June 30, 2021

Delaware Supreme Court Says Entire Fairness Sometimes Isn’t Enough

Earlier this week, the Delaware Supreme Court issued its decision in Coster v. UIP Companies, (Del. Sup.; 6/21), which involved a disputed share issuance used by an incumbent board to resolve a stockholder deadlock at a private company. The Court overturned a prior Chancery Court decision upholding the share issuance – even though the Chancery Court determined that the transaction satisfied the entire fairness standard.

The Supreme Court didn’t reject the Chancery Court’s conclusion as to the fairness of the share issuance, but held that in light of the circumstances, that was only the first step in the required analysis.  As this excerpt indicates, the Court reached that conclusion because it thought the transaction raised concerns about stockholder disenfranchisement.

In our view, the court bypassed a different and necessary judicial review where, as here, an interested board issues stock to interfere with corporate democracy and that stock issuance entrenches the existing board. As explained below, the court should have considered Coster’s alternative arguments that the board approved the Stock Sale for inequitable reasons, or in good faith but for the primary purpose of interfering with Coster’s voting rights and leverage as an equal stockholder without a compelling reason to do so.

Two precedents featured prominently in the Court’s decision. The first, Schnell v. Chris-Craft Industries,  stands for the proposition that actions taken by an interested board with the intent of interfering with a stockholder’s voting rights are a breach of the directors’ fiduciary duty. The second, Blasius v. Atlas Industries, holds that even good faith actions by the board that have the effect of interfering with voting rights require a “compelling justification.”

Ann Lipton has a Twitter thread on this decision that I highly recommend. She has some interesting thoughts on how to reconcile the apparent incongruity of using Blasius, which the Delaware courts have demoted over the years to merely being a particularized application of the intermediate scrutiny called for under the Unocal standard, to knock out a transaction that’s withstood the supposedly more demanding review called for by the entire fairness standard.

John Jenkins