MM Companies, Inc. v. Liquid Audio, Inc.

Liquid Audio and MM Companies, both Delaware corporations, engaged in a contest for control over the board of directors. MM, a more than 7 percent shareholder in Liquid Audio, attempted to gain control of Liquid Audio for more than a year. MM first offered to acquire Liquid Audio. After that offer was rejected, MM announced its intention to nominate its own candidates for two seats on the Liquid Audio board, which consisted of five members. Subsequently, Liquid Audio announced a stock-for-stock merger transaction with "white knight," Alliance Entertainment Corp. MM's board candidates were elected to the board and Liquid Audio, fearful that other board members would resign due to the contentious environment MM's board members would likely bring to the boardroom, expanded the board from five to seven members. This had the effect of nullifying the impact of the election of MM's board candidates.

The Court applies both the Blasius and Unocal rules and holds that they are not mutually exclusive. Blasius holds that when the primary purpose of the Board's action was to interfere with or impede the effective exercise of the shareholder franchise in a contested election for directors, the Court will apply a compelling justification standard of review. The Unocal requirement states that any defensive measure be proportionate and reasonable in relation to the threat posed. In this case, the Court applies the Blasius standard of review into the Unocal test and holds that because there is an interference in the effective exercise of the shareholder franchise and there is no compelling justification, Liquid Audio's action is not valid.

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