Coster v. UIP Companies, Inc., 300 A.3d 656

Background

UIP Companies was founded by Steven Schwat, Cornelius Bruggen, and Wout Coster; Bruggen left and, after Wout’s death, his widow Marion Coster inherited his 50% interest.
After disputes over inspections and buyout negotiations, stockholder meetings in 2018 deadlocked between Coster and Schwat; Coster sued in Chancery seeking appointment of a custodian under 8 Del. C. § 226 to break the deadlock.
The UIP board issued a one‑third equity interest to long‑time employee Peter Bonnell for $41,289.67, diluting Coster from 50% to 33% and mooting the custodian action.
The Court of Chancery initially upheld the stock issuance under the entire‑fairness standard; the Delaware Supreme Court remanded, instructing the Chancery Court to apply Schnell/Blasius (and related Unocal) review because the issuance interfered with voting rights.
On remand Chancery found the board acted in good faith, the sale was at a fair price, and the board had a compelling, tailored justification (risk that a broadly empowered custodian would trigger SPE contract terminations; retention/succession of a key employee); the Supreme Court affirmed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Scope of Schnell: whether Schnell review extends beyond board actions totally lacking good faith	Coster: Schnell should apply broadly to equitable review of any board action that interferes with shareholder franchise, not only actions totally devoid of good faith	Defendants: Schnell is cabined to cases of inequitable, self‑serving manipulation; good‑faith motives are addressed within Unocal/Blasius framework	Court: Schnell remains focused on legally‑possible but inequitable manipulation; Chancery did not err in limiting Schnell to its traditional scope and folding loyalty/good‑faith analysis into Unocal/Blasius review
Need for a "compelling justification" under Blasius/Unocal for dilutive stock issuance that interferes with shareholder vote	Coster: The issuance primarily served to disenfranchise and entrench management; no compelling justification (no exigency; Bonnell posed no clear departure threat)	Defendants: The issuance addressed an existential threat posed by a broadly empowered custodian that could trigger SPE contract terminations and also advanced succession/retention of a key employee; price was fair and the measure was tailored	Court: Chancery findings that the board faced an existential threat and had compelling, proportionate justifications were not clearly wrong; the issuance survived enhanced Unocal/Blasius scrutiny
Whether the stock issuance was preclusive or coercive of shareholder voting rights	Coster: Dilution foreclosed her blocking rights and effectively disenfranchised her	Defendants: Three‑way ownership created realistic paths for Coster to swing votes; issuance was not designed to preclude all shareholder remedies	Court: Not preclusive or coercive; issuance left realistic opportunity for Coster to influence future votes and thus was not invalid on that ground

Key Cases Cited

Schnell v. Chris‑Craft Indus., Inc., 285 A.2d 437 (Del. 1971) (inequitable manipulation of corporate machinery is impermissible even if facially legal)
Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. 1988) (directors who interfere with shareholder elections must show a compelling justification)
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (enhanced review: directors must show reasonable grounds for a threat and that the response was reasonable in relation to the threat)
MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003) (Blasius’s compelling‑justification requirement is applied within Unocal’s enhanced review framework)
Mercier v. Inter‑Tel (Del.), Inc., 929 A.2d 786 (Del. Ch. 2007) (applies a modified Unocal test with heightened sensitivity where board action could affect shareholder franchise)
Pell v. Kill, 135 A.3d 764 (Del. Ch. 2016) (requires a close fit between means and ends and gimlet‑eye scrutiny when board action preordains election outcomes)
Stroud v. Grace, 606 A.2d 75 (Del. 1992) (recognizes overlap and interplay between Blasius and Unocal review)