Last month, I joined the chorus of commenters who proclaimed the death of the Blasius v. Atlas Industries ” standard of review after the Delaware Supreme Court’s decision in Coster v. UIP Companies, (Del.; 7/23). In that decision, the Court held that Blasius “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.” A recent Chancery Court case suggests that we may have been at least somewhat premature in reaching the conclusion that Blasius is an “ex-Parrot.”
Vice Chancellor Zurn’s recent decision in In re AMC Entertainment Stockholder Litigation, (Del. Ch.; 8/23), suggests that at least some of Blasius remains in non-control contest settings. The case involved a proposed settlement of litigation surrounding the issuance and conversion of AMC’s APE units. One of the issues raised by the objectors to the settlement was the standard of review that should be applied to the fiduciary duty claims arising out of the issuance of the APE units for purposes of valuing those claims.
The plaintiffs claimed that Blasius should apply, while the defendants said that the business judgment rule should attach. The Delaware Supreme Court decided the Coster case while this one was pending, so Vice Chancellor Zurn had to address whether Blasius retained viability as an independent standard of review for director actions targeting the franchise outside of contests for control following that decision. She concluded that it did, although in a diluted form that cast aside the “compelling justification” standard for a heightened “reasonableness review.” This excerpt explains her reasoning:
Under my reading of Blasius and the law that followed, including Coster IV, the business judgment rule would not have applied to Plaintiffs’ breach of fiduciary duty claim. Directorial usurpation of stockholder voting power can inspire enhanced scrutiny regardless of the topic of the vote or its effect on corporate control. Case law blending Blasius with other enhanced scrutiny doctrines does not foreclose applying Blasius alone. Delaware law urges restraint in applying Blasius enhanced scrutiny alone, but it need not be coupled to another doctrine to have legs. Delaware law teaches that Blasius’s original formulation, requiring directors to prove they had a compelling justification for thwarting the franchise, is too potent for contexts in the vote does not touch on corporate control.
This opinion concludes that where a plaintiff establishes directors acted with the primary purpose of impeding the exercise of stockholder voting power for a vote on issues other than corporate control, in the absence of another basis to apply enhanced scrutiny, the directors must demonstrate their actions were reasonable in relation to their legitimate objective.
The Vice Chancellor ultimately concluded that while the Plaintiffs had established a viable claim that AMC’s directors acted unreasonably in issuing the APE units, that claim should be discounted because the directors had potentially viable defenses based on its potential bankruptcy in the absence of that issuance.
In his commentary on Coster, UCLA prof. Stephen Bainbridge noted that the standard announced there for reviewing actions targeting the franchise in contests for control could be characterized as “Unocal+”. If that’s the right way to characterize Coster, then it seems appropriate to characterize the Chancery Court’s spin on the remnants of Blasius outside of control settings as “Blasius-“,
– John Jenkins