Coster v. Uip Companies, Inc

Facts

Wout Coster and Steven Schwat each owned half of UIP (D). D is a real estate services company founded in 2007 by Steven Schwat, Cornelius Bruggen, and Wout Coster. Through various subsidiaries, D provides a range of services to investment properties in the Washington, D.C. area. Many of these properties are held in special purpose entities (SPEs) that D owns alongside third-party investors. Each of the three founders controlled a third of D's shares. In 2011, Bruggen left UIP and tendered his shares to the Company at no cost. This left Schwat and Wout as half-owners of UIP. In 2013, Wout notified Schwat and Peter Bonnell, a senior D executive, that he had been diagnosed with leukemia. Shortly after, the group began negotiations for a buyout in which Bonnell and Heath Wilkinson, another D executive, would purchase Wout's shares in the company. Bonnell had previously been promised equity in D on multiple occasions. As the prospect for promotion had stalled, Bonnell and Wilkinson had both considered leaving D. The buyout was essential in incentivizing Bonnell and Wilkinson to stay. The parties agreed on a non-binding term sheet in which Wout would receive $2,125,000 for his half of D shares. No deal was ever finalized. Wout passed on April 8, 2015, and his widow, P, inherited his D interests. Schwat and Bonnell continued exploring buyout options with P. P became 'very distressed about her financial situation' as she had not received income distributions or the benefits she had expected. A July 2016 email revealed three options which included a lump sum buyout, an installment buyout, and a distribution scheme. Mike Pace, a friend of Wout and one of P's lawyers, reached out to Bonnell regarding the profitability of D's operating companies. Bonnell responded that the 'companies operate close to even' and that Schwat also 'ha[d] not taken any distributions . . . after Wout's passing' since 'there [had not] been much positive revenue generated.' 'Pace did not believe that Bonnell was forthcoming about the operating companies' true profitability.' P sought an independent valuation of UIP. In August 2017, P provided D with a $7.3 million valuation and demanded to inspect D's books and records. Coster followed up with a second inspection demand in October 2017. On April 4, 2018, P called for a UIP stockholders special meeting to elect new board members.' D had a five-member board composed of Schwat, Bonnell, and Stephen Cox, D's Chief Financial Officer. Two seats were vacant due to Wout's passing and Cornelius Bruggen's departure in 2011. The stockholder meeting took place on May 22, 2018. P represented by counsel, raised multiple motions affecting the size and composition of the board. They all failed. That same day the board reduced the number of board seats to three through unanimous written consent. A second stockholder meeting followed on June 4, 2018. The meeting also ended in deadlock as Schwat and P each opposed the other's respective motions. With the deadlock, Schwat, Bonnell, and Cox remained D's directors. P filed a complaint in the Court of Chancery seeking the appointment of a custodian. P 'sought the appointment of a custodian with broad oversight and managerial powers.' 'The appointment of a custodian with these powers would have given rise to broad termination rights in SPE contracts and threatened D's revenue stream, as D's business model is dependent on the continued viability of those contracts.' The board decided to 'issue the equity that they had long promised to Bonnell. Having conducted its own valuation that 'valued a 100-percent, noncontrolling equity interest in D at $123,869,' D offered, and Bonnell purchased, a one-third interest in the company for $41,289.67. P's ownership was diluted to one-third which negated her ability to block stockholder action as a half-owner of the company. The Sale also mooted the Custodian Action. P filed suit and sought to cancel the Stock Sale. The Court of Chancery upheld the Stock Sale under the entire fairness standard of review. P appealed. The court remanded with instructions to review the Stock Sale under Schnell and Blasius. In the first appellate decision, the 'undisputed facts or facts found by the court' could 'support the conclusion, under Schnell, that the D board approved the Stock Sale for inequitable reasons. Those facts included that 'The Stock Sale occurred while buyout negotiations stalled between D's two equal stockholders,' that '[t]he Stock Sale entrenched the existing board in control of D,' and the Court of Chancery's finding that 'Ds obviously desired to eliminateP's ability to block stockholder action, including the election of directors, and the leverage that accompanied those rights.' But, the court held 'that the [Court of Chancery] made other findings inconsistent with this conclusion,' and therefore gave the Court of Chancery the 'opportunity to review all of its factual findings in any manner it sees fit in light of its new focus on Schnell/Blasius review.' Under Schnell, the Court of Chancery found that the D board had not acted for inequitable purposes under Schnell and had compelling justifications for the Stock Sale under Blasius. The court held that 'the D board had multiple reasons for approving the Stock Sale' and that 'the D board's decision did not totally lack a good faith basis.' The court found that the UIP board was primarily motivated by 'retaining and rewarding Bonnell, mooting the Custodian Action, and undermining P's leverage.' Under Blasius, the court concluded that 'in the exceptionally unique circumstances of this case, Ds have met the onerous burden of demonstrating a compelling justification.' This compelling justification analysis was borrowed from Unocal's reasonableness and proportionality test for defensive measures adopted by a board in response to a takeover threat. To satisfy the compelling justification standard, 'the directors must show that their actions were reasonable in relation to their legitimate objective, and did not preclude the stockholders from exercising their right to vote or coerce them into voting a particular way.' The court held that the threat posed by the Custodian Action was 'an existential crisis' that justified the D board's actions and 'that the Stock Sale was appropriately tailored to achieve the goal of mooting the Custodian Action while also achieving other important goals, such as implementing the succession plan that Wout favored and rewarding Bonnell.' P appealed. P argues that the Court of Chancery erred when it limited its Schnell review to board action totally lacking a good faith basis.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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