Serving two masters: out of the AlliedSignal-AMP battle may come an important decision on director conflicts.

• Author: Kaback, Hoffer
• Position: Hostile takeover bid of AlliedSignal for AMP

The hostile takeover and corporate governance worlds intersect. The AlliedSignal (ALD) bid for AMP is a superb example. (Note: I may or may not own AMP shares at publication date.)

ALD coupled its early August $44.50 hostile tender with a planned consent solicitation of AMP shareholders, a key goal of which is to elect, as a majority of AMP's board, ALD's nominees (each an ALD officer or director). AMP contends that, if elected, ALD's nominees would be compelled to serve two masters (ALD as ALD insiders and AMP as AMP directors) and would inherently and irreconcilably be compromised.

The federal judge hearing the case breezily embraced AMP's position on October 8. He enjoined ALD's consent solicitation unless ALD stated "unequivocally that its director nominees have a fiduciary duty solely to AMP under Pennsylvania law" and each nominee "affirmatively committ[ed] personally to that duty." After ALD spent $890 million to buy 9% of AMP's shares in reliance on that explicit court order, the judge (importuned by AMP's lawyers) backed away from it. Following a November 4 hearing to peer into the thought processes of the ALD nominees, the judge determined (erroneously) that he had no jurisdiction to dissolve the existing injunction but also indicated his "inclination" to do so if ALD added specified disclosure about its nominees' continued duty of loyalty to ALD.

When ALD first announced its slate, I concluded that, as a tactical matter, it had erred. ALD should instead have put forward outsiders unconnected to it. In addition, overall ALD has not handled the litigation well. And I personally would not be comfortable as an ALD nominee under the existing state of play. These points aside, however: Is ALD's slate improper as a matter of law or governance? I believe the answer is "no" and that AMP's "serving two masters" position is off-base. Reasons:

1. Excluding hermits, everybody has a congeries of relationships, duties, and loyalties. These may run to family, country, employer, clients, friends, etc. And they may sometimes conflict. Thus, what a literary agent negotiates for one author-client will affect future money received by, and the marketability of, his other clients. Yet, by choosing such an agent, clients (the agent's principals) ratify this aspect of the representation - because they conclude that, on net, their own interests are best served that way.

2. Generally, elections involve voting for candidates or propositions as the electorate...