## Facts

- MM Companies, Inc. sought to obtain control or significant influence over Liquid Audio, Inc. after earlier acquisition overtures were rejected.
- Liquid Audio had a staggered five-member board; two seats were up for election at the 2002 annual meeting.
- MM initiated a proxy contest nominating two candidates for the two open seats and proposing a bylaw amendment to expand the board by four seats, which would have enabled MM to gain effective board control if adopted.
- The annual meeting was scheduled for September 26, 2002; by mid-August, it appeared likely MM would win the two contested seats.
- On August 22–23, 2002, the incumbent board amended the bylaws to increase the board size from five to seven and immediately filled the two new seats with directors aligned with the incumbents.
- At the annual meeting, stockholders elected MM’s two nominees to the contested seats but rejected MM’s proposal to add four additional directorships.
- MM sued in the Delaware Court of Chancery challenging the board expansion and the appointments as impermissible interference with the stockholder franchise and an improper defensive measure.
- After trial, the Court of Chancery found the board acted with the primary purpose of diminishing the effectiveness of MM’s vote but upheld the action under Unocal as reasonable and proportionate; MM appealed.

## Issues

1. What standard of review governs a board action taken as a defensive measure that also has the primary purpose of interfering with stockholder voting in a contested election.
2. Whether the board’s bylaw amendment expanding the board and immediately filling the new seats was valid under that standard.

## Decision

- The Delaware Supreme Court reversed the judgment upholding the board’s expansion-and-appointment action and remanded for relief invalidating the August 22 action.
- The court held that Unocal enhanced scrutiny governs defensive measures affecting the stockholder franchise, but the analysis must expressly incorporate Blasius concerns when the board’s primary purpose is to impede the stockholder vote.
- Given the trial court’s binding factual finding that the board’s primary purpose was to diminish the effectiveness of the stockholder vote, the board was required to show a compelling justification within the enhanced-scrutiny framework.
- The board failed to establish that the measure was proportionate and compellingly justified, particularly where the asserted “threat” largely reflected the possibility that stockholders would choose MM’s nominees.

## Legal Principles

- Defensive board action is reviewed under Unocal enhanced scrutiny: the board must identify a legally cognizable threat and show the response was reasonable and proportionate.
- When a defensive measure is taken with the primary purpose of interfering with, impeding, or diluting the stockholder vote, Unocal’s proportionality inquiry must account for Blasius’s protection of the franchise.
- In that setting, the board must demonstrate a compelling justification for intentional vote-impairing action.
- Disagreement with likely stockholder electoral choices, standing alone, is not a cognizable threat supporting structural manipulation that diminishes the practical effect of an impending election.
- Board actions affecting election outcomes may be invalidated when timing, purpose, and effect show intentional interference without a compelling justification.

## Conclusion

The Delaware Supreme Court held that defensive measures adopted primarily to diminish stockholder voting effectiveness are subject to Unocal enhanced scrutiny informed by Blasius, requiring a compelling justification; because Liquid Audio’s board expansion and immediate appointments were intended to dilute the election’s effect and were not compellingly justified, the action was invalidated.


MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003)