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additional four nominees failed. As a result, the MM nominees were elected to two of
seven directorships.

The Chancery Court Holding

Following the trial, the Chancery Court ruled from the benCh. The Court first found
that the "primary reason" for the increase from five to seven was the board’s sincere
belief that it was in the best interests of the corporation to pursue the proposed stock-
for-stock merger, which was opposed by MM. The board believed that the election of
two MM nominees might cause one or more of the current board members to resign,
resulting in either a deadlock or control by the nominees of MM: "Either scenario could
jeopardize the pending merger, which the incumbent board favored. That was the
primary reason. ... 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 then discussed the Blasius decision, where the Court of Chancery held
that when a board of directors acts for the primary purpose of interfering with or
impeding the effective exercise of a stockholder vote, the board action will not be
sustained unless the board can demonstrate "a compelling justification for such action.”
In Blasius, the court invalidated board action adding two members following a
stockholder’s commencement of a consent solicitation. The consents would have
expanded the board from seven to 15 and filled the eight newly created directorships
with nominees of the stockholder. The corporation’s charter limited the number of
directors to fifteen, and the board acted to increase the number of directors from seven
to nine, and to immediately fill the new seats. This made it impossible for the stockholder
to gain a majority control of the board through its consent solicitation. The court found
that this act thwarted the exercise of the stockholders’ right to vote. Accordingly, even
though the board was acting in good faith and believed that the insurgent stockholder’s
plan was not in the best interests of the corporation and its stockholders, the court held
that the board’s action could not be upheld unless a "compelling justification" were
shown. Furthermore, the court concluded that no such justification had been shown.

On its face, the action taken by the Liquid Audio board was similar to the action
taken by the board in Blasius: following an insurgent’s announced proxy contest for seats
on a staggered board, the incumbent board expanded the board by two. The Chancery
Court, however, found that Blasius was distinguishable because the board action did not
affect the ability of the stockholders to elect a majority of the board:

This addition to the board did not impact the shareholder vote or shareholder
choices in any significant way. I say that because the shareholders had the option of
electing two MM nominees to a seven-person board, and they also had the option of
electing six MM nominees to an expanded 11-person board, assuming that the

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