Page 146 - מיזוגים ורכישות - פרופ' אהוד קמר תשפב

intended to solicit proxies to fill those four newly created directorships. Thus, if its
proposal to elect just the two directors, which required a mere plurality, were successful,
it would have obtained two of five directorships. If, on the other hand, its proposal to
increase the board and fill the newly created directorships, which required the more
difficult two-thirds vote, were also successful, it would obtain six of nine directorships,
thereby gaining control of the board.

In February 2002, MM reduced its offer to $2.50 per share. This offer was
rejected. The annual meeting was scheduled to take place July 1. On June 10, 2002, MM
began soliciting proxies to elect directors and to expand the board. Three days later,
Liquid Audio announced that it had entered into a merger agreement with another
corporation and, in connection therewith, postponed its annual meeting "indefinitely,"
and announced that a special meeting of stockholders would be held in the future to vote
on the merger. The merger agreement did not contemplate any cash payment to the
stockholders.

MM then amended an earlier complaint it had filed in the Chancery Court and
sought an order directing Liquid Audio to hold an annual meeting as soon as possible. A
trial was held and the court ordered that the company hold its annual meeting on Sept.
26, 2002.

On August 23, when it was apparent that MM’s nominees would be elected to two
of the five board positions, the company announced that the board had amended its by-
laws to increase the size of the board to seven and that two individuals had been
appointed to fill the newly-created positions. As a result of this change, if MM were
successful in having its two directors elected, it would have elected two-sevenths of the
board; if it were successful in its more difficult attempt to increase the size of the board,
it would end up with six of eleven directors, rather than six of nine. MM filed a new
complaint, challenging this increase in board size. At the September 26 meeting, the two
directors proposed by MM were elected, but the proposal to expand the board by an

 Practitioners take note: in order to avoid this end-run of a staggered board, the charter of a
Delaware corporation must provide that only directors can increase the number of directorships; because
stockholders can unilaterally amend by-laws, stockholders will always be able to try to "pack" the board if
the number of directors or the method of determining the number is only addressed in the by-laws. Since
the charter can only be amended with both board and stockholder approval, putting the director provision
there protects the provision from unilateral stockholder action.

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