Enhanced scrutiny applies when board interferes with stockholder voting

• Even if board action is taken advisedly and in good faith
• Must demonstrate a "compelling justification" if the board's actions had "the primary purpose of impeding the exercise of stockholder voting power"
• Began with Blasius (Del Ch 1988)

MM Cos v Liquid Audio 813 A2d 1118 (Del 2003)

• Supreme Court endorsed the use of the Blasius standard in both takeover and non-takeover situations
• Reversed a Chancery Court ruling that had upheld defensive board actions under Unocal and Blasius

• MM Companies had sought to acquire Liquid Audio, but the board entered into a merger agreement with a third party
• MM then sought to elect two directors at the next annual meeting, which could have led, as a practical matter, to MM's gaining control of the board because of the concern that two of the other three incumbent directors would resign if MM's nominees were elected
• In response, the Liquid Audio board expanded the size of the board from five to seven directors and appointed directors to fill the two new board positions

• The Delaware Supreme Court noted that the Chancery Court concluded after an expedited trial that the director defendants timed their actions "for the primary purpose of diminishing the influence of MM's nominees, if they were elected at the annual meeting."
• Based on that finding, the Delaware Supreme Court applied Blasius "within an application of the Unocal standard of review," stating:

• When the primary purpose of a board of directors' defensive measure is to interfere with or impede the effective exercise of the shareholder franchise in a contested election for directors, the board must first demonstrate a compelling justification for such action as a condition precedent to any judicial consideration of reasonableness and proportionality.
• Since the director defendants did not demonstrate a compelling justification for their action in expanding the board, the court ruled that the board expansion should have been invalidated by the Court of Chancery

Blasius Indus v Atlas Corp (Del Ch 1988)

• Must demonstrate a "compelling justification" if the board's actions had "the primary purpose of impeding the exercise of stockholder voting power."

Schnell v Chris-Craft Indus Inc 285 A2d 437 (Del 1971)

• board's rescheduling of an annual meeting to be unlawful, because: management ha[d] attempted to utilize the corporate machinery and the Delaware Law for the purpose of perpetuating itself in office

Lerman v Diagnostic Data Inc 421 A2d 906 914 (Del
Ch 1980)

Paramount Communications v QVC Network 637 A2d 34

Shamrock Holdings Inc v Polaroid Corp 559 A2d 278

Stroud v Grace CA No 10719 slip op aff'd in part

    606 A2d 75

Gilbert v El Paso Co 575 A2d 1131

Paramount Communications Inc v Time Inc aff'd

    571 A2d 1140

Williams v Geier 671 A2d 1368 quoting Stroud v Grace 606 A2d 75

Kidsco Inc v Dinsmore 674 A2d 483 aff'd No 481

Mills Acquisition Co v Macmillan Inc 559 A2d 1261

Paramount Communications v QVC Network 637 A2d 34

Fiduciary Duties