## Facts

- UIP Companies, Inc. (UIP) was a closely held company co-owned 50/50 by Wout Coster and Steven Schwat.
- Wout died before completing a planned transition that included selling equity to Peter Bonnell, a long-time senior UIP executive identified as Wout’s intended successor.
- Wout’s shares passed to his widow, Marion Coster (Coster), leaving Coster and Schwat as equal stockholders.
- The stockholders became deadlocked, including at meetings called to elect directors and fill long-vacant board seats.
- A central dispute concerned appointing Bonnell to UIP’s board—an appointment Coster opposed because it could interfere with her plan to obtain a financially favorable buyout of her shares.
- Coster petitioned the Delaware Court of Chancery under 8 Del. C. § 226(a)(1) to appoint a custodian to address UIP’s deadlock.
- While the deadlock litigation was pending, UIP’s board approved a stock sale that used authorized but previously unissued voting shares, selling roughly one-third of UIP’s voting equity to Bonnell at a price based on an independent valuation.
- The issuance diluted Coster’s 50% interest to approximately one-third, ended the 50/50 voting stalemate, and mooted the pending custodianship proceeding.
- Coster challenged the stock sale in the Court of Chancery, alleging fiduciary breaches and inequitable interference with her voting and statutory rights.
- The Court of Chancery initially upheld the transaction under entire fairness. In a prior appeal in the same litigation, the Delaware Supreme Court remanded for additional analysis of equity and franchise interference principles associated with Schnell, Blasius, and Unocal.
- On remand, the Court of Chancery again upheld the stock sale, and Coster appealed a second time, producing the 2023 decision.

## Issues

1. When a board issues stock in a control-related context and the action dilutes an existing stockholder and affects voting outcomes, must the court evaluate the action under a heightened standard informed by Schnell, Blasius, and Unocal rather than relying on entire fairness alone?
2. Did UIP’s board act inequitably, or without a compelling and proportionate justification, by selling one-third of UIP’s stock to Bonnell in a manner that diluted Coster and mooted her pending § 226 custodian petition?

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s post-remand judgment upholding the stock sale to Bonnell.
- The Court accepted the remand court’s factual findings that the directors did not act primarily for an inequitable purpose aimed at vote manipulation or entrenchment.
- The Court agreed that the board identified serious corporate risks associated with a court-appointed custodian (including threats to UIP’s business relationships and contractual arrangements) and that stabilizing Bonnell’s long-discussed equity role and succession plan served a legitimate corporate purpose.
- Applying a heightened Unocal-type review informed by Schnell and Blasius concerns, the Court held that the board carried its burden to show a compelling justification for the disenfranchising effect and that the response was reasonable and proportionate to the threat.
- The stock issuance remained valid, and no custodian was appointed because the deadlock was resolved by the change in ownership and voting power.

## Legal Principles

- Entire fairness is not a complete defense when board action, even if fairly priced and fairly implemented, interferes with the stockholder franchise in the setting of a contested election or other control-related dispute.
- When directors take action that has a disenfranchising effect in a control-related context, courts apply heightened scrutiny rooted in Unocal and informed by Schnell and Blasius.
- Under this approach, the board bears the burden to show (i) a legitimate corporate objective and absence of inequitable purpose, and (ii) a reasonable and proportionate response to a legitimate threat.
- Where the board’s action materially interferes with voting rights, the board must further show a compelling justification for that interference.
- Schnell’s equitable review focuses on whether board action is inequitable in context; conduct may be invalidated even if technically authorized under corporate law.

## Conclusion

In Coster v. UIP Companies, Inc., the Delaware Supreme Court affirmed the validity of UIP’s dilutive stock sale to a senior executive that ended a 50/50 stockholder deadlock and mooted a pending § 226 custodianship petition, holding that the transaction—though previously found entirely fair—also satisfied heightened scrutiny because the board did not act for an inequitable purpose and demonstrated a compelling, reasonable, and proportionate justification for an action that affected voting rights.


Coster v. UIP Companies, Inc., 300 A.3d 656 (Del.2023)