Opinion ID: 2275517
Heading Depth: 1
Heading Rank: 14

Heading: Board Expansion Invalid

Text: The record reflects that the primary purpose of the Director Defendants' action was to interfere with and impede the effective exercise of the stockholder franchise in a contested election for directors. The Court of Chancery concluded that the Director Defendants amended the bylaws to provide for a board of seven and appointed two additional members of the Board for the primary purpose of diminishing the influence of MM's two nominees on a five-member Board by eliminating either the possibility of a deadlock on the board or of MM controlling the Board, if one or two Director Defendants resigned from the Board. That defensive action by the Director Defendants compromised the essential role of corporate democracy in maintaining the proper allocation of power between the shareholders and the Board, because that action was taken in the context of a contested election for successor directors. Since the Director Defendants did not demonstrate a compelling justification for that defensive action, the bylaw amendment that expanded the size of the Liquid Audio board, and permitted the appointment of two new members on the eve of a contested election, should have been invalidated by the Court of Chancery. One of the most venerable precepts of Delaware's common law corporate jurisprudence is the principle that inequitable action does not become permissible simply because it is legally possible. [40] At issue in this case is not the validity generally of either a bylaw that permits a board of directors to expand the size of its membership or a board's power to appoint successor members to fill board vacancies. In this case, however, the incumbent Board timed its utilization of these otherwise valid powers to expand the size and composition of the Liquid Audio board for the primary purpose of impeding and interfering with the efforts of the stockholders' power to effectively exercise their voting rights in a contested election for directors. As this Court held more than three decades ago, these are inequitable purposes, contrary to established principles of corporate democracy ... and may not be permitted to stand. [41]