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Delaware Supreme Court Decision on Protection of the Stockholder Franchise

By Frederick H. Alexander
35 Securities Regulation and Law Report 53, February 10, 2003

In MM Companies, Inc. v. Liquid Audio, Inc.,9 the Delaware Supreme Court
reversed a decision of the Chancery Court after trial. The decision has three interesting
aspects for corporate practitioners. First, its application of the Blasius standard, which
restricts the ability of directors to take action that interferes with the stockholder
franchise, provides significant guidance as to when that standard will be applied. Second,
the decision reiterates the significant policy underpinnings of that standard. Finally, the
decision discusses the relationship of the Blasius standard to the standard established in
Unocal Corp. v. Mesa Petroleum Co., which subjects defensive actions by directors to a
higher standard of review than the business judgment rule.

The Facts

Liquid Audio was a publicly traded Delaware corporation. MM was a stockholder
that had sought to obtain control of the company for more than a year. The Liquid Audio
board of directors was staggered into three classes, one of which was up for election each
year. Such a structure is intended to provide for continuity on the board and to prevent
a change in control from being effected by a single election. The board had a total of five
members.

In October of 2001, MM sent a letter to the Liquid Audio board indicating its
interest in acquiring the company for $3.00 per share. In November of 2001, MM
announced that it was planning to nominate candidates for the two-member class of
directors that was up for election at Liquid Audio’s next annual meeting. In December,
MM also announced its intention to seek to amend the by-laws to increase the size of the
board from five to nine, which required a two-thirds vote of the stockholders. MM also

 Frederick H. Alexander is a partner at Morris, Nichols, Arsht & Tunnell in Wilmington, Delaware.
He is a member of the Corporation Law Council of the Delaware State Bar Association and is a co-author of
BNA Corporate Practice Series Portfolio No. 1-3rd, "The Delaware Corporation: Legal Aspects of
Organization and Operation."

9 Del. Supr., No. 606, 2002 (Jan. 7, 2003) [Now reported at 813 A.2d 1118 — E.K.].

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