Page 149 - מיזוגים ורכישות - פרופ' אהוד קמר 2022
P. 149
not in any way either increase or exacerbate the effect that naturally flows
from the fact that Liquid Audio has a staggered board of directors.
The Supreme Court Reverses
The Supreme Court, in reversing the holding of the Chancery Court, focused not
simply on the ability of MM to control the board pursuant to the proxy contest, but on
the directors’ belief as to the ultimate effect on control that the proxy contest might have.
In particular, the court focused on interrogatories and testimony of the defendants that
indicated that the director defendants were concerned that two of the incumbent
directors would resign from the Liquid Audio board if the MM nominees were elected,
resulting in MM’s gaining control of the board. The court stated that the primary purpose
was to minimize the impact of the MM proxy solicitation: "The record also reflects that
the timing of the Director Defendants’ decision to expand the Board was to accomplish
its primary purpose: to minimize the impact of the election of MM’s nominees to the
board.” The Supreme Court quoted a factual finding from the Chancery Court’s oral
ruling:
By adding two additional directors, the board foreclosed the result that it feared:
The possibility of a deadlock or of MM taking control of the board. The reason is that
even if MM’s two nominees were elected at the 2002 annual meeting the current
directors would still constitute a majority of five. The result of the board’s action was to
diminish the influence of any nominees of MM that were elected, at least in numerical
terms.
The court found that the Chancery Court’s conclusions essentially meant that the
primary purpose of the defendants was that of "diminishing the influence of MM’s
nominees, if they were elected at the annual meeting."
Corporate Governance Principles
After reciting these facts and findings, the Supreme Court set out certain
"fundamental principles of corporate governance" regarding "the allocation of power
within a corporation between its stockholders and its board of directors.” In particular,
the court noted that "the stockholder franchise has been characterized as the ‘ideological
underpinning’ upon which the legitimacy of the directors[‘] managerial power rests.” The
court then discussed the proper standard of judicial review of director action in light of
these principles. First, the court noted that the business judgment rule was a "recognition
of the statutory authority" that boards possess to manage a corporation. Under that
standard, courts generally defer to director decisions. The court went on to explain why
Blasius held that this deferential standard was not appropriate when the director action
in question was taken for the "primary purpose of impeding or interfering with the
145
from the fact that Liquid Audio has a staggered board of directors.
The Supreme Court Reverses
The Supreme Court, in reversing the holding of the Chancery Court, focused not
simply on the ability of MM to control the board pursuant to the proxy contest, but on
the directors’ belief as to the ultimate effect on control that the proxy contest might have.
In particular, the court focused on interrogatories and testimony of the defendants that
indicated that the director defendants were concerned that two of the incumbent
directors would resign from the Liquid Audio board if the MM nominees were elected,
resulting in MM’s gaining control of the board. The court stated that the primary purpose
was to minimize the impact of the MM proxy solicitation: "The record also reflects that
the timing of the Director Defendants’ decision to expand the Board was to accomplish
its primary purpose: to minimize the impact of the election of MM’s nominees to the
board.” The Supreme Court quoted a factual finding from the Chancery Court’s oral
ruling:
By adding two additional directors, the board foreclosed the result that it feared:
The possibility of a deadlock or of MM taking control of the board. The reason is that
even if MM’s two nominees were elected at the 2002 annual meeting the current
directors would still constitute a majority of five. The result of the board’s action was to
diminish the influence of any nominees of MM that were elected, at least in numerical
terms.
The court found that the Chancery Court’s conclusions essentially meant that the
primary purpose of the defendants was that of "diminishing the influence of MM’s
nominees, if they were elected at the annual meeting."
Corporate Governance Principles
After reciting these facts and findings, the Supreme Court set out certain
"fundamental principles of corporate governance" regarding "the allocation of power
within a corporation between its stockholders and its board of directors.” In particular,
the court noted that "the stockholder franchise has been characterized as the ‘ideological
underpinning’ upon which the legitimacy of the directors[‘] managerial power rests.” The
court then discussed the proper standard of judicial review of director action in light of
these principles. First, the court noted that the business judgment rule was a "recognition
of the statutory authority" that boards possess to manage a corporation. Under that
standard, courts generally defer to director decisions. The court went on to explain why
Blasius held that this deferential standard was not appropriate when the director action
in question was taken for the "primary purpose of impeding or interfering with the
145
