MM Companies, Inc. v. Liquid Audio, Inc.
Supreme Court of Delaware
813 A.2d 1118 (2003)
MM Companies, Inc. (MM) (plaintiff) began its efforts to acquire control of Liquid Audio, Inc. (defendant) in October 2001. The directors of Liquid Audio (defendants) rebuffed MM’s initial offer to purchase the company at $3 per share. Liquid Audio had a staggered board with five total members. In June 2002, MM launched a proxy campaign for the 2002 shareholders meeting. It nominated two candidates to fill the two board positions up for election that year, and also proposed to add four positions to the board and nominated candidates for those seats. If approved, MM’s proposals would have granted it control of Liquid Audio’s board. The shareholders’ meeting was scheduled for September 26, 2002. By mid-August, it became clear that at a minimum, MM would be successful in electing its two candidates for the open board seats. On August 23, Liquid Audio’s board announced that it had amended the bylaws to increase the size of the board to seven members, and that it had filled the new vacancies with two of its candidates. At the shareholders meeting, MM’s two candidates were elected, but the shareholders rejected its proposal to expand the board by four members. MM sued Liquid Audio and its five directors, challenging the August 23expansion of the board. MM argued that the expansion frustrated MM’s efforts to obtain a substantial presence on the board, and that it improperly interfered with the shareholder franchise. After a trial, the Court of Chancery found that the board had acted with the primary purpose of diminishing the effectiveness of MM’s two elected board members. The court also found, however, that the board expansion was a valid defensive measure under the Unocal test because it was reasonable in relation to the threat posed. MM appealed.
Rule of Law
Holding and Reasoning (Holland, J.)