MM Companies, Inc. v. Liquid Audio, Inc.
Supreme Court of Delaware
813 A.2d 1118 (2003)
MM Companies (plaintiff) sought to acquire control of Liquid Audio (defendant) and, after its initial purchase offer was rejected, ran a proxy campaign to elect two directors to open board seats and add four more seats it hoped to fill, which together would have given it board control. Days before the shareholders meeting, once it became clear MM would win its two open seats, Liquid Audio's board amended its bylaws to expand the board from five to seven members and immediately filled the two new seats with its own candidates. Shareholders then elected MM's two candidates but rejected MM's proposal to add four more seats. MM sued, and after trial the Court of Chancery found the board's expansion was primarily intended to dilute the effectiveness of MM's newly elected directors, but still upheld it as a valid defensive measure under the Unocal test.
Whether, absent a compelling justification, a defensive measure whose primary purpose is to impede the effective exercise of the shareholder vote can be reasonable and proportionate in relation to the threat posed.