MM Companies Inc, v. Liquid Audio, Inc.
MM Companies (7% shareholder in the defendant)
The plaintiff has tried to buy defendant for a long time. Defendant has refused the offer to be purchased. The plaintiff also tried to nominate its own two candidates for the two seats that were up for election on the next meeting of the board. When they were confronted with resistance, the plaintiff tried to get a list of shareholders from the defendant which was refused. Finally, the plaintiff started to solicit proxies.
The defendant ignored some of these measures. It also tried to do a stock for stock merger with another company called Alliance. Finally, it attempted to add two directors to its board.
The court first starts by defining the business judgment rule:
- Statutory authority to manage the corporation is vested in the board of directors
- The rule is a presumption that the directors make their business judgments "in good faith and in the honest belief that the action was in the best interests of the company." The standard is applied deferentially and the burden is on the challenging party to rebut the presumption."
Second, the court recaps the decision from Blasius where the court said:
- The court said that the traditional business judgment rule is inappropriate when the board acts for the "primary purpose of impeding or interfering with the effectiveness of a shareholder vote."
- If it is found that there is a primary purpose for impeding the effectiveness of the shareholder vote, then the board has a heavy burden to demonstrate "compelling justifications for such actions."
The court then states that in this case, the court will use the Blasius standard within the Unocal standard of reasonableness and proportionality.
The court further reasons that since this is a defensive measure taken by the defendant, the Basius standard has to be used within the Unocal standard. ("To invoke the Blasius compelling justification standard of review within an application of the Unocal standard of review, the defensive actions of the board only need to be taken for the primary purpose of interfering with or impeding the effectiveness of the stockholder in a contested election for directors.")
Finally, the court rules that this fact pattern fails the Blasius standard.
- Walk away or hostile tender offer
- Target respons with defensive measures
- Defensive measure rightful or wrongful
- If rightful, strops tender offer? (This is where the Unical standard is. Blasius is not evoked because the franchise of corporation is not impeded.)
- Go to the share holders with a slate of directors
- Directors now take new measures to make it more difficult for bidder to take over target. (Blasius is now applied at this stage because there might be the franchise of the corporation that is impeded.)
Compelling Justifications for Interfering
- If the hostile bidder was rushing the vote