Mm Companies, Inc. v. Liquid Audio, Inc.,

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. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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