Coster v. UIP Companies, Inc.
Facts
Coster and Schwat each owned fifty percent of UIP and deadlocked in repeated efforts to elect directors. Coster then filed a custodian action seeking appointment of a broadly empowered custodian, which the Court of Chancery found threatened UIP because many key contracts could be terminated if such a custodian were appointed. In response, UIP's board issued a one-third equity interest to Bonnell, a long-time and important employee who had long been promised equity, for a price previously found entirely fair. The stock sale diluted Coster from one-half to one-third ownership, broke the deadlock, and mooted the custodian action.
Issue
When a board issues stock in a way that interferes with director elections or stockholder voting rights in a control dispute, what standard governs review of that action? Under that standard, did UIP's board act improperly or without sufficient justification when it approved the stock sale to Bonnell?
Rule
When a stockholder challenges board action that interferes with the election of directors or a stockholder vote in a contest for corporate control, enhanced scrutiny under Unocal governs and can subsume Schnell and Blasius concerns. The board bears the burden to show, first, that it faced a real, nonpretextual threat to an important corporate interest or significant corporate benefit and that its motivations were proper, not selfish or disloyal; and second, that its response was reasonable in relation to the threat and was not preclusive or coercive of the stockholder franchise.
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