Coster v. UIP Companies, Inc.
No reporter information provided in text, decided June 28, 2023. (2023)
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Rule of Law:
When a corporate board's action interferes with the election of directors or a stockholder vote in a contest for corporate control, Delaware courts apply an enhanced judicial scrutiny under an integrated Unocal review, requiring the board to demonstrate that it faced a real threat to a significant corporate interest and that its response was reasonable, proportionate, non-preclusive, and non-coercive to the stockholder franchise, even if not motivated by selfish reasons.
Facts:
- In 2011, Steven Schwat and Wout Coster each became 50% owners of UIP Companies, Inc., after a third founder departed.
- After Wout Coster's death on April 8, 2015, his widow, Marion Coster, inherited his 50% ownership interest in UIP.
- Throughout 2015-2017, Marion Coster was unable to secure a buyout of her shares or consistent income, leading her to seek company financial information and an independent valuation.
- In April-June 2018, Marion Coster attempted to elect new board members at stockholder meetings, but she and Schwat repeatedly deadlocked, preventing the election of new directors.
- Following the deadlock, Marion Coster filed a complaint in the Court of Chancery, seeking the appointment of a custodian with broad managerial powers over UIP.
- The UIP board, consisting of Schwat, Peter Bonnell (a senior executive), and Stephen Cox, feared that a broadly empowered custodian would trigger termination clauses in many of its key SPE contracts, posing an "existential crisis" to the company.
- To address this threat and fulfill a prior equity commitment, the UIP board offered and Bonnell purchased a one-third interest in the company for an "entirely fair price."
- The Stock Sale diluted Marion Coster's ownership from 50% to 33.3%, effectively breaking the stockholder deadlock and mooting her custodian action.
Procedural Posture:
- Marion Coster filed a complaint in the Court of Chancery of the State of Delaware, seeking the appointment of a custodian for UIP Companies, Inc. and later sought to cancel a dilutive stock sale.
- After a trial, the Court of Chancery upheld the Stock Sale under the entire fairness standard of review and dismissed the custodian action.
- Marion Coster (appellant) appealed the Court of Chancery's decision to the Supreme Court of Delaware, arguing the court erred by applying only the entire fairness standard.
- The Supreme Court of Delaware (in Coster Appellate Decision, 2021) reversed the Court of Chancery's decision in part, concluding that entire fairness review was insufficient, and remanded the case, instructing the Court of Chancery to review the Stock Sale under Schnell and Blasius for inequitable reasons or compelling justification.
- 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.
- Marion Coster (appellant) appealed the Court of Chancery's remand decision to the Supreme Court of Delaware for a second time.
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Issue:
Does a corporate board's issuance of dilutive stock to an employee, which breaks a stockholder deadlock and moots a petition for a broadly empowered custodian, satisfy the enhanced judicial scrutiny required when such action interferes with stockholder voting rights?
Opinions:
Majority - Chief Justice Seitz
Yes, a corporate board's issuance of dilutive stock to an employee that breaks a stockholder deadlock and moots a petition for a broadly empowered custodian can satisfy the enhanced judicial scrutiny required when the board demonstrates a real threat to an important corporate interest, proper motivations, and a response that is reasonable, proportionate, and not preclusive or coercive to the stockholder franchise. Chief Justice Seitz affirmed the Court of Chancery's remand decision, holding that the lower court correctly applied an integrated Unocal review, which subsumes the principles of Schnell (policing board actions motivated by selfish reasons to interfere with elections) and Blasius (requiring compelling justification for good faith actions interfering with the stockholder franchise). The court clarified that Schnell is reserved for actions "that threaten the fabric of the law, or which by an improper manipulation of the law, would deprive a person of a clear right," while Blasius's compelling justification standard is effectively folded into Unocal's proportionality review for board actions impacting the stockholder franchise in contests for control. First, the board must demonstrate a real and not pretextual threat to an "important corporate interest or to the achievement of a significant corporate benefit," with proper motivations. The Court of Chancery found the UIP board faced an "existential crisis" due to the broadly empowered custodian action, which could trigger termination clauses in key contracts, jeopardizing UIP's revenue stream. The board was also motivated by rewarding and retaining an essential employee (Bonnell) and implementing a succession plan that Wout Coster had favored. The court found these motivations proper and not selfish, especially since the stock was issued at an "entirely fair price." The court specifically found that the UIP board's decision did not totally lack a good faith basis and their motivations were not pretexts for entrenchment. Second, the board's response must be reasonable and proportionate, not preclusive or coercive. The Court of Chancery found the Stock Sale "appropriately tailored" to moot the custodian action, implement the succession plan, and retain Bonnell, noting that there were less aggressive options that could have been, but were not, pursued to break the deadlock. Crucially, the court found the action was not preclusive or coercive to Coster's franchise, as the new three-way ownership structure (one-third each for Coster, Schwat, and Bonnell) allowed her a "realistic path to control" by potentially forming a majority with either Schwat or Bonnell (as they are not bound to vote together), meaning she could still cast a swing vote. This negates the preclusive impact of the Stock Sale. The court rejected Coster's challenges to factual findings, deferring to the Chancellor's assessment that the custodian action itself posed the threat and that Bonnell's equity was critical, and that Wout Coster's past wishes for a succession plan were only one among other compelling justifications.
Analysis:
This case significantly clarifies the application of Delaware's enhanced judicial scrutiny standards (Schnell, Blasius, Unocal) when corporate boards take actions that interfere with shareholder voting rights, particularly in control contests. By explicitly stating that Schnell and Blasius can be "folded into Unocal review," the Supreme Court provides a more streamlined yet still robust framework for judicial oversight. The decision emphasizes the importance of a board demonstrating both a legitimate, non-pretextual threat to the corporation and a response that is precisely tailored, non-coercive, and non-preclusive, even if it impacts voting power. This integrated approach, which applies Unocal "with a special sensitivity" or "gimlet eye" to electoral manipulation, will guide future courts in evaluating defensive measures in proxy contests, tender offers, and other control disputes, reinforcing the sanctity of the shareholder franchise while acknowledging legitimate corporate interests and board's duty to the company.
