Third Circuit observed, the district court's interpretation of the Statute would effectively prevent the acquisition of a company by proxy solicitations and would disable a shareholder's ability to "prod" management to change corporate policy by threatening corporate control contests.
AMP Inc. v. AlliedSignal Corp., No. 98-2019, 1999 U.S. App. Lexis 2718 (3d Cir. Feb. 18, 1999).