MM Cos. v. Liquid Audio, Inc.

Supreme Court of Delaware · 2003 · Corporations

813 A.2d 1118 (2003)

Updated August 22, 2026

Corporationsshareholder voting rightsboard expansiondefensive measurescontested electionBlasiusUnocalshareholder franchise

Facts

Liquid Audio had a staggered five-member board, and MM, a stockholder group holding slightly over 7% of the company's stock, sought to elect two nominees to the two Class III seats up for election at the 2002 annual meeting. In August 2002, shortly before the meeting and after it appeared MM's two nominees would be elected, the incumbent board amended the bylaws to expand the board to seven members and appointed two new directors to the newly created seats. The record showed the board's primary purpose was to minimize the impact of MM's expected electoral success by preventing a deadlock or possible MM control if incumbent directors later resigned. MM challenged the board expansion as an interference with the shareholder franchise.

Issue

When an incumbent board, during a contested election for directors, expands the size of the board and fills the new seats primarily to diminish the influence of an opposing stockholder's expected nominees, must the board show a compelling justification under Blasius within Unocal enhanced scrutiny? If so, was the Liquid Audio board's action valid?

Rule

When a board adopts a defensive measure touching on issues of control, Unocal enhanced scrutiny applies. If the primary purpose of that defensive measure is to interfere with or impede the effective exercise of the shareholder franchise in a contested election for directors, the board must, as a condition precedent to any judicial consideration of reasonableness or proportionality, demonstrate a compelling justification for the action. Otherwise valid board powers, such as expanding board size and filling vacancies, may not be used for inequitable purposes that frustrate effective shareholder voting.

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Summit Wave Systems, a Delaware corporation based in Denver, has a seven-member staggered board. Two seats are up at the annual meeting, and a dissident stockholder group from Columbus is likely to elect both of its nominees. Ten days before the vote, the incumbent board amends the bylaws to add two seats and immediately appoints two loyal directors, explaining internally that the move will reduce the influence of the dissidents' expected winners.

If the dissident group challenges the board action, which standard should a Delaware court apply first, and what is the most likely result?

Explanation. When a board adopts a defensive measure touching issues of control, Unocal enhanced scrutiny applies. If the board’s primary purpose is to interfere with or impede the effective exercise of the shareholder franchise in a contested election, the board must, as a condition precedent to judicial review of reasonableness or proportionality, demonstrate a compelling justification. Otherwise lawful powers such as board expansion cannot be used for inequitable purposes that frustrate effective voting.