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

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 sees fit in its own interests. Thus, so long as there is full disclosure about director nominees (including actual or potential conflicts), shareholders should be free to elect those directors they want. Indeed, in political elections, substantial votes are sometimes received by candidates who died after ballots were printed. American voters are free to (and do) vote for candidates from among the dead; American shareholders must be free to elect, from among the quick, the candidates they prefer.

3. A retired general can be loyal to his country even as he sits on a defense contractor's board. What's important is not whether a director has more than one set of loyalties out in the world, but how they are disclosed, how he reconciles them, and how he fulfills his fiduciary duty to a specific company in his capacity as a director of it.

4. It is not unusual for boards to include those sitting on more than one side of the table. In management LBOs, insiders participate in the buying entity even as they serve as directors of the seller. Too, when a majority shareholder bids for the rest, its representatives generally remain on the target's board. What often happens in these situations is that the "interested" directors are excluded from board presentations about competing bids and the like and, in the relevant proxy statement, the conflicts are disclosed.

The ALD-AMP situation is, in effect, cleaner: ALD's nominees would be elected pursuant to a "sell at $44.50 or better" platform endorsed, in advance, by their electorate, and would become "interested" directors only concurrent with such election. In the above two situations, the directors would have become "interested" after their previous election by shareholders.

Nevertheless, were ALD's nominees, post election, to learn data that should properly cause them to conclude that $44.50 is too low, they should refuse to endorse ALD's current bid - notwithstanding that 72% of AMP shares were tendered to ALD at $44.50 in October.

5. State corporation laws (including Pennsylvania's) address, both procedurally and substantively, the presence on boards of "interested" directors. It's therefore absurd to be "shocked, shocked" (like Captain Reynaud in "Casablanca") that this exists in AMPALD. The law explicitly contemplates that this can and does arise.

The governance and takeover communities await the Third Circuit's disposition of ALD's appeal - which may nail down the important issue of director "conflicts" as presented in the AMP case.