Coster v. UIP Companies, Inc. ( 2023 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
MARION COSTER, §
§ No. 163, 2022
Plaintiff Below, §
Appellant, §
§ Court Below: Court of Chancery
v. § of the State of Delaware
§
UIP COMPANIES, INC., § C.A. No. 2018-0440
STEVEN SCHWAT, and § CONSOLIDATED
SCHWAT REALTY, LLC, §
§
Defendants Below, §
Appellees. §
Submitted: March 29, 2023
Decided: June 28, 2023
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, Justices; and
ADAMS, Judge,1 constituting the Court en Banc.
Upon appeal from the Court of Chancery of the State of Delaware: AFFIRMED.
Max B. Walton, Esquire (argued), Kyle Evans Gay, Esquire, CONNOLLY
GALLAGHER LLP, Newark, Delaware; Michael K. Ross, Esquire, Serine
Consolino, Esquire, AEGIS LAW GROUP LLP, Washington, D.C., for Plaintiff
Below, Appellant Marion Coster.
Deborah B. Baum, Esquire (argued), PILLSBURY WINTHROP SHAW PITTMAN
LLP, Washington, D.C.; Stephen B. Brauerman, Esquire, Elizabeth A. Powers,
Esquire, BAYARD, P.A., Wilmington, Delaware, for Defendants Below, Appellees
Steven Schwat, Schwat Realty, LLC, Peter Bonnell, Bonnell Realty, LLC, and Steven
Cox.
1
Justice Vaughn and Judge Adams are sitting by designation under Del. Const. art. IV, §§ 38 &
12, respectively, and Supreme Court Rules 2(a) and 4(a), to complete the quorum.
Neal C. Belgam, Esquire, Kelly A. Green, Esquire, Jason Z. Miller, Esquire, SMITH
KATZENSTEIN & JENKINS LLP, Wilmington, Delaware, for Defendants Below,
Appellee UIP Companies, Inc.
2
SEITZ, Chief Justice:
This appeal returns to the Supreme Court following remand. As the Court of
Chancery recognized in its latest opinion, “[m]any aspects of the facts of this case
were vexingly complicated or unique” and “the case gave rise to many close calls
on which reasonable minds could differ.”2 We agree with the court’s assessment
and appreciate its work to address the issues remanded for reconsideration. We also
agree with the court’s observation that the dispute has been driven by hard feelings
on both sides – the untimely death of Marion Coster’s husband, Wout Coster, who
could not secure his wife’s financial security before his death, and the UIP board’s
desire to preserve UIP’s operational viability after the loss of one of its major
stockholders and founding members.
As described in our first opinion and in the Court of Chancery opinions,
Marion Coster and Steven Schwat – the two UIP stockholders who each owned fifty
percent of the company – deadlocked after attempting several times to elect
directors. In response to the director election deadlock, Marion Coster filed a
petition for appointment of a custodian for UIP. The UIP board responded by issuing
stock to a long-time employee representing a one-third interest in UIP. The stock
issuance diluted Coster’s ownership interest, broke the deadlock, and mooted the
2
Coster v. UIP Cos., Inc., 2022 WL 1299127, at *14 (Del. Ch. May 2, 2022) [hereinafter Coster
II].
3
custodian action. Coster countered by requesting that the Court of Chancery cancel
the stock issuance.
After trial, the Court of Chancery found that the stock sale met the most
exacting standard of judicial review under Delaware law – entire fairness. As a
result, according to the court, review under any other standard was unnecessary. On
appeal, we concluded that the court erred by evaluating the stock sale solely under
the entire fairness standard of review. We reasoned that, even though the stock sale
price might have been entirely fair, issuing stock while a contested board election
was taking place interfered with Coster’s voting rights as a half owner of UIP.
Therefore, the court needed to conduct a further review to assess whether the board
approved the stock issuance for inequitable reasons. If not, the court still had to
decide whether the board, even if it acted in good faith, approved the stock sale to
thwart Coster’s leverage to vote against the board’s director nominees and to moot
the custodian action. To uphold the stock issuance under those circumstances, the
board had to demonstrate a compelling justification to interfere with Coster’s voting
rights.
On remand, the Court of Chancery found that the UIP board had not acted for
inequitable purposes and had compelling justifications for the dilutive stock
issuance. Among the justifications for the stock sale was the threat that a custodian
4
would pose to UIP due to termination provisions in many of its key contracts. It also
cemented UIP’s relationship with an employee critical to the success of the business.
In this second appeal after remand, Coster makes two primary arguments –
first, the Court of Chancery misinterpreted Schnell3 when it restricted its review for
inequitable conduct to “the limited scenario wherein the directors have no good faith
basis” for board action;4 and second, the court erred when it found that the board had
a compelling justification for the stock issuance. As explained below, the Court of
Chancery did not err as a legal matter, and its factual findings are not clearly wrong.
Thus, we affirm the Court of Chancery’s remand decision.
I.
To recap the events leading to this appeal, UIP Companies, Inc. is a real estate
services company founded in 2007 by Steven Schwat, Cornelius Bruggen, and Wout
3
For those unfamiliar with the Delaware cases referred to in the opinion that now have shorthand
references, Schnell refers to Schnell v. Chris Craft Industries, Inc. 285 A.2d 437, 439 (Del. 1971),
where Justice Herrmann famously wrote that “inequitable action does not become permissible
simply because it is legally possible” and management cannot inequitably manipulate corporate
machinery to perpetuate itself in office and disenfranchise the stockholders. Blasius refers to
Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651, 659–61 (Del. 1988), where Chancellor Allen
wrote that directors who interfere with board elections, even if in good faith, must have a
compelling justification for their actions. And Unocal refers to Unocal Corp. v. Mesa Petroleum
Co., 493 A.2d 946, 955 (Del. 1985), where the Supreme Court used an enhanced standard of review
to decide whether the directors “had reasonable grounds for believing that a danger to corporate
policy and effectiveness existed” and that the board’s response “was reasonable in relation to the
threat posed.”
4
Coster II, at *9.
5
Coster (“Wout”).5 The company operates through various subsidiaries that provide
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 UIP owns
alongside third-party investors.
Each of the three founders initially controlled a third of UIP’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 UIP executive, that
he had been diagnosed with leukemia. Shortly after, the group began negotiations
for a buyout in which Bonnell and Heath Wilkinson, another UIP executive, would
purchase Wout’s shares in the company. Bonnell had previously been promised
equity in UIP on multiple occasions. As the prospect for promotion had stalled,
Bonnell and Wilkinson had both considered leaving UIP. Therefore, beyond
providing Wout with an exit, the buyout was also useful in incentivizing Bonnell
and Wilkinson to stay.
Unfortunately, negotiations were unsuccessful. While the parties agreed on a
non-binding term sheet in April 2014 in which Wout would receive $2,125,000 for
5
Unless otherwise stated, the facts are drawn from the Court of Chancery’s January 28, 2020
opinion, Coster v. UIP Cos., Inc., 2020 WL 429906, at *1 (Del. Ch. Jan. 28, 2020), rev’d, 255
A.3d 952 (Del. 2021) [hereinafter Coster I].
6
his half of UIP shares, the parties continued to go back and forth over the deal terms.6
Wout did not feel comfortable with the terms so “[n]o deal was ever finalized.”7
Wout passed away on April 8, 2015, and his widow, Marion Coster (“Coster”),
inherited his UIP interests.
Immediately after Wout’s death, Schwat and Bonnell continued exploring
buyout options with Coster. Discussions continued throughout 2015 with no
resolution. During this time, Coster became “very distressed about her financial
situation” as she had not received income distributions or the benefits she had
expected.8 By May 2016, “Coster appeared primarily interested in a lump sum
buyout or arrangement that would provide her with a consistent stream of income.”9
A July 2016 email reveals three “divorce” options that Bonnell had identified
for Coster.10 These included a lump sum buyout, an installment buyout, and a
distribution scheme.11 Seeking more information on these options and the status of
any current outstanding distributions, Mike Pace, a friend of Wout and one of
Coster’s lawyers, reached out to Bonnell regarding the profitability of the UIP
6
See Coster I, at *3. While it would be revised later, this initial valuation valued the company at
$4,250,000. See id. at *4.
7
Id. at *5.
8
App. to Opening Br. at A77; Coster v. UIP Cos., Inc., 255 A.3d 952 (Del. 2021) [hereinafter
Coster Appellate Decision].
9
Coster Appellate Decision, at 955.
10
App. to Answering Br. at B34.
11
See id. at B34–35.
7
operating companies.12 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.”13 As the
Court of Chancery noted, “Pace did not believe that Bonnell was forthcoming about
the operating companies’ true profitability.”14 Negotiations between the parties
continued throughout 2016 and into 2017 as Coster sought an independent valuation
of UIP.
A.
In August 2017, Coster provided UIP with a $7.3 million valuation and
demanded to inspect UIP books and records. Coster followed up with a second
inspection demand in October 2017. Then, “[a]fter much back and forth about the
adequacy of the documents provided, on April 4, 2018, Coster called for a UIP
stockholders special meeting to elect new board members.”15 At this time, UIP had
a five-member board composed of Schwat, Bonnell, and Stephen Cox, UIP’s Chief
12
See App. to Opening Br. at A79 (“You had indicated you would be forwarding the list of the
remaining ‘Wout projects’ along with the target cash-out date and the expected cash-out amount.
(We all recognize that such projections are just that and normal business risks could modify both
the pay-out and the date.)”); id. at A76 (“From what you say, revenue from these companies has
been sufficient to cover salaries, including, when [Wout] was fully involved, about $250,000/ year
to Wout. How has this ‘Wout salary money’ been spent since he’s been gone? Wouldn’t this
excess be available for distribution to the two owners?”).
13
Id. at A77.
14
Coster I, at *6.
15
Coster Appellate Decision, at 956.
8
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. Coster, represented by
counsel, raised multiple motions affecting the size and composition of the board.
Predictably, each of Coster’s motions failed due to Schwat’s opposition. Later that
day, the UIP 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 Coster each opposed the other’s respective
motions. With the deadlock, Schwat, Bonnell, and Cox remained UIP’s directors.
B.
Coster filed a complaint in the Court of Chancery seeking appointment of a
custodian under 8 Del. C. § 226(a)(1) (the “Custodian Action”).16 Coster’s
“complaint mainly sought to impose a neutral tie-breaker to facilitate director
elections, but it also lodged allegations against Schwat” about the lack of
16
8 Del. C. § 226 allows for the Court of Chancery to appoint a custodian “upon application of
any stockholder . . . when . . . [a]t any meeting held for the election of directors the stockholders
are so divided that they have failed to elect successors to directors whose terms have expired or
would have expired upon qualification of their successors.”
9
distributions and transparency into the company’s affairs.17 Coster “sought the
appointment of a custodian with broad oversight and managerial powers.”18
Coster’s request for a “broadly empowered” custodian rather than one
specifically tailored to target the stockholder deadlock “posed new risks to the
Company.”19 As the Court of Chancery would later find, “[t]he appointment of a
custodian with these powers would have given rise to broad termination rights in
SPE contracts and threatened UIP’s revenue stream, as UIP’s business model is
dependent on the continued viability of those contracts.”20 “Facing this threat to the
Company,” the UIP board decided to “issue the equity that they had long promised
to Bonnell.”21 Having conducted its own valuation that “valued a 100-percent,
noncontrolling equity interest in UIP at $123,869,” the UIP board offered, and
Bonnell purchased, a one-third interest in the company for $41,289.67 (the “Stock
Sale”).22
17
Coster I, at *10; see App. to Opening Br. at A94 (“[D]espite the apparent success of the
Company in recent years, [Coster] has been denied any distributions from the Company since
2015, the year her husband, a founder, died. Over the same period, Mrs. Coster believes the current
Chairman of the Board and President of the Company, Defendant Steven Schwat, has received a
generous salary from the Company and is enjoying significant benefit from his 50% stake. Mr.
Schwat has further prevented Mrs. Coster from gaining a meaningful view into the Company’s
financial affairs, and has barred her from any representation on the Board.”).
18
Coster I, at *10.
19
Coster II, at *4.
20
Id.
21
Id. at *5.
22
Coster Appellate Decision, at 957.
10
The Stock Sale diluted Coster’s ownership interest from one half to one third
and negated her ability to block stockholder action as a half owner of the company.
The Stock Sale also mooted the Custodian Action. Coster responded by filing suit
and sought to cancel the Stock Sale.
C.
In its opinion following trial, the Court of Chancery upheld the Stock Sale
under the entire fairness standard of review.23 According to the court, once the Stock
Sale “satisfie[d] Delaware’s most onerous standard of review,” no further review
was required.24 The deadlock broken, the court did not need to consider appointing
a custodian and dismissed the action.
D.
In the first appeal, this Court did not disturb the Court of Chancery’s entire
fairness decision but remanded with instructions to review the Stock Sale under
Schnell and Blasius. As explained in our first decision, while entire fairness is
“Delaware’s most onerous standard of review,” it is “not [a] substitute for further
equitable review” under Schnell or Blasius when the board interferes with director
elections:
In a vacuum, it might be that the price at which the board agreed to sell
the one-third UIP equity interest to Bonnell was entirely fair, as was the
process to set the price for the stock. But “inequitable action does not
23
Coster I, at *12.
24
Id. at *14.
11
become permissible simply because it is legally possible.” If the board
approved the Stock Sale for inequitable reasons, the Court of Chancery
should have cancelled the Stock Sale. And if the board, acting in good
faith, approved the Stock Sale for the “primary purpose of thwarting”
Coster’s vote to elect directors or reduce her leverage as an equal
stockholder, it must “demonstrat[e] a compelling justification for such
action” to withstand judicial scrutiny.
After remand, if the court decides that the board acted for inequitable
purposes or in good faith but for the primary purpose of
disenfranchisement without a compelling justification, it should cancel
the Stock Sale and decide whether a custodian should be appointed for
UIP.25
In the first appellate decision, we recounted the “undisputed facts or facts
found by the court” that could “support the conclusion, under Schnell, that the UIP
board approved the Stock Sale for inequitable reasons.”26 Those facts included that
“[t]he Stock Sale occurred while buyout negotiations stalled between UIP’s two
equal stockholders,” that “[t]he Stock Sale entrenched the existing board in control
of UIP,” and the Court of Chancery’s finding that “Defendants obviously desired to
eliminate Plaintiff’s ability to block stockholder action, including the election of
directors, and the leverage that accompanied those rights.”27 We recognized,
however, “that the [Court of Chancery] made other findings inconsistent with this
conclusion,” and therefore gave the Court of Chancery the “opportunity to review
25
Id. at 953–54 (quoting Schnell, 285 A.2d at 439 then quoting Blasius, 564 A.2d at 661–62).
26
Id. at 963–64.
27
Id. (quoting Coster I, at *12).
12
all of its factual findings in any manner it sees fit in light of its new focus on
Schnell/Blasius review.”28
E.
On remand, the Court of Chancery found that the UIP board had not acted for
inequitable purposes under Schnell and had compelling justifications for the Stock
Sale under Blasius. For Coster’s Schnell claim, the court held that “the UIP board
had multiple reasons for approving the Stock Sale” and that “the UIP board’s
decision did not totally lack a good faith basis.”29 The court also found that the UIP
board was primarily motivated by “retaining and rewarding Bonnell, mooting the
Custodian Action, and undermining [Coster’s] leverage.”30
Turning to Blasius review, the court concluded that “[i]n the exceptionally
unique circumstances of this case, Defendants have met the onerous burden of
demonstrating a compelling justification.”31 The court’s compelling justification
analysis largely borrowed from Unocal’s reasonableness and proportionality test for
defensive measures adopted by a board in response to a takeover threat.32 As the
court explained:
To satisfy the compelling justification standard, “the directors must
show that their actions were reasonable in relation to their legitimate
28
Id. at 964.
29
Coster II, at *10.
30
Id.
31
Id. at *12.
32
Unocal, 493 A.2d at 955.
13
objective, and did not preclude the stockholders from exercising their
right to vote or coerce them into voting a particular way.” “In this
context, the shift from ‘reasonable’ to ‘compelling’ requires that the
directors establish a closer fit between means and ends.”33
The court found that the threat posed by the Custodian Action was “an existential
crisis” that justified the UIP 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.”34
II.
In her second appeal, Coster has challenged the Court of Chancery’s ruling on
both remand questions. This Court reviews the Court of Chancery’s legal
conclusions de novo but defers to the Court of Chancery’s factual findings supported
by the record.35 We will set aside a trial court’s factual findings only if “they are
clearly wrong and the doing of justice requires their overturn.”36 “When there are
two permissible views of the evidence, the factfinder’s choice between them cannot
be clearly erroneous.”37
33
Coster II, at *11 (quoting Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810–11 (Del. Ch.
2007) then quoting Pell v. Kill, 135 A.3d 764, 787 (Del. Ch. 2016)).
34
Id. at *12–13.
35
See Backer v. Palisades Growth Cap. II, L.P., 246 A.3d 81, 94 (Del. 2021).
36
Id. at 95 (quoting DV Realty Advisors LLC v. Policemen’s Annuity & Ben. Fund of Chi., 75 A.3d
101, 108 (Del. 2013)).
37
Id. (quoting RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015)).
14
A.
In her lead argument on appeal, Coster argues that the Court of Chancery erred
when it limited its Schnell review to board action totally lacking a good faith basis.
To frame our analysis, it is helpful to review again the circumstances of Schnell and
Blasius. Both cases involved board action that interfered with director elections in
contests for control – Schnell, a proxy solicitation, and Blasius, a consent
solicitation.
In Schnell, the incumbent Chris-Craft board faced the prospect of a difficult
proxy fight to retain their seats.38 In response to the threat to their tenure as board
members, the board accelerated the annual meeting date and moved the meeting to
a more remote location. The director defendants mounted no real defense to the
Court of Chancery suit except to argue that their actions did not violate the Delaware
General Corporation Law (“DGCL”) or Chris-Craft’s bylaws and were therefore
legal.
The Court of Chancery was persuaded by the board’s legal authorization
defense and dismissed the case. On appeal, the Supreme Court took a dim view of
the board’s intentional efforts to obstruct the insurgent’s proxy contest. As the Court
held, even though the board’s actions met all legal requirements, the Chris-Craft
board was “attempt[ing] to utilize the corporate machinery and the Delaware Law
38
285 A.2d at 439.
15
for the purpose of perpetuating itself in office; and, to that [sic] end, for the purpose
of obstructing legitimate efforts of dissident stockholders in the exercise of their
rights to undertake a proxy contest against management.”39 In Justice Herrmann’s
oft-quoted words, “inequitable action does not become permissible simply because
it is legally possible.”40 The Supreme Court ordered the Chris-Craft board to
reinstate the original meeting date.
In Blasius, the Court of Chancery explored how Schnell operates in contested
election cases, and specifically how Schnell was not the end of the road for judicial
review of good faith board actions that interfered with director elections.41 Like
Schnell, Blasius involved an incumbent board facing a consent solicitation aimed at
replacing a majority of the board. Atlas Industries had a staggered board. Only
seven of the authorized fifteen board seats were occupied. With a majority of
stockholders behind the effort, an insurgent could in one action amend the
company’s bylaws, increase the board size to fifteen, and elect a new board majority
of eight members.
If the Atlas board had acted on a clear day to establish new seats and to fill
the vacancies, the circumstances would have been different. But for the Atlas board,
the skies were cloudy, and it was raining. It faced a serious consent solicitation. In
39
Id. at 439.
40
Id.41
Blasius, 564 A.2d at 658.
16
response, the board added two seats and filled the newly created positions with
directors friendly to management. Now, Blasius had to win not one, but two
elections to control the board.
Two other points were important to the court’s decision. First, Blasius enticed
stockholders to vote for its nominees with a business plan that would give
stockholders upfront cash and a later debenture redemption, all premised on a highly
leveraged and speculative business strategy. And second, the Atlas board had its
own turn-around strategy that it believed in good faith was a better choice for Atlas
stockholders than Blasius’ risky plan that could lead to Atlas’ bankruptcy.
Blasius argued that the board’s corporate maneuvers were “a selfishly
motivated effort to protect the incumbent board from a perceived threat to its control
of Atlas.”42 The Chancellor turned to Schnell to evaluate this claim. According to
the court, if the board was not “principally motivated” to interfere with the consent
solicitation and instead “had taken action completely independently of the consent
solicitation, which merely had an incidental impact upon the possible effectuation
of any action authorized by the shareholders, it is very unlikely that such action
would be subject to judicial nullification.”43 On the other hand, if “there was no
policy dispute or issue that really motivated this action” or “policy differences were
42
Id. at 657.
43
Id. at 655.
17
pretexts for entrenchment for selfish reasons,” then the court “would not need to
inquire further.”44 The Atlas board’s actions “would constitute a breach of duty.”45
The Chancellor found that the Atlas board did not act out of a desire to
entrench the existing board but out of a good faith belief that Blasius was an
existential threat to Atlas and its stockholders. Thus, under Schnell, the Atlas board
was not principally motivated to interfere with the election of directors for selfish
reasons. But the court was still left with the fact that the Atlas board, even if well-
intentioned, had nonetheless acted to thwart Blasius’s consent solicitation. Thus, the
“real question the case present[ed]” was whether a board, even if acting in good
faith, “may validly act for the principal purpose of preventing the shareholders from
electing a majority of new directors.”46
To answer the ultimate question, the court had to answer another question –
whether there should be a “per se rule that would strike down, in equity, any board
action taken for the primary purpose of interfering with the effectiveness of a
corporate vote.”47 A rigid rule had the advantage of “clarity and predictability.”48
The disadvantage of such a rule, the Chancellor noted, was that “it may sweep too
broadly.”49 In two relatively recent cases at the time, the court had enjoined board
44
Id. at 658.
45
Id.
46
Id.
47
Id. at 661.
48
Id.
49
Id.
18
acts done for the primary purpose of impeding the exercise of stockholder voting
power.50 In those cases, the court held that “the board bears the heavy burden of
demonstrating a compelling justification for such action.”51 Applying this standard
instead of a per se invalidity rule, according to the Chancellor, was “somewhat more
consistent with the recent Unocal case.”52
Ultimately, Chancellor Allen concluded that, even if the board acted in good
faith, it did not justify its interference with the stockholder franchise. The court did
not propose to “invalidat[e], in equity, every board action taken for the sole or
primary purpose of thwarting a shareholder vote.”53 But the board could not rely on
the justification that it “knows better than do the shareholders what is in the
corporation’s best interest.”54
B.
In the years since the Supreme Court and the Court of Chancery decided these
iconic cases, the courts deployed Schnell to police board action that, although
technically legal, was motivated for selfish reasons to interfere with corporate
50
See Aprahamian v. HBO & Co., 531 A.2d 1204, 1208 (Del. Ch. 1987); Phillips v. Insituform of
N. Am., Inc., 1987 WL 16285, at *8 (Del. Ch. Aug. 27, 1987).
51
Blasius, 564, A.2d at 661.
52
Id. at 662 (quoting Phillips, 1987 WL 16285, at *8).
53
Id.54
Id. at 663; see also Stahl v. Apple Bancorp, Inc., 579 A.2d 1115, 1124 (Del. Ch. 1990) (rejecting
“the notion that the prospect that the shareholders might vote differently than the board
recommends can alone constitute any threat to a corporate interest”).
19
elections and stockholder voting.55 It was reserved, however, for “those instances
that threaten the fabric of the law, or which by an improper manipulation of the law,
would deprive a person of a clear right.”56 In other words, “[a]lmost all of the post-
55
See Backer, 246 A.3d at 96 (“[E]ven if the Bäckers complied with the technical requirements
under the Company’s corporate governance documents, the board’s actions were nonetheless
invalid under equitable principles because the Bäckers affirmatively deceived Anderson to create
a quorum.”); Full Value Partners, L.P. v. Swiss Helvetia Fund, Inc., 2018 WL 2748261, at *4 (Del.
Ch. June 7, 2018) (finding claim based on Schnell that incumbent board unequally applied a
qualification bylaw to shareholder nominees to be meritorious when filed for purposes of the
corporate benefit doctrine); Portnoy v. Cryo-Cell Int’l, Inc., 940 A.2d 43, 79 (Del. Ch. 2008)
(finding delay of vote count to allow more time for management slate to secure votes was
inequitable); Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1081 (Del. Ch. 2004), aff’d, 872 A.2d
559 (Del. 2005) (finding bylaw amendments implemented by controller to facilitate a favored
transaction and neutralize board’s opposition “were clearly adopted for an inequitable purpose and
have an inequitable effect”); Linton v. Everett, 1997 WL 441189, at *10 (Del. Ch. July 31, 1997)
(“[D]irectors’ decision to provide only thirty days’ notice, which would inevitably trigger the
advance notice provision in a manner foreseeably adverse to any shareholders desiring to nominate
an opposing slate, constituted an inequitable manipulation of the election process. Accordingly,
the election must be set aside and a new election ordered.”); WNH Invs., LLC v. Batzel, 1995 WL
262248, at *8 (Del. Ch. Apr. 28, 1995) (ruling “that defendants’ purported purpose for the dilutive
issuance is a pretext and their true purpose was to defeat plaintiff’s challenge to their control”);
Hubbard v. Hollywood Park Realty Enterprises, Inc., 1991 WL 3151, at *13 (Del. Ch. Jan. 14,
1991) (ordering waiver of an advance notice by-law to allow shareholders to nominate an opposing
director slate in response to a material change in company policy instituted after nomination
deadline); Aprahamian, 531 A.2d at 1208 (enjoining the incumbent board from further delaying
the company’s annual stockholders meeting given the timing, “on the eve of the meeting, upon
learning that they might be turned out of office”); Lerman v. Diagnostic Data, Inc., 421 A.2d 906,
914 (Del. Ch. 1980) (holding that a 70-days’ notice bylaw was inequitable in a situation where the
board announced the annual meeting only 63 days before it was to occur, rendering compliance
impossible).
56
Alabama By-Prod. Corp. v. Neal, 588 A.2d 255, 258 n.1 (Del. 1991); see also In re WeWork
Litig., 250 A.3d 976, 996 (Del. Ch. 2020) (“[O]ur ‘case law is indicative of a healthy inclination
on the part of the judiciary to employ the Schnell principle of “legal but inequitable” only
sparingly,’ and typically does so only when ‘inequitable conduct has occurred but is not plainly
remediable under conventional fiduciary doctrines.’” (citation omitted)); AB Value Partners, LP
v. Kreisler Mfg. Corp., 2014 WL 7150465, at *5 (Del. Ch. Dec. 16, 2014) (holding that “[p]laintiff
must provide compelling facts indicating that enforcement of the [advance notice bylaw] is
inequitable” to enjoin application of an otherwise valid bylaw through Schnell); Accipiter Life Scis.
Fund, L.P. v. Helfer, 905 A.2d 115, 124-26 (Del. Ch. 2006) (finding Schnell inapplicable in case
where directors “did not act with the specific intent to limit the stockholder’s rights to nominate
and elect a dissident slate”); Applebaum v. Avaya, Inc., 812 A.2d 880, 886 (Del. 2002)
20
Schnell decisions involved situations where boards of directors deliberately
employed various legal strategies either to frustrate or completely disenfranchise a
shareholder vote.”57 While the Supreme Court was a bit hyperbolic to say that only
claims that tear the fabric of our law come within Schnell, the Chancellor was correct
in this case to cabin Schnell and its equitable review to those cases where the board
acts within its legal power, but is motivated for selfish reasons to interfere with the
stockholder franchise.58
C.
The Court of Chancery in this case also interpreted Blasius with a sensitivity
to how, in practice, the Supreme Court and the Court of Chancery have effectively
folded Blasius into Unocal review. As discussed earlier, Chancellor Allen in Blasius
(distinguishing the requirement to treat shareholders equitably under Schnell from an obligation to
treat holders of fractional shares equally in a reverse stock split); Williams v. Geier, 671 A.2d
1368, 1384 (Del. 1996) (refusing to apply Schnell where a share recapitalization plan did not have
entrenchment as “its sole or primary purpose”); Stahl, 579 A.2d at 1123 (“[T]he action of deferring
this company’s annual meeting where no meeting date has yet been set and no proxies even
solicited does not impair or impede the effective exercise of the franchise to any extent.”).
57
Stroud v. Grace, 606 A.2d 75, 91 (Del. 1992).
58
See Rosenbaum v. CytoDyn Inc., 2021 WL 4775140, at *15–17 (Del. Ch. Oct. 13, 2021)
(explaining that factual circumstances drive application of Schnell and that plaintiffs’ “materially
deficient” nomination notices undermine evidence of inequitable conduct by incumbent board);
Strategic Inv. Opportunities LLC v. Lee Enterprises, Inc., 2022 WL 453607, at *18 (Del. Ch. Feb.
14, 2022) (“The directors enforced requirements that were long known to [plaintiff] and that could
have been complied with had [plaintiff] not delayed. Those actions cannot constitute a breach of
fiduciary duty and are far from the sort of inequitable conduct that would require this court to
intervene.”); Saba Cap. Master Fund, Ltd. v. Blackrock Credit Allocation Income Tr., 2019 WL
2711281, at *7 (Del. Ch. June 27, 2019), aff’d in part, rev’d in part, 224 A.3d 964 (Del. 2020)
(“Proof that Defendants acted with the primary purpose of thwarting Saba’s nominees under
Blasius, or otherwise acted inequitably under Schnell, requires more than merely laying out the
timeline of Defendants’ conduct and speculating about bad intent or purpose.”).
21
was skeptical of the board’s authority, even if acting in good faith, to protect the
stockholders from themselves when it came to corporate elections. As Chancellor
Allen noted, “[t]he shareholder franchise is the ideological underpinning upon which
the legitimacy of directorial power rests. Generally, shareholders have only two
protections against perceived inadequate business performance. They may sell their
stock . . . or they may vote to replace incumbent board members.”59 Given the stakes
involved, the court decided that the board’s justifications must be subject to
enhanced scrutiny.
Blasius first applied that enhanced review by requiring a board, even if acting
in good faith, to demonstrate a “compelling justification” for interfering with the
stockholder franchise. But another standard of review could also apply when the
board interferes with the stockholder vote during a contest for control. In Unocal
Corporation v. Mesa Petroleum Company, this Court noted the “omnipresent
specter” that incumbent directors might take action to further their own interests or
those of incumbent management “rather than those of the corporation and its
shareholders.”60 When stockholders challenge a board’s use of anti-takeover
measures, the board must show (i) that “they had reasonable grounds for believing
that a danger to corporate policy and effectiveness existed,” and (ii) that the response
59
Blasius, 564 A.2d at 659.
60
493 A.2d at 954.
22
was “reasonable in relation to the threat posed.”61 A defensive measure is an
unreasonable response in relation to the threat if it is either draconian – coercive or
preclusive – or falls outside a range of reasonable responses.62
In Stroud v. Grace, our Court first recognized how both Blasius and Unocal
review were called for in a proxy fight involving a tender offer:
Board action interfering with the exercise of the franchise often arose
during a hostile contest for control where an acquiror launched both a
proxy fight and a tender offer. Such action necessarily invoked both
Unocal and Blasius. We note that the two “tests” are not mutually
exclusive because both recognize the inherent conflicts of interest that
arise when shareholders are not permitted free exercise of their
franchise.
. . . In certain circumstances, a court must recognize the special import
of protecting the shareholders’ franchise within Unocal’s requirement
that any defensive measure be proportionate and “reasonable in relation
to the threat posed.” A board’s unilateral decision to adopt a defensive
measure touching “upon issues of control” that purposefully
disenfranchises its shareholders is strongly suspect under Unocal, and
cannot be sustained without a “compelling justification.”63
After Stroud, the Court of Chancery in Chesapeake Corporation v. Shore went
a step further and suggested merging the two standards of review in contested
election cases.64 A single standard of review was possible, according to the court,
61
Id. at 955.
62
See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1367 (Del. 1995).
63
Stroud, 606 A.2d at 92 n.3 (internal citations omitted); see also Unitrin, 651 A.2d at 1379–80
(noting use of Blasius and Unocal in contests for corporate control).
64
Chesapeake Corp. v. Shore, 771 A.2d 293, 323 (Del. Ch. 2000).
23
by “infus[ing] . . . Unocal analyses with the spirit animating Blasius.”65 Stated
differently, the court would apply Unocal “with a gimlet eye out for inequitably
motivated electoral manipulation or for subjectively well-intended board action that
has preclusive or coercive effects.”66
In MM Companies v. Liquid Audio, Inc., the Supreme Court took the formal
step to incorporate Blasius “within Unocal.”67 In Liquid Audio, MM had tried for
some time to take control of Liquid Audio. When it looked likely that MM’s
nominees would gain board seats at the annual meeting, the Liquid Audio board
responded by expanding the board from five to seven members and filling the new
seats. With a staggered board, the board expansion defeated MM’s ability to control
the board following the annual meeting.
MM filed suit to enjoin the incumbent board’s action. To invalidate the
board’s expansion, the Supreme Court applied Blasius “within Unocal” as the
standard of review:
When the primary purpose of a board of directors’ defensive measure
is to interfere with or impede the effective exercise of the shareholder
franchise in a contested election for directors, the board must first
demonstrate a compelling justification for such action as a condition
precedent to any judicial consideration of reasonableness and
proportionately. . . . To invoke the Blasius compelling justification
standard of review within an application of the Unocal standard of
review, the defensive actions of the board only need to be taken for the
65
Id.66
Id.67
MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118, 1129 (Del. 2003).
24
primary purpose of interfering with or impeding the effectiveness of the
stockholder vote in a contested election for directors.68
Even though the Supreme Court in Liquid Audio combined Blasius and
Unocal review, it did not solve the practical problem of how to turn Unocal’s
reasonableness review and Blasius’ “primary purpose” and “compelling
justification” elements into a useful standard of review. The Blasius “compelling
justification” standard of review turned out to be unworkable in practice. Once the
court required a compelling justification to justify the board’s action, the outcome
was, for the most part, preordained.69 The Court of Chancery also skirted Blasius
review by limiting the “primary purpose” requirement and redefining what it meant
to be compelling.70
68
Id. at 1132.
69
See Chesapeake, 771 A.2d at 323 (“In reality, invocation of the Blasius standard of review
usually signals that the court will invalidate the board action under examination. Failure to invoke
Blasius, conversely, typically indicates that the board action survived (or will survive) review
under Unocal.”); William T. Allen et. al., Function over Form: A Reassessment of Standards of
Review in Delaware Corporation Law, 56 BUS. LAW. 1287, 1314 (2001) (“[T]he post-Blasius
decisions surfaced the reality that a sorting mechanism was needed to insulate from the severe
‘compelling justification’ test, situations where directors took direct action to influence the
electoral process, but in a manner that was consistent with their legitimate authority. . . . The
elements of the Unocal/Unitrin analysis therefore gave courts the tool to answer the predicate
question to the application of Blasius—did the directors act with the primary purpose of
disenfranchisement?”).
70
See Esopus Creek Value LP v. Hauf, 913 A.2d 593, 602–03 (Del. Ch. 2006) (“[T]he court is
convinced that the board’s seemingly good faith decision to structure the . . . transaction as a
bankruptcy sale does not trigger the exacting legal standard set forth in Blasius. . . . [T]he directors’
decision to structure the transaction in the manner they did cannot be traced to any entrenchment
motivation.”); Apple Computer, Inc. v. Exponential Tech., Inc., 1999 WL 39547, at *5 (Del. Ch.
Jan. 21, 1999) (“[T]he patent sale for which a shareholder vote was allegedly required could not
serve as an opportunity for entrenchment. . . . [A] board’s unintentional failure to fulfill its
supposed § 271 obligations, while perhaps constituting a breach of fiduciary duty, does not
ordinarily trigger Blasius review.”); Kidsco Inc. v. Dinsmore, 674 A.2d 483, 496 (Del. Ch.), aff’d
25
In Mercier v. Inter-Tel (Del.), the Court of Chancery reflected on these
practical problems with Blasius review and took a different approach to the standard
of review. The minority stockholders in Mercier claimed that a special committee
of independent directors breached its fiduciary duties by rescheduling stockholder
special meeting to consider a proposed merger. The committee also set a new record
date. Instead of applying Schnell and Blasius “within Unocal,” the Court of
Chancery turned to Unocal and its “reasonableness” review but applied it with
greater sensitivity to the interests at stake because the “director action . . . could have
the effect of influencing the outcome of corporate director elections or other
stockholder votes having consequences for corporate control.”71
According to the court, the committee bore the burden of proof under a
modified Unocal review (1) to identify “a legitimate corporate objective” supporting
its decision to move the special stockholders’ meeting date and to change the record
date; (2) “to show that their motivations were proper and not selfish;” and (3) to
demonstrate that, even if not disloyal, “their actions were reasonable in relation to
and remanded, 670 A.2d 1338 (Del. 1995) (“[T]he board action—amending the by-law to give the
board an additional 25 days to call a shareholder-initiated special meeting—was not enacted for
the ‘primary purpose’ of impairing or impeding the effective exercise of the franchise, nor will the
challenged board action have that effect.”); Stahl, 579 A.2d at 1122 (refusing to find defendants
acted for “primary purpose of impairing or impeding the . . . the corporate franchise” despite board
changing annual meeting date “in response to the risk that the combination of the proposed Stahl
proxy contest and tender offer would result in a change in board control and the sale of the
company.”); Pell, 135 A.3d at 787 (linking the requirement to demonstrate a compelling
justification with demonstrating reasonability).
71
Mercier, 929 A.2d at 810.
26
their legitimate objective and did not preclude the stockholders from exercising their
right to vote or coerce them into voting a particular way.”72 If “for some reason, the
fit between means and end is not reasonable, the directors would also come up
short.”73 The court decided that the board’s action satisfied Unocal review because
the board’s meeting and record date changes (1) allowed additional time for
stockholders to consider the proposed merger; (2) protected the financial best
interests of the stockholders; and (3) was neither preclusive nor coercive as the
stockholders would ultimately be free to vote as they desired.74 The court refused to
enjoin the board from rescheduling the special meeting date.
As Chancellor Allen did in Blasius, the court in Mercier also rejected “[t]he
notion that directors know better than the stockholders” who should run the
company.75 The court explained that the “know better” defense, standing alone, “is
no justification at all” for the board to interfere with a contest for corporate control.76
Finally, in another important observation, the court did not believe that a more
muscular Unocal analysis should apply outside of corporate election interference
72
Id.73
Id. at 811. The court also found that, applying Blasius review, the board had demonstrated a
compelling justification for its actions. See id. at 813 (“Because it would be impossible and
inappropriate for me to ignore the existence of Liquid Audio and other Delaware Supreme Court
decisions continuing to refer to a compelling justification standard, . . . I conclude that the Inter–
Tel Special Committee has demonstrated a compelling justification for its actions.”).
74
See id. at 788, 817–18.
75
Id. at 811.
76
Id.27
claims or contests for control. In the court’s view, outside this context, “more
traditional tools are available to police self-dealing or improperly motivated director
action.”77
More recently, in Pell v. Kill, the Court of Chancery continued to apply a
modified Unocal review when board action interferes with a corporate election or a
stockholder’s voting rights in contests for control.78 The board in Pell was an eight-
member staggered classified board. In advance of its annual meeting and a looming
proxy fight, the incumbent board reduced from three to one the Class I director seats
up for election, ensuring their continued control of the company through a three-to-
two majority.
As in Mercier, the court examined the board’s motivations, whether the
board’s action was reasonable in relation to a legitimate objective, and whether the
board’s action was preclusive or coercive.79 The court required the board to have a
compelling justification for its action and noted that “[i]n this context, the shift from
‘reasonable’ to ‘compelling’ requires that the directors establish a closer fit between
77
Id.78
See Pell, 135 A.3d at 787.
79
See id.28
means and ends.”80 To do so required the court to scrutinize the directors’ action
“with a ‘gimlet eye.’”81
The court focused on the preclusive effect of the board reduction, which
guaranteed that the incumbent board would maintain control, and the lack of
adequate justification for the change. On the latter point, the court explained that
even if the board had not acted selfishly, it improperly instituted the plan so that it,
“rather than the Company’s stockholders, could determine who would serve on the
Board.”82 The court did not accept the board’s other justifications that the plan was
meant to boost board efficiency and cut costs. The court enjoined the board
reduction.83
And in Strategic Investment Opportunities LLC v. Lee Enterprises, the board
rejected a slate of board nominees for noncompliance with Lee’s advance notice
bylaw. The court found that the nominations did not comply with the contractual
requirements of the bylaw, but that further equitable review was required to ensure
the nomination rejections were equitable.84 As the nominations and advance notice
bylaw implicated board action interfering with a corporate election or a
80
Id.; see also id. (“Although linguistically reminiscent of the type of review given to suspect
classifications under the federal constitution, the use of the word ‘compelling’ is not intended to
signal that type of strict scrutiny.”).
81
Id. (quoting Chesapeake, 771 A.2d at 323).
82
Id. at 790.
83
See id. at 769.
84
Strategic Inv., 2022 WL 453607 at *14 (“Put simply, directors’ inequitable acts towards
stockholders do not become permissible because they are legally possible.”).
29
stockholder’s voting rights in contests for control, the court applied enhanced
scrutiny. According to the court,
[t]he enhanced scrutiny standard of review requires a context-
specific application of the directors’ duties of loyalty, good faith and
care. Fundamentally, the standard to be applied is one of
reasonableness. The defendants must “identify the proper corporate
objectives served by their actions” and “justify their actions as
reasonable in relation to those objectives.” If the incumbent directors
actions’ “operate[d] as a reasonable limitation upon the shareholders’
right to nominate candidates for director,” they will generally be
validated.85
“[W]hether labeled as Unocal or Blasius,” the court reasoned that the “inquiry
[would] be undertaken ‘with a special sensitivity’ where directors’ actions may
affect the stockholder franchise or the result of director elections.”86 The court then
found that the Lee board had a “genuine interest in enforcing its Bylaws so that they
retain meaning and clear standards” and did so “even handedly and in good faith” in
a way that did not make “compliance difficult.”87 The board had not, therefore, acted
inequitably.
D.
In Unocal, the Supreme Court remarked that “our corporate law is not
static.”88 Experience has shown that Schnell and Blasius review, as a matter of
85
Id. at *16 (quoting Mercier, 929 A.2d at 810 then Hubbard, 1991 WL 3151, at *11).
86
Id. at *15 (quoting Kallick v. Sandridge Energy, Inc., 68 A.3d 242, 259 (Del. Ch. 2013)).
87
Id. at *17–18.
88
493 A.2d at 957.
30
precedent and practice, have been and can be folded into Unocal review to
accomplish the same ends – enhanced judicial scrutiny of board action that interferes
with a corporate election or a stockholder’s voting rights in contests for control.89
When Unocal is applied in this context, it can “subsume[] the question of loyalty
that pervades all fiduciary duty cases, which is whether the directors have acted for
proper reasons” and “thus address[] issues of good faith such as were at stake in
Schnell.”90 Unocal can also be applied with the sensitivity Blasius review brings to
protect the fundamental interests at stake – the free exercise of the stockholder vote
as an essential element of corporate democracy.91
As we explained in our earlier decision in this case, the court’s review is
situationally specific and is independent of other standards of review.92 When a
stockholder challenges board action that interferes with the election of directors or a
stockholder vote in a contest for corporate control, the board bears the burden of
proof. First, the court should review whether the board faced a threat “to an
important corporate interest or to the achievement of a significant corporate
89
See Lawrence A. Hamermesh et. al., Optimizing the World’s Leading Corporate Law: A Twenty-
Year Retrospective and Look Ahead, 77 BUS. LAW. 321, 331 (2022) [hereinafter Hamermesh]
(“[Unocal] provides a functional way for courts to expose and invalidate pretextual behavior even
where a subjective inequitable purpose cannot be clearly established.”).
90
Mercier, 929 A.2d at 807.
91
See Chesapeake, 771 A.2d at 323; Hamermesh, at 330–31 (discussing benefits of
“incorporat[ing] Blasius’ and Schnell’s spirit into the Unocal test”).
92
See Coster Appellate Decision, at 960 (explaining that further equitable review under Schnell
was necessary despite Court of Chancery’s entire fairness review).
31
benefit.”93 The threat must be real and not pretextual, and the board’s motivations
must be proper and not selfish or disloyal. As Chancellor Allen stated long ago, the
threat cannot be justified on the grounds that the board knows what is in the best
interests of the stockholders.
Second, the court should review whether the board’s response to the threat
was reasonable in relation to the threat posed and was not preclusive or coercive to
the stockholder franchise. To guard against unwarranted interference with corporate
elections or stockholder votes in contests for corporate control, a board that is
properly motivated and has identified a legitimate threat must tailor its response to
only what is necessary to counter the threat. The board’s response to the threat
cannot deprive the stockholders of a vote or coerce the stockholders to vote a
particular way.94
93
See Phillips, 1987 WL 16285, at *7; Mercier, 929 A.2d at 788 (“[D]irectors fearing that
stockholders are about to make an unwise decision that poses the threat that the stockholders will
irrevocably lose a unique opportunity to receive a premium for their shares have a compelling
justification—the protection of their stockholders’ financial best interests . . . .”); In re MONY
Grp., Inc. S’holder Litig., 853 A.2d 661, 678 (Del. Ch. 2004) (“The Board clearly identified a
threat—the possibility that a merger that the Board twice reasonably deemed to be in the best
interests of the Company and its stockholders, and which was supported by a majority of
stockholders who had voted, would fail to win approval, in large part due to a stale record date.”);
Peerless, 2000 WL 1805376, at *15 (abstaining from ruling on issue of compelling justification at
summary judgment stage but noting that “justifications offered . . . collectively provide some hope
or reasonable possibility for satisfying the onerous compelling justification burden.”); Stahl, 579
A.2d at 1124 (justifying a delay to shareholder vote on the sale of company to allow for more time
to gather information).
94
See Pell, 135 A.3d at 793 (“By pre-ordaining the results of the Annual Meeting, the Board
Reduction Plan deprives stockholders of their right to vote.”); compare Stahl, 579 A.2d at 1123(finding shareholder voting not precluded by postponement of shareholder meeting when proxies
had not yet been collected and meeting date not fixed) with Aprahamian, 531 A.2d at 1208 (finding
32
Applying Unocal review in this case with sensitivity to the stockholder
franchise is no stretch for our law. Here, the UIP board issued stock to break a
director election deadlock and moot a custodian action. In Phillips v. Insituform of
North America, Inc., the Court of Chancery addressed a dilutive stock issuance
designed to thwart a consent solicitation.95 Chancellor Allen, applying Unocal
review, recognized the extraordinary nature of the board’s action and the important
interests at stake when the board issues stock to counteract a looming stockholder
vote:
Unocal teaches that the powers of the board to deal with
perceived threats to the corporation extend, in special circumstances, to
threats posed by shareholders themselves and a board may, in such
circumstances, take action to protect the corporation even if such action
discriminates against and injures the shareholder or class of
shareholders that poses a special threat. However, it is extraordinary
for the law to sanction the act of a fiduciary directed against the interest
of his cestui que trust and, in such a case, it is necessary for a reviewing
court to be satisfied that, in all of the circumstances, the act taken was
justified. The Unocal court used the phrase “reasonable in relationship
to the threat posed.”96
After reviewing two other cases that applied enhanced review to board action
issuing stock to interfere with the stockholder franchise, the Court of Chancery in
postponement of shareholder meeting inequitable where postponement did not serve “any
significant interests of the stockholders” and could have resulted in voiding of proxies and
frustration of shareholder franchise); see also Blasius, 564 A.2d at 656 (“[T]he effect of adding
two directors would be to preclude stockholders from effectively implementing the Blasius
proposal.”).
95
Phillips, 1987 WL 16285.
96
Id., at *7.
33
Phillips concluded that “the record supplies scant grounds to suppose that an
affirmative injury to the corporation was to be reasonably apprehended” and “no
justification has been shown that would arguably make the extraordinary step of
issuance of stock for the admitted purpose of impeding the exercise of stockholder
rights reasonable in light of the corporate benefit, if any, sought to be obtained.”97
The court in Phillips prohibited the board’s interference with the stockholder
franchise.
E.
In our first decision, we highlighted facts in the Court of Chancery’s first
decision that might have led to the conclusion that the board acted for selfish reasons.
But we recognized that the court had made findings inconsistent with this result and
remanded to allow the Court of Chancery to reconsider its decision in light of our
97
Id., at *8 (discussing Canada S. Oils, Ltd. v. Manabi Expl. Co., 96 A.2d 810, 813 (1953) then
Condec Corp. v. Lunkenheimer Co., 230 A.2d 769, 777 (1967)); see Klaassen v. Allegro Dev.
Corp., 2013 WL 5967028, at *11 (Del. Ch. Nov. 7, 2013) (“Equity will protect a controlling
stockholder against the dilution of its position when a board acts for an improper purpose, such as
entrenchment, that is adverse to the interests of the entity and all of its stockholders, but a board
otherwise does not have a duty to protect the controller. The board’s fiduciary duty of loyalty
compels the directors to act in the best interests of the entity and the stockholders as a whole, and
a board acting loyally may take action to oppose, constrain, or even dilute a large or controlling
stockholder.”); Mendel v. Carroll, 651 A.2d 297, 304 (Del. Ch. 1994) (“Surely if the principal
motivation for such dilution is simply to maintain corporate control (‘entrenchment’) it would
violate the norm of loyalty. Where, however, a board of directors acts in good faith and on the
reasonable belief that a controlling shareholder is abusing its power and is exploiting or threatening
to exploit the vulnerability of minority shareholders, I suppose, for reasons touched upon in the
cases cited in the margin, that the board might permissibly take such an action.”); Freedman v.
Rest. Assocs. Indus., Inc., 1987 WL 14323, at *9 (Del. Ch. Oct. 16, 1987) (stating that, under
Unocal review, “a board might be justified in issuing an option that would have the effect of
diluting the voting power of an existing block.”).
34
first opinion. On remand the court did as requested. The court found that there was
“more to the story” than contained in its first opinion.98 It supplemented the earlier
factual findings with the following:
 “Without making any meaningful effort to negotiate board
composition, Plaintiff filed a complaint in this Court seeking the
appointment of a custodian;”99
 “Plaintiff’s request for custodial relief was extremely broad.
Plaintiff did not present a tailored request for relief that targeted the
stockholder deadlock. Rather, she asked the court to empower a
custodian to ‘exercise full authority and control over the Company,
its operations, and management;’”100
 “The threat of a court-appointed custodian so broadly empowered
posed new risks to the Company. The appointment of a custodian
with these powers would have given rise to broad termination rights
in SPE contracts and threatened UIP’s revenue stream, as UIP’s
business model is dependent on the continued viability of those
contracts;”101
 “Facing this threat to the Company,” the UIP board “identified a
solution” to issue equity “long promised to Bonnell” that
“implent[ed] a succession plan” proposed “on a clear day;”102
 The Stock Sale would “moot the Custodian Action and eliminate the
risks the appointment of a custodian posed to UIP” and would
“eliminate the stockholder leverage that Plaintiff was using to try to
force a buyout at a price detrimental to the Company;”103
98
Coster II, at *3.
99
Id. at *4.
100
Id.
101
Id.
102
Id. at *5.
103
Id.
35
 The UIP board’s motives were not “pretexts for entrenchment for
selfish reasons” or “post-hoc justifications;”104 and
 “[T]hese were genuine motivations for their actions that stood
alongside the more problematic purposes that [Coster I] identified
and the Appellate Decision collected.”105
After its additional fact findings, the Court of Chancery gathered the many
strands of precedent and conducted a careful review of the UIP board’s actions. The
Chancellor found that the UIP board faced a threat – which the court described as an
“existential crisis” – to UIP’s existence through a deadlocked stockholder vote and
the risk of a custodian appointment. Although the court thought that some of the
board’s reasons for approving the Stock Sale were problematic, on balance the court
held that the board was properly motivated in responding to the threat. According
to the court, the UIP board acted in good faith “to advance the best interests of UIP”
by “reward[ing] and retain[ing] an essential employee,” “implement[ing] a
succession plan that Wout had favored,” and “moot[ing] the Custodian Action to
avoid risk of default under key contracts.”106 The court also relied on its earlier
finding that the UIP board issued UIP stock to Bonnell at an entirely fair price.107
The Court of Chancery also found that the UIP board responded reasonably
and proportionately to the threat posed when it approved the Stock Sale and mooted
104
Id. (quoting Blasius, 564 A.2d at 658 then quoting Pl.’s Post-Remand Opening Br. at 2).
105
Id.
106
Id. at *10.
107
Id.
36
the Custodian Action. As it held, “in the exceptionally unique circumstances of this
case,” without the Stock Sale, the possibility that a custodian appointed with broad
powers would jeopardize key contracts caused an existential crisis at UIP. The Stock
Sale, the court held, “was appropriately tailored to achieve the goal of mooting the
Custodian Action” while implementing the succession plan and retaining Bonnell.108
And the court noted that there were more aggressive options that could have been,
but were not, pursued to break the deadlock.109
Finally, the board’s response to the existential threat posed by the stockholder
deadlock and custodian action was not preclusive or coercive. Although the Stock
Sale effectively foreclosed Coster from perpetuating the deadlock facing UIP, the
new three-way ownership of the company presented a potentially more effective way
for her to exercise actual control. As the Court of Chancery noted, Schwat and
Bonnell are not bound to vote together, meaning Coster could cast a swing vote at
stockholder meetings.110 As an equal one third owner with the two other
stockholders, Coster can join forces with either one of UIP’s other owners “at some
108
Id. at *11–12.
109
Id. at *13 (“The UIP board could have chosen more aggressive means of breaking the deadlock
that would have favored Schwat. They could have issued him an additional share, thereby giving
him hard voting control. They could have issued Schwat options, claiming that it was part of his
compensation. They could have created an employee stock option plan and empowered Schwat
to vote those shares. . . . But the UIP board did not pursue a course that would enhance Schwat’s
authority. It implemented the succession plan that Wout had favored.”).
110
See Coster II, at *13 (“Bonnell could switch sides tomorrow and unite with Plaintiff to Schwat’s
detriment. The record reflects that Schwat and Bonnell have disagreed on a number of business
decisions”).
37
point in the future.”111 A realistic path to control of UIP negates the preclusive
impact of the Stock Sale.112
F.
Coster’s remaining arguments on appeal pick at the court’s factual findings
without success. As noted above, Coster has a steep hill to climb because we review
those findings to see whether they are “clearly wrong.” First, the main thread
running through several of her arguments is that, instead of diluting her equity, the
UIP board could have made the same arguments about an existential crisis when it
opposed the appointment of a custodian. If the court declined to appoint a custodian,
111
Air Prod. & Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48, 115 (Del. Ch. 2011).
112
See Pell, 135 A.3d at 788 (finding the reduction of board seats had a preclusive impact as it
made success in a proxy contest realistically unattainable through removing classified board seats
that “prevented the stockholders from establishing a new majority”); Yucaipa Am. All. Fund II,
L.P. v. Riggio, 1 A.3d 310, 354 (Del. Ch. 2010), aff’d, 15 A.3d 218 (Del. 2011) (finding defensive
measures not preclusive as plaintiff could “succeed in a proxy contest if it puts together a platform
and a slate of candidates that are attractive to” other major stockholders); Versata Enterprises, Inc.
v. Selectica, Inc., 5 A.3d 586, 601 (Del. 2010) (“[T]here is, analytically speaking, only one test of
preclusivity: ‘realistically unattainable.’”); In re Gaylord Container Corp. S’holders Litig., 753
A.2d 462, 483–84 (Del. Ch. 2000) (finding a supermajority provision that made it “very difficult
to amend the corporation’s bylaws and . . . other defenses without the support of [the] board” not
preclusive as attaining the requisite shareholder vote was “theoretically achievable” and a newly
elected board could itself amend the bylaws); Mentor Graphics Corp. v. Quickturn Design Sys.,
Inc., 728 A.2d 25, 49 (Del. Ch.), aff’d sub nom. Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d
1281 (Del. 1998) (finding that a delayed redemption provision for a shareholder rights plan did
not preclude outstanding sale of company as a hostile bidder could take control of board and enter
into transaction structured to close after expiration of deferred redemption provision but
invalidating provision on other grounds); Unitrin, 651 A.2d at 1383 (“Even a complete
implementation of the Repurchase Program, in combination with the pre-existing Supermajority
Vote provision, would not appear to have a preclusive effect upon American General’s ability
successfully to marshall enough shareholder votes to win a proxy contest. A proper understanding
of the record reflects that American General or any other 14.9% shareholder bidder could
apparently win a proxy contest with a 90% turnout.” (internal citations omitted)).
38
the argument goes, the Stock Sale would have been unnecessary to defeat the
custodian action. Coster also claims that “there was nothing exigent about allowing
Bonnell to buy equity in UIP” as there was no “evidence that Bonnell threatened to
leave UIP if he did not receive equity.”113
But the Chancellor found, under the unusual facts of this case, that it was the
pendency of the Custodian Action itself that caused the existential crisis at UIP.114
The Board was not required to risk court appointment of a custodian with broad
powers that would trigger defaults under UIP’s SPE contracts. The court also found
that the Stock Sale fulfilled a prior equity commitment to Bonnell, which encouraged
him, as a key employee, to remain with UIP. According to the court, Bonnell was
“essential to the Company’s survival.”115
Coster also contests the relevance of the “broad termination rights” in UIP’s
various contracts. At trial, Bonnell testified that a “primary investor” in each SPE
holds termination authority.116 Coster contends that “many, if not most, of the third-
party contracts relied upon by Defendants are contracts between UIP and SPEs
113
Opening Br. at 35.
114
See Coster II, at *12–13 (“To make Bonnell the swing vote, Schwat clearly believed that the
Custodian Action was a threat to the Company and that Bonnell was vital to the Company.”).
115
Coster I, at *12.
116
App. to Answering Br. at B208 (“[T]he primary investor, the large investor, the 90 or 80 percent
partner, has broad authority to terminate those -- to terminate those agreements.”).
39
owned and controlled by Schwat and Bonnell,”117 who supposedly control the
termination decision.
The record contains only excerpts of the UIP contracts. While these excerpts
reveal superficial links between UIP and the SPEs, as would be expected of affiliated
companies, the excerpts do not have provisions clearly placing termination rights in
Schwat or Bonnell’s control.118 The record, therefore, does not unequivocally
support Coster’s contention. Bonnell also testified at trial that an independent
primary investor in each SPE has the authority to terminate the contracts.119 UIP
also confirmed at oral argument that UIP representatives did not control the
termination rights.120
117
Opening Br. at 35. There is a link between Schwat and Bonnell and the SPEs given UIP
valuation materials stating that “UIP Companies and its subsidiary primarily serve the realty
businesses of its owners, as the majority of the Company’s revenue (over 95%) comes from SPEs
that have Schwat Realty LLC and Coster Realty LLC as equity members” and “UIP Companies
and its subsidiaries primarily serve the realty businesses of its owners, as nearly all of the
Company’s revenue comes from SPEs in which the owners are investors.” Coster I, at *19 n.254
(quoting JX-67 at 7 then quoting JX-66 at 7) (emphasis added). The extent of control, however,
remains unanswered as the record only contains excerpts of relevant contracts.
118
In some instances, the contract excerpts show what may be UIP-affiliated companies on both
sides of the agreements. See, e.g., App. to Opening Br. at A233 (showing agreement “by and
between UIP 3501 13th Street, NW LLC, a Delaware limited liability company . . . and UIP
Property Management, Inc., a Maryland corporation”); id. at A240 (showing agreement “by and
between UIP-NYCB FIVE, LP, a District of Columbia limited partnership . . . and UIP Asset
Management, Inc, a Delaware corporation”); id. at A247 (showing agreement “by and between
UIP 1841 Columbia Road, LLC, a Delaware limited liability company . . . and UIP Property
Management, Inc., a Maryland corporation”).
119
See App. to Answering Br. at B208.
120
Oral Argument at 19:48, Coster v. UIP Companies, Inc., et al., No. 163, 2022 (Del. argued
Mar. 29, 2023), https://livestream.com/delawaresupremecourt/events/10769099/videos
/235612372 (“Important decisions like termination rights are reserved to the principal equity
investor.”).
40
Finally, Coster takes issue with two other aspects of the Court of Chancery’s
decision. First, she disagrees with how the court considered Wout’s wishes for a
succession plan benefiting Bonnell. The Court of Chancery concluded that Wout
and Schwat had devised a succession plan to sell equity to Bonnell.121 Coster claims
that Wout’s intentions before his passing were irrelevant to the dispute because “it
is the current stockholders to whom a board owes a duty of loyalty.”122 The court
did not, however, place undue weight on this fact. It was merely one in a
constellation of other more compelling justifications for the Stock Sale.
Second, Coster contends that the court improperly considered her motivations
for filing the Custodian Action. The court believed that Coster “wielded [her] rights
to create leverage in buyout negotiations” and viewed the Custodian Action as
contrary to Coster’s interests.123 According to Coster, this assessment in turn
improperly influenced whether the UIP board had a compelling justification for the
Stock Sale.124 Coster’s argument, however, exaggerates the role of these findings.
The court did not rely directly on this observation in its analysis. What the court did
find dispositive was the harm caused by the possibility of a custodian appointment
121
See Coster II, at *13 (“But the UIP board did not pursue a course that would enhance Schwat’s
authority. It implemented the succession plan that Wout had favored.”).
122
Opening Br. at 38.
123
Coster II, at *3.
124
Opening Br. at 38–42 (arguing it was error to find that Coster had an improper motive for filing
the Custodian Action).
41
– termination of the SPE contracts – that would not have been in either UIP’s or
Coster’s best interests.125
III.
The judgment of the Court of Chancery is affirmed.
125
See Coster II, at *11 (“[T]he UIP board believed that the Custodian Action would cause defaults
under the Company’s key agreements and threaten the business. No one, including Plaintiff, would
benefit from that outcome.”).
42