Coster v. UIP Companies, Inc.

• Court: Supreme Court of Delaware
• Decided: June 28, 2023
• Docket: 163, 2022
• Status: Published

Opinion

IN THE SUPREME COURT OF THE STATE OF DELAWARE

MARION COSTER, § § No. 163, 2022 Plaintiff Below, § Appellant, § § Court Below: Court of Chancery v. § of the State of Delaware § UIP COMPANIES, INC., § C.A. No. 2018-0440 STEVEN SCHWAT, and § CONSOLIDATED SCHWAT REALTY, LLC, § § Defendants Below, § Appellees. §

Submitted: March 29, 2023 Decided: June 28, 2023

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, Justices; and ADAMS, Judge,1 constituting the Court en Banc.

Upon appeal from the Court of Chancery of the State of Delaware: AFFIRMED.

Max B. Walton, Esquire (argued), Kyle Evans Gay, Esquire, CONNOLLY GALLAGHER LLP, Newark, Delaware; Michael K. Ross, Esquire, Serine Consolino, Esquire, AEGIS LAW GROUP LLP, Washington, D.C., for Plaintiff Below, Appellant Marion Coster.

Deborah B. Baum, Esquire (argued), PILLSBURY WINTHROP SHAW PITTMAN LLP, Washington, D.C.; Stephen B. Brauerman, Esquire, Elizabeth A. Powers, Esquire, BAYARD, P.A., Wilmington, Delaware, for Defendants Below, Appellees Steven Schwat, Schwat Realty, LLC, Peter Bonnell, Bonnell Realty, LLC, and Steven Cox.

1 Justice Vaughn and Judge Adams are sitting by designation under Del. Const. art. IV, §§ 38 & 12, respectively, and Supreme Court Rules 2(a) and 4(a), to complete the quorum. Neal C. Belgam, Esquire, Kelly A. Green, Esquire, Jason Z. Miller, Esquire, SMITH KATZENSTEIN & JENKINS LLP, Wilmington, Delaware, for Defendants Below, Appellee UIP Companies, Inc.

2 SEITZ, Chief Justice:

This appeal returns to the Supreme Court following remand. As the Court of

Chancery recognized in its latest opinion, “[m]any aspects of the facts of this case

were vexingly complicated or unique” and “the case gave rise to many close calls

on which reasonable minds could differ.”2 We agree with the court’s assessment

and appreciate its work to address the issues remanded for reconsideration. We also

agree with the court’s observation that the dispute has been driven by hard feelings

on both sides – the untimely death of Marion Coster’s husband, Wout Coster, who

could not secure his wife’s financial security before his death, and the UIP board’s

desire to preserve UIP’s operational viability after the loss of one of its major

stockholders and founding members.

As described in our first opinion and in the Court of Chancery opinions,

Marion Coster and Steven Schwat – the two UIP stockholders who each owned fifty

percent of the company – deadlocked after attempting several times to elect

directors. In response to the director election deadlock, Marion Coster filed a

petition for appointment of a custodian for UIP. The UIP board responded by issuing

stock to a long-time employee representing a one-third interest in UIP. The stock

issuance diluted Coster’s ownership interest, broke the deadlock, and mooted the

2 Coster v. UIP Cos., Inc., 2022 WL 1299127, at *14 (Del. Ch. May 2, 2022) [hereinafter Coster II]. 3 custodian action. Coster countered by requesting that the Court of Chancery cancel

the stock issuance.

After trial, the Court of Chancery found that the stock sale met the most

exacting standard of judicial review under Delaware law – entire fairness. As a

result, according to the court, review under any other standard was unnecessary. On

appeal, we concluded that the court erred by evaluating the stock sale solely under

the entire fairness standard of review. We reasoned that, even though the stock sale

price might have been entirely fair, issuing stock while a contested board election

was taking place interfered with Coster’s voting rights as a half owner of UIP.

Therefore, the court needed to conduct a further review to assess whether the board

approved the stock issuance for inequitable reasons. If not, the court still had to

decide whether the board, even if it acted in good faith, approved the stock sale to

thwart Coster’s leverage to vote against the board’s director nominees and to moot

the custodian action. To uphold the stock issuance under those circumstances, the

board had to demonstrate a compelling justification to interfere with Coster’s voting

rights.

On remand, the Court of Chancery found that the UIP board had not acted for

inequitable purposes and had compelling justifications for the dilutive stock

issuance. Among the justifications for the stock sale was the threat that a custodian

4 would pose to UIP due to termination provisions in many of its key contracts. It also

cemented UIP’s relationship with an employee critical to the success of the business.

In this second appeal after remand, Coster makes two primary arguments –

first, the Court of Chancery misinterpreted Schnell3 when it restricted its review for

inequitable conduct to “the limited scenario wherein the directors have no good faith

basis” for board action;4 and second, the court erred when it found that the board had

a compelling justification for the stock issuance. As explained below, the Court of

Chancery did not err as a legal matter, and its factual findings are not clearly wrong.

Thus, we affirm the Court of Chancery’s remand decision.

I.

To recap the events leading to this appeal, UIP Companies, Inc. is a real estate

services company founded in 2007 by Steven Schwat, Cornelius Bruggen, and Wout

3 For those unfamiliar with the Delaware cases referred to in the opinion that now have shorthand references, Schnell refers to Schnell v. Chris Craft Industries, Inc. 285 A.2d 437, 439 (Del. 1971), where Justice Herrmann famously wrote that “inequitable action does not become permissible simply because it is legally possible” and management cannot inequitably manipulate corporate machinery to perpetuate itself in office and disenfranchise the stockholders. Blasius refers to Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651, 659–61 (Del. 1988), where Chancellor Allen wrote that directors who interfere with board elections, even if in good faith, must have a compelling justification for their actions. And Unocal refers to Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985), where the Supreme Court used an enhanced standard of review to decide whether the directors “had reasonable grounds for believing that a danger to corporate policy and effectiveness existed” and that the board’s response “was reasonable in relation to the threat posed.” 4 Coster II, at *9. 5 Coster (“Wout”).5 The company operates through various subsidiaries that provide

a range of services to investment properties in the Washington, D.C. area. Many of

these properties are held in special purpose entities (“SPEs”) that UIP owns

alongside third-party investors.

Each of the three founders initially controlled a third of UIP’s shares. In 2011,

Bruggen left UIP and tendered his shares to the Company at no cost. This left

Schwat and Wout as half owners of UIP.

In 2013, Wout notified Schwat and Peter Bonnell, a senior UIP executive, that

he had been diagnosed with leukemia. Shortly after, the group began negotiations

for a buyout in which Bonnell and Heath Wilkinson, another UIP executive, would

purchase Wout’s shares in the company. Bonnell had previously been promised

equity in UIP on multiple occasions. As the prospect for promotion had stalled,

Bonnell and Wilkinson had both considered leaving UIP. Therefore, beyond

providing Wout with an exit, the buyout was also useful in incentivizing Bonnell

and Wilkinson to stay.

Unfortunately, negotiations were unsuccessful. While the parties agreed on a

non-binding term sheet in April 2014 in which Wout would receive $2,125,000 for

5 Unless otherwise stated, the facts are drawn from the Court of Chancery’s January 28, 2020 opinion, Coster v. UIP Cos., Inc., 2020 WL 429906, at *1 (Del. Ch. Jan. 28, 2020), rev’d, 255 A.3d 952 (Del. 2021) [hereinafter Coster I]. 6 his half of UIP shares, the parties continued to go back and forth over the deal terms.6

Wout did not feel comfortable with the terms so “[n]o deal was ever finalized.”7

Wout passed away on April 8, 2015, and his widow, Marion Coster (“Coster”),

inherited his UIP interests.

Immediately after Wout’s death, Schwat and Bonnell continued exploring

buyout options with Coster. Discussions continued throughout 2015 with no

resolution. During this time, Coster became “very distressed about her financial

situation” as she had not received income distributions or the benefits she had

expected.8 By May 2016, “Coster appeared primarily interested in a lump sum

buyout or arrangement that would provide her with a consistent stream of income.”9

A July 2016 email reveals three “divorce” options that Bonnell had identified

for Coster.10 These included a lump sum buyout, an installment buyout, and a

distribution scheme.11 Seeking more information on these options and the status of

any current outstanding distributions, Mike Pace, a friend of Wout and one of

Coster’s lawyers, reached out to Bonnell regarding the profitability of the UIP

6 See Coster I, at *3. While it would be revised later, this initial valuation valued the company at $4,250,000. See id. at *4. 7 Id. at *5. 8 App. to Opening Br. at A77; Coster v. UIP Cos., Inc., 255 A.3d 952 (Del. 2021) [hereinafter Coster Appellate Decision]. 9 Coster Appellate Decision, at 955. 10 App. to Answering Br. at B34. 11 See id. at B34–35. 7 operating companies.12 Bonnell responded that the “companies operate close to

even” and that Schwat also “ha[d] not taken any distributions . . . after Wout’s

passing” since “there [had not] been much positive revenue generated.”13 As the

Court of Chancery noted, “Pace did not believe that Bonnell was forthcoming about

the operating companies’ true profitability.”14 Negotiations between the parties

continued throughout 2016 and into 2017 as Coster sought an independent valuation

of UIP.

A.

In August 2017, Coster provided UIP with a $7.3 million valuation and

demanded to inspect UIP books and records. Coster followed up with a second

inspection demand in October 2017. Then, “[a]fter much back and forth about the

adequacy of the documents provided, on April 4, 2018, Coster called for a UIP

stockholders special meeting to elect new board members.”15 At this time, UIP had

a five-member board composed of Schwat, Bonnell, and Stephen Cox, UIP’s Chief

12 See App. to Opening Br. at A79 (“You had indicated you would be forwarding the list of the remaining ‘Wout projects’ along with the target cash-out date and the expected cash-out amount. (We all recognize that such projections are just that and normal business risks could modify both the pay-out and the date.)”); id. at A76 (“From what you say, revenue from these companies has been sufficient to cover salaries, including, when [Wout] was fully involved, about $250,000/ year to Wout. How has this ‘Wout salary money’ been spent since he’s been gone? Wouldn’t this excess be available for distribution to the two owners?”). 13 Id. at A77. 14 Coster I, at *6. 15 Coster Appellate Decision, at 956. 8 Financial Officer. Two seats were vacant due to Wout’s passing and Cornelius

Bruggen’s departure in 2011.

The stockholder meeting took place on May 22, 2018. Coster, represented by

counsel, raised multiple motions affecting the size and composition of the board.

Predictably, each of Coster’s motions failed due to Schwat’s opposition. Later that

day, the UIP board reduced the number of board seats to three through unanimous

written consent.

A second stockholder meeting followed on June 4, 2018. The meeting also

ended in deadlock as Schwat and Coster each opposed the other’s respective

motions. With the deadlock, Schwat, Bonnell, and Cox remained UIP’s directors.

B.

Coster filed a complaint in the Court of Chancery seeking appointment of a

custodian under 8 Del. C. § 226(a)(1) (the “Custodian Action”).16 Coster’s

“complaint mainly sought to impose a neutral tie-breaker to facilitate director

elections, but it also lodged allegations against Schwat” about the lack of

16 8 Del. C. § 226 allows for the Court of Chancery to appoint a custodian “upon application of any stockholder . . . when . . . [a]t any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors.” 9 distributions and transparency into the company’s affairs.17 Coster “sought the

appointment of a custodian with broad oversight and managerial powers.”18

Coster’s request for a “broadly empowered” custodian rather than one

specifically tailored to target the stockholder deadlock “posed new risks to the

Company.”19 As the Court of Chancery would later find, “[t]he appointment of a

custodian with these powers would have given rise to broad termination rights in

SPE contracts and threatened UIP’s revenue stream, as UIP’s business model is

dependent on the continued viability of those contracts.”20 “Facing this threat to the

Company,” the UIP board decided to “issue the equity that they had long promised

to Bonnell.”21 Having conducted its own valuation that “valued a 100-percent,

noncontrolling equity interest in UIP at $123,869,” the UIP board offered, and

Bonnell purchased, a one-third interest in the company for $41,289.67 (the “Stock

Sale”).22

17 Coster I, at *10; see App. to Opening Br. at A94 (“[D]espite the apparent success of the Company in recent years, [Coster] has been denied any distributions from the Company since 2015, the year her husband, a founder, died. Over the same period, Mrs. Coster believes the current Chairman of the Board and President of the Company, Defendant Steven Schwat, has received a generous salary from the Company and is enjoying significant benefit from his 50% stake. Mr. Schwat has further prevented Mrs. Coster from gaining a meaningful view into the Company’s financial affairs, and has barred her from any representation on the Board.”). 18 Coster I, at *10. 19 Coster II, at *4. 20 Id. 21 Id. at *5. 22 Coster Appellate Decision, at 957. 10 The Stock Sale diluted Coster’s ownership interest from one half to one third

and negated her ability to block stockholder action as a half owner of the company.

The Stock Sale also mooted the Custodian Action. Coster responded by filing suit

and sought to cancel the Stock Sale.

C.

In its opinion following trial, the Court of Chancery upheld the Stock Sale

under the entire fairness standard of review.23 According to the court, once the Stock

Sale “satisfie[d] Delaware’s most onerous standard of review,” no further review

was required.24 The deadlock broken, the court did not need to consider appointing

a custodian and dismissed the action.

D.

In the first appeal, this Court did not disturb the Court of Chancery’s entire

fairness decision but remanded with instructions to review the Stock Sale under

Schnell and Blasius. As explained in our first decision, while entire fairness is

“Delaware’s most onerous standard of review,” it is “not [a] substitute for further

equitable review” under Schnell or Blasius when the board interferes with director

elections:

In a vacuum, it might be that the price at which the board agreed to sell the one-third UIP equity interest to Bonnell was entirely fair, as was the process to set the price for the stock. But “inequitable action does not

23 Coster I, at *12. 24 Id. at *14. 11 become permissible simply because it is legally possible.” If the board approved the Stock Sale for inequitable reasons, the Court of Chancery should have cancelled the Stock Sale. And if the board, acting in good faith, approved the Stock Sale for the “primary purpose of thwarting” Coster’s vote to elect directors or reduce her leverage as an equal stockholder, it must “demonstrat[e] a compelling justification for such action” to withstand judicial scrutiny. After remand, if the court decides that the board acted for inequitable purposes or in good faith but for the primary purpose of disenfranchisement without a compelling justification, it should cancel the Stock Sale and decide whether a custodian should be appointed for UIP.25

In the first appellate decision, we recounted the “undisputed facts or facts

found by the court” that could “support the conclusion, under Schnell, that the UIP

board approved the Stock Sale for inequitable reasons.”26 Those facts included that

“[t]he Stock Sale occurred while buyout negotiations stalled between UIP’s two

equal stockholders,” that “[t]he Stock Sale entrenched the existing board in control

of UIP,” and the Court of Chancery’s finding that “Defendants obviously desired to

eliminate Plaintiff’s ability to block stockholder action, including the election of

directors, and the leverage that accompanied those rights.”27 We recognized,

however, “that the [Court of Chancery] made other findings inconsistent with this

conclusion,” and therefore gave the Court of Chancery the “opportunity to review

25 Id. at 953–54 (quoting Schnell, 285 A.2d at 439 then quoting Blasius, 564 A.2d at 661–62). 26 Id. at 963–64. 27 Id. (quoting Coster I, at *12). 12 all of its factual findings in any manner it sees fit in light of its new focus on

Schnell/Blasius review.”28

E.

On remand, the Court of Chancery found that the UIP board had not acted for

inequitable purposes under Schnell and had compelling justifications for the Stock

Sale under Blasius. For Coster’s Schnell claim, the court held that “the UIP board

had multiple reasons for approving the Stock Sale” and that “the UIP board’s

decision did not totally lack a good faith basis.”29 The court also found that the UIP

board was primarily motivated by “retaining and rewarding Bonnell, mooting the

Custodian Action, and undermining [Coster’s] leverage.”30

Turning to Blasius review, the court concluded that “[i]n the exceptionally

unique circumstances of this case, Defendants have met the onerous burden of

demonstrating a compelling justification.”31 The court’s compelling justification

analysis largely borrowed from Unocal’s reasonableness and proportionality test for

defensive measures adopted by a board in response to a takeover threat.32 As the

court explained:

To satisfy the compelling justification standard, “the directors must show that their actions were reasonable in relation to their legitimate

28 Id. at 964. 29 Coster II, at *10. 30 Id. 31 Id. at *12. 32 Unocal, 493 A.2d at 955. 13 objective, and did not preclude the stockholders from exercising their right to vote or coerce them into voting a particular way.” “In this context, the shift from ‘reasonable’ to ‘compelling’ requires that the directors establish a closer fit between means and ends.”33

The court found that the threat posed by the Custodian Action was “an existential

crisis” that justified the UIP board’s actions and “that the Stock Sale was

appropriately tailored to achieve the goal of mooting the Custodian Action while

also achieving other important goals, such as implementing the succession plan that

Wout favored and rewarding Bonnell.”34

II.

In her second appeal, Coster has challenged the Court of Chancery’s ruling on

both remand questions. This Court reviews the Court of Chancery’s legal

conclusions de novo but defers to the Court of Chancery’s factual findings supported

by the record.35 We will set aside a trial court’s factual findings only if “they are

clearly wrong and the doing of justice requires their overturn.”36 “When there are

two permissible views of the evidence, the factfinder’s choice between them cannot

be clearly erroneous.”37

33 Coster II, at *11 (quoting Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810–11 (Del. Ch. 2007) then quoting Pell v. Kill, 135 A.3d 764, 787 (Del. Ch. 2016)). 34 Id. at *12–13. 35 See Backer v. Palisades Growth Cap. II, L.P., 246 A.3d 81, 94 (Del. 2021). 36 Id. at 95 (quoting DV Realty Advisors LLC v. Policemen’s Annuity & Ben. Fund of Chi., 75 A.3d 101, 108 (Del. 2013)). 37 Id. (quoting RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015)). 14 A.

In her lead argument on appeal, Coster argues that the Court of Chancery erred

when it limited its Schnell review to board action totally lacking a good faith basis.

To frame our analysis, it is helpful to review again the circumstances of Schnell and

Blasius. Both cases involved board action that interfered with director elections in

contests for control – Schnell, a proxy solicitation, and Blasius, a consent

solicitation.

In Schnell, the incumbent Chris-Craft board faced the prospect of a difficult

proxy fight to retain their seats.38 In response to the threat to their tenure as board

members, the board accelerated the annual meeting date and moved the meeting to

a more remote location. The director defendants mounted no real defense to the

Court of Chancery suit except to argue that their actions did not violate the Delaware

General Corporation Law (“DGCL”) or Chris-Craft’s bylaws and were therefore

legal.

The Court of Chancery was persuaded by the board’s legal authorization

defense and dismissed the case. On appeal, the Supreme Court took a dim view of

the board’s intentional efforts to obstruct the insurgent’s proxy contest. As the Court

held, even though the board’s actions met all legal requirements, the Chris-Craft

board was “attempt[ing] to utilize the corporate machinery and the Delaware Law

38 285 A.2d at 439. 15 for the purpose of perpetuating itself in office; and, to that [sic] end, for the purpose

of obstructing legitimate efforts of dissident stockholders in the exercise of their

rights to undertake a proxy contest against management.”39 In Justice Herrmann’s

oft-quoted words, “inequitable action does not become permissible simply because

it is legally possible.”40 The Supreme Court ordered the Chris-Craft board to

reinstate the original meeting date.

In Blasius, the Court of Chancery explored how Schnell operates in contested

election cases, and specifically how Schnell was not the end of the road for judicial

review of good faith board actions that interfered with director elections.41 Like

Schnell, Blasius involved an incumbent board facing a consent solicitation aimed at

replacing a majority of the board. Atlas Industries had a staggered board. Only

seven of the authorized fifteen board seats were occupied. With a majority of

stockholders behind the effort, an insurgent could in one action amend the

company’s bylaws, increase the board size to fifteen, and elect a new board majority

of eight members.

If the Atlas board had acted on a clear day to establish new seats and to fill

the vacancies, the circumstances would have been different. But for the Atlas board,

the skies were cloudy, and it was raining. It faced a serious consent solicitation. In

39 Id. at 439. 40 Id. 41 Blasius, 564 A.2d at 658. 16 response, the board added two seats and filled the newly created positions with

directors friendly to management. Now, Blasius had to win not one, but two

elections to control the board.

Two other points were important to the court’s decision. First, Blasius enticed

stockholders to vote for its nominees with a business plan that would give

stockholders upfront cash and a later debenture redemption, all premised on a highly

leveraged and speculative business strategy. And second, the Atlas board had its

own turn-around strategy that it believed in good faith was a better choice for Atlas

stockholders than Blasius’ risky plan that could lead to Atlas’ bankruptcy.

Blasius argued that the board’s corporate maneuvers were “a selfishly

motivated effort to protect the incumbent board from a perceived threat to its control

of Atlas.”42 The Chancellor turned to Schnell to evaluate this claim. According to

the court, if the board was not “principally motivated” to interfere with the consent

solicitation and instead “had taken action completely independently of the consent

solicitation, which merely had an incidental impact upon the possible effectuation

of any action authorized by the shareholders, it is very unlikely that such action

would be subject to judicial nullification.”43 On the other hand, if “there was no

policy dispute or issue that really motivated this action” or “policy differences were

42 Id. at 657. 43 Id. at 655. 17 pretexts for entrenchment for selfish reasons,” then the court “would not need to

inquire further.”44 The Atlas board’s actions “would constitute a breach of duty.”45

The Chancellor found that the Atlas board did not act out of a desire to

entrench the existing board but out of a good faith belief that Blasius was an

existential threat to Atlas and its stockholders. Thus, under Schnell, the Atlas board

was not principally motivated to interfere with the election of directors for selfish

reasons. But the court was still left with the fact that the Atlas board, even if well-

intentioned, had nonetheless acted to thwart Blasius’s consent solicitation. Thus, the

“real question the case present[ed]” was whether a board, even if acting in good

faith, “may validly act for the principal purpose of preventing the shareholders from

electing a majority of new directors.”46

To answer the ultimate question, the court had to answer another question –

whether there should be a “per se rule that would strike down, in equity, any board

action taken for the primary purpose of interfering with the effectiveness of a

corporate vote.”47 A rigid rule had the advantage of “clarity and predictability.”48

The disadvantage of such a rule, the Chancellor noted, was that “it may sweep too

broadly.”49 In two relatively recent cases at the time, the court had enjoined board

44 Id. at 658. 45 Id. 46 Id. 47 Id. at 661. 48 Id. 49 Id. 18 acts done for the primary purpose of impeding the exercise of stockholder voting

power.50 In those cases, the court held that “the board bears the heavy burden of

demonstrating a compelling justification for such action.”51 Applying this standard

instead of a per se invalidity rule, according to the Chancellor, was “somewhat more

consistent with the recent Unocal case.”52

Ultimately, Chancellor Allen concluded that, even if the board acted in good

faith, it did not justify its interference with the stockholder franchise. The court did

not propose to “invalidat[e], in equity, every board action taken for the sole or

primary purpose of thwarting a shareholder vote.”53 But the board could not rely on

the justification that it “knows better than do the shareholders what is in the

corporation’s best interest.”54

In the years since the Supreme Court and the Court of Chancery decided these

iconic cases, the courts deployed Schnell to police board action that, although

technically legal, was motivated for selfish reasons to interfere with corporate

50 See Aprahamian v. HBO & Co., 531 A.2d 1204, 1208 (Del. Ch. 1987); Phillips v. Insituform of N. Am., Inc., 1987 WL 16285, at *8 (Del. Ch. Aug. 27, 1987). 51 Blasius, 564, A.2d at 661. 52 Id. at 662 (quoting Phillips, 1987 WL 16285, at *8). 53 Id. 54 Id. at 663; see also Stahl v. Apple Bancorp, Inc., 579 A.2d 1115, 1124 (Del. Ch. 1990) (rejecting “the notion that the prospect that the shareholders might vote differently than the board recommends can alone constitute any threat to a corporate interest”). 19 elections and stockholder voting.55 It was reserved, however, for “those instances

that threaten the fabric of the law, or which by an improper manipulation of the law,

would deprive a person of a clear right.”56 In other words, “[a]lmost all of the post-

55 See Backer, 246 A.3d at 96 (“[E]ven if the Bäckers complied with the technical requirements under the Company’s corporate governance documents, the board’s actions were nonetheless invalid under equitable principles because the Bäckers affirmatively deceived Anderson to create a quorum.”); Full Value Partners, L.P. v. Swiss Helvetia Fund, Inc., 2018 WL 2748261, at *4 (Del. Ch. June 7, 2018) (finding claim based on Schnell that incumbent board unequally applied a qualification bylaw to shareholder nominees to be meritorious when filed for purposes of the corporate benefit doctrine); Portnoy v. Cryo-Cell Int’l, Inc., 940 A.2d 43, 79 (Del. Ch. 2008) (finding delay of vote count to allow more time for management slate to secure votes was inequitable); Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1081 (Del. Ch. 2004), aff’d, 872 A.2d 559 (Del. 2005) (finding bylaw amendments implemented by controller to facilitate a favored transaction and neutralize board’s opposition “were clearly adopted for an inequitable purpose and have an inequitable effect”); Linton v. Everett, 1997 WL 441189, at *10 (Del. Ch. July 31, 1997) (“[D]irectors’ decision to provide only thirty days’ notice, which would inevitably trigger the advance notice provision in a manner foreseeably adverse to any shareholders desiring to nominate an opposing slate, constituted an inequitable manipulation of the election process. Accordingly, the election must be set aside and a new election ordered.”); WNH Invs., LLC v. Batzel, 1995 WL 262248, at *8 (Del. Ch. Apr. 28, 1995) (ruling “that defendants’ purported purpose for the dilutive issuance is a pretext and their true purpose was to defeat plaintiff’s challenge to their control”); Hubbard v. Hollywood Park Realty Enterprises, Inc., 1991 WL 3151, at *13 (Del. Ch. Jan. 14, 1991) (ordering waiver of an advance notice by-law to allow shareholders to nominate an opposing director slate in response to a material change in company policy instituted after nomination deadline); Aprahamian, 531 A.2d at 1208 (enjoining the incumbent board from further delaying the company’s annual stockholders meeting given the timing, “on the eve of the meeting, upon learning that they might be turned out of office”); Lerman v. Diagnostic Data, Inc., 421 A.2d 906, 914 (Del. Ch. 1980) (holding that a 70-days’ notice bylaw was inequitable in a situation where the board announced the annual meeting only 63 days before it was to occur, rendering compliance impossible). 56 Alabama By-Prod. Corp. v. Neal, 588 A.2d 255, 258 n.1 (Del. 1991); see also In re WeWork Litig., 250 A.3d 976, 996 (Del. Ch. 2020) (“[O]ur ‘case law is indicative of a healthy inclination on the part of the judiciary to employ the Schnell principle of “legal but inequitable” only sparingly,’ and typically does so only when ‘inequitable conduct has occurred but is not plainly remediable under conventional fiduciary doctrines.’” (citation omitted)); AB Value Partners, LP v. Kreisler Mfg. Corp., 2014 WL 7150465, at *5 (Del. Ch. Dec. 16, 2014) (holding that “[p]laintiff must provide compelling facts indicating that enforcement of the [advance notice bylaw] is inequitable” to enjoin application of an otherwise valid bylaw through Schnell); Accipiter Life Scis. Fund, L.P. v. Helfer, 905 A.2d 115, 124-26 (Del. Ch. 2006) (finding Schnell inapplicable in case where directors “did not act with the specific intent to limit the stockholder’s rights to nominate and elect a dissident slate”); Applebaum v. Avaya, Inc., 812 A.2d 880, 886 (Del. 2002) 20 Schnell decisions involved situations where boards of directors deliberately

employed various legal strategies either to frustrate or completely disenfranchise a

shareholder vote.”57 While the Supreme Court was a bit hyperbolic to say that only

claims that tear the fabric of our law come within Schnell, the Chancellor was correct

in this case to cabin Schnell and its equitable review to those cases where the board

acts within its legal power, but is motivated for selfish reasons to interfere with the

stockholder franchise.58

The Court of Chancery in this case also interpreted Blasius with a sensitivity

to how, in practice, the Supreme Court and the Court of Chancery have effectively

folded Blasius into Unocal review. As discussed earlier, Chancellor Allen in Blasius

(distinguishing the requirement to treat shareholders equitably under Schnell from an obligation to treat holders of fractional shares equally in a reverse stock split); Williams v. Geier, 671 A.2d 1368, 1384 (Del. 1996) (refusing to apply Schnell where a share recapitalization plan did not have entrenchment as “its sole or primary purpose”); Stahl, 579 A.2d at 1123 (“[T]he action of deferring this company’s annual meeting where no meeting date has yet been set and no proxies even solicited does not impair or impede the effective exercise of the franchise to any extent.”). 57 Stroud v. Grace, 606 A.2d 75, 91 (Del. 1992). 58 See Rosenbaum v. CytoDyn Inc., 2021 WL 4775140, at *15–17 (Del. Ch. Oct. 13, 2021) (explaining that factual circumstances drive application of Schnell and that plaintiffs’ “materially deficient” nomination notices undermine evidence of inequitable conduct by incumbent board); Strategic Inv. Opportunities LLC v. Lee Enterprises, Inc., 2022 WL 453607, at *18 (Del. Ch. Feb. 14, 2022) (“The directors enforced requirements that were long known to [plaintiff] and that could have been complied with had [plaintiff] not delayed. Those actions cannot constitute a breach of fiduciary duty and are far from the sort of inequitable conduct that would require this court to intervene.”); Saba Cap. Master Fund, Ltd. v. Blackrock Credit Allocation Income Tr., 2019 WL 2711281, at *7 (Del. Ch. June 27, 2019), aff’d in part, rev’d in part, 224 A.3d 964 (Del. 2020) (“Proof that Defendants acted with the primary purpose of thwarting Saba’s nominees under Blasius, or otherwise acted inequitably under Schnell, requires more than merely laying out the timeline of Defendants’ conduct and speculating about bad intent or purpose.”). 21 was skeptical of the board’s authority, even if acting in good faith, to protect the

stockholders from themselves when it came to corporate elections. As Chancellor

Allen noted, “[t]he shareholder franchise is the ideological underpinning upon which

the legitimacy of directorial power rests. Generally, shareholders have only two

protections against perceived inadequate business performance. They may sell their

stock . . . or they may vote to replace incumbent board members.”59 Given the stakes

involved, the court decided that the board’s justifications must be subject to

enhanced scrutiny.

Blasius first applied that enhanced review by requiring a board, even if acting

in good faith, to demonstrate a “compelling justification” for interfering with the

stockholder franchise. But another standard of review could also apply when the

board interferes with the stockholder vote during a contest for control. In Unocal

Corporation v. Mesa Petroleum Company, this Court noted the “omnipresent

specter” that incumbent directors might take action to further their own interests or

those of incumbent management “rather than those of the corporation and its

shareholders.”60 When stockholders challenge a board’s use of anti-takeover

measures, the board must show (i) that “they had reasonable grounds for believing

that a danger to corporate policy and effectiveness existed,” and (ii) that the response

59 Blasius, 564 A.2d at 659. 60 493 A.2d at 954. 22 was “reasonable in relation to the threat posed.”61 A defensive measure is an

unreasonable response in relation to the threat if it is either draconian – coercive or

preclusive – or falls outside a range of reasonable responses.62

In Stroud v. Grace, our Court first recognized how both Blasius and Unocal

review were called for in a proxy fight involving a tender offer:

Board action interfering with the exercise of the franchise often arose during a hostile contest for control where an acquiror launched both a proxy fight and a tender offer. Such action necessarily invoked both Unocal and Blasius. We note that the two “tests” are not mutually exclusive because both recognize the inherent conflicts of interest that arise when shareholders are not permitted free exercise of their franchise. . . . In certain circumstances, a court must recognize the special import of protecting the shareholders’ franchise within Unocal’s requirement that any defensive measure be proportionate and “reasonable in relation to the threat posed.” A board’s unilateral decision to adopt a defensive measure touching “upon issues of control” that purposefully disenfranchises its shareholders is strongly suspect under Unocal, and cannot be sustained without a “compelling justification.”63

After Stroud, the Court of Chancery in Chesapeake Corporation v. Shore went

a step further and suggested merging the two standards of review in contested

election cases.64 A single standard of review was possible, according to the court,

61 Id. at 955. 62 See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1367 (Del. 1995). 63 Stroud, 606 A.2d at 92 n.3 (internal citations omitted); see also Unitrin, 651 A.2d at 1379–80 (noting use of Blasius and Unocal in contests for corporate control). 64 Chesapeake Corp. v. Shore, 771 A.2d 293, 323 (Del. Ch. 2000). 23 by “infus[ing] . . . Unocal analyses with the spirit animating Blasius.”65 Stated

differently, the court would apply Unocal “with a gimlet eye out for inequitably

motivated electoral manipulation or for subjectively well-intended board action that

has preclusive or coercive effects.”66

In MM Companies v. Liquid Audio, Inc., the Supreme Court took the formal

step to incorporate Blasius “within Unocal.”67 In Liquid Audio, MM had tried for

some time to take control of Liquid Audio. When it looked likely that MM’s

nominees would gain board seats at the annual meeting, the Liquid Audio board

responded by expanding the board from five to seven members and filling the new

seats. With a staggered board, the board expansion defeated MM’s ability to control

the board following the annual meeting.

MM filed suit to enjoin the incumbent board’s action. To invalidate the

board’s expansion, the Supreme Court applied Blasius “within Unocal” as the

standard of review:

When the primary purpose of a board of directors’ defensive measure is to interfere with or impede the effective exercise of the shareholder franchise in a contested election for directors, the board must first demonstrate a compelling justification for such action as a condition precedent to any judicial consideration of reasonableness and proportionately. . . . To invoke the Blasius compelling justification standard of review within an application of the Unocal standard of review, the defensive actions of the board only need to be taken for the

65 Id. 66 Id. 67 MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118, 1129 (Del. 2003). 24 primary purpose of interfering with or impeding the effectiveness of the stockholder vote in a contested election for directors.68

Even though the Supreme Court in Liquid Audio combined Blasius and

Unocal review, it did not solve the practical problem of how to turn Unocal’s

reasonableness review and Blasius’ “primary purpose” and “compelling

justification” elements into a useful standard of review. The Blasius “compelling

justification” standard of review turned out to be unworkable in practice. Once the

court required a compelling justification to justify the board’s action, the outcome

was, for the most part, preordained.69 The Court of Chancery also skirted Blasius

review by limiting the “primary purpose” requirement and redefining what it meant

to be compelling.70

68 Id. at 1132. 69 See Chesapeake, 771 A.2d at 323 (“In reality, invocation of the Blasius standard of review usually signals that the court will invalidate the board action under examination. Failure to invoke Blasius, conversely, typically indicates that the board action survived (or will survive) review under Unocal.”); William T. Allen et. al., Function over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 BUS. LAW. 1287, 1314 (2001) (“[T]he post-Blasius decisions surfaced the reality that a sorting mechanism was needed to insulate from the severe ‘compelling justification’ test, situations where directors took direct action to influence the electoral process, but in a manner that was consistent with their legitimate authority. . . . The elements of the Unocal/Unitrin analysis therefore gave courts the tool to answer the predicate question to the application of Blasius—did the directors act with the primary purpose of disenfranchisement?”). 70 See Esopus Creek Value LP v. Hauf, 913 A.2d 593, 602–03 (Del. Ch. 2006) (“[T]he court is convinced that the board’s seemingly good faith decision to structure the . . . transaction as a bankruptcy sale does not trigger the exacting legal standard set forth in Blasius. . . . [T]he directors’ decision to structure the transaction in the manner they did cannot be traced to any entrenchment motivation.”); Apple Computer, Inc. v. Exponential Tech., Inc., 1999 WL 39547, at *5 (Del. Ch. Jan. 21, 1999) (“[T]he patent sale for which a shareholder vote was allegedly required could not serve as an opportunity for entrenchment. . . . [A] board’s unintentional failure to fulfill its supposed § 271 obligations, while perhaps constituting a breach of fiduciary duty, does not ordinarily trigger Blasius review.”); Kidsco Inc. v. Dinsmore, 674 A.2d 483, 496 (Del. Ch.), aff’d 25 In Mercier v. Inter-Tel (Del.), the Court of Chancery reflected on these

practical problems with Blasius review and took a different approach to the standard

of review. The minority stockholders in Mercier claimed that a special committee

of independent directors breached its fiduciary duties by rescheduling stockholder

special meeting to consider a proposed merger. The committee also set a new record

date. Instead of applying Schnell and Blasius “within Unocal,” the Court of

Chancery turned to Unocal and its “reasonableness” review but applied it with

greater sensitivity to the interests at stake because the “director action . . . could have

the effect of influencing the outcome of corporate director elections or other

stockholder votes having consequences for corporate control.”71

According to the court, the committee bore the burden of proof under a

modified Unocal review (1) to identify “a legitimate corporate objective” supporting

its decision to move the special stockholders’ meeting date and to change the record

date; (2) “to show that their motivations were proper and not selfish;” and (3) to

demonstrate that, even if not disloyal, “their actions were reasonable in relation to

and remanded, 670 A.2d 1338 (Del. 1995) (“[T]he board action—amending the by-law to give the board an additional 25 days to call a shareholder-initiated special meeting—was not enacted for the ‘primary purpose’ of impairing or impeding the effective exercise of the franchise, nor will the challenged board action have that effect.”); Stahl, 579 A.2d at 1122 (refusing to find defendants acted for “primary purpose of impairing or impeding the . . . the corporate franchise” despite board changing annual meeting date “in response to the risk that the combination of the proposed Stahl proxy contest and tender offer would result in a change in board control and the sale of the company.”); Pell, 135 A.3d at 787 (linking the requirement to demonstrate a compelling justification with demonstrating reasonability). 71 Mercier, 929 A.2d at 810. 26 their legitimate objective and did not preclude the stockholders from exercising their

right to vote or coerce them into voting a particular way.”72 If “for some reason, the

fit between means and end is not reasonable, the directors would also come up

short.”73 The court decided that the board’s action satisfied Unocal review because

the board’s meeting and record date changes (1) allowed additional time for

stockholders to consider the proposed merger; (2) protected the financial best

interests of the stockholders; and (3) was neither preclusive nor coercive as the

stockholders would ultimately be free to vote as they desired.74 The court refused to

enjoin the board from rescheduling the special meeting date.

As Chancellor Allen did in Blasius, the court in Mercier also rejected “[t]he

notion that directors know better than the stockholders” who should run the

company.75 The court explained that the “know better” defense, standing alone, “is

no justification at all” for the board to interfere with a contest for corporate control.76

Finally, in another important observation, the court did not believe that a more

muscular Unocal analysis should apply outside of corporate election interference

72 Id. 73 Id. at 811. The court also found that, applying Blasius review, the board had demonstrated a compelling justification for its actions. See id. at 813 (“Because it would be impossible and inappropriate for me to ignore the existence of Liquid Audio and other Delaware Supreme Court decisions continuing to refer to a compelling justification standard, . . . I conclude that the Inter– Tel Special Committee has demonstrated a compelling justification for its actions.”). 74 See id. at 788, 817–18. 75 Id. at 811. 76 Id. 27 claims or contests for control. In the court’s view, outside this context, “more

traditional tools are available to police self-dealing or improperly motivated director

action.”77

More recently, in Pell v. Kill, the Court of Chancery continued to apply a

modified Unocal review when board action interferes with a corporate election or a

stockholder’s voting rights in contests for control.78 The board in Pell was an eight-

member staggered classified board. In advance of its annual meeting and a looming

proxy fight, the incumbent board reduced from three to one the Class I director seats

up for election, ensuring their continued control of the company through a three-to-

two majority.

As in Mercier, the court examined the board’s motivations, whether the

board’s action was reasonable in relation to a legitimate objective, and whether the

board’s action was preclusive or coercive.79 The court required the board to have a

compelling justification for its action and noted that “[i]n this context, the shift from

‘reasonable’ to ‘compelling’ requires that the directors establish a closer fit between

77 Id. 78 See Pell, 135 A.3d at 787. 79 See id. 28 means and ends.”80 To do so required the court to scrutinize the directors’ action

“with a ‘gimlet eye.’”81

The court focused on the preclusive effect of the board reduction, which

guaranteed that the incumbent board would maintain control, and the lack of

adequate justification for the change. On the latter point, the court explained that

even if the board had not acted selfishly, it improperly instituted the plan so that it,

“rather than the Company’s stockholders, could determine who would serve on the

Board.”82 The court did not accept the board’s other justifications that the plan was

meant to boost board efficiency and cut costs. The court enjoined the board

reduction.83

And in Strategic Investment Opportunities LLC v. Lee Enterprises, the board

rejected a slate of board nominees for noncompliance with Lee’s advance notice

bylaw. The court found that the nominations did not comply with the contractual

requirements of the bylaw, but that further equitable review was required to ensure

the nomination rejections were equitable.84 As the nominations and advance notice

bylaw implicated board action interfering with a corporate election or a

80 Id.; see also id. (“Although linguistically reminiscent of the type of review given to suspect classifications under the federal constitution, the use of the word ‘compelling’ is not intended to signal that type of strict scrutiny.”). 81 Id. (quoting Chesapeake, 771 A.2d at 323). 82 Id. at 790. 83 See id. at 769. 84 Strategic Inv., 2022 WL 453607 at *14 (“Put simply, directors’ inequitable acts towards stockholders do not become permissible because they are legally possible.”). 29 stockholder’s voting rights in contests for control, the court applied enhanced

scrutiny. According to the court,

[t]he enhanced scrutiny standard of review requires a context- specific application of the directors’ duties of loyalty, good faith and care. Fundamentally, the standard to be applied is one of reasonableness. The defendants must “identify the proper corporate objectives served by their actions” and “justify their actions as reasonable in relation to those objectives.” If the incumbent directors actions’ “operate[d] as a reasonable limitation upon the shareholders’ right to nominate candidates for director,” they will generally be validated.85

“[W]hether labeled as Unocal or Blasius,” the court reasoned that the “inquiry

[would] be undertaken ‘with a special sensitivity’ where directors’ actions may

affect the stockholder franchise or the result of director elections.”86 The court then

found that the Lee board had a “genuine interest in enforcing its Bylaws so that they

retain meaning and clear standards” and did so “even handedly and in good faith” in

a way that did not make “compliance difficult.”87 The board had not, therefore, acted

inequitably.

In Unocal, the Supreme Court remarked that “our corporate law is not

static.”88 Experience has shown that Schnell and Blasius review, as a matter of

85 Id. at *16 (quoting Mercier, 929 A.2d at 810 then Hubbard, 1991 WL 3151, at *11). 86 Id. at *15 (quoting Kallick v. Sandridge Energy, Inc., 68 A.3d 242, 259 (Del. Ch. 2013)). 87 Id. at *17–18. 88 493 A.2d at 957. 30 precedent and practice, have been and can be folded into Unocal review to

accomplish the same ends – enhanced judicial scrutiny of board action that interferes

with a corporate election or a stockholder’s voting rights in contests for control.89

When Unocal is applied in this context, it can “subsume[] the question of loyalty

that pervades all fiduciary duty cases, which is whether the directors have acted for

proper reasons” and “thus address[] issues of good faith such as were at stake in

Schnell.”90 Unocal can also be applied with the sensitivity Blasius review brings to

protect the fundamental interests at stake – the free exercise of the stockholder vote

as an essential element of corporate democracy.91

As we explained in our earlier decision in this case, the court’s review is

situationally specific and is independent of other standards of review.92 When a

stockholder challenges board action that interferes with the election of directors or a

stockholder vote in a contest for corporate control, the board bears the burden of

proof. First, the court should review whether the board faced a threat “to an

important corporate interest or to the achievement of a significant corporate

89 See Lawrence A. Hamermesh et. al., Optimizing the World’s Leading Corporate Law: A Twenty- Year Retrospective and Look Ahead, 77 BUS. LAW. 321, 331 (2022) [hereinafter Hamermesh] (“[Unocal] provides a functional way for courts to expose and invalidate pretextual behavior even where a subjective inequitable purpose cannot be clearly established.”). 90 Mercier, 929 A.2d at 807. 91 See Chesapeake, 771 A.2d at 323; Hamermesh, at 330–31 (discussing benefits of “incorporat[ing] Blasius’ and Schnell’s spirit into the Unocal test”). 92 See Coster Appellate Decision, at 960 (explaining that further equitable review under Schnell was necessary despite Court of Chancery’s entire fairness review). 31 benefit.”93 The threat must be real and not pretextual, and the board’s motivations

must be proper and not selfish or disloyal. As Chancellor Allen stated long ago, the

threat cannot be justified on the grounds that the board knows what is in the best

interests of the stockholders.

Second, the court should review whether the board’s response to the threat

was reasonable in relation to the threat posed and was not preclusive or coercive to

the stockholder franchise. To guard against unwarranted interference with corporate

elections or stockholder votes in contests for corporate control, a board that is

properly motivated and has identified a legitimate threat must tailor its response to

only what is necessary to counter the threat. The board’s response to the threat

cannot deprive the stockholders of a vote or coerce the stockholders to vote a

particular way.94

93 See Phillips, 1987 WL 16285, at *7; Mercier, 929 A.2d at 788 (“[D]irectors fearing that stockholders are about to make an unwise decision that poses the threat that the stockholders will irrevocably lose a unique opportunity to receive a premium for their shares have a compelling justification—the protection of their stockholders’ financial best interests . . . .”); In re MONY Grp., Inc. S’holder Litig., 853 A.2d 661, 678 (Del. Ch. 2004) (“The Board clearly identified a threat—the possibility that a merger that the Board twice reasonably deemed to be in the best interests of the Company and its stockholders, and which was supported by a majority of stockholders who had voted, would fail to win approval, in large part due to a stale record date.”); Peerless, 2000 WL 1805376, at *15 (abstaining from ruling on issue of compelling justification at summary judgment stage but noting that “justifications offered . . . collectively provide some hope or reasonable possibility for satisfying the onerous compelling justification burden.”); Stahl, 579 A.2d at 1124 (justifying a delay to shareholder vote on the sale of company to allow for more time to gather information). 94 See Pell, 135 A.3d at 793 (“By pre-ordaining the results of the Annual Meeting, the Board Reduction Plan deprives stockholders of their right to vote.”); compare Stahl, 579 A.2d at 1123 (finding shareholder voting not precluded by postponement of shareholder meeting when proxies had not yet been collected and meeting date not fixed) with Aprahamian, 531 A.2d at 1208 (finding 32 Applying Unocal review in this case with sensitivity to the stockholder

franchise is no stretch for our law. Here, the UIP board issued stock to break a

director election deadlock and moot a custodian action. In Phillips v. Insituform of

North America, Inc., the Court of Chancery addressed a dilutive stock issuance

designed to thwart a consent solicitation.95 Chancellor Allen, applying Unocal

review, recognized the extraordinary nature of the board’s action and the important

interests at stake when the board issues stock to counteract a looming stockholder

vote:

Unocal teaches that the powers of the board to deal with perceived threats to the corporation extend, in special circumstances, to threats posed by shareholders themselves and a board may, in such circumstances, take action to protect the corporation even if such action discriminates against and injures the shareholder or class of shareholders that poses a special threat. However, it is extraordinary for the law to sanction the act of a fiduciary directed against the interest of his cestui que trust and, in such a case, it is necessary for a reviewing court to be satisfied that, in all of the circumstances, the act taken was justified. The Unocal court used the phrase “reasonable in relationship to the threat posed.”96

After reviewing two other cases that applied enhanced review to board action

issuing stock to interfere with the stockholder franchise, the Court of Chancery in

postponement of shareholder meeting inequitable where postponement did not serve “any significant interests of the stockholders” and could have resulted in voiding of proxies and frustration of shareholder franchise); see also Blasius, 564 A.2d at 656 (“[T]he effect of adding two directors would be to preclude stockholders from effectively implementing the Blasius proposal.”). 95 Phillips, 1987 WL 16285. 96 Id., at *7. 33 Phillips concluded that “the record supplies scant grounds to suppose that an

affirmative injury to the corporation was to be reasonably apprehended” and “no

justification has been shown that would arguably make the extraordinary step of

issuance of stock for the admitted purpose of impeding the exercise of stockholder

rights reasonable in light of the corporate benefit, if any, sought to be obtained.”97

The court in Phillips prohibited the board’s interference with the stockholder

franchise.

In our first decision, we highlighted facts in the Court of Chancery’s first

decision that might have led to the conclusion that the board acted for selfish reasons.

But we recognized that the court had made findings inconsistent with this result and

remanded to allow the Court of Chancery to reconsider its decision in light of our

97 Id., at *8 (discussing Canada S. Oils, Ltd. v. Manabi Expl. Co., 96 A.2d 810, 813 (1953) then Condec Corp. v. Lunkenheimer Co., 230 A.2d 769, 777 (1967)); see Klaassen v. Allegro Dev. Corp., 2013 WL 5967028, at *11 (Del. Ch. Nov. 7, 2013) (“Equity will protect a controlling stockholder against the dilution of its position when a board acts for an improper purpose, such as entrenchment, that is adverse to the interests of the entity and all of its stockholders, but a board otherwise does not have a duty to protect the controller. The board’s fiduciary duty of loyalty compels the directors to act in the best interests of the entity and the stockholders as a whole, and a board acting loyally may take action to oppose, constrain, or even dilute a large or controlling stockholder.”); Mendel v. Carroll, 651 A.2d 297, 304 (Del. Ch. 1994) (“Surely if the principal motivation for such dilution is simply to maintain corporate control (‘entrenchment’) it would violate the norm of loyalty. Where, however, a board of directors acts in good faith and on the reasonable belief that a controlling shareholder is abusing its power and is exploiting or threatening to exploit the vulnerability of minority shareholders, I suppose, for reasons touched upon in the cases cited in the margin, that the board might permissibly take such an action.”); Freedman v. Rest. Assocs. Indus., Inc., 1987 WL 14323, at *9 (Del. Ch. Oct. 16, 1987) (stating that, under Unocal review, “a board might be justified in issuing an option that would have the effect of diluting the voting power of an existing block.”). 34 first opinion. On remand the court did as requested. The court found that there was

“more to the story” than contained in its first opinion.98 It supplemented the earlier

factual findings with the following:

 “Without making any meaningful effort to negotiate board composition, Plaintiff filed a complaint in this Court seeking the appointment of a custodian;”99

 “Plaintiff’s request for custodial relief was extremely broad. Plaintiff did not present a tailored request for relief that targeted the stockholder deadlock. Rather, she asked the court to empower a custodian to ‘exercise full authority and control over the Company, its operations, and management;’”100

 “The threat of a court-appointed custodian so broadly empowered posed new risks to the Company. The appointment of a custodian with these powers would have given rise to broad termination rights in SPE contracts and threatened UIP’s revenue stream, as UIP’s business model is dependent on the continued viability of those contracts;”101

 “Facing this threat to the Company,” the UIP board “identified a solution” to issue equity “long promised to Bonnell” that “implent[ed] a succession plan” proposed “on a clear day;”102

 The Stock Sale would “moot the Custodian Action and eliminate the risks the appointment of a custodian posed to UIP” and would “eliminate the stockholder leverage that Plaintiff was using to try to force a buyout at a price detrimental to the Company;”103

98 Coster II, at *3. 99 Id. at *4. 100 Id. 101 Id. 102 Id. at *5. 103 Id. 35  The UIP board’s motives were not “pretexts for entrenchment for selfish reasons” or “post-hoc justifications;”104 and

 “[T]hese were genuine motivations for their actions that stood alongside the more problematic purposes that [Coster I] identified and the Appellate Decision collected.”105

After its additional fact findings, the Court of Chancery gathered the many

strands of precedent and conducted a careful review of the UIP board’s actions. The

Chancellor found that the UIP board faced a threat – which the court described as an

“existential crisis” – to UIP’s existence through a deadlocked stockholder vote and

the risk of a custodian appointment. Although the court thought that some of the

board’s reasons for approving the Stock Sale were problematic, on balance the court

held that the board was properly motivated in responding to the threat. According

to the court, the UIP board acted in good faith “to advance the best interests of UIP”

by “reward[ing] and retain[ing] an essential employee,” “implement[ing] a

succession plan that Wout had favored,” and “moot[ing] the Custodian Action to

avoid risk of default under key contracts.”106 The court also relied on its earlier

finding that the UIP board issued UIP stock to Bonnell at an entirely fair price.107

The Court of Chancery also found that the UIP board responded reasonably

and proportionately to the threat posed when it approved the Stock Sale and mooted

104 Id. (quoting Blasius, 564 A.2d at 658 then quoting Pl.’s Post-Remand Opening Br. at 2). 105 Id. 106 Id. at *10. 107 Id. 36 the Custodian Action. As it held, “in the exceptionally unique circumstances of this

case,” without the Stock Sale, the possibility that a custodian appointed with broad

powers would jeopardize key contracts caused an existential crisis at UIP. The Stock

Sale, the court held, “was appropriately tailored to achieve the goal of mooting the

Custodian Action” while implementing the succession plan and retaining Bonnell.108

And the court noted that there were more aggressive options that could have been,

but were not, pursued to break the deadlock.109

Finally, the board’s response to the existential threat posed by the stockholder

deadlock and custodian action was not preclusive or coercive. Although the Stock

Sale effectively foreclosed Coster from perpetuating the deadlock facing UIP, the

new three-way ownership of the company presented a potentially more effective way

for her to exercise actual control. As the Court of Chancery noted, Schwat and

Bonnell are not bound to vote together, meaning Coster could cast a swing vote at

stockholder meetings.110 As an equal one third owner with the two other

stockholders, Coster can join forces with either one of UIP’s other owners “at some

108 Id. at *11–12. 109 Id. at *13 (“The UIP board could have chosen more aggressive means of breaking the deadlock that would have favored Schwat. They could have issued him an additional share, thereby giving him hard voting control. They could have issued Schwat options, claiming that it was part of his compensation. They could have created an employee stock option plan and empowered Schwat to vote those shares. . . . But the UIP board did not pursue a course that would enhance Schwat’s authority. It implemented the succession plan that Wout had favored.”). 110 See Coster II, at *13 (“Bonnell could switch sides tomorrow and unite with Plaintiff to Schwat’s detriment. The record reflects that Schwat and Bonnell have disagreed on a number of business decisions”). 37 point in the future.”111 A realistic path to control of UIP negates the preclusive

impact of the Stock Sale.112

F.

Coster’s remaining arguments on appeal pick at the court’s factual findings

without success. As noted above, Coster has a steep hill to climb because we review

those findings to see whether they are “clearly wrong.” First, the main thread

running through several of her arguments is that, instead of diluting her equity, the

UIP board could have made the same arguments about an existential crisis when it

opposed the appointment of a custodian. If the court declined to appoint a custodian,

111 Air Prod. & Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48, 115 (Del. Ch. 2011). 112 See Pell, 135 A.3d at 788 (finding the reduction of board seats had a preclusive impact as it made success in a proxy contest realistically unattainable through removing classified board seats that “prevented the stockholders from establishing a new majority”); Yucaipa Am. All. Fund II, L.P. v. Riggio, 1 A.3d 310, 354 (Del. Ch. 2010), aff’d, 15 A.3d 218 (Del. 2011) (finding defensive measures not preclusive as plaintiff could “succeed in a proxy contest if it puts together a platform and a slate of candidates that are attractive to” other major stockholders); Versata Enterprises, Inc. v. Selectica, Inc., 5 A.3d 586, 601 (Del. 2010) (“[T]here is, analytically speaking, only one test of preclusivity: ‘realistically unattainable.’”); In re Gaylord Container Corp. S’holders Litig., 753 A.2d 462, 483–84 (Del. Ch. 2000) (finding a supermajority provision that made it “very difficult to amend the corporation’s bylaws and . . . other defenses without the support of [the] board” not preclusive as attaining the requisite shareholder vote was “theoretically achievable” and a newly elected board could itself amend the bylaws); Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 728 A.2d 25, 49 (Del. Ch.), aff’d sub nom. Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998) (finding that a delayed redemption provision for a shareholder rights plan did not preclude outstanding sale of company as a hostile bidder could take control of board and enter into transaction structured to close after expiration of deferred redemption provision but invalidating provision on other grounds); Unitrin, 651 A.2d at 1383 (“Even a complete implementation of the Repurchase Program, in combination with the pre-existing Supermajority Vote provision, would not appear to have a preclusive effect upon American General’s ability successfully to marshall enough shareholder votes to win a proxy contest. A proper understanding of the record reflects that American General or any other 14.9% shareholder bidder could apparently win a proxy contest with a 90% turnout.” (internal citations omitted)). 38 the argument goes, the Stock Sale would have been unnecessary to defeat the

custodian action. Coster also claims that “there was nothing exigent about allowing

Bonnell to buy equity in UIP” as there was no “evidence that Bonnell threatened to

leave UIP if he did not receive equity.”113

But the Chancellor found, under the unusual facts of this case, that it was the

pendency of the Custodian Action itself that caused the existential crisis at UIP.114

The Board was not required to risk court appointment of a custodian with broad

powers that would trigger defaults under UIP’s SPE contracts. The court also found

that the Stock Sale fulfilled a prior equity commitment to Bonnell, which encouraged

him, as a key employee, to remain with UIP. According to the court, Bonnell was

“essential to the Company’s survival.”115

Coster also contests the relevance of the “broad termination rights” in UIP’s

various contracts. At trial, Bonnell testified that a “primary investor” in each SPE

holds termination authority.116 Coster contends that “many, if not most, of the third-

party contracts relied upon by Defendants are contracts between UIP and SPEs

113 Opening Br. at 35. 114 See Coster II, at *12–13 (“To make Bonnell the swing vote, Schwat clearly believed that the Custodian Action was a threat to the Company and that Bonnell was vital to the Company.”). 115 Coster I, at *12. 116 App. to Answering Br. at B208 (“[T]he primary investor, the large investor, the 90 or 80 percent partner, has broad authority to terminate those -- to terminate those agreements.”). 39 owned and controlled by Schwat and Bonnell,”117 who supposedly control the

termination decision.

The record contains only excerpts of the UIP contracts. While these excerpts

reveal superficial links between UIP and the SPEs, as would be expected of affiliated

companies, the excerpts do not have provisions clearly placing termination rights in

Schwat or Bonnell’s control.118 The record, therefore, does not unequivocally

support Coster’s contention. Bonnell also testified at trial that an independent

primary investor in each SPE has the authority to terminate the contracts.119 UIP

also confirmed at oral argument that UIP representatives did not control the

termination rights.120

117 Opening Br. at 35. There is a link between Schwat and Bonnell and the SPEs given UIP valuation materials stating that “UIP Companies and its subsidiary primarily serve the realty businesses of its owners, as the majority of the Company’s revenue (over 95%) comes from SPEs that have Schwat Realty LLC and Coster Realty LLC as equity members” and “UIP Companies and its subsidiaries primarily serve the realty businesses of its owners, as nearly all of the Company’s revenue comes from SPEs in which the owners are investors.” Coster I, at *19 n.254 (quoting JX-67 at 7 then quoting JX-66 at 7) (emphasis added). The extent of control, however, remains unanswered as the record only contains excerpts of relevant contracts. 118 In some instances, the contract excerpts show what may be UIP-affiliated companies on both sides of the agreements. See, e.g., App. to Opening Br. at A233 (showing agreement “by and between UIP 3501 13th Street, NW LLC, a Delaware limited liability company . . . and UIP Property Management, Inc., a Maryland corporation”); id. at A240 (showing agreement “by and between UIP-NYCB FIVE, LP, a District of Columbia limited partnership . . . and UIP Asset Management, Inc, a Delaware corporation”); id. at A247 (showing agreement “by and between UIP 1841 Columbia Road, LLC, a Delaware limited liability company . . . and UIP Property Management, Inc., a Maryland corporation”). 119 See App. to Answering Br. at B208. 120 Oral Argument at 19:48, Coster v. UIP Companies, Inc., et al., No. 163, 2022 (Del. argued Mar. 29, 2023), https://livestream.com/delawaresupremecourt/events/10769099/videos /235612372 (“Important decisions like termination rights are reserved to the principal equity investor.”). 40 Finally, Coster takes issue with two other aspects of the Court of Chancery’s

decision. First, she disagrees with how the court considered Wout’s wishes for a

succession plan benefiting Bonnell. The Court of Chancery concluded that Wout

and Schwat had devised a succession plan to sell equity to Bonnell.121 Coster claims

that Wout’s intentions before his passing were irrelevant to the dispute because “it

is the current stockholders to whom a board owes a duty of loyalty.”122 The court

did not, however, place undue weight on this fact. It was merely one in a

constellation of other more compelling justifications for the Stock Sale.

Second, Coster contends that the court improperly considered her motivations

for filing the Custodian Action. The court believed that Coster “wielded [her] rights

to create leverage in buyout negotiations” and viewed the Custodian Action as

contrary to Coster’s interests.123 According to Coster, this assessment in turn

improperly influenced whether the UIP board had a compelling justification for the

Stock Sale.124 Coster’s argument, however, exaggerates the role of these findings.

The court did not rely directly on this observation in its analysis. What the court did

find dispositive was the harm caused by the possibility of a custodian appointment

121 See Coster II, at *13 (“But the UIP board did not pursue a course that would enhance Schwat’s authority. It implemented the succession plan that Wout had favored.”). 122 Opening Br. at 38. 123 Coster II, at *3. 124 Opening Br. at 38–42 (arguing it was error to find that Coster had an improper motive for filing the Custodian Action). 41 – termination of the SPE contracts – that would not have been in either UIP’s or

Coster’s best interests.125

III.

The judgment of the Court of Chancery is affirmed.

125 See Coster II, at *11 (“[T]he UIP board believed that the Custodian Action would cause defaults under the Company’s key agreements and threaten the business. No one, including Plaintiff, would benefit from that outcome.”). 42