MM COMPANIES, INC. V. LIQUID AUDIO, INC.,
813 A.2d 1118 (Del. 2003)
NATURE OF THE CASE: MM Companies (P), shareholder, appealed from a judgment of the Court
of Chancery denying the injunctive relief it sought against the adoption, by Liquid Audio's
(D) board of directors of certain measures that changed the size and composition of the
board's membership.
FACTS: P sought to obtain control of D. On October 26, 2001, P sent a letter to the D
board of directors indicating its willingness to acquire the company at approximately $3 per
share. D's board rejected P's offer. D's bylaws provide for a staggered board of directors
that is divided into three classes. Only one class of directors is up for election in any
given year. D's board of directors consisted of five members divided into three classes.
Class I had two members (defendants Flynn and Imbler), whose terms expire in 2003; Class II
had one member (defendant Winblad), whose term expires in 2004; and Class III had two
members (defendants Kearby and Doig), whose terms expired in 2002. Defendants Flynn, Doig
and Imbler were not elected to the Board by the stockholders of D. They were appointed to
the Board by the directors of D to fill vacancies on the Board. On October 24, 2001, D
issued a press release which stated that it had denied P's request to call a special meeting
because D believed that under P bylaws stockholders are not permitted to call special
meetings. D then appointed defendants Doig and Imbler to the D board of directors. P
delivered a formal notice to D stating that it intended to nominate Seymour Holtzman and
James Mitarotonda as directors to fill the two seats on the Board then held by the
individuals designated as Class III directors whose terms expired at the next annual
meeting. The December 18, 2001 notice also requested that the Board adopt resolutions
declaring certain amendments to the certificate of incorporation and bylaws advisable and
that such amendments be submitted to the stockholders. P sent notice to D informing the
Board of its intention to bring before the annual meeting a proposal that would amend the
bylaws and increase the size of the Board by four members. On February 22, 2002, P renewed
its October 2001 offer to acquire D. That offer, however, was at the reduced price of $2.50
per share. D rejected that offer as inadequate. On June 10, 2002, P filed proxy materials
with the SEC and commenced soliciting proxies for a shareholder meeting planned for July 1,
2002. P's takeover proposal sought to expand the Board from five members to nine. If P's two
directors were elected and its four proposed directors were also placed on the Board, P
would control a majority of the Board. On June 13, 2002, D announced a stock-for-stock
merger transaction with Alliance Entertainment Corp. This announcement came three days after
P mailed its proxy statement and other materials to the stockholders of D, and one day
before the scheduled Court of Chancery hearing in connection with a Section 220 complaint. D
also announced that: the July 1, 2002 meeting would be postponed; a special meeting of
stockholders of D would be held sometime in the future to vote upon the merger; and, if the
merger received the requisite stockholder and regulatory approval, the merger would 'close
in the Fall of 2002.' P filed an amended complaint, seeking an order of the Court of
Chancery directing D to hold the annual meeting as soon as possible, and a motion for
expedited and summary proceedings. The Court of Chancery granted P's motion for expedited
and summary proceedings and directed that a trial in connection with P's application for
relief be held on July 15, 2002. Right before trial, D announced a self-tender offer under
which D would acquire up to 10 million shares of its common stock at $3.00 per share in
cash, if the merger was approved by the stockholders of D. Upon consummation of the merger
and a fully subscribed self-tender offer, D's stockholders would own 26% and Alliance
stockholders would own 74% of the combined enterprise. D's board also announced that the
Director Defendants reduced the 'trigger' of D's shareholders rights plan or 'poison pill'
to 10% from 15%. The modified merger agreement was approved unanimously by the Board at a
meeting held on July 14, 2002. The Court of Chancery ordered that the annual meeting of Ds
shareholders occur on September 26, 2002. The record date for the meeting was August 12,
2002. It was apparent that P's nominees, Holtzman and Mitarotonda, would be elected at the
annual meeting, to serve in place of the two incumbent nominees. D announced that the Board
had amended the bylaws to increase the size of the Board to seven members from five members.
The Board also announced that defendants James D. Somes and Judith N. Frank had been
appointed to fill the newly created directorships. P revised its proxy statement to note
that its proposal to add four directors, if successful, would have resulted in a board with
eleven directors, instead of nine. P filed its initial lawsuit challenging the Board's
decision to add two directors. Stockholders, however, did not approve P's takeover proposals
that would have expanded the Board. P alleged that the expansion of D's board, its timing,
and the Board's appointment of two new directors violated the principles of Blasius and
Unocal. The Court of Chancery concluded that the Director Defendants amended the bylaws to
expand the Board from five to seven, appointed two additional members of the Board, and
timed those actions for the primary purpose of diminishing the influence of P's nominees, if
they were elected at the annual meeting. The Court of Chancery ruled in favor of Ds, holding
that the Board expansion did not violate Delaware law under either Blasius or Unocal. P
appealed.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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