Coster v. UIP Companies, Inc.
49, 2020
| Del. | Jun 28, 2021Background
- UIP was formed by three principals; after departures and a death, Marion Coster inherited a 50% stake and the board became deadlocked between two equal stockholders.
- Coster sought relief in the Court of Chancery under 8 Del. C. § 226(a)(1) to appoint a custodian to resolve the deadlock and enable director elections.
- While that litigation was pending, UIP’s board (controlled by the other 50% holder, Schwat, and two aligned directors) authorized issuance of a one‑third equity interest to director/employee Peter Bonnell, diluting Coster below 50% and mooting the custodian petition.
- The Court of Chancery found the board acted to moot the custodian action and that majority directors were interested, but nevertheless held the Stock Sale passed entire‑fairness review (price and pricing process) and refused to cancel the issuance or appoint a custodian.
- The Delaware Supreme Court reversed and remanded, holding that a successful entire‑fairness finding did not foreclose further equitable review under Schnell/Blasius when a conflicted board acts to impair shareholder franchise; if the board’s primary purpose was disenfranchisement it must justify the action with a compelling justification.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether entire‑fairness review alone was dispositive when an interested board issued stock to dilute a 50% holder and thwart a custodial petition | Coster: Court of Chancery should have considered motives and applied Schnell/Blasius, not stop after entire fairness | Defs: Entire fairness is the most rigorous test; passing it ends inquiry | Reversed: Entire‑fairness is not the end when issuance is aimed at frustrating shareholder franchise; motives must be examined under Schnell/Blasius |
| Whether the Stock Sale violated fiduciary duties because it was timed and designed to neutralize Coster’s voting power and pending custodial action | Coster: Sale was primarily to disenfranchise and entrench board — illegal even if legally authorized | Defs: Sale had legitimate objectives (avoid SPE defaults, reward/retain key employee) and a fair price | Court: Factfinder must reassess whether primary purpose was disenfranchisement; if so, board must show compelling justification |
| Standard of review where board action interferes with shareholder franchise | Coster: Schnell applies when action subverts election machinery; Blasius requires compelling justification even if good faith | Defs: If action survives entire fairness, no further scrutiny needed | Held: Schnell/Blasius doctrines apply; where primary purpose is to impede voting, Blasius compelling‑justification test governs |
| Remedy and custodian appointment after finding improper motivation | Coster: Cancel the issuance and appoint a custodian | Defs: No custodian needed if issuance valid and price fair; appointment may harm UIP (defaults) | Remanded: Court of Chancery should, after applying Schnell/Blasius, cancel the sale if motivated by disenfranchisement or lacking compelling justification and then consider (in its discretion) whether to appoint a custodian |
Key Cases Cited
- Schnell v. Chris‑Craft Indus., Inc., 285 A.2d 437 (Del. 1971) (board action that manipulates election machinery to entrench incumbents violates equitable duty despite legal authority)
- Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988) (if board acts primarily to impede shareholder franchise, it must show a compelling justification)
- MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003) (applies Blasius where directors act to thwart shareholder vote; confirms close scrutiny of franchise‑impairing actions)
- Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (framework for reviewing defensive measures by boards under reasonableness and proportionality tests)
- Condec Corp. v. Lunkenheimer Co., 230 A.2d 769 (Del. Ch. 1967) (enjoined stock issuance whose primary purpose was to defeat a stockholder’s majority control)
- Canada S. Oils, Ltd. v. Manabi Exploration Co., Inc., 96 A.2d 810 (Del. Ch. 1953) (court enjoined share issuance primarily intended to deprive plaintiff of majority voting control)
- Bäcker v. Palisades Growth Capital II, L.P., 246 A.3d 81 (Del. 2021) (reiterates that director actions are “twice‑tested”: legal authorization followed by equitable scrutiny)