MM Companies, Inc. v. Liquid Audio Inc.: Determination of the Review Standard When Directors’ Defensive Measure Impedes Shareholders’ Right to Vote
Shaunna L. Wollpert
In Blasius Industries, Inc. v. Atlas Corp., the Delaware Court of Chancery enumerated the principle that a board of directors must demonstrate a compelling justification when the primary purpose of the board’s actions was designed to interfere with shareholders’voting rights. In Unocal Corp. v. Mesa Petroleum Co., the Supreme Court of Delaware enumerated a two-prong test that before the business judgment rule is applied to a board’s adoption of a defensive measure, the burden will lie with the board to prove that reasonable grounds for believing a danger to corporate policy and effectiveness existed and that the defensive measure adopted was reasonable in relation to the threat posed This comment will address the question of how to apply the standards from Blasius and Unocal when a board adopts a defensive measure in response to a threat of control where the board adopted the defensive measure for the reason of impeding the shareholders’ right to vote on issues of corporate governance. In particular, this comment will evaluate the Supreme Court of Delaware’s recent opinion in MM Companies, Inc. v. Liquid Audio, Inc., where that court explained that in the context of a board’s adoption of antitakeover defenses to impede the shareholders’ right to vote for directors, the board has the burden to demonstrate a compelling justification for taking such an action before the defensive measure could be analyzed as reasonably proportionate.