statutory authority of 8 Del.C. 242, the stockholder vote is dispositive MM Companies v. Liquid Audio Procedural History Facts Summer of 2002- a 7% shareholder of liquid audio began soliciting prozies in an attempt to secure the board seats that were up for election at liquid audio’s upcoming annual meeting. The insurgent shareholder, MM companies intended to use the influence that the two directors would have on staggered, five member board to press for a sale of liquid audio to mm Mm also solicited proxy proposals to increase the size of the board to nine an to elect four additional directors to fill the newly created vacancies The proposals if successful would have given mm 6 of the 9 directors In response to the proxy contest initiated by mm, liquid audio’s board amended the by-laws to increase the size of its board from 5 to 7 and appointed two new directors to fill the vacancies Issue
Reasoning Both the primary goal and the result of liquid audio actions was to diminish the influence of mm’s nominees on the board Holding DE supreme court held that bc the board’s defensive actions were taken in response to some threat to corporate policy and effectiveness, the proper standard review was the standard of review under Unocal (a board’s unilateral decision to adopt defensive measures touching upon issues of corporate control is strongly suspect and must be reasonable in relation to the threat posed) and its progeny, rather than more deferential business judgment rule The court also applied the standard Blasius (a board must demonstrate a compelling justification when it acts for the primary purpose if impeding or interfering with the effectiveness of shareholder vote) The court held that even where there is no evidence that action was either coercive or preclusive under Unocal, an additional test must be met where the primary purpose of the boards action is to interfere with ot impede the shareholder franchise Therefore, in cases where the composition of the board is altered in the face of a proxy contest, the board must satisfy the enhance Blasius standard by demonstrating a compelling justification for its action De corps considering a change in the size of composition of their boards of directors must now demonstrate a compelling justification for such action taken in connection with a proxy contest Liquid Audio is important for two reasons
1) a board of directors of a DE corp threatened with a proxy fight cannot respond by expanding the number of board seats with the purpose of impeding the ability of the shareholders to elect directors unless it can demonstrate a compelling justification for its actions- in the event that th proxy contests become more common in the post enron world, as some have predicted, this case will remove an important defensive tactic from the options available to target companies 2) for being the most recent of a growing number of De supreme
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